Labcorp Holdings Inc. (LH) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 4 2012 Laboratory Corporation of America Holdings Earnings Conference Call. My name is Sean, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. David King, Chairman and CEO. Please proceed, sir.

Thank you, Sean. Good morning, and welcome to LabCorp's Fourth Quarter 2012 Conference Call. Joining me today from LabCorp are: Brad Hayes, Executive Vice President and Chief Financial Officer; Ed Dodson, Senior Vice President and Chief Accounting Officer; and Steve Anderson, Vice President, Investor Relations. This morning, we will discuss our fourth quarter and full year 2012 financial results, provide 2013 guidance, highlight our progress on our Five Pillar Strategy and provide answers to several frequently asked questions. I'd now like to turn the call over to Steve Anderson, who has a few comments before we begin.

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, 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, the implementation of our business strategy and the ongoing benefits from acquisitions. 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 2011 10-K and will be in our 2012 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.

Thank you, Steve. On today's call, I will review 4 key measures of our financial performance: cash flow, revenue growth, margin and liquidity. I'll also provide our 2013 guidance. First, cash flow. Our cash flow remains strong. Free cash flow for the trailing 12 months ended December 31, 2012, was $667.6 million. Free cash flow was below our expectations as a result of lower operating cash flow and higher capital spending. Operating cash flow was lower in part due to payment to certain key vendors to take advantage of favorable economics, as well as the negative impact due to weather. Also operating cash flow was reduced by a one-time out-of-period adjustment of $34 million related to a balance sheet reclassification between cash and accounts payable. Without this adjustment, 2012 operating cash flow would have been $875 million. Certain capital expenditures were made in the fourth quarter to take advantage of favorable economics. These factors are included in our 2013 guidance. DSO was 46 days at the end of December, a decrease of 2 days sequentially and flat year-over-year. During the quarter, our bad debt rate was 4.3%. Second, revenue growth. Revenue increased 2.9% year-over-year in the fourth quarter. During the quarter, total company volume increased 2.8%. Organic volume increased 0.7% year-over-year, adjusted for the impact of inclement weather, which we estimate reduced volume growth by approximately 1% during the quarter. Revenue per requisition was essentially flat year-over-year. Third, margin. For the fourth quarter, our adjusted operating income margin was 17.2% compared to 18.9% in the fourth quarter of 2012. We estimate that inclement weather lowered margin by approximately 80 basis points during the quarter. Fourth, liquidity. We remain well capitalized. At the end of December, we had cash of $466.8 million and no borrowings outstanding under our $1 billion credit…

Thank you, Brad. We are pleased with our performance, given that we continue to face a very difficult operating environment. During 2012, we grew revenue 2.3%. We grew adjusted EPS excluding amortization by 7.1%. We continued to generate strong operating and free cash flow, which we invested in the business and returned to shareholders through share purchase. We repurchased $516 million of our stock, representing 5.9 million of our shares. And we kept a tight lid on expenses, measurably reducing our selling, general and administrative expenses as a percentage of revenue. We continue to make progress on each aspect of our Five Pillar Strategy. The first pillar of our strategy is that we deploy capital to investments that enhance our business and return capital to shareholders. Last month, we announced a target leverage ratio of 2.5x debt to EBITDA, which all other things being equal, we intend to achieve over time. We expect to continue to deploy our capital toward acquisitions and share repurchase. Over the last several years, we have deployed our free cash flow almost evenly between acquisitions and share repurchase. Going forward, we would expect to deploy our free cash flow similarly. And in the absence of sizable acquisition opportunities, we anticipate deploying our additional leverage largely towards share repurchase. The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. As planned, we completed the nationwide rollout of our Beacon Patient Portal in Q4, which is now available to all patients in right-to-know states. The portal is a secure and easy-to-use online solution that enables patients to receive and share lab results, make appointments, pay bills, set up automatic alerts and notifications, and manage health information for the entire family. We experienced fast adoption of the portal in…

