Labcorp Holdings Inc. (LH) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2013 Laboratory Corporation of America Holdings Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to hand the call over to David King, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Clinton. Good morning, and welcome to LabCorp's Third Quarter 2013 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; Adam Feinstein, Senior Vice President, Corporate Development and Strategy; and Steve Anderson, Vice President, Investor Relations. This morning, we will discuss our third quarter 2013 financial results, update our 2013 guidance, discuss the payment landscape, 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, 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 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 update our 2013 guidance. First, cash flow. Our cash flow continues to be solid, although year-to-date, it continued to be impacted by delays in payment and denials of coverage for existing tests by some payors after implementation of recently adopted molecular pathology codes. Free cash flow for the trailing 12 months ended September 30, 2013 were $620.2 million. DSO at the end of September was 50 days, which was flat sequentially and remains elevated due to our experience with the molecular pathology codes to which I just referred, increased utilization by uninsured patients and increased patient billing due to plan design changes. During the quarter, our bad debt remained 4.3%. Second, revenue growth. Revenue increased 3% year-over-year in the third quarter. During the quarter, total company volume increased 5.1%. Organic volume increased approximately 2% year-over-year, primarily from our toxicology business. Revenue per requisition decreased to 1.9% year-over-year. Revenue per requisition decreased year-over-year due largely to previously discussed government payment reductions, payment issues related to molecular pathology codes and strong growth in our toxicology business. Third, margin. For the third quarter, our adjusted operating income margin was 17% compared to 18.2% in the third quarter of 2012. Margins were negatively affected by Medicare payment reductions, delays and denials of coverage by some payors after the implementation of recently adopted molecular pathology codes and the implementation of sequestration on April 1. Fourth, liquidity. We remain well capitalized. At the end of September, we had cash of $174.1 million and $372 million of borrowings outstanding under our $1 billion credit facility. During the third quarter, we repurchased $288 million of stock, representing 2.9 million shares. During the first 9 months of 2013, the company repurchased $763.9 million of stock, representing 7.9 million shares. At the end of September, $304 million of repurchase authorization remained under our share repurchase program. Our share repurchase activity during the third quarter reflects our continued disciplined capital allocation program and commitment to return capital to our shareholders. This morning, we announced that LabCorp's Board of Directors authorized an additional $1 billion share repurchase program. This morning, we updated our 2013 financial guidance. We expect revenue growth of approximately 3%; adjusted EPS, excluding amortization, of $6.95 to $7.05; operating cash flow of approximately $825 million to $850 million; and capital expenditures of approximately $210 million. The guidance includes the negative impact of approximately $0.35 due to Medicare payment reductions. In addition, the guidance includes the negative impact of molecular pathology payment issues, which is not included in the $0.35 that I just mentioned. The guidance excludes the impact of any share repurchase activity after September 30, 2013. The company's capital expenditure guidance is higher than historical levels due to near-term investments in facility consolidation and the replacement of a major testing platform. I'll now turn the call over to Dave.

Thank you, Brad. We are very pleased with our third quarter results. During the quarter, we grew revenue 3%, we grew volume 5.1%, and organic volume by approximately 2%, a notable achievement in this environment. We continue to execute well on our key growth initiatives. We maintained pricing discipline. And this morning, we announced that LabCorp's Board of Directors authorized an additional $1 billion share repurchase program. This authorization clearly demonstrates our commitment to our stated capital allocation objectives and continuing to return more capital to our shareholders. I would now like to provide an update on our payment landscape. We continue to maintain our disciplined approach to managed care pricing. Our payment experience with respect to the recently implemented molecular pathology codes has improved, but remains challenging. As we noted last quarter, we are experiencing delays in the pricing and coverage decisions related to these codes among various payors including Medicaid, Medicare, TRICARE and commercial carriers. These coverage decisions are contrary to long-established standards of care and will ultimately be harmful to patients. We continue to work diligently with payors to address these payment issues, and ACLA and our industry colleagues are fully engaged. These delays and denials of coverage had a negative impact on revenue; price; operating income; adjusted EPS, excluding amortization; and cash flow during the first 9 months of 2013. And this is incorporated in our 2013 guidance. Once again, the industry is being harmed and the harm is not only to LabCorp, but also to hospital labs, academic labs and other independent labs. Our industry cannot and should not be expected to provide critical services to patients without receiving payment. I would now like to update our progress on each aspect of our Five Pillar Strategy. The first pillar of our strategy is that we…

