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Executives

David P. King - Chairman, Chief Executive Officer and President

Stephen Anderson -

William B. Hayes - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Adam T. Feinstein - Barclays Capital, Research Division

Bill Bonello - RBC Capital Markets, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Amanda Murphy - William Blair & Company L.L.C., Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Dane Leone - Macquarie Research

Steven Valiquette - UBS Investment Bank, Research Division

Gary P. Taylor - Citigroup Inc, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Gavin Weiss - JP Morgan Chase & Co, Research Division

Brian Zimmerman

Isaac Ro - Goldman Sachs Group Inc., Research Division

Arthur I. Henderson - Jefferies & Company, Inc., Research Division

Laboratory of America Holdings (LH) Q1 2012 Earnings Call April 19, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Laboratory Corp. of America Holdings Earnings Conference Call. My name is Keisha and I'll be year coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David P. King, Chairman and CEO of LabCorp. Please proceed.

David P. King

Thank you, Keisha. Good morning, and welcome to LabCorp's First 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 first quarter 2012 financial results, reaffirm our 2012 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.

Stephen Anderson

Before we get started, I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press release for replay information. This morning, the company filed a Form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information.

Additionally, we refer you to today's press release, which is available on our website, for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS, 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 the Genzyme Genetics and other 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 subsequent filings. The company has no obligation to provide any updates to these forward-looking statements, even if our expectations change.

Now Brad Hayes will review our financial results.

William B. Hayes

Thank you, Steve. On today's call, I will review 4 key measures of our financial performance: cash flow, revenue growth, margin and liquidity. I'll also review our 2012 guidance.

First, cash flow. Our cash flow remain strong. Free cash flow for the trailing 12 months ended March 31, 2012, was $686.9 million. We remain pleased with our cash collections. DSO was 48 days at the end of March, an increase of 1 day year-over-year and 2 days sequentially. During the quarter, we reduced our bad debt rate to 4.4%.

Second, revenue growth. Revenue increased 4% year-over-year in the first quarter. During the quarter, revenue per requisition increased 1.2% year-over-year. Total company volume increased 2.8% year-over-year during the first quarter. Esoteric volume increased 4.8% in the quarter. The quarter benefited from an easier weather comp, which increased the revenue and volume growth rate by 1.5%. Although there was an extra calendar day in the quarter, the strength of days in the quarter was approximately the same as last year.

Third, margin. For the first quarter, our adjusted operating income margin was 19.9% compared to 19.3% in the first quarter of 2011. We are very pleased with the margin improvement, which reflects the positive impact from our integration activities.

Fourth, liquidity. We remain well capitalized. At the end of March, we had cash of $129.9 million and $500 million available under our revolving line of credit.

During the first quarter, we repurchased $122.3 million of stock representing 1.4 million shares. At the end of March, $462.1 million of repurchase authorization remained under our share repurchase program.

This morning, we also reiterated our 2012 financial guidance. We expect revenue growth of 2% to 3.5%; adjusted EPS, excluding amortization, in the range of $6.75 to $7.05, excluding the impact of any share repurchase activity after March 31, 2012; operating cash flow of approximately $950 million; and capital expenditures of approximately $155 million.

I'll now turn the call over to Dave.

David P. King

Thank you, Brad. We are very pleased with our first quarter 2012 results. We generated strong revenue growth. We delivered solid increases in core and esoteric volume. Revenue per requisition increased 1.2%. We lowered our bad debt rate to 4.4% during the quarter, reflecting the continued exceptional performance of our operational and billing personnel.

We continue to make significant progress on each aspect of our Five Pillar Strategy. The first pillar of our strategy is that we deploy our cash to enhance our footprint and test menu through acquisitions and to repurchase shares. The acquisition market is attractive and we continue to see promising opportunities. As always, we will balance our execution of the first pillar of our strategy with good discipline around valuation.

The integrations of Genzyme Genetics and Orchid Cellmark are going well and are in line with our expectations. Our rebranding of the Genzyme Genetics business has been well accepted by our customers. As a reminder, we adopted the name Integrated Genetics for the reproductive portion of Genzyme's business and LabCorp's legacy genetics business, and we adopted the name Integrated Oncology for Genzyme's Oncology business and LabCorp's legacy oncology business.

Finally, we repurchased approximately $122 million of our shares in the first quarter.

The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to see strong growth in the adoption of our Beacon platform. LabCorp Beacon order entry capability is now deployed to more than 11,000 sites and approximately 56,000 providers.

We also have approximately 4,000 Beacon mobile users. We added a number of new features to Beacon in the first quarter, and we continue to receive positive feedback from users for its flexibility and functionality. We recently initiated our Beacon patient portal. This 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 have seen fast adoption and are on track with our plan to launch the portal nationwide this year. We continue to improve our electronic medical record connectivity. We added over 6,000 new client EMR interfaces in 2011 and are on pace to exceed that number in 2012. We continue to pursue our open platform strategy, allowing our customers to connect seamlessly to LabCorp directly or via the EMR of their choice.

Over the course of 2012, we will continue to expand our IT offerings with decision support, report improvements and additional patient- and physician-facing solutions.

The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. In the first quarter, we continued our Touch AccuDraw system implementation to more than 200 additional sites. The system is now deployed in more than 1,300 sites across the country and is processing over 1.3 million accessions per month.