Thank you, Dave. "Can you describe the impact of Medicare payment cuts you will face in 2013?" The Affordable Care Act baseline for the 2013 update to the clinical lab fee schedule was negative 0.95%. And the Middle Class Tax Relief and Job Creation Act rebaselined the fee schedule an additional 2% lower. These fee schedule reductions became effective on January 1, 2013. If mandatory sequestration is implemented, we will receive an additional 2% reduction to the clinical lab fee schedule and a separate 2% reduction to the physician fee schedule, effective April 1, 2013. We also face significant impacts as a result of a variety of other government payment reductions, including the reduction to CPT code 88305 and the full year impact of the TC Grandfather Clause. Summed together, we estimate that these payment reductions will lower our 2013 EPS by approximately $0.35. "Why is the midpoint of your initial 2013 EPS guidance approximately $0.25 below consensus?" Our guidance encompasses a wide range of potential outcomes, and we are just beginning 2013. We continue to note that the diluted share counts in analyst estimates differ considerably from our own and from each other. In reviewing these forecasts, we note that the average share count across sell-side models implies a $0.17 benefit in 2013 from share repurchase. As we stated in our press release this morning, our guidance excludes the impact of share repurchase, effective after December 31, 2012. Further, as I noted in my previous comments, we face several Medicare reductions in 2013. It appears that most analysts did not model the full impact of these reductions in their 2013 estimates as we projected the negative impact of the major 2013 Medicare reductions at $0.22 on our third quarter conference call, $0.13 lower than the full projected impact of the 2013 Medicare reductions that we described this morning. "Why are capital expenditures so high in 2013?" We typically spend approximately 3% of revenue on capital expenditures. As Brad previously mentioned, our capital expenditure increase in 2013 is driven by near-term investments in facility consolidation and replacement of a major testing platform. "Can you update us on the mix of your business coming from esoteric testing?" For the year, approximately 40% of our revenues were in the genomic, esoteric and anatomic pathology categories. As we reiterated last quarter, our goal is to increase our esoteric test mix to approximately 45% of our revenue within the next 3 to 5 years. Now I'd like to turn the call back over to Dave.

Thank you, Steve. And thank you very much for listening. We are now ready to take your questions.

[Operator Instructions] Your first question comes from the line of Tom Gallucci, Lazard Capital Markets.

I guess, I had 2 questions. The first one was sort of on the '13 outlook. Obviously, Medicare is a big negative. But I'm wondering what -- if you could highlight some of the positive drivers that overcome some of the pressures on the business as you look out. I know in the past, you've talked about Genzyme and MEDTOX and [indiscernible], et cetera, sort of ramping up. Is that still the case? So if you could just explore some of the positives versus the negatives as we think about the '13 moving parts.

Tom, it's Brad. I'd like to say a couple of things to answer your question. One is, obviously, we face the Medicare cuts that we described and you referred to. Secondly, we have some offset of those cuts from increases in payment from other payor types that are nongovernment. So there's one thing that helps to offset. We also have continued acquisition integration from Genzyme and some of the other acquisitions that we've done since that date that also help to offset. Given the 2% to 3% top line revenue guidance, we still think of it as a low organic growth environment, which is what I think keeps some of the positives from offsetting the negative from the payment reduction.

And Tom, it's Dave. Just to add one further point. We're encouraged that organic volume growth increased sequentially from 3Q to 4Q. So we have some cautious optimism that we're going to see better organic volume growth as we go forward through 2013.

And in that 2% to 3% you mentioned, Brad, there's small acquisitions in there as you normally would have, maybe a 0.5% or 1% or so?

Not really. I mean, just the annualized impact of MEDTOX and some of the smaller ones that we did in 2012.

Okay. So nothing new or incremental that you haven't done yet in terms of top line that would add to the top line?

No.

Okay, good. That's good. And then just I guess, a big-picture question. I don't know if you want to take a stab at it, Dave. But obviously for a lot of health care these days, thinking about health care reform in 2014 and beyond has become a lot of the focus for investors. So any updated thoughts on how reform will impact your company and your industry?

Tom, I think reform will be a net positive to us. There are a lot of moving parts. And some of them, such as how will the exchanges actually work, what will pricing be through the exchanges and how many states will actually participate in Medicaid expansion, remain unclear at this point. But at a high level, I think we will see volume growth, offset to some extent by reduced pricing on the business that is coming through the company now that is uninsured that will be subject to insurance rates and a net benefit from reduction in the bad debt rate. So we view it as a net positive. But again a lot of moving pieces and too early to try to even begin to quantify it.

Your next question comes from the line of Robert Willoughby, Bank of America.