Thank you, Dave. Can you elaborate on LabCorp's capital allocation policy? As we have stated throughout 2013, we are committed to achieving a 2.5x net-debt-to-EBITDA ratio. We have taken steps toward this goal over the last 2 quarters. Based on our capital allocation history, we target half of our free cash flow for acquisitions and half for share repurchase. In the absence of a large acquisition over the next year, we would anticipate using additional leverage to repurchase shares. We have a strong history of returning capital to our shareholders. Over the last decade, we have repurchased $5.3 billion of our stock, representing 79.7 million shares at a price of approximately $67. Why are capital expenditures expected to be so high in 2013? We typically spend approximately 3% of revenue on capital expenditures. Our capital expenditure increase in 2013 is driven by near-term investments in facility consolidation and replacement of a major testing platform. What is included in, and excluded from, your 2013 guidance? Our 2013 guidance includes the negative impact of approximately $0.35 due to Medicare payment reductions. In addition, our guidance includes the negative impact of molecular pathology payment issues, which is not included in the $0.35 that I just mentioned. And our guidance excludes the impact of any share repurchase activity after September 30, 2013. Can you remind us of how drugs-of-abuse volume trended during the year? In the third quarter, our drugs-of-abuse volume increased approximately 14% year-over-year, excluding the impact of the MEDTOX acquisition. This compares to a year-over-year increase of 10.6% in Q2 of 2013, 10.2% in Q1 of 2013 and 6.8% in Q4 of 2012. We also delivered strong year-over-year growth this quarter in our wellness and pain management businesses, which fall within our occupational testing services operations. We believe wellness and pain management testing will provide a great growth opportunity for LabCorp over the next several 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] Our first question comes from the line of Gary Lieberman of Wells Fargo.

[indiscernible] of the molecular pathology payment issues?

Gary, sorry, the only thing we heard in your question was molecular pathology payment issues. Can you state it again, please?

Sorry, I was wondering if you could quantify what the negative impact is from it for the year?

No. We haven't quantified it specifically,, in large part because our hope is we'll see continued improvement. So I'm just not prepared to do that right now.

Okay. But conceivably, if the issues get worked out, are you optimistic that you could recoup the payments that you haven't received or you think it would only be fixed sort of going forward?

I think we feel that if the issues are worked out, we have the opportunity to recoup the payments that we -- that have been delayed.

Okay. And are you optimistic that happens before the end of the year or you think it takes longer than that?

I think some of it would be resolved by the end of the year and some of it will go over into next year. There are multiple payors, multiple issues, it's a complex discussion. We've had a terrific team working on it from our side and we've had great collaboration in terms of the payors being willing to listen to us and try to work with us, but I don't think it's realistic to think we'll get it all resolved in the next couple of months.

Okay. And then on the volume experience, it seems like your experience is somewhat more positive than your largest competitor. Do you think that -- do you think you guys are taking share or what -- what, if anything, do you think you could attribute that to?

I'm not going to speculate on things like taking share. I'm going to tell you that I think our volume experience is based on exceptional operational focus and execution. We have a terrific team of senior leaders in this company, starting from the men and women who run the operating divisions, going down through the sales leadership, going down to the sales force feet on the street. And we have been talking to them throughout 2013 about the importance of growth. And what you're seeing is just excellent execution, excellent blocking and tackling on a day-to-day basis in every aspect of our business, and that's where the volume is coming from.

Okay. So maybe if I ask it another way. Do you feel like you guys are growing faster than the overall market or is the growth accelerated from last year? How do you feel about that?

I think the utilization environment has improved. I think some of the initiatives that we've put in place, particularly around things like our wellness testing, are bearing fruit. And again, I think we are focusing on the growth opportunities. And with everybody's shoulder to the wheel on the operational team, we're performing very well.

The next question comes from the line of Hima Inguva of Bank of America.

I would like to know your thoughts on consolidation within lab space. Your main competitor has been reporting soft quarters the past few quarters, so I would like to know if you would be open to a large transformation acquisition if a right strategic target comes along?

