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Laboratory Corporation of America Holdings (LH - Analyst Report) reported a dismal first-quarter 2014 with adjusted earnings per share (EPS) of $1.51, down 13.2% year over year. Results also fell short of the Zacks Consensus Estimate of $1.60. According to the company, unfavorable weather conditions during the quarter dragged the bottom line by 22 cents.

On a reported basis, after including amortization (15 cents), restructuring and other special charges (5 cents), LabCorp’s net earnings came in at $113.1 million or $1.31 per share against net earnings of $147.2 million or $1.56 per share in the year-ago quarter.

Quarter Under Review

Revenues edged down 1% year over year to $1,430.7 million in the first quarter, missing the Zacks Consensus Estimate of $1,445 million.

Although the company witnessed a 2.6% increase in testing volume (measured by requisitions), poor revenue per requisition (down 3.3% year over year) reflects Medicare payment reductions unfavorable test mix and the Canadian business. We note that Medicare payment reductions and business mix also affected LabCorp’s peer Quest Diagnostics’ (DGX - Analyst Report) first-quarter results.

Gross margin fell a huge 359 basis points (bps) to 36.1% in the quarter. Adjusted operating income declined 19.8% year over year to $231.9 million. This led to an adjusted operating margin of 16.2%, down 385 bps from the year-ago quarter. During the quarter under review, selling, general and administrative expenses shot up 0.6% to $284.9 million.

LabCorp exited the quarter with cash and short-term investments of $338.9 million compared with $404.0 million at the end of 2013. At quarter-end, the company had no borrowings outstanding under its $1.0 billion revolving credit facility. Operating cash flow for the quarter was $142.3 million, down from the year-ago level of $198.2 million.

During the quarter, LabCorp repurchased 1.1 million shares for $106.2 million and was left with $946.3 million of authorization under the approved share repurchase plan. A consistent share buyback program led to an 8.4% decline in the outstanding share count.

Outlook

In spite of a dismal first quarter primarily impacted by inclement weather, the company increased its full-year 2014 EPS guidance to the range of $6.40 to $6.70 from the earlier provided projectionof $6.35 to $6.65.The current Zacks Consensus Estimate of $6.70 coincides the upper end of the revised range.

However, LabCorp still maintains its feeble revenue guidance for 2014 at a mere 2%. The current Zacks Consensus Estimate for revenues is pegged at $5,915 million.

In addition, operating cash flow and capital expenditures are expected to remain in the band of $780−$820 million and $185−$205 million respectively (unchanged from the previous guidance).

Our Take

LabCorp provided a dismal first quarter with both top and bottom-line miss. Adverse weather conditions acted as the main obstacle to the company’s performance in the reported quarter.

Moreover, the current economic uncertainty continues to adversely affect LabCorp. The challenging volume environment for testing laboratories and utilization weaknesses stand as looming headwinds. We are also concerned about the Medicare payment reductions (effective Jan 2013), recently-introduced molecular pathology codes and the implementation of sequestration.

Although the share repurchase activity provided some cushion for the company, the bottom-line results are yet to boost confidence. Margins also continue to remain under pressure. Moreover, the poor outlook for 2014 implies that the industry trend does not seem likely to improve in the near future.

However, LabCorp is working on portfolio expansion to drive its top line. The company is focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years.

Further, the company’s recent announcement of major upper management churns including appointment of a new Chief Financial Officer and changes to the board of directors instills our confidence. This new management is expected to come up with several new ideas to enhance the company’s position amid several market challenges.

Zacks Rank

The stock currently carries a Zacks Rank #3 (Hold).  Some of the better-placed Medical stocks are Cardinal Health, Inc. (CAH - Analyst Report) and The Cooper Companies Inc. (COO - Analyst Report), both carrying a Zacks Rank #2 (Buy).

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