Dave or Brad, does the larger share repurchase authorization suggest any kind of moratorium on acquisitions near-term or any kind of comment on deal pricing that you're seeing?

Bob, it's Dave. It does not suggest a moratorium on acquisition activity. The pipeline remains quite active. The share repurchase commitment and the board's endorsement of the $1 billion in share repurchase authorization reflects more our continued commitment to using share repurchase as a way to return capital to shareholders.

Okay. And just another broader question, who are you talking to now with your greater kind of technology and electronic connectivity that you weren't talking to previously? Is there somebody out there vastly more intrigued with your data connectivity now?

Bob, it's Dave. I would say the increasing prevalence of ACOs and mega physician practice groups that are thinking about transitioning to an environment in which they either share risk or take risk has made them a lot more interested in population health management and data analytics. Obviously, a lot of people are working on population health management and data analytics. One of the great benefits that we have is the enormous amount of information and data that we have on the unique patients that we see every year and the longitudinal database that we have on those same patients as they come back to see us over time. So I think as we continue to see the development of ACOs, the consolidation of physician practices and even the consolidation of health systems, the value of those data analytics will continue to increase.

Your next question comes from the line of Ricky Goldwasser of Morgan Stanley.

So this has been the strongest volume you have reported, I think, back -- if I go back since 2001. So can you just share with us a little bit more about what's the contribution from acquisitions in the quarter? How big was MEDTOX in the numbers and if there's anything else? And then what are you seeing overall in the marketplace? Are you taking share? Or are you seeing just overall an improved environment?

Ricky, this is Brad. On the volume side, there's a significant contribution from MEDTOX. We had that for a full quarter in the fourth quarter as opposed to 2/3 of the quarter in the third. So that is a significant contributor. But still as we look beyond that, as we pointed out and Dave mentioned a second ago, too, adjusted for weather, because that was about 1 point drag on the volume growth, we still saw organic volume in the quarter of 0.7%. And sequentially, that is better than we saw in Q3 and any other quarter, I believe, of 2012. So on the volume side, a lot from MEDTOX but some organic there as well.

And when you think about organically, are you growing with the market? Or do you think that you're taking share?

Ricky, it's Dave. That's a very difficult question to answer just because it's hard to know how the market is growing. I think we're growing with the market. I will say we continue to see in our patient and physician satisfaction surveys very strong satisfaction with the quality of our service level. And I think that, that is a very important aspect of why organic volume has increased sequentially.

Okay. And then can you just break down for us the weather impact of -- I think it was about $13 million to the EBIT line by cost of goods and SG&A?

Yes. Ricky, this is Brad. Really, when we think about the weather impact, the only costs that are involved are our supply cost, the direct variable cost of the testing, as well as bad debt. So the supply cost would be in cost of goods, the bad debt would be in SG&A.

Okay. And we can assume just the bad debt that's kind of at the corporate level?

Yes.

The next question comes from the line of Gary Lieberman, Wells Fargo.

Can you discuss any impact at all that you've seen on the competition from the reimbursement cuts, either from a business perspective or a willingness to try to go after acquisitions?

Gary, it's Dave. Obviously, the reimbursement impact hits all laboratories and indeed hits hospitals that perform Medicare laboratory services as well. The biggest impact we've seen in the marketplace is in the anatomic pathology-focused specialty businesses simply because as you recognize from Steve's commentary, the clinical lab fee schedule, the physician fee schedule and the 88305 reduction all have a direct impact on them. So the entire industry has been affected by this. And I think we're seeing some of the smaller and some of the specialty players be more cognizant of the opportunity to monetize their businesses than maybe they were earlier in 2012.

Okay, that's helpful. And then just in terms of thinking about the additional leverage that you guys plan to take on. I mean, it would indicate a fairly sizable dollar amount. So it would seem like it would leave you more than enough capital to do share purchases at, at least the rate that you've been for the past year or so and also acquisitions. So is there anything specific or general that you're thinking you're going to use it for and, I guess, the timing in terms of how long you think it's going to take you to increase the leverage?