I think we are always open to acquisitions. And acquisitions have historically been an important part of the first pillar of our strategy, based both on the ability to expand our test menu and on the ability to expand our footprint. So we're open to the opportunity to make any acquisition that will benefit our long-term strategy. The key factors are: is the asset attractive, is it strategic for us and is the valuation appropriate. And within those parameters, we would consider whatever came along that would be interesting to us.

And as a follow-up, do you have any target range in terms of size and your commitment to investment grade ratings?

Well, target range in terms of size, as we have historically mentioned, we think about -- in a typical year, or I should say in kind of a -- over a typical period of years, that half of our free cash flow goes to acquisitions and half of it goes to share repurchase. Obviously, we have done some sizable transactions in the past. We are proud of -- and our investment-grade credit rating, we think it remains important in this environment. And it's always something that we take into consideration when we think about transactions.

The next question comes from the line of Bill Bonello of Craig-Hallum.

Just a couple of questions. Brad, are you going to buy a baseball team?

Good question, Bill. Probably not. I might work in the stands there.

Got it. I think that would be fitting. Couple of other questions. Just a follow-up on the molecular coding question, I just want to make sure I understand the accounting there. I know you got into this a little bit last quarter, I think it was. But am I right that for at least some of these denials or delays, you are not recording the revenues. So you're performing the test, you're not recording the revenue, you're incurring the expense. So that if you did eventually get paid, that would just sort of flow through to pretax or is that a misunderstanding?

Bill, this is Brad. That's a correct understanding. I mean, given the situation and the uncertainty, we have recorded reserves against that revenue based on what we think we're ultimately going to collect, but a lot of that has a pessimistic view on it, given what we've heard recently. But we continue to work with payors, as Dave said, in a very focused way. And it is payor-by-payor to get a more favorable outcome of the initial reactions. I would say that, generally speaking, and again it's different for every payor, but generally speaking, the updates that I get on a very regular basis suggest that a number of payors are still being educated on exactly what the change was. So even though we're in October of this year, we're still spending a lot of time educating payors on what happened, what was it like last year, what is it like this year, and are working to have that turn in our favor.

Okay. Great. And then, Dave, just wondering if you could add a little bit more color on the Baroma and UNH relationships? Maybe give us some sense of how that economic model works and whether there's any kind of a network component to what you're doing with either of those organizations?

Well, Bill, with Baroma, it's the parent company of Medicare Shared Savings ACO. There is an economic component. I'm not prepared to discuss it separately, but I think it's an economic component that will be rewarding both for us and for Baroma. And with BeaconLBS, again, as we said, we've -- BeaconLBS has signed the contract with United. Implementation will be in 2014 and we'll give updates as we get closer to the implementation date in terms of what that entails and what it means. But again, we see the opportunity to benefit physicians, patients and employer groups in the administration of lab services in that market.

Okay. But not -- don't -- I mean, should we -- it sounds like you just don't want to say maybe yet or don't know but, I mean, it could potentially just be the analytical support piece or -- and not some kind of preferred lab network or -- I mean, just trying to think how we would think about that?

Let's say that I prefer not to say.

The next question comes from the line of Lisa Gill from JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Dave, you mentioned that you would bring the BRCA test to launch in the fourth quarter. Can you maybe just talk about what your expectations would be as far as garnering market share around that test as we move through '14?

It's a big day for questions about market share, isn't it, Lisa? We have some assessment of what we think the market is and what we think the opportunity is. And I don't think it benefits anybody to -- well, I don't think it benefits us to kind of go into a lot of detail about that. Let me just say that I think there is a desire in the market for alternatives. We are very focused on not only the validation of this test, but particularly, the ability to call the variance of unknown significance. The genetic counselors provide us with, I think, a substantial differentiation in the marketplace, and we have not only the largest, but I think the best, terrific team of genetic counselors to support our reproductive genetic works. So I think there will be the opportunity to make a substantial impact in that market and we look forward to the launch of the test when we're satisfied that we're ready. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Great. And then my second question would just be around the Affordable Care Act and moving into 2014, especially on the exchange side. Clearly, you have a very large partner in United. But my question is around, one, are there separate contracts for the exchanges? And then secondly, are you seeing narrow networks around the exchanges and would you expect that you'll see an increase in volume based on who your partners are in the market?