We recently introduced iris [ph] digital pathology to improve pathology workflow. Instead of reviewing glass slides on a microscope and scoring them manually, this advanced diagnostic method allows our pathologists to read and score digital slides using image-based algorithms. This digital model allows creation of virtual centers of excellence, fosters collaboration with peers in remote locations and increases both efficiency and quality.

The expansion of our Burlington lab campus continues to go well. We have begun to consolidate several satellite locations into this state-of-the-art facility and will realize additional rationalization opportunities over time. We continue to move testing into this facility over the next several months to enhance specimen flow and streamline our process.

The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduce new tests and collaborate with leading companies and academic institutions to provide physicians and patients with the most scientifically advanced testing in our industry.

We recently enhanced our women's health initiatives by introducing a series of tests that are derived from a single collection swab, making collection of samples convenient. Our new swab tests offer clinically-validated profiles for targeted clinical conditions; are configured to be cost-effective for payers and patients; and provide high-quality results to guide diagnosis and treatment. Further, we offer panels, as well as individual tests, to give physicians appropriate choice in addressing patient needs.

We also launched 4 additional tests to detect species of candida within our new swab portfolio. These additional tests are for patients with problematic or recurrent yeast infections and can be used when the most prevalent species of yeast infections are negative. This approach to our offerings again emphasizes physician choice, so testing is targeted and cost-effective.

We also recently launched additional HPV test offerings. LabCorp now offers multiple HPV testing options to aid in the detection of cervical cancer, allowing physicians to choose the method for papillate DNA testing that they deem best for their patients.

Last month, we signed an exclusive agreement with OPKO Health for intellectual property associated with a potential Alzheimer's disease diagnostic. OPKO has identified unique antibodies that appear to be elevated in Alzheimer's patients. We will be exploring these markers and their potential to help guide and improve patient care through a diagnostic test.

The fifth pillar of our strategy is to develop alternative delivery models. We continue to discuss alternative models with our managed care partners. Though health care reform will likely change our payer mix and reimbursement systems, our goal remains to provide customers with the highest value for their laboratory spend. To this end, we are developing our Beacon lab benefit solution to provide payers, health systems and physicians a variety of options to improve laboratory quality and assist patients in receiving the right test at the right time. We intend to discuss these initiatives in more detail over the next several quarters.

In summary, we are very pleased with our first quarter performance and the progress we have achieved on our Five Pillar Strategy. Now Steve Anderson will review anticipated questions and our specific answers to those questions.

Stephen Anderson

Thank you, Dave. Can you describe the impact of the SGR fix in 2013? As part of the SGR fix enacted in February, labs are slated to receive a 2% reduction to the clinical lab fee schedule, effective January 1, 2013. Further, absent any Congressional activity, mandatory sequestration, including an additional 2% reduction in the Medicare fee schedule, will be implemented effective January 1, 2013.

Can you update us on the status of the inquiry you received from the Senate Finance Committee? LabCorp continues to work closely with the staff of the Senate Finance Committee to respond to their request for information. We were the first company to meet with the committee staff, shortly after receiving their letter asking us to provide a responsive overview of how our contracts with managed care organizations work. We have provided the staff with hundreds of pages of documents responding to their request. We were disappointed by some recent comments reported in the press, which are not accurate, and we will continue to work closely with the committee to answer their questions and provide all appropriate information.

Can you update us on the mix of your business coming from esoteric testing? In the first quarter, approximately 41% 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.

David P. King

Thank you, Steve. Thank you very much for listening. Again, I would remind you that we have a large number of analysts covering our stock at this time, and so we ask that you make your questions brief and please try not to repeat questions that have already been answered. We're now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Adam Feinstein with Barclays.

Adam T. Feinstein - Barclays Capital, Research Division

Maybe just a question to start out here. So it seems like between seeing the Quest results and your results, it seems like volume trends appear to be stable here. Do you think that's a fair way to think about volume trends?

David P. King

Yes, Adam I think it is.

Adam T. Feinstein - Barclays Capital, Research Division

Okay, great. And then just as a follow-up, and I'll be brief here. Just -- I guess, just -- as you think about the industry environment, Dave, with some of the backdrop in Washington and some of these cuts coming, how are you thinking about that in terms of creating M&A opportunities? And I guess, what are the implications of some of these cuts that are coming in the future?

David P. King

Well, I could speak for a long time about this and negate my own admonition that we should be brief. Let me just say, Adam that I think that the reimbursement environment from the government -- everybody knows we're facing a 2% cut that was implemented -- that will be implemented as part of the SGR fix. And it's mystifying to me that an industry that accounts for 1.6% of the total Medicare spend is bearing 15% of the savings that are generated from Medicare in that most recent SGR fix. So it's obviously going to be difficult on the industry. It's going to be difficult on smaller competitors, and that will provide some M&A opportunities. I would also say, though -- and I'll wear my chair of ACLA hat here for a moment, there are thousands of small independent labs in this country, and many of them serve niches such as nursing home and long-term care facilities that the major laboratories don't serve. Our model is an ambulatory model where people come to see us or specimens arrive from the doctor's office through our couriers. And going out and doing nursing home draws and the number of staffs required, it just doesn't fit within our model. So I have a serious concern that some of these cuts, particularly when you look at the operating margins of some of these smaller laboratories that serve long-term care facilities, are going to start to create real beneficiary access issues and cost issues for the Medicare program. So yes, there will be M&A opportunities, but there also will be long-term consequences for seniors if this trajectory of reimbursement cuts continues.