Obviously, we don't guide to our share repurchase activity. And so I want to make sure that nobody's interpreting this as giving guidance on our share repurchase activity. As I said in the prepared comments, if you look at the last 5 years, it's been almost exactly half of our free cash flow to acquisitions and half to share repurchase. And going forward, we would expect to deploy our free cash flow similarly, about half to acquisitions and half to share repurchase. The additional leverage that we've talked about, by and large, and again all other things being equal in the absence of sizable acquisition opportunities, we would expect the additional leverage to be deployed toward share purchase. We don't have a specific time frame for when we would achieve the target leverage largely because, going back to your last question, the acquisition market is very active, the environment is very fluid. And so we're going to be strategic about how we deploy that additional leverage and how we reach the leverage point over time.

The next question comes from the line of Gary Taylor, Citigroup.

As I kind of do my math on the volume, I just want to see if you agree with this. So reported 2.8%, I guess, really would have been 3.8% adding back the weather. And then you're saying 0.7% of that is organic. So MEDTOX and other deals added about 3.1% year-over-year?

Gary, it's Dave. The only observation I would make on that is -- and I don't mean to split hairs. But some of that 1% that we lost due to weather would have been organic as well. So your numbers are close. I don't think there is a material difference there. But as reported, if you don't take account of that 1%, then I would agree with you, 0.7% organic and the rest, acquisitions. I think some of that 1% would have been driven by organic growth as well.

Okay. It's a fair point. I guess, what I'm interested in is you had commented that the underlying organic was better sequentially. And I see that as well. But shouldn't we believe that the very widespread flu activity and presumably physician office activity might have contributed to some of that sequential improvement and maybe not to read too much into that heading into '13?

It's Dave again. I mean, far be it from me to suggest how you should interpret the data. The only thing that I will say is our business is not driven by flu. Most of the flu that we test for at all is going to be rapid point-of-care testing in patient service centers. As you probably know, most rapid flu testing is done in physician offices and is not sent out. So my view is the flu season really doesn't have an impact, a strong impact one way or the other. But again that's my view. And you may have a different view of how to interpret the data.

And for Brad, on the amortization acceleration, I assume that, that's in the amortization line, but that -- if we exclude that, that means kind of the recurring amortization number drops to $17 million, which looks low. Is that the right quarterly run rate into '13?

Gary, the $6.2 million is in the number for the amortization. And I think some things are rolling off. So generally, amortization is coming down as some things get fully amortized. But again since that's a number that we add back for our adjusted EPS in the way we guide and the way we report, it's interesting, but I don't think it affects our guidance or our results.

Well, I guess, I'm thinking the run rate amortization has been roughly $21 million. If we exclude the $6 million this quarter, it was $17 million. So that lower run rate, it sounds like it carries into '13 because things are rolling off.

Yes. And the only thing I'll add to that not being exactly the way to extrapolate it is, as we do the acquisitions and there are adjustments to amortizations, as we get final valuations and things of that nature, those go into that line as well.

Okay. And then last question. I guess, absent from the Medicare headwinds you outlined were some of the changes to the molecular diagnostic payments that obviously are coming out of the Palmetto fee schedule that a lot of us have been trying to compare apples-to-apples and understand what's being paid for and not paid for, et cetera. And it seems like there is a headwind there but not something that you explicitly identified today. Do you want -- can you comment on that a little more?

Gary, it's Dave. First of all, as we have consistently said, only about 4% to 5% of our total revenue base is impacted by the Medicare molecular Dx coding changes. And molecular Dx is about 6% of the total revenue base. We have been saying all along that we did not expect a material impact. And in fact, we expect these Medicare repricing and molecular codes to be a slight positive for us. We're continuing to discuss the appropriate payment rates with our managed care partners. And whether that's a headwind or a tailwind remains to be determined.

Okay. And the 6%, it includes the commercial side?

Yes.

Your next question comes from the line of Lisa Gill of JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: This morning, Dave, you talked about an increase in payment from other payors when you answered Tom's question about positives. Can you maybe just talk about what you're seeing? We heard from your large competitor that they're actually seeing a decline and talked about a tough reimbursement environment. So if you can give us some color as to where you're seeing some opportunities to actually increase price. And is that actual increase in price? Or is it more of a mix issue that you're seeing?

