Laboratory of America Holdings (LH) Q3 2011 Earnings Call October 20, 2011 9:00 am ET Executives William B. Hayes - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer David P. King - Chairman, Chief Executive Officer and President Stephen Anderson - Director of Investor Relations Analysts Gary P. Taylor - Citigroup Inc, Research Division Adam T. Feinstein - Barclays Capital, Research Division Dane Leone - Macquarie Research Bill Bonello - RBC Capital Markets, LLC, Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division Kevin K. Ellich - Piper Jaffray Companies, Research Division Kevin Ellich - RBC Capital Market Darren Lehrich - Deutsche Bank AG, Research Division Amanda Murphy - William Blair & Company L.L.C., Research Division Steven Valiquette - UBS Investment Bank, Research Division Ricky Goldwasser - Morgan Stanley, Research Division Anthony V. Vendetti - Maxim Group LLC, Research Division Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division Lisa C Gill - JP Morgan Chase & Co, Research Division Robert M. Willoughby - BofA Merrill Lynch, Research Division Ashim Anand - Natixis Bleichroeder LLC, Research Division Gary Lieberman - Wells Fargo Securities, LLC, Research Division Presentation Operator
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This morning, we will discuss our third quarter 2011 financial results, highlight our progress on our Five Pillar Strategy and provide answers to several frequently-asked questions. I now like to turn the call over to Steve Anderson, who has a few comments before we begin.Stephen Anderson Before we get started, I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press release for replay information. This morning, the company filed a Form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information. Additionally, we refer you to today's press release, which is available on our website for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS, excluding amortization, free cash flow and adjusted operating income. I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results. These statements are based upon current expectations and are subject to change based upon various factors that could affect the company's financial results. Some of these factors are set forth in detail in our 2010 10-K and subsequent filings. The company has no obligation to provide any updates to these forward-looking statements even if our expectations change. Now Brad Hayes will review our financial results. William B. Hayes Thank you, Steve. On today's call, I'll discuss 4 key measures of our financial performance: cash flow, revenue growth, margin and liquidity. First, cash flow. Our cash flow remains strong, excluding the Hunter Labs settlement of $49.5 million, free cash flow for the first 9 months of the year was $510.9 million. Cash flow has been negatively impacted by approximately $28 million due to delays in the Genzyme Genetics enrollment process and billing conversion, which we expected and have previously discussed. We expect that these delays will be resolved in the fourth quarter and are reiterating our 2011 operating cash flow guidance of $900 million, excluding the Hunter Labs settlement. We remain pleased with our cash collections. DSO increased to 2 days year-over-year to 46 days at the end of September due to the Genzyme Genetics acquisition and was unchanged sequentially. As a result of continued success in our billing and collection activities, we reduced our bad debt rate to 4.5% during the quarter.
Second, revenue growth. Revenue increased 10% year-over-year in the third quarter. Genzyme Genetics accounted for approximately 7% of this growth. During the quarter, we achieved strong growth in revenue per requisition, which increased 7.8% year-over-year. The growth in revenue per requisition is attributable to acquisitions, rate increases, test mix shift and increases in test per requisition. Genzyme Genetics accounted for approximately 6% of the growth in revenue per requisition. Total company volume increased to 2.1% year-over-year during the third quarter. Genzyme Genetics accounted for approximately 0.9% of this volume growth. Esoteric volume increased approximately 7% in the quarter.Third, margin. For the third quarter, our adjusted operating income margin was 18.8% compared to 19.6% in the third quarter of 2010. Year-over-year margin decline was due entirely to recent acquisitions that we have not fully integrated. Excluding these acquisitions, margins would have increased year-over-year. Margins will improve as we continue to integrate these businesses. Fourth, liquidity. We remain well capitalized. At the end of September, we had cash at $85.8 million and approximately $463 million available under our revolving line of credit. At the end of September, total debt was $2 billion, and there were no borrowings outstanding under our revolving credit facility. During the third quarter, we repurchased $152 million of stock, representing 1.8 million shares. At the end of September, $256.5 million of repurchase authorization remained under our previously approved share repurchase program. This morning, we updated our 2011 financial guidance. We expect revenue growth of 10.5% to 11%, adjusted EPS excluding amortization in the range of $6.28 to $6.33, operating cash flow of approximately $900 million, excluding the Hunter Labs settlement and capital expenditures of $150 million. I will now turn the call over to Dave. David P. King Thank you, Brad. We are very pleased with our third quarter results. We generated strong revenue growth of 10%, volume increased 2.1% and esoteric volume increased approximately 7%. Despite continued economic headwinds organic volume grew by 1.2% year-over-year. Revenue per requisition remained strong, increasing 7.8%. We reduced our bad debt rate to 4.5% during the quarter, reflecting the continued exceptional performance of our operational and billing personnel. Read the rest of this transcript for free on seekingalpha.com