So far, I don't think we're being asked to contract separately for the exchanges. There has been a lot of talk about the narrowing of networks, but I think this is very much a work in process and I think 2014 will be the year of learning for all of us about the exchanges. I mean, I was certainly reviewing some of the exchange literature recently. And for example, the -- some of the bronze plans have no out-of-network benefit except for emergency room services. The silver and gold plans have higher benefits, which suggest broader networks. So I just really think this is going to be a learning experience for us and for everybody else during 2014. And I think it would be very hard to talk specifically about expectations, but we are committed through our partners to serving the exchanges and look at that in the long term, certainly, as an opportunity for further growth. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And are you still positive, Dave, on the long-term opportunities around ACA?

Absolutely. I mean, we're going to have more patients who have coverage, we're going to have fewer uninsured. And we think in -- at LabCorp, about driving innovation across scale, driving opportunity across scale and driving growth across scale. And so more people with insurance coverage gives us more opportunity to grow.

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

So one follow-up on the molecular diagnostic issues. I mean, set aside the delay in payments. When you kind of like think kind of like forward-looking into 2014, are you now at kind of like a new kind of like re-based with payors, commercial payors, as well, where, in the future, you're just not going to run these additional tests? So just trying to understand kind of like what it means just for the opportunity longer term?

Ricky, it's Dave. I think it's too early to talk about how we would address the problem if we ended up being told, "You're just not going to get paid for this," because I'm not prepared to concede at this point that we're not going to get paid. So as I said on the last quarter call and repeated on this call, I would hate to see patients deprived of needed services based on payment policies that are contrary to standards of care and contrary to historic payment policies. And I would hate to see labs put in the position of having to decide whether to perform those services or not. But to go back to Bill's question, we perform the test, we incur the expense, we realize no revenue, that puts us in a difficult situation as well. So it's too early to say definitively how we would address that, but I will say I think it's very important for payors to realize the implications of these decisions and to reconsider whether this is really the outcome that they want for their patients.

Okay. And then with the first 2 weeks, you kind of talked about this shutdown, the clinical lab fee schedule has been kind of like on hold. Do you have any updates on when we should expect it to be out?

I do not, and I don't know whether there'll be any delay as a result of the government shutdown.

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

Dave, I guess, first off, could you talk about Canada, kind of what opportunities do you see on the horizon? Specifically, I saw something in the news about Alberta Health Services is planning to maybe privatize its whole lab business and that could be -- it looks like it could be very significant, maybe worth $3 billion over 15 years. Is that something you guys have seen yet?

Kevin, this is Brad. Obviously, we've followed that situation closely. We are partners in the private lab that's already in Alberta that has part of that work today. So there is an opportunity for that work to grow based on that proposal that's out there.

Okay. And when you say the private lab, you're talking about DynaLIFE, Brad?

Yes, yes.

Okay. But that's not majority-owned, though, is that correct?

That's correct. Around 44% or so LabCorp owned.

Got it. Got it. And then since I have you, Brad, just wondering, the toxicology business is obviously growing pretty nicely, with wellness and pain management as well. Just wondering, that is lower-price business, right?

Yes.

So if we backed out that growth, wondering what your rev-per-req growth would look like? Instead of down 1.9%, would it have been down maybe like 1%? Have you done that math?

Yes, we're not sharing exactly those specifics, but it's obviously one of the categories. I mean, the government reductions are probably one significant component, the MoPath issues that we talk about. And then the third is the one you mentioned, that's the growth of business that's roughly half of the average-price business, so it's obviously a large moving part.

Understood. And then, Dave, just kind of conceptually, big picture. I know you believe that the industry will eventually get back to the 4% to 6% organic growth. Just wondering kind of what are your latest thoughts on how far out that could be or how close we could be to getting back to that type of organic growth.

Well, I think I have said 4% to 6% top line growth, so there's -- so some of that's revenue, some of that's organic volume, some of that potentially is acquisition volume, Kevin. But my answer is we had a nice quarter from a revenue and a volume perspective here. We had the pricing issues that I think everybody pretty much knew about. But it does give me greater optimism that we're returning to a time in which we would see better top line industry growth. Now as I said before, I think 2014 is going to be a learning year for everybody because of the implementation of the ACA, the exchanges, the challenges that have -- people have experienced so far in signing up for the public exchanges. So I think it's going to be wait-and-see for 2014. But I think we're going to see continued improvement in trends and that -- the center point is lab services are vital to the health care system. They're a fraction of the cost at 2%. They -- the lab values are 50% of the data elements in patient's electronic health records. And our industry is going to continue to be a vital contributor to the improvement of health care in the U.S. And that, to me, implies that we will see top line growth.