Operator

Your next question comes from the line of Bill Bonello with RBC.

Bill Bonello - RBC Capital Markets, LLC, Research Division

So trying to understand a little bit the movement in gross margins year-over-year, the decline was the biggest it's been in a while, despite Genzyme's annualizing and the synergies that you noted in the proxy from Genzyme. And so I'm just trying to understand if that's due to the fact that volume growth was so strong in Q1 of last year, or is it just all the different acquisition moving parts? Or should we be extrapolating less of a benefit from mix, or maybe even price pressure?

William B. Hayes

Bill, it's Brad. I think it has more to do with the acquisition. So as you recall, we closed Orchid at the end of the fourth quarter of last year, so it's new basically in the first quarter, and we have -- we're early in the integration there. So we do have Genzyme integration and past acquisition integration that's benefiting. Some new acquisitions, and one that we're still integrating also from last year is Clearstone, in the clinical trial space. So I think it's a bag of -- a mixed bag of improvement in some, relative newness and still progress being made in others that is resulting in what we see there.

David P. King

And Bill -- Dave. Just to follow on that, Clearstone in particular, because of some of the European operations, until the synergies are fully realized, is a sizable -- has a sizable impact on gross margins.

Bill Bonello - RBC Capital Markets, LLC, Research Division

Okay. I mean, is that really most of it, because I would just think that the contribution from those 2 acquisitions would have to have been relatively minimal, so -- I mean, even if they were at a huge discount to what your corporate gross margin is, it still seems like you'd be seeing a lot of gross margin pressure.

David P. King

Well, the thing is if you look all the way down the P&L, I mean, most of the savings that we're realizing from Genzyme are coming in the SG&A. So the gross margin profile of Genzyme is still not vastly superior to our typical corporate margin. And then when you add a sizable gross margin expense component with Orchid and Clearstone, it actually does drag it down pretty fast. So I'd say that is the vast majority, if not the single explanation for the gross margin decline.

Operator

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

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Dave, the digital technology that you mentioned for the pathology sector, that sounds like the answer to what's been a nightmare process, I guess, a manual preparation and monitoring. Is this -- am I correct in viewing that as a material savings and capacity reduction opportunity, or will we not be able to see that in your numbers going forward?

David P. King

Bob, I think it is a material opportunity to generate savings for a couple of reasons. One, which is not insignificant, is just moving the glass slides around to different specialty pathologists. And the other is our ability to create virtual centers of excellence, where pathologists can review slides either individually or in collaboration without necessarily having to all be present. So I think there is savings opportunity there. Obviously, we have to scale it to the entire organization, but we've made a very solid start.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

But it doesn't save you on your prep time, that manual process of receiving, cutting and staining?

David P. King

We're working on some automation tools for the prep, but it doesn't directly impact prep at this point. It just impacts review and scoring and reporting.

Operator

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

Darren Lehrich - Deutsche Bank AG, Research Division

One housekeeping question, one big picture question. First, just on the housekeeping side. Your noncontrolling interest is essentially gone here due to the buy up in Canada. The question is, do you expect to retain full ownership going forward there, or is the plan to sell equity to a local partner?

William B. Hayes

Dan, this is Brad. We do have people who are interested in that business and think it is important to have a local partner, so too early to call how that's going to end. But definitely something that we're interested in.

Darren Lehrich - Deutsche Bank AG, Research Division

And for modeling purposes -- just timing. Should we keep minority or noncontrolling interest basically the same as what we saw in Q1? Any thought there, Brad?

William B. Hayes

I just think it's all incorporated in our range of guidance and wouldn't want to guide on a specific assumption like that.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay, that's fair. My big picture question, Dave, is you're at 1.5x leverage basically. You've hovered around 1.5x to 2x since doing Genzyme, and basically have maintained that leverage despite a lot of cash flow with fairly consistent buyback that we've seen over the last year. So I guess the question here is how are you thinking about optimal leverage? Is 1.5x to 2x the right range? And if so, I guess, shouldn't we really expect your share count to shrink in the high single-digit percentage range going forward?

David P. King

Darren, it's Dave. So I think the optimal leverage is 1.5x to 2x. And I think when you model 1.5x to 2x leverage and you model the cash that we generate, I think it's a reasonable assumption that either we're going to continue to do acquisitions with that cash or we're going to continue to repurchase shares. Or depending on the circumstances, obviously, we could consider the initiation of a dividend or other means of returning capital to shareholders. But yes, the optimal leverage is in that 1.5x to 2x range and our deployment of the cash generated over time, as it's traditionally been, would be first toward acquisitions and second toward share repurchase, absent some change in our capital philosophy.

Darren Lehrich - Deutsche Bank AG, Research Division

And just as far as buyback goes, I mean, because that's where the focus has been over the last year in large part in terms of your free cash flow, is there a way to help us think about just the deployment to keep that 1.5x to 2x leverage that you're referring to?