Lisa, it's Dave. Obviously, the Medicare reductions are a direct price headwind, so all of those go straight to price. As Brad commented earlier, we do have some price increases in other payor groups, which will help offset the payment reductions. And those consist of actual unit cost increases. And I'm not going to go to detail about those unit cost increases. But suffice to say, they go broadly across all of our other payor groups besides government. There also will be some benefit from test mix. And there will be some benefit from -- if history continues to repeat, some benefit from a slightly larger number of tests per requisition. So those are the pricing aspects of what we see in 2013 that will help us to offset to some extent the Medicare headwind. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And then just in your conversations with ACOs and some of the big IDNs that you talked about, as we see consolidation of health care, have you had those conversations around maybe narrower lab networks or being the lab provider of choice for any of these ACOs as we move forward?

We have. I would say one of the complications is that the ACO environment is evolving quite rapidly. So you have many large ACOs forming that, that provide services to members of many different managed care plans. And so even being the preferred lab provider, obviously it doesn't mean you're going to get all of the volume. And most of those payment rates are going to be based on managed care contracts. I think over time as we see the evolution where ACOs and other providers are actually sharing or taking risk, that's when you'll start to see much more clarity on what the impact of that transition will be on pricing.

The next question comes from the line of Amanda Murphy, William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: So I had a question on some commentary you made about Beacon and some of the alternative models that you're looking at pursuing. Is there a way to think about that sort of at a high level in terms of how that might impact the P&L relative to your core lab business? Is there -- would it be lower margin or higher revenue? I'm just trying to think about how that would flow through the P&L specifically.

Amanda, it's Dave. I don't think we're in a position to talk about how Beacon might impact the P&L because there are so many different potential ways in which BeaconLBS could be deployed. So I think it's just too early to give a sense of what that would do from a revenue and a margin perspective. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it. And then for the TC Grandfather, I recognize that's totally not a huge impact. But are there any lessons to be learned there in terms of how that may or may not have changed reimbursement just in terms of having to deal with a hospital directly versus what you were billing to a payor before?

Well, I think it's -- I think it would be self-evident that the rates that we receive when we bill the government are really not negotiated rates. They're rates that are provided in the fee schedule. Anytime that we deal with nongovernment payors, we typically have a negotiation. So I don't know that there are any lessons to be learned. The TC Grandfather was a long-standing provision of law that Congress opted to change. And, again, I think it reflects a broader movement in the marketplace, where the government fee-for-service environment is migrating more towards either direct relationships with other payors or towards managed government beneficiaries and dealing with them in a managed rather than a fee-for-service environment. Amanda Murphy - William Blair & Company L.L.C., Research Division: Yes. I guess, I was -- the reason for the question was can we extrapolate anything from that to -- if the world moves more towards an ACO-type model, where the -- I guess, your customer becomes a provider versus the payor, is there anything that we can extrapolate from that experience? Or is it just too specific? That was really the point of the question, I suppose.

I think that -- again, I think it's very early to try to think about what would happen as you move toward a more comprehensive, let's call it, ACO health system environment. But we negotiate with the payors, we negotiate with other providers who want to use our services. And I think that will continue to be, in 80% of our business, that will be the model. There will be negotiated rates of payment for services provided and for other services, like BeaconLBS or data analytics or population health management. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it. And just one last one. You had mentioned something about having to reinvest in a testing platform. Could you just provide a little more color around what that is exactly?

Yes. Without giving you a lot of specifics, we have a testing platform that had reached its -- the expiration of kind of its natural life and is not going to be supported anymore. It's a sizable platform and we have to replace the instruments basically in all of our laboratories. Amanda Murphy - William Blair & Company L.L.C., Research Division: Okay. Is that something to be -- from a risk standpoint, that could be an issue? Or is this just -- I'm sure you've counted [ph] these replacements before.

Yes. I mean this is a 10-year-old system that just we need to upgrade. From a risk perspective, I don't think it entails an unusual amount of risk. We go through system replacements frequently and we do them on a rolling basis so that we don't disrupt workflow.

Your next question comes from the line of Kevin Ellich, Piper Jaffray.

Dave, just wanted to go back to the volume growth in Q4. How much growth are you guys getting from number of tests per requisition and mix shift to higher acuity tests? And also what about partnerships like with Ariosa Diagnostics? How much contribution did you guys see to the top line and volume from that?