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

Dave, I was interested in your comments regarding the oncology panel you guys are working on. Was hoping you could maybe put some color around your strategy there and anything you could offer with regards to how you plan to price that test and where you think you need to be competitively to be effective in the marketplace in terms of service levels and genetic content, that kind of stuff.

I don't think we're prepared to talk about pricing at this point because, obviously, that's a discussion with payors. But I certainly think there is increasing evidence about the value of assessing tumors through next-generation sequencing methodology. I think that our outstanding team of clinicians and scientists has focused on not what's the broadest spectrum that we could test, but what are the key things, the key genes that need to be looked at and the key items within the tumor that need to be evaluated. And in that context, have, as I mentioned, selected these 50 APA genes and tumor-suppressor genes or approximately 50 APA genes and tumor select -- suppressor genes to look at 2,700 important and powerful mutations. So this is our -- this will be our initial launch. We will continue to add content and services. Again, I go back to our genetic counselors, I go back to the number of tests that we perform and the size of the databases that we bring to bear. And I think LabCorp has a very, very important role to play in better diagnosis and treatment of complex cancer.

Sure. And if I could just ask a follow-up there. Conceptually, we're still obviously, as you pointed out, learning what these tests can be used for. But it seems to me, structurally, that they're very complicated tests to run. So what I'm interested to know is if you have a strong view as to how much of gene-based cancer diagnostics will be done by centralized labs versus these distributed products, because you've got a lot of sequencing companies trying to come up with kitted versions of cancer diagnostics that might be distributed out to hospital labs. And it just seems like, to me, that this is a market that would really require a more specialized central lab. So do you have a strong view as to sort of how much will get done centralized versus distributed? I'd be interested in that.

I agree with your view. I mean, I think it'll -- I think this will be -- these are complex and sophisticated tests. They require a high degree of specialization, and so I think the centralized scale reference laboratory is going to be the obvious place to perform them. I also think that the ability to interpret and deliver the content is going to be absolutely critical, and you're going to need to see enough of these to be able to develop a robust database and robust content. And again, I think we're in an excellent position to do that.

The next question comes from the line of Gary Taylor of Citi.

A couple of questions. First, do you have any update, just kind of on your outlook for the pathology cuts on the physician fee schedule for '14? And anything new since the last call on the possible re-basing of the clinical lab fee schedule in '15?

On the OPPS proposal, ACLA and a number of other groups have met with CMS and expressed our views. In addition, a letter went to CMS from -- signed by 115 congressmen. There is a similar letter that is, I believe, being circulated in the Senate or has been sent already, signed by 36 senators, asking CMS to withdraw the proposal. So I think there's been a very, very solid effort to identify the policy issues that, we believe, are not correctly stated within the proposed rule. And I think the fact that 115 members of Congress and 36 senators have agreed with us and signed a letter asking to withdraw the proposal is evidence that we've made substantial progress on that front. In terms of the clinical lab fee schedule proposal, as mentioned previously, the government has been shut down for the last couple of weeks. There are a large number of proposals circulating, and ACLA and the laboratory industry continue to be very, very much involved in trying to shape the discussion about the future of the clinical lab fee schedule.

Okay. Two quick questions, maybe for Brad. Is there any chance you could give us acquisition spend for the third quarter?

Gary, I don't have that in front of me but it's not a lot. I think year-to-date, it's $100 million. I think in the third quarter, it was very small.

Okay. And when you -- I just want to recall correctly, when you talk about kind of the 2% organic volume, MEDTOX is the only thing that's being excluded? Are some of these smaller tuck-in acquisitions included or excluded from that number?

Small tuck-in acquisitions would be included in the organic number.

Got it. And then last question. I know the 4Q earnings guidance excludes any repurchase after the end of the quarter. How much would the diluted share count drop sequentially even if you did no additional share repurchase? In other words, just trying to think about the timing of the repurchase through the -- throughout the third quarter. Would you naturally have an additional sequential decline in share count even without additional share repurchase?