David P. King

Well, I'll let Brad comment on this. I mean, we're not paying down debt to delever. So the delevering comes naturally as EBITDA grows. I don't know that there's a good way to think about the amount of share repurchase because we have tried to be consistent other than to say it seems to me that the amount of share repurchase that we did in this quarter is sort of what we would think about as a fairly typical amount in an environment where we're not doing a lot of acquisitions.

William B. Hayes

Yes, Darren I'll just add to that. I mean, our philosophy is unchanged, as Dave alluded to. Our first goal is to grow this business, and a lot of that growth can come from acquisition, given the market share that we have and the number of other players that are out there. And we alluded to that earlier a little bit in the industry commentary about the cuts. So that's still #1. I think when those opportunities are not present, you see us go more to share repurchase. And yes, we do have additional leverage that we could take on to be at optimal levels, but we like to reserve that right to do for opportunistic situations.

Operator

Your next question comes from the line of Amanda Murphy with William Blair.

Amanda Murphy - William Blair & Company L.L.C., Research Division

I just had a question on the revenue per requisition growth in the quarter. So I'm curious, is there -- were there any moving parts there? So for example, acquisitions impacting it or sort of Genzyme-related contract changes impacting that metric this quarter?

David P. King

Amanda, it's Dave. I mean, there's always moving parts. The 2 probably biggest moving parts here were payer mix -- so we had, again, strong growth in the drugs of abuse testing, which is not at the average price point of the company; and then test mix, in that obviously, as we've said for some time, vitamin D has flattened, histology is under pressure. So it's a combination, I would say, of payer mix and test mix that's -- we're not getting as much of a lift as we traditionally have gotten from mix, but I'm very pleased with the revenue per requisition result in the quarter.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Okay, I got it. And then -- I know you don't give guidance specifically to the breakdown between revenue per req and volume growth, but is there anything we should be thinking about in terms of nuances other than the comp situation as we sort of progress through 2012 on both of those metrics?

David P. King

Well, since we don't give guidance on it, it would be hard for me to give you anything to think about.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Okay, fair enough. And then last question, you talked about Beacon in terms of the benefit management side of it. I'm curious just if you could talk to that offering, and are you getting traction in the marketplace at this point? Or is it early to -- if you can provide some more color on that offering.

David P. King

Sure, the idea of the Beacon Lab benefit system is to essentially combine a variety of options and provide a menu that -- whether it's a managed care plan, whether it's a health system or whether it's a physician practice can select from. So it runs the range from decision support to help physicians select the right test, to decision support at the time that we provide reports to help the physicians manage the patient optimally, to credentialing of providers to be able to order tests. I mean, there's a whole range of services within the lab benefit system that can be offered, depending on the desire of the customer. I would say it's early. There certainly is very strong interest in the market, again, ranging -- spanning the range from managed care plans to health systems to large physician practice groups, for some tools that will help them select the proper test; select the highest quality and most efficient, most effective, cost-effective laboratory to perform it; and provide support for the decision-making process at the time the results are delivered so that the patient can be treated better.

Operator

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

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Just a couple of questions. First, could you give us the drugs of abuse testing growth? I don't think Steve mentioned that in his prepared remarks.

William B. Hayes

Kevin, it's 6.4%.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And then Dave, just wondering what the pricing environment is like now. We've heard a lot of comments about downward pressure coming from commercial payers. Just wondering if you have anything to add about that.

David P. King

Yes, Kevin. I mean, I think we all know the government pricing environment. Frankly, I was a bit surprised by the commentary yesterday on pricing. We, since 2007, 2008 when we had the pricing reset, I think we at LabCorp feel that we have been very disciplined on pricing and we've been successful in gaining real price increases over time. Now they're not gigantic [ph] real price increases, but we never said they would be. But unit price over time has improved. And so I guess any time that you're in a negotiation, people are -- we're trying to get more price and the managed care plans certainly are not saying we want to pay you more. But one, I don't think the environment has changed. Two, I think the environment is pretty stable. And three, I hope that the commentary yesterday didn't indicate that there's going to be some dramatic price cutting on the competitor side in search of volume, because what we've seen over time is that the industry is growing, volume is growing. And for the entire industry, pricing discipline is very important and we will continue to maintain pricing discipline here at LabCorp as we've done for the last 5, 6 years.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then suffice to say, you guys still continue to be the low-priced provider in the industry.

David P. King

We do. And everything that we do around here in terms of innovation and efficiency is designed to maintain that position.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Understood. And then just a last follow-up on that, how are the efforts with the managed care plans going to shift volume from the high-cost setting? Is it too early to say anything, or do you have any data points you can give us?

David P. King

I think there's a renewed level of attention to it, or a greater level of attention to it. One of the comments that you do hear when you talk to people at managed care plans is that lab is really the only unmanaged area of spending. So everything else, there's preauthorization. There's radiology, mental health, hospital inpatient, emergency room. There's preauthorization or there's some kind of gatekeeping function. There is not and has not been that in lab. So that's part of what the lab benefit, the LBS, is designed to address. But it's also, even aside from the LBS, collaboration with the managed care partners to help them redirect cost to the more efficient providers. And it is going to require some lifting on their side, and I think we've seen more interest than in the past. But I think it's too early to say whether there are going to be tangible results.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then just one last quick one. The 1.2% -- the 2.8% volume growth, if we back out the 1.5%, is organic volume growth 1.3%? Or was there any tuck-ins in that?

