Laboratory Corporation of America Holdings (LH - Analyst Report), or LabCorp, released consolidated first quarter 2015 results including Covance (as of Feb 19, 2015 – the closing date of the acquisition). Prior to Feb 19, all consolidated results exclude Covance.

The company reported a solid first-quarter 2015 with adjusted earnings per share (EPS) of $1.73, up 14.6% from the year-ago quarter. Adjusted EPS also breezed past the Zacks Consensus Estimate of $1.65.

On a reported basis, after including restructuring and special items ($1.51) and amortization (21 cents), LabCorp’s net earnings was reduced to $0.7 million or a penny per share against $113.1 million or $1.31 per share a year ago.

Net revenues for the first quarter increased 23.9% year over year to $1,772.3 million, edging past the Zacks Consensus Estimate of $1,770 million. Apart from strong organic volume growth in the clinical laboratory business, measured by requisitions, and tuck-in acquisitions, this year-over-year improvement was also driven by the Covance acquisition which contributed $267.2 million to LabCorp’s revenues since Feb 19, 2015, driving 18.7% year over year net revenue growth. However, these were partially offset by price, mix and currency.

Quarter Under Review

With the inclusion of Covance, currently LabCorp reports under two operating segments:  LabCorp Diagnostics (LabCorp’s legacy business except for its clinical trial services business, which is now part of Covance Drug Development, and includes the nutritional chemistry and food safety business, which was previously part of Covance) and Covance Drug Development (Covance’s legacy business except for its nutritional chemistry and food safety business, which is now part of LabCorp Diagnostics, and includes LabCorp’s legacy clinical trial services business)

In the reported quarter, LabCorp Diagnostics reported adjusted net revenues of $1.48 billion, up 4.9% year over year fueled by volume growth (6%), measured by requisitions, and tuck-in acquisitions, partially offset by price, mix and currency. The increase in volume was primarily due to organic growth (5.2%). On the other hand, the company reported poor revenue per requisition (down 1.1% year over year) and unfavorable currency impact of 0.5%.

Covance Drug Development however, reported a 1.2% decline in adjusted net revenues to $636.9 million in the first quarter of 2015. According to LabCorp, the strengthening U.S. dollar negatively impacted year-over-year revenue growth by approximately 410 basis points. At Constant Exchange Rate (CER), net revenue increased 2.2% year over year.

Gross margin fell 362 basis points (bps) to 32.5% in the quarter. Adjusted operating income declined 30.6% year over year to $160.9 million. This led to an adjusted operating margin of 9.1%, down 713 bps from the year-ago quarter. During the quarter under review, selling, general and administrative expenses shot up 45.7% to $415.1 million.

LabCorp exited the quarter with cash and cash equivalents of $446.4 million compared with $508.0 million at the end of 2014. Operating cash outflow for the quarter was $86.9 million, a huge slash from the year-ago operating cash inflow of $142.3 million as the company’s operating cash flow was negatively impacted by $153.5 million in non-recurring items relating to the acquisition of Covance. Free cash outflow came in at $120.7 million, down from free cash flow of $85.8 million in the first quarter of 2014.

Outlook

LabCorp provided an update on its earlier projected 2015 outlook that considers the benefits from the Covance acquisition as of Feb 19, 2015 as well as Project LaunchPad.

Based on the foreign exchange rates effective as of Mar 31, 2015, revenue growth is expected to remain in the range of 39% to 42% (narrower than earlier provided range of approximately 40% to 44%) over 2014. This includes the 230 basis points impact of unfavorable foreign exchange headwind resulting from the strengthening of the dollar. The current Zacks Consensus Estimate for revenues is pegged at $8,502 million.

Adjusted EPS is currently projected within $7.55−$7.90 in 2015, an increase from the earlier provided $7.35−$7.70. The current Zacks Consensus Estimate of $7.57 falls within the guided range.

In addition, operating cash flow, free cash flow and capital expenditures are expected to remain in the bands of $1,045−$1,070 million (earlier $1,075−$1,100 million), $695−$745 million ($725−$775 million) and $325−$350 million ($325−$350 million), respectively.

Our Take

The first operational quarter at LabCorp with consolidated results post the acquisition of Covance highly impresses us with beats over the Zacks Consensus Estimate on both lines. According to the company, this strong quarter highlighted solid organic revenue growth and operating leverage. We believe that, with the integration of Covance, LabCorp is perfectly positioned to drive long-term profitable growth through a combination of world-class diagnostics, drug development expertise, and knowledge services.

In addition, Project LaunchPad, the company’s newly introduced enterprise-wide business process improvement initiative, is expected to garner net savings in excess of $150 million over the next three years.

Zacks Rank

The stock currently carries a Zacks Rank #3 (Hold).  Some of the top-ranked stocks in the same sector are AmerisourceBergen Corp. (ABC - Analyst Report), Becton, Dickinson and Co. (BDX - Analyst Report) and Neostem, Inc. (NBS - Snapshot Report). All three stocks carry a Zacks Rank #2 (Buy).