Yes, because you'd get the full impact of the ones that we bought in any quarter. That would bring down the share count in a subsequent quarter by being fully outstanding for that amount of time.

Well, off the top of your head, do you have a number in mind for diluted share count? Or what's the diluted share count implied in the 4Q?

I don't have that raw off the top of my head. But I mean, if we'd just kind of use a half-quarter convention, you could think that what we bought in the third quarter was half outstanding in the third and would be fully outstanding in the fourth.

The next question comes from the line of Robert Willoughby of Bank of America Merrill Lynch.

Brad, glad to see you're joining Wes Elingburg in that great campground of retirement, but good luck to you there. Question for Dave, just you had a nice return on the FMI investment stake. Is there much behind that in terms of other investments we should focus on, with the equity markets now open and more deals coming out there? And maybe, if not, why isn't that an opportunity for you to make some investments in these technology companies, given your access and view on all of the new thoughts that are out there?

Yes, Bob, we have made a number of investments over time and we'll continue to make them. We look at opportunities that we think are interesting from a technological perspective, opportunities that we think are interesting from a testing perspective and opportunities that we think are attractive from a strategic perspective. So we've had -- like most investors, we've had some successes and some failures. We had a couple of nice successes recently, and this will continue to be an important part of our strategy as we think about how we stay abreast of what's going on in the market.

How many shots on goal, maybe just to help us think about the opportunity? I mean, are there 10 active investments or half that amount? I mean, how do we think about the potential opportunity?

Bob, this as Adam. Just -- yes, I mean, if you think about any portfolio, we have several active investments. I don't want to give you a precise number, but from the range you gave, I'd say you're in the right ballpark. So you wouldn't look for us to have hundreds of things out there, so I think the ballpark you gave is accurate. And as Dave said, we continue to look for opportunities that create -- that are strategic for us, and we'll continue to think about that.

The next question comes from the line of Amanda Murphy of William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: I just had a question on some of the dynamics that we haven't talked about in a little while. But in terms of hospitals buying doc practices and in-sourcing lab testing and then, generally, physicians in-sourcing testing and sort of general follow-up from the TC Grandfather Clause, just curious if you could update us on those 3 dynamics at this point.

Amanda, it's Dave. I mean, I would say that health systems acquiring physicians is a continuing trend. I do think it's diminishing in the sense that a lot of those deals have been done and health systems are now trying to figure out exactly what they're going to do now that they've acquired these practices, and the doctors are trying to figure out what they're going to do. Physician in-sourcing continues to be a -- particularly around pathology, continues to be a theme. Again, I think the most significant part of that has abated, but it's still out there in the marketplace. TC Grandfather, in my mind, is done. It happened. We've absorbed the impact and we've moved on. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it, okay. And then just as a follow-up to Kevin's question earlier on just long-term growth trends or rates in the industry. It used to be that you were able to drive a couple percentage points of revenue-per-req growth, just the mix shift to esoteric testing. I'm just curious, as you're launching some of these newer tests, is that a dynamic that we might see again, not necessarily that growth rate but just an impact from esoteric percentages going up over time?

Yes, I think it is. I mean, we don't launch esoteric tests because they're esoteric or because of their price point. We launch them because they are clinically relevant and medically necessary. Certainly, there's the opportunity to see benefit from the mix there. As Brad mentioned, the wellness and pain management testing, while we still get a very nice margin from that testing, on a pure price perspective, is lower than our overall book. And the reductions that we've received from the government are pretty much unprecedented and that has a major impact on revenue per requisition, as well as on margin. So there are many puts and takes to pricing, and positive mix certainly is one of those things that is an opportunity in the mid to longer term. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it. And then just last one on M&A. Obviously, that's been a driver for you guys for a while. I mean, how do think about that, too, in the longer term? That's something that, essentially with some of these pricing changes that are going on, do you see that being an avenue for growth over the longer term?

Yes, I think as I said in the prepared remarks and said in response to an earlier question, M&A and acquisitions are going to be, I think, important for us going forward.

The next question comes from the line of Tom Gallucci [ph] of FBR.