David P. King

Well, there's no tuck-ins. Remember, there was Orchid. So the organic volume growth, we'd say, is approximately 1%.

Operator

Your next question comes from the line of Tom Gallucci with Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Two quick ones for you, Dave. Just first on SG&A, I think you mentioned that you were getting some of the benefit of integration sort of below the line. Can you maybe just update us on some of the details in terms of the types of things that you're embarking on now, whether it's Genzyme or where Westcliff stands, operationally, to just make sure we know what are sort of the -- what's going on, on the ground these days.?

David P. King

Yes. I mean, the big areas that you're going to see an impact from in SG&A are corporate support functions, billing, back office, bad debt expense. Exactly. Those are probably the major areas in which you would expect to see, and we are seeing, improvement in both of those that you called out, Genzyme and Westcliff.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay. So I mean, I recognize there is some quarterly volatility naturally, but relatively speaking, and the types of numbers that we're seeing this quarter are relatively sustainable on the SG&A front, if not improved over time?

David P. King

Yes, I would think so, Tom.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay. And then just thinking back to your comment earlier on the Medicare front, you noted that you were surprised that as a percent of the health care spend, I guess, you're bearing a larger burden of the cost -- or the savings for the government on the SGR. Do you have any idea why you think that happened? You've got the Senate sort of inquiry, if you will. You sort of took a disproportionate share of the burden on the SGR. How do you view the environment in Washington for the labs right now?

David P. King

Well, I think the environment in Washington for health care right now is pretty tough to begin with. And I think that when we were up on the hill and asking for the rationale behind the 2% reduction, the fundamental thing that kept being raised was that MedPAC had "recommended a 10% reduction in the clinical lab fee schedule." Now if you look at the MedPAC recommendations, what they actually say is, if you had to fix the SGR over 10 years for $300 billion and it all had to come from Medicare, here are the things that would be cut. And they did say the lab fee schedule would be one of those things, and there were a whole variety of other hospital cuts. And so I think that -- and MedPAC specifically said that's not a recommendation, that's just, "If we had to do it, this is one way you could." I think that got translated -- and if you look at the conference report on the legislation, that got translated into "MedPAC recommended a 10% cut." So we're meeting with the MedPAC to try to clarify their position and clarify the position for the Hill. The other thing I would point out, not to suggest that -- I mean, we are very disappointed by the reimbursement reduction, but I think if you talk to the hospitals, they feel like they got hit pretty hard in the SGR fix. So there was a lot of pain for health care providers and it's -- we need to deal with the SGR fix as a long-term issue, not as a "every year, there is a number that we have to find to stave off reductions in the physician fee schedule," which we know are never going to happen. And so every year, we know these reductions are never going to happen and yet we make long-term changes in the law regarding reimbursement for other providers that have consequences.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

And just to close out the topic, you mentioned that maybe some of the press reports on the Senate issue were a little disappointing to you all. Do you have any better insights on when we might see something wrapped up relative to that investigation, or next data points or milestones we should be watching for?

David P. King

I don't, Tom. I think -- we've tried to be very cooperative. We met with the staff, we've turned over documents. They've given us a new request for information, which involve some pricing questions. And obviously, it's sensitive because it involves our contracts with other people. And they've made those requests not only of us, but of others. And I think everybody who has received those requests is evaluating them in terms of what it's appropriate to provide. So I don't have any timeframe for when we're likely to see this resolved, or when anybody else who has received the inquiry is likely to see it resolved.

Operator

Your next question comes from the line of Gary Lieberman with Wells Fargo Securities.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Dave, I would be interested to get your thoughts on some of the recent FTC decisions regarding some oppositions [ph] that have been proposed and kind of what you think the implications might be for the lab industry.

David P. King

You have anything in mind, Gary?

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

No. Just -- I mean, the 2 big ones that people have been watching that are out there.

David P. King

Yes. I mean, I think it's hard for me to provide more commentary than the FTC provided. Obviously, they're -- as they defined the market in Medco Express, they found that the transaction was not anticompetitive. And as they looked at the market, or as they perceived the market in Omnicare PharMerica, they felt that the transaction was anticompetitive, which I guess would lead me to say that the definition of market is the critical factor in these determinations and if the market is defined broadly, transactions have an easier chance of succeeding than if the market is defined narrowly.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay, fair enough. And then question, Brad, maybe on the bad debts, it looks like you had some -- made some good progress in the quarter, although it looks like DSOs actually increased year-over-year and sequentially. So can you maybe just explain the dynamic there?

William B. Hayes

Yes. Sequentially, it's historic. We typically see about a 2-day rise between Q4 and Q1, just given the sales flow between the 2 quarters and the cash collection dynamics at the end of the year. So the sequential is sort of historical and in line. The one day year-over-year, I would say, is due to a several factors. One would be, we're having some experience from the implementation of 5010, the new electronic filing requirements, both on ourselves and the impact on our customers, on our physicians who end up paying us for laboratory services. They've had slowdowns. Another one would be, we still have -- not to the magnitude that we talked about last quarter, but a few lingering impacts of the Genzyme acquisition and conversion, but much, much smaller than the numbers we called out in the last several quarters. And last but not least, as we reduce the bad debt rate, it has some increase on DSO. But all in all, we look at our agents, we look at our allowance, we look at all of that and DSO in combination, and we're comfortable where we are.

