LabCorp Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts are in millions except per-share data. LabCorp operates LabCorp Diagnostics (LCD) and Covance Drug Development (CDD); the segments contributed approximately 61% and 39% of Q2 revenue, respectively.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $2,881.7 | $2,866.3 | $5,672.9 | $5,714.6 |
| Gross profit | $824.8 | $835.1 | $1,614.5 | $1,614.1 |
| Operating income | $335.7 | $369.2 | $653.9 | $674.6 |
| Net earnings attributable to LabCorp | $190.4 | $233.8 | $376.0 | $407.0 |
| Diluted EPS | $1.93 | $2.27 | $3.79 | $3.94 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $419.3 | $567.1 |
Q2 revenue increased 0.5%, while operating income declined 9.1% and diluted EPS declined 15.0%. Gross margin was approximately 28.6% versus 29.1%; operating margin was approximately 11.7% versus 12.9%. For the first half, revenue fell 0.7%, operating income fell 3.1%, and diluted EPS fell 3.8%. The filing attributes revenue pressure principally to divestitures and foreign currency, partly offset by organic growth and acquisitions.
- Segments: Q2 LCD revenue fell 2.9% to $1,760.9 and operating income fell 7.1% to $312.5; CDD revenue rose 6.8% to $1,126.3, while operating income fell 4.4% to $65.8. First-half LCD operating income declined 9.2%; CDD operating income increased 43.3%.
- Cash flow and investment: First-half operating cash flow was $419.3, down $147.8 year over year, primarily from lower cash earnings and higher working-capital needs. Investing used $891.3, including $703.7 for acquisitions; capital expenditures were $179.4. Financing provided $311.7. Cash declined $161.4 to $265.4.
- Debt and liquidity: Total debt was approximately $6.64 billion at June 30, including $502.3 current and $6,135.0 long-term. The company had $892.8 available under its revolving facility after letters of credit, and was compliant with debt covenants. Debt to pro forma trailing-12-month EBITDA was 3.4x. Cash plus stated revolver availability was approximately $1.16 billion.
Material changes and notable items
- CDD acquired Envigo’s nonclinical contract research business on June 3 for $601.0 cash and a $110.0 floating-rate secured note received for the sale of Covance Research Products; the transaction was funded in part by a new $850.0 term loan. The acquisition contributed $16.5 revenue and $0.7 operating income in the quarter. Purchase accounting remains preliminary.
- Q2 “other, net” included an $8.8 loss on the Covance Research Products disposition, a $5.3 write-off of two cost-method investments, and foreign-currency transaction losses. The company also reported $13.6 of Q2 restructuring and special charges; first-half charges totaled $34.2.
- Share repurchases totaled $300.0 in the first half. The board authorized a new $1.25 billion program in February; $1.05 billion remained authorized at June 30.
- Adoption of lease accounting in 2019 added significant operating lease assets and liabilities to the balance sheet; the company said the adoption had no material income-statement impact.
Outlook, commentary and risks
- The filing provides no explicit full-year revenue or EPS guidance. Management expected 2019 capital expenditures of approximately 4.0% of revenue.
- Management said it remained on track for approximately $200 million of net savings from LCD’s three-year LaunchPad phase II initiative by end-2021, with approximately $40 million of one-time implementation costs. The CDD LaunchPad target is $150 million of net savings by end-2020; Chiltern integration synergies target $30 million by end-2019.
- PAMA reimbursement reductions were approximately $54 million through the first half of 2019; an additional approximately $61 million was expected for 2019 absent further delay or change. Management cited PAMA, divestitures, lower consumer genetics, managed-care contract changes, fewer revenue days, personnel costs and cybersecurity spending as pressures, particularly on LCD.
- Patient information held by external collection agency AMCA may have been exposed; LabCorp said its own systems were not affected and test results and diagnostic information were not in AMCA’s affected system. The company stopped referrals to AMCA, notified affected individuals where possible, and faces related class-action litigation and governmental inquiries. It has not recognized insurance recovery for the separate 2018 ransomware incident.
- Other disclosed exposures include healthcare reimbursement and regulatory risks, cybersecurity and privacy, litigation and government investigations, acquisition integration, foreign exchange, and variable interest rates. The company reported no material change to its previously disclosed risk factors and stated disclosure controls were effective.
- CEO David P. King is scheduled to transition from CEO and President effective November 1, 2019, remaining Chairman and senior advisor for a period under the disclosed transition agreement.
Investor verification priorities
- Check the drivers and sustainability of the operating-income and EPS declines, especially LCD volume, PAMA reimbursement pressure, and rising costs.
- Assess working-capital trends and the conversion of earnings to operating cash flow, including receivables and unbilled services.
- Review acquisition performance, final Envigo purchase accounting, integration costs, and the expected realization of stated savings and synergies.
- Monitor debt, refinancing needs, variable-rate exposure, leverage and available revolver capacity alongside repurchases and acquisition spending.
- Track the scope, potential costs and insurance coverage related to the AMCA incident, associated litigation and regulatory inquiries.
- Confirm subsequent developments in the CEO transition and any updated company outlook or PAMA estimates.