I just had a couple of things I want to clarify real quick, and maybe one question after that. On the molecular -- on the impact of the molecular-related issues, do you describe that as sort of getting a little bit better or the same or getting worse versus, let's say, the last quarter?

Tom, it's Dave. I think it's getting a little bit better.

Little bit better, okay. I thought that's what you said. And then I don't know if I missed it, but was there any meaningful intra-quarter trend on volumes or particular volatility, as we've heard maybe some describe out there, that you saw?

Tom, we don't talk about volumes within the quarter or trends within the quarter, so I'm not in a position to respond to that.

Okay. And then just the last one, Dave. I know you've talked in the past about sort of diversifying revenue streams a bit, maybe a little bit away from government-oriented reimbursement, for good reason. MEDTOX clearly seems to have been a home run of a deal. As you think about the acquisition environment going forward, should we be thinking about acquisitions that are more skewed away from some of the core clinical testing that we've seen in the past and towards these other types of areas or even international? Or do you still expect it to sort of be a blend that you've done in the past?

I think it'll be a blend. I mean, when we talk about the knowledge strategy and creating knowledge for health care stakeholders, that's how we think about the way that we can diversify revenue as, again, things like the Baroma relationship and BeaconLBS and other tools that we're developing. So I don't think about that as going out and buying non-lab assets for the purpose of diversifying revenue. Because one of the things I think we're good at is running laboratories and be careful about buying things that we're not good at just so we can get away from our traditional mix. Having said that, I look 5 years down the road and we certainly will be a more global company, we need to be. I mean, it's a global world and health care is a global business, and so we need to figure out how to participate more broadly in international markets. I don't foresee a big acquisition there but I foresee -- we do business in 40 countries today. I see the opportunity to expand that presence. And continuing to look for strategic opportunities within our own markets will be a very important part of long-term growth for us.

The next question comes from the line of Darren Lehrich of Deutsche Bank.

I wanted just to pick your brain a little bit, Dave, just get your thoughts on what business model you think is resonating the most within the hospital channel, just in terms of the offerings that you're bringing to market there. You obviously broadened your -- in Northern California. Do you think that's the primary mode of consolidation within that realm? Do you think JVs are too cumbersome for health systems? How's your ability to co-manage labs? Just want to get your thoughts in sort of what's resonating out there.

I think there's a broad range of offerings for health systems, ranging from acquisition at the one end to JVs at the other end. I think health systems are becoming increasingly focused on what the financial characteristics of the laboratory are, particularly the capital needs required there and the space needs and how they can potentially deploy those assets more effectively within their core competencies. That means some will sell, some will ask us to manage their laboratories, some will just want to send us reference work. I agree with you, Darren. I think JVs with large health systems are complex, but that doesn't mean they can't be done, we have several. So from our perspective, it's the broadest -- the willingness to participate in the broadest range of potential offerings, the willingness to do what makes the most sense to the health system in terms of optimizing its ability to provide the highest quality lab services at the most effective cost.

And I guess, the follow-up then would just be your -- or how different are the conversations today? I mean, you bring up capital and space constraints. Obviously, there's reimbursement issues perhaps down the road, but just the unit cost still is pretty different. So I'm curious how that conversation is changing, if at all, as you talk to health systems.

Well, when I started 7 years ago, I'm sure everyone can remember that I was very, very optimistic about how the health system would -- how lab work would migrate from hospitals to independent labs. And 7 years later, I've relearned one of the great truths of health care, which is everything takes a lot longer than we think it will. So I just -- we're having constructive conversations. Hospitals and health systems are more capital constrained. They're seeing reimbursement come down. They, too, have been cut significantly by the government over the last 2-year cycle. And we're just going to continue to press ahead with this strategic focus. And ultimately, I think there's great opportunity for growth there.

That's great. And then just my last question, really just to clarify your comments on BeaconLBS and the United arrangement. Congrats for signing that. The question here though is, is this something that will be part of a benefit design for 2014 or is this for the 2015 year? And if the latter, do you think you'll have more health plan customers signed up for the selling season for next year?

We've said that we expect implementation in the latter part of 2014, and that's what we're going to say right now. And we'll provide you with further information over the next several quarters. So 2 minutes past the top of the hour here and we'd like to try to take everybody's questions. We do want wrap up though. So please, let's try to ask questions that haven't been asked and answered already and let's be brief.