Operator

Your next question comes from the line of Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Can you give us the contribution of Orchid and Clearstone to revenue in the quarter, and whether that would have a disproportionate impact to pricing versus volume?

David P. King

Ralph, it's Dave. I don't think it's material to either pricing or volume. Clearly, Clearstone is not, and I don't think Orchid is material to pricing or volume either. We've already given -- basically given you the volume contribution, which was about -- in the range of 30 basis points. So I don't think it's material to pricing.

Ralph Giacobbe - Crédit Suisse AG, Research Division

And just the revenue, overall revenue for these 2 in the quarter?

William B. Hayes

Ralph, it's Brad. We said last quarter that Orchid for the year would contribute a point to overall revenue. Clearstone was immaterial to call out and we haven't done that.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And I guess my second question, it's our understanding that Aetna recently made Genzyme Genetics out of network. Is there any way you can give us any sense of contribution there, maybe how we should think about that and your ability to sort of retain that if it does go out of network? And maybe even how we should think about sort of volume and pricing stat for the balance of the year, if you think that would have any impact if that volume shifted.

David P. King

Well, it is true that Genzyme was terminated from the Aetna contract. Just to give you some background there, post the acquisition, Aetna did extend the contract with Genzyme, which we were very pleased about. I don't think that Aetna was jumping up and down and turning cartwheels about the fact that this termination was going to occur. But I think they were contractually required to do it and they felt that, that was their contractual obligation. I think at the same time, the providers and patients, the Aetna providers and patients who use Genzyme's services, recognize the unique and differentiated value proposition. I disagree with the comment made yesterday that Genzyme doesn't offer anything that our competitor offers. I think that's just not the case. So we're going to continue to serve the Aetna patients and providers who want to use us and we hope that, that will be most of them. And we're going to continue to offer our test menu, our genetic counseling and our overall expertise in reproductive genetics and oncology, and we'll be honored and pleased if those providers and patients will continue to use us.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And any willingness to sort of give a sense of what the run rate of that -- of the Aetna contribution is?

David P. King

No.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then just my last one, I want to go back to -- you talked about sort of the somewhat uncontrolled cost on the lab side within kind of the managed care realm and not a lot of sort of preauthorization or medical policy in place. Is there -- have you guys looked at or is there any way you can estimate either what percentage of your -- either overall tests and/or the esoteric or genetic or molecular tests that you'd estimate now have any preauthorization in [ph] medical policy? And then to that end, I mean, can you tell or do you think that, that has any impact on the pricing/mix figure as we go forward and more of these things are put in place?

David P. King

Now first of all, I did not say uncontrolled cost. I said unmanaged utilization. There's not utilization management. That doesn't mean that managed care is not aggressively trying to control lab costs and working to control lab costs. So what I said is there's no utilization management in place for laboratory services, and that most other services in health care do have some form of utilization management. We have a very small number of situations in which we're subject to preauthorization, for a very limited number of tests. And I think this is something that is likely to increase over time. I don't think the issue is overutilization. I think the issue is not ordering the right test for the right patient at the right time. And I think, in fact, there are some circumstances in which better decision support will lead to more utilization of things like prenatal genetic screening, where it's not being properly utilized today. So I think long-term, the likely implications for us are relatively small. The hope is that it will encourage physicians and health systems to use testing more wisely and also to be cognizant of the cost of the testing that they're ordering when they make those decisions.

Operator

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

Dane Leone - Macquarie Research

Just for Dave. I guess, if you could provide a high-level outlook or change in thinking perhaps for 2012, and then where you started the year, it'd be helpful, because original guidance -- EPS guidance for the year, I guess, did not include share repurchases. You did $122 million in the quarter and, I guess, presumably did not forecast. The weather comp set, I think, added somewhere $0.04 to $0.05 in EPS. So by kind of reaffirming the guidance range, I guess, there's potentially a view from the market set that you may have become inherently more bearish on the 2012 outlook, so I guess any color you can give to that. And I guess for Brad, just a quick question on operating cash flow. It seems like for the first quarter, it's the lowest it's been since 2008 and I was just curious what the reason for that was.

William B. Hayes

So Dane, this is Brad. We'll go ahead with operating cash flow and I'll let Dave come back to the outlook. As we look at the operating cash flow for the quarter, it's entirely impacted by some working capital timing items, so we're maintaining our guidance for the year and feel like that's still appropriate guidance on the cash flow. So entirely working capital timing-related on that metric.

David P. King

So Dane, on the guidance. I mean, let me first -- this notion that somehow the weather accounts for a beat of guidance does not make any sense to me. It does affect the year-over-year comp, but our guidance doesn't assume that we're going to have terrible weather. Our guidance assumes that we're going to have good weather. And your model, I don't think, assumed that we would have $0.05 negative of weather in there. So I don't think the weather has anything to do with the beat this quarter. I think what has to do with the beat this quarter is good volume, good pricing, good discipline around expenses. I'm not any more bearish than I was at the beginning of the year. I feel exactly the same way. We have one quarter in the book. We've always said that our guidance encompasses a wide range of outcomes, and we started out with what we feel is very realistic guidance. We didn't give you low guidance and allow ourselves a lot of room. We gave you very realistic guidance, and we're well within the range of outcomes that we expect. So we'll revisit the guidance next quarter, but I feel very, very comfortable. I think the year is going to shape up just as we've talked about. There's going to be better utilization trends. It's going to be better year-over-year comps for us because the comps get easier as we go along, and looking forward to a great year.