Kevin, it's Dave. I don't think it benefits us to break down every single component of volume growth. So I will say that test per requisition is a slight help on a comparative 2012 to 2011 basis, but it's not -- it doesn't change from 3Q to 4Q. We have gotten some nice top line growth from Ariosa, which is the noninvasive prenatal screening test. But, again, that's what we do. We introduce new tests that are scientifically innovative, cutting-edge and provide better, and in this case, less invasive patient care. And so it's our expectation that, that's part of our growth over time.

Got it. That's helpful, Dave. And then kind of going back to one of the earlier questions on ACOs. You talked about alternative delivery models in your prepared remarks. Just wondering how the discussions are going with hospitals and other providers. And any developments or updates from Adam's efforts since he's been with the company?

Well, I think, Adam has been terrific. But Adam is part of a very large team of people at LabCorp, who are working on enhancing our hospital presence. And I'm not going to call the names of every single one of them on the call. But we have a very robust hospital business already, and everybody's working to grow it. I think we've had very constructive discussions with a number of health systems, about a broad range of relationships, going from reference testing to lab management to joint operating and joint equity ventures. And we will continue to push forward with that initiative. And I expect it to pay significant benefits as we come out of 2013 and go into 2014 in terms of revenue and volume growth.

Okay. And then just one last quick thing here, Dave. Brad talked about facility consolidation with the higher CapEx. I'm just wondering how much -- is that enough to move the needle with some of the operating costs? It looks like you've done a good job of keeping a tight lid on expenses as you always do. Just wondering how much more we could see in 2013.

The facility consolidation, by its nature, is time-consuming. It's not just a question of moving a facility from one place to another because we have instrumentation, we have interfaces, we have to make sure that the customers are receiving the same level of service. So there is opportunity around facilities. And I put that into 2 categories. One is planned consolidations for acquisitions, where we know that over time we have a plan to reduce or consolidate space. And the other is a comprehensive review of our existing footprint and what are ways in which we can deploy it better. And this, the particular investment that we spoke about in facility consolidation, falls under the latter category, where we're looking at our existing footprint and we are consolidating, we will be consolidating multiple facilities into 1 facility during 2013. And we will continue to look at that. Again, very hard to put a specific cost number on it, Kevin. But what I would say is without a lot of fanfare around here, every year we reduce costs by $45 million, $50 million. And that's just part of our business, it's part of what we do and it's going to continue to be part of what we do.

Your next question comes from the line of A.J. Rice, UBS.

Just a couple of quick questions hopefully. Just first of all, I know you were giving that comment last quarter pretty early, and I applaud you for just even making a guess at it. But you said $0.22 last quarter for the Medicare headwind, and now it's $0.35. And I just was trying to understand what is the clarification or the change in thinking that happened that resulted in the $0.35.

A.J., this is Brad. I think the major difference as we look at the $0.22 from Q3 and the $0.35 that we've updated now for our 2013 outlook is the 88305, which we did not know about at the time. The full impact -- the full year impact of the TC Grandfather change, which we did not consider in the $0.22 and a few other changes that are related to all the government changes and reductions in payment, and that is the difference.

Okay. And then another, a sort of broader question on the pricing trend. Is there anything -- when you step back and look at the aggregate business, payor mix, is that the places -- the different sources of payors? Is that changing and having an impact on pricing if you look at '12 versus '11 and maybe your expectation for '13?

A.J., it's Brad again. The biggest change I can think of that we see in that is mostly as a result of acquisition. So if I think about MEDTOX, for example, that's hitting in the client or direct to the company sort of billing, which is typically lower nature in price. I think beyond that, and some of the other things that we've done in the past few years, clinical trials-related, are also showing up in that same area. If I take those things away, I don't see a major shift going on between the payor mix schedules, especially on a year-over-year basis. We can see some variations in quarters and sequential views and things of that nature, but no real change in -- dramatic change in capitation or managed care fee-for-service patient, the other categories that come to mind.

Okay. That's good. And then just a last question on -- I appreciate the comments on health reform. I wondered specifically about the exchanges. Do your contracts with commercial payors' managed care today date just automatically apply to those people that are on the exchanges? Or do you have to go out and negotiate new contracts for those new health plans that -- maybe with payors you have current contracts with? And if so, have you had any early discussions and any sense that the exchange-related patients may get -- may be priced somehow differently or set up differently?