The next question comes from the line of Glen Santangelo from Crédit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: I'll be quick. My question was on margins. The margins probably came in a little bit lower than I would have thought on volumes that were probably a little bit stronger than I would have thought. And so I'm just kind of curious if you can give us a little bit more color on those margins and what your expectations are going forward.

Glen, it's Brad. For the reasons that we mentioned in the call that relate to revenue per requisition, as well as price, when we look through what's going on with the margins, those are the major drivers. So very much the reductions revenue, reductions that we've talked about, are the culprit there. And as Dave mentioned earlier, as we think about the opportunity over time, I mean, it has been a reimbursement challenge, as you know, for the reasons that we've mentioned. But we continue to believe that the margin characteristics of the business are attractive going forward, from driving standardization and innovation over our scale. So bumpy time from the reimbursement perspective, but it's there.

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

In the same vein as the previous question, but just thinking about the operating expense leverage that the business model has, I guess, in light of some of the innovations you're putting in automation and the labs going forward. As volumes, as organic volumes come back, hopefully supported by ACA in 2014, what's your kind of guess of how much variable costs will still need to come back on? I mean, I think you're operating from a fairly low volume perspective historically, so we would, I guess, expect to see some leverage there. Any color is helpful.

I think, again, it definitely relates to the reimbursement environment. But from a leverage and the cost perspective, I mean, we have the variable costs of the reagents and the supplies that we use. But our infrastructure is still there and visiting lots of accounts and picking up samples every day. So I think to the extent that can organically grow, there's a tremendous amount of leverage that's there.

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

I was going to ask you about maybe any comment you have, early days, obviously, but the Walgreens announcement to begin to try to offer clinical lab services through their retail outlets as part of their minute clinic type of approach. And I mean, they are talking about being disruptive to the clinical lab industry. How -- what do you think of that? And then also with the other retail drug chains that offer similar type of service, is there any opportunity for you to partner with any of them? Have you thought about that?

It's Dave. So we have, in the past, had partnering relationships with a number of the in-store clinics. They're not economically very productive for us. The testing menu is extremely limited, the demand for when you come pick up specimens is high. And you end up sending a courier at an odd hour to pick up one specimen. It just -- that model is not a -- the in-store clinic model is an acute -- to me, is a model of you take care of an acute problem like an earache or a flu shot or something. It's not really like even an urgent care clinic, where there's a significant number of blood draws. With respect to Walgreens, my understanding is that what they're doing in this pilot, at least in the one store, is they're just going to have a phlebotomist there who's going to draw blood and send it to a reference lab, just like we do. And again, I think from the perspective of convenience, accuracy, cost, I still think that the reference lab model, in the long run, is going to be the most successful. So we're always aware of what others are doing and have interesting innovations, and we'll continue to watch this closely.

The next question comes from the line of Nicholas Jansen of Raymond James & Associates. Nicholas Jansen - Raymond James & Associates, Inc., Research Division: Quick question on guidance. What's the primary delta between where your guidance is today relative to when you issued original guidance back in February? You've done over $750 million of buybacks, yet the midpoint of EPS is unchanged. So relative to your initial expectations, is the entire delta just the molecular pathology coding changes or is there something else there that's kind of not played out as you originally anticipated?

Nicholas, this is Brad. That is the delta, you've nailed it.

I would now like to hand the call back to David King, Chairman and Chief Executive Officer.

Thank you very much. Thank you, Clinton. In closing here today, obviously, we had a significant announcement about Brad's retirement. And I was reflecting with him yesterday afternoon, it's really a sad day for me. I remember what I first met Brad, and I think it was 1996, and since then, we have worked together on a professional and a personal level in an extraordinary way. Brad has been a phenomenal contributor to this company and to our industry in a period of great transformation. He was the head of billing here. When he came here, bad debt was 11%. We literally were struggling to get the bills out the door. And what we've accomplished with his leadership under -- as head of billing and as Chief Financial Officer when Wes stepped down is really exceptional. So I don't say this about a lot of people at LabCorp but Brad has been a stalwart here. And I know I speak for the whole team in saying we will really, really miss him deeply and wish him and his family well. And with that, we thank you for listening to our call and wish you a great day.

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining. Have a very good day.