Operator

Your next question comes from the line of Steven Valiquette with UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So just a quick follow-up on this pull-through whistleblower lawsuit. I'm obviously not going to ask you to comment on the merits of the overall case, because I doubt you want to do that on this call. But just procedurally, could the DOJ still potentially join the suit? And is there any deadline by which they either have to join or not join? Or should we just assume that if they haven't done it by now, they're not going to. I mean, just really any color on how to think about that would be helpful as we kind of ponder this overall case.

David P. King

Sure. I think the fact that the government has chosen not to intervene and allowed the lawsuit to be unsealed is significant because the suit was under seal for some period of time. The government, in my experience, did a thorough investigation and determined that they did want to intervene in this suit. And I believe they reached the same conclusion with regard to a related suit that had been filed against Quest. However, the government is never precluded from coming back and revisiting its decision not to intervene, so when the papers are filed, when the judge makes a ruling, the government -- up until the time the case is finally resolved, the government always has the opportunity to reconsider its position and advise the court that it would like to intervene. And obviously, we are hopeful that the government has done a thorough investigation and made a sound decision, but I can't rule out that they could change their mind.

Operator

Your next question comes from the line of Gary Taylor with Citigroup.

Gary P. Taylor - Citigroup Inc, Research Division

Just 2 quick clarifying questions. First, just going back to volume. When you talked about a 30 basis point contribution, you were talking about total acquired contribution, so year-over-year, the quarter's volume was 28, less 30 bips acquired, less 1.5 weather is how you got to the 1% organic number you talked about earlier. Is that right?

David P. King

Yes.

Gary P. Taylor - Citigroup Inc, Research Division

Okay. And then second, for Brad. There was a question earlier about G&A levels and you had said something along the lines of considering kind of this level as the right way to think about it forward. I wasn't sure if you were talking about as a percent of revenue or on a dollar basis. Obviously you had about a $10 million step down in the fourth quarter that very nicely carried through to the first. So I guess, on a dollar basis, should we assume that, that kind of grows modestly with revenue growth, but generally at these new lower levels? Or is there anything through the year that might bounce it up?

William B. Hayes

Nothing through the year that I can think of. So I'd think of it on an absolute dollar basis before I would as a percent of sales because sales can vary. And bad debt would be the only thing I can think of that would make the absolute dollar value grow as sales change. And I would say that there are integration activities that are ongoing, that are working to further help that metric. But I'd be careful also with the overall dollars, because there can be things like payroll days that vary quarter-to-quarter. But generally speaking, I think absolute dollars ability [ph] are something that we would strive for.

Gary P. Taylor - Citigroup Inc, Research Division

Sure. We had that nice step down in the fourth quarter that was kind of maintained. I just want to make sure there's nothing material to sort of that run rate that might be not contemplated, but it sounds like the answer is no.

William B. Hayes

Nothing we can think of.

Operator

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

Ricky Goldwasser - Morgan Stanley, Research Division

Just a couple of soft [ph] questions. First of all -- so obviously we know what the weather impact was on volume, but can you just provide us what the same store growth, excluding weather, was for core?

David P. King

No. We've given you the volume number. That's what we give, Ricky.

Ricky Goldwasser - Morgan Stanley, Research Division

So when we back into -- based on the information that you provide, I think you get 2% core volume. Should I make the assumption that weather has more impact on one segment versus the other? Or more impact on core versus esoteric?

David P. King

No. Look, the number we gave was 2.8%. 1.5% benefiting from weather and about 30 basis points benefiting from Orchid. So that's 1% core volume growth. We also gave you the year-over-year esoteric growth. My view is weather is weather. It affects volume indiscriminately and largely equally. And so I don't think there's anything in the 1% number that can be further chopped or refined to get at a better sense of volume. And certainly, I just -- we can pick apart these numbers all day long, but the reality is the core business grew, the esoteric business grew, we feel good about both of them.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. And then secondly -- I mean, I know that you said in response to a question before that you feel exactly the same as you felt before. But I actually get the sense that you feel better, because you said that you actually expect better utilization trends for the remainder of the year, which -- I think in past quarters, you said that the environment -- utilization environment, it continues to be to some degree challenging. So I actually see that the tone is more positive. So is there something that you're seeing maybe kind of like 2Q to-date or something that you see in terms of kind of like share shift that makes you more optimistic as to how volumes are progressing for the remainder of 2012?

David P. King

I obviously am not going to talk about 2Q today. Again, I feel that we have been very consistent from the fall forward that we felt that we would see better utilization in 2012. We felt that over the year, utilization would pick up and sort of return to what we hope will be a more normal environment as we get late in 2012 and into 2013, and that the comps would improve because last year we had deceleration. I feel exactly the same way. I don't feel better. I don't feel worse. I feel very confident and comfortable with the guidance range that we've given, with the performance in the quarter and with the fact that we're executing well on our priorities.