A.J., it's Dave. It's a great question, and I wish there were a clear answer that we could give you. I think the way that the exchanges are going to operate is still very unclear. And so we have had many conversations with our managed care partners about how the exchanges are going to work. And I think they are as uncertain as we are. So I think that the best we can give you is we're in frequent and detailed discussions. But it's not clear what the outcome will be from a pricing or an offering perspective.

Your next question come from the line of Darren Lehrich of Deutsche Bank.

I wanted to just ask a couple of things here. First, as it relates to buyback, I understand you're not going to guide us on the cadence of your buyback, et cetera. But just curious just given the size of it, will -- should we expect anything different as it relates to how you approach it? In other words, historically, we've seen more opportunistic buybacks in the quarter. Do you think you might do some larger, fuller purchase agreements? Just structurally, how are you thinking about the buyback, given the size that you've announced here?

Darren, it's Dave. I think the share buyback has been an extremely important way of returning capital to shareholders. And I think, over time, we've done a very good job of doing it in a disciplined way that has created a lot of value. That's our goal. That's what we're going to continue to do. Beyond that, we are not going to guide to how we're going to do it structurally or otherwise other than to say that this is the way we return capital to shareholders, we're committed to it and we're going to continue to do that.

Sure. Okay, that's fair. And then I guess, just on the cash flow outlook. Brad, it seems like you maybe pull a little bit more of working capital from the 2012 period. It sounded like maybe this inventory build around some vendor discounts that you got. I'm curious just why the cash flow outlook for '12 -- or '13 rather, wouldn't reverse that. Is there anything else in working capital that we ought to be thinking about for '13?

Not specifically in working capital. I mean, I think about the other things related to earnings that we talked about. The payment reductions are obviously a headwind for the cash flow. And then just generally speaking, the growth environment. I think again back to our comments of most of the growth driven by the MEDTOX acquisition in '13 that's in our range, I think it's just the muted earnings growth environment and the payment reductions are the only thing that come to mind specifically and nothing really in the other areas of working capital.

Okay. And then just so I'm clear. Severance and other restructuring is excluded from that outlook or contemplated in it?

It's excluded from both the EPS, so we don't project in our guidance at all any sort of restructuring activities. And therefore, it's also not considered for the cash flow guidance either.

Okay. But given some of the ongoing nature of what you're describing in terms of cost reductions and consolidations, what would be a rough cash impact from that in '13, any range you'd put on it?

No, I wouldn't want to estimate it because again it has a lot of things that it depends on as we execute on these things.

Okay. All right. And then just last thing is really around margins and what's sort of baked into your guidance. Implicitly it does assume margin improvement, just if you take midpoints and walk it up from the EPS line. I guess, Dave, you made the comment that you're taking $50 million of costs out per year, and you've already commented about some managed care pricing that you'll be able to benefit from. I guess, just given the environment and the growth of what we're seeing here, is there anything else that we ought to be considering in terms of your margin outlook that would get us to an improvement, my math, close to 1 point of year-over-year improvement in margin?

Obviously, the major swing factors, Darren, on margin are volume, price and expenses. So how we do on volume will have an impact on where we end up in the margin range. The pricing that we believe that we will encounter in 2013 have an impact on that margin range. And the facility consolidation, the cost reductions that we've talked about, and of course, other cost reductions that we do on a regular basis, those are the 3 major factors. But I don't -- and I guess, actually the fourth thing is just the continued integration of acquisitions and the ability to reduce costs in MEDTOX and continue to reduce the cost base in Genzyme. Those are the major things that are incorporated in the guidance.

Your next question comes from the line of Isaac Ro, Goldman Sachs.

I just maybe wanted to touch on the organic volume trend this quarter when you adjust for Sandy. Was there anything else in there? You mentioned flu being sort of not that important. But maybe deductibles are another item there that helped the business sequentially?

No, I think what helped the business sequentially is that more people came to our patient service centers. I mean, we had a -- in our view, we had a strong organic volume growth in a quarter that typically is not one of our stronger growth quarters. So we're pleased with it. And I don't know that there's anything we can do to kind of break it down into bits and pieces.

Okay. And then just on the testing platform switch there. Is there an opportunity for you guys to maybe get better pricing terms or upgrade the technology you are using in a material way? And I'm just trying to put that into context as to how important that is for the overall business, how sizable it is.

There's a -- whenever we switch out a testing platform, it is to improve technology. And in almost every case, it's to reduce expenses. And so in this case, the change in the testing platform will have both impacts, although obviously there is a capital component that comes back as an expense once it's deployed into service.