Operator

Your next question comes from the line of Lisa Gill with JPMorgan.

Gavin Weiss - JP Morgan Chase & Co, Research Division

This is actually Gavin Weiss in for Lisa. Just a quick one to clarify your comments on the extra calendar day. I just want to make sure I heard you correctly. I know it's a leap year, but there's a timing around New Year's. Your revenue days are the same, correct?

David P. King

Well, the way that we analyze that, Gavin, is strength of days. And what Brad said is the strength of days was approximately the same year-over-year.

Gavin Weiss - JP Morgan Chase & Co, Research Division

Okay. And then on Palmetto, I know it's set to go into effect on May 1. Are you still actively fighting this?

David P. King

I think the -- we and ACLA have been working very closely with Palmetto. We feel like they made some major improvements to their program, and we're hopeful that we're going to be able to have a collaborative effort in their endeavors to do a better job pricing and paying for molecular testing and our endeavors to make sure that we get fairly paid for the valuable service we provide.

Operator

Your next question comes from the line of Anthony Vendetti with Maxim Group.

Brian Zimmerman

It's actually Brian in for Anthony. I guess just first, could you elaborate a little bit more on -- sorry, I think you did answer that question. So the drugs of abuse testing, you've captured share of drugs of abuse testing over the last quarter -- almost every quarter for the last couple of years now. What's driving that share capture? And are you seeing strength of drugs of abuse testing in areas -- in regional areas where you're stronger, or how is pricing in that business?

David P. King

Pricing in the business is quite stable. Obviously, as we've said many times, it's below our average price point per requisition. I think we've done a good job in drugs of abuse testing. Again, all of the underlying investments we've made in improving the quality of service at our patient service centers, all the investments we've made in the touch system and AccuDraw and all the things that we're doing have led to, in my view, better and more consistent levels of service facing the patient, and that's what drugs of abuse testing is all about. So I think it's -- the drugs of abuse testing gains great -- it gains great leverage and synergy from the core business -- from the patient service centers, from the transportation, the couriers. And I think all the investments we've made to improve service are why we're seeing positive results there.

Brian Zimmerman

All right. And then also, can you quantify or somehow frame the margin impact from the European operations of Clearstone, and sort of what's the timeframe of the integration of those ops, so when we'll start to see that margin improvement?

David P. King

I don't think we want to get into that level of detail about that business.

Brian Zimmerman

Okay. Not even on the timeframe of the integration?

David P. King

Not even on the timeframe of the integration.

Operator

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

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just had one question to ask on a long-term picture for cash deployment. If you look at consensus estimates, it does appear the Street is more or less assuming that you sit on the majority of the cash that you're going to generate. So based on what you said in your previous commentary here, my question is, if you guys don't find compelling acquisition opportunities, would it be conceivable that you would deploy all of your free cash to share repurchase or dividends, particularly if the volume environment remains tepid beyond this year?

David P. King

Well, yes, it's conceivable. I don't think it's likely, because I think there will be attractive acquisitions, but if there are not attractive acquisitions to make, we're certainly not going to sit on the cash and let it build.

We're right at an hour, so we're going to try and be done here in the next 5 minutes if we can.

Operator

Next question comes from the line of Art Henderson with Jefferies & Company.

Arthur I. Henderson - Jefferies & Company, Inc., Research Division

Dave, can you remind us just what contracts are up for renewal this year on the managed care side, if you have any big national ones, and how the outlook is there?

David P. King

The only contract that's up for renewal this year on the national level is Humana, and we're engaged in discussions with them and feel quite comfortable about where we are. So that's it for managed care in 2012 -- major national managed care.

Arthur I. Henderson - Jefferies & Company, Inc., Research Division

And what's the outlook in 2013 on that?

David P. King

We have some renewals coming up in 2013 and again obviously, it's very early in discussions and again, feel good that we'll be in a good position to tell you more as things progress.

Arthur I. Henderson - Jefferies & Company, Inc., Research Division

And Dave, did the Horizon BlueCross BlueShield, did that contract get resolved or is that still ongoing as well?

David P. King

Yes, we did renew that contract over a multi-year period on the same terms and conditions that were previously in place.

Arthur I. Henderson - Jefferies & Company, Inc., Research Division

Okay, great. And then earlier, you were talking about the HPV assay. Is that a new DNA test? Is that -- refresh my memory on that.

David P. King

What's happened is that other competitors have entered the market and normally, Art, we don't offer multiple versions of testing for the same analite. [ph] But in this case, because of Roche being in the market and some other competitors having entered the market, we're offering multiple options for the physicians to choose the HPV assay that they would like.

Arthur I. Henderson - Jefferies & Company, Inc., Research Division

I see. Okay. And then last question for Brad, the DSO, I know you talked about it ticking up. Does it go back to the levels that we saw in the previous quarters?

William B. Hayes

I think so, yes.

David P. King

Well, thank you very much for listening. I want to make one additional comment. As you know, at the end of April, Dr. Mohapatra will be retiring from Quest and I wanted to say that although a competitor, Surya has been a strong collaborator in our activities at ACLA and for the broader industry, and he's been a strong advocate for diagnostics and for our industry. So we certainly -- we'll miss Surya and wish him well in his future endeavors and we wish you all a good day. Thank you all for listening.

David P. King

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.

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