And Isaac, this is Brad. I would add that because of our standardization and the way we go about this from a supply chain perspective, we do the whole network at one time, not on the same day but we make the decision, and it applies to the entire network. It takes some time to roll it out. But we think by approaching it that way, we are able to get the best economics on those kinds of activities.

And can you maybe offer some color as to what type of a testing platform it is. Is it routine testing or molecular? I'm just trying to get a sense of how important this is to the business mix.

No, we're not going to give any color on what platform it is. So it's 10:00, and I'm going to -- we're going to try to take a couple more questions. But let us please try to limit it to 1 question so that everybody has a chance.

Your next question comes from the line of Glen Santangelo from Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: I was wondering if I could just maybe follow up on that previous sort of EBIT question. It kind of feels like if I look over the last 6 months, your operating profit was shrinking a little bit by about maybe 3% sort of year-over-year in the second half of '12, if I normalize for Sandy. And then if I kind of take into account what you're telling us in terms of guidance, it feels like you're looking for a 1% to 2% increase in your operating profit this year. And Dave, I heard you just talk about the drivers. Maybe if you can give us a little bit more clarity about what you think you can do on the expense reduction side, so we can maybe back into kind of what you're implying in terms of vols and pricing?

Glen, it's Brad. Are you talking about absolute dollars or on a margin basis? Glen J. Santangelo - Crédit Suisse AG, Research Division: On a dollars basis.

Okay. Because I can see that, but I couldn't get to on the margin side what your question was.

So Glen, it's Dave. I think, as I've mentioned and I'm not sure that I can say it in a different way from what I've said before, we have some opportunities around the acquisition integration. We have some opportunities around the consolidation of facilities. And we always are working on cost reductions across the organization, with SG&A this year being a prime example. So I can't really give you much more than what I've said before, which is these are the expense opportunities and the expense reduction opportunities that we're always looking at. Glen J. Santangelo - Crédit Suisse AG, Research Division: Okay, that's fine. Maybe if I could just ask one quick one on the anatomic pathology side. You talked about obviously the major cut in your sort of prepared remarks. Could you give us your updated view maybe on this trend of physician in-sourcing of these tests? Do you see it moderating at all? Or with the reimbursement cut, do you think it reverses over time this trend?

I do think that the reduction in the technical component of 88305 will discourage physician in-sourcing because it becomes considerably less of a profit center. But again the impact, the reduction only occurred on January 1, so it's really too early to call it a trend.

Your next question comes from the line of Dane Leone from Macquarie.

A quick one for me. You kind of always highlight some new tests that you have in the pipeline in your the outlook. I think it would be helpful if you could just give some color going into '13 on expectations for new products to add to the growth of the franchise. I know you don't really break it out specifically. But any type of characterization you can give this year versus last year, any real impact towards the growth of the esoteric mix overall would be helpful.

Yes. I think the Ariosa test will be a significant contributor, the noninvasive prenatal screening test. I think that we're going to continue to see some growth in specialized testing around hepatitis C as more of these compounds are successful and come to market and there are tests associated with the efficacy of the new compounds. I think that the next-generation sequencing and the cardio seq will continue to grow. I also think that even though it would not be described by itself as esoteric, I think that the chronic kidney, the cardiovascular, the bone, all of the services that we've launched through Litholink that help physicians manage patients will continue to see nice growth there. So there are a lot of things that obviously I have not mentioned, but those are probably some of the highlights for where we think we'll see growth in new tests in 2013.

Okay. And for context, is there a hurdle rate where you'd consider something an impactful contributor, generally speaking, of a new test or growth of a test?

I think the reality is that most tests -- most new tests that we introduce are relatively specialized and meet needs of a certain physician community or a certain part of the clinical community. So for us, the hurdle rate is, is there an unmet need in the population, is this something that's going to be helpful to clinicians, will it give us the ability to better diagnose and treat disease? Obviously, we want to be financially successful with these tests, but it would be unrealistic to say there has to be a financial hurdle rate for everything that we launch.

I would now like to turn the call over to David King for closing remarks.

Thank you, Sean. Thank you, everyone, for attending our Fourth Quarter and Full Year 2012 Earnings Call today, and we hope you have a great day.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.