LabCorp Holdings Inc. — Q3 2019 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. LabCorp operates LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). Amounts are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,928.5 | $2,831.3 | $8,601.4 | $8,545.9 |
| Operating income | $339.9 | $343.4 | $993.8 | $1,018.0 |
| Net earnings attributable to LabCorp | $220.7 | $318.8 | $596.7 | $725.8 |
| Diluted EPS | $2.25 | $3.10 | $6.04 | $7.04 |
- Q3 revenue increased 3.4%; nine-month revenue increased 0.6%. Q3 gross margin was approximately 27.9%, unchanged year over year; nine-month gross margin was approximately 28.3%, versus 28.1%.
- Operating income declined 1.0% in Q3 and 2.4% year to date. Nine-month operating margin was approximately 11.6%, versus 11.9%.
- Nine-month operating cash flow was $874.9, compared with $819.0. Capital expenditures were $272.0; operating cash flow less capital expenditures was approximately $602.9, a derived measure.
- Cash was $361.1 at September 30, 2019, down from $426.8 at year-end 2018. Total current assets were $2,987.8 and current liabilities $2,554.9.
- Short- and long-term debt totaled approximately $6,603.9, compared with $6,000.9 at year-end. The company reported a 3.3-to-1.0 total debt-to-pro forma trailing-12-month EBITDA ratio and compliance with debt covenants. Its $1 billion revolving facility had no borrowings; availability was $927.6 after letters of credit.
Material changes and drivers
- Q3 LCD revenue grew 0.4%, while CDD revenue grew 8.7%. Nine-month LCD revenue declined 1.8%, while CDD increased 5.0%.
- LCD operating income and margin weakened, principally due to Medicare payment cuts under PAMA, personnel costs and, year to date, business dispositions and cybersecurity expenses. CDD operating income rose, supported by organic demand, acquisitions and cost savings.
- Net earnings comparisons were affected by substantial 2018 divestiture gains: the company recorded a $209.4 million net gain on business sales in the first nine months of 2018. In 2019 it recorded an $11.9 million loss on disposition of a business. Q3 2018 other income also included a $258.3 million gain on the Food Solutions sale, partly offset by a $48.9 million loss on the U.K. forensic testing business sale.
- In June 2019, CDD acquired Envigo’s nonclinical research services business and sold Covance Research Products to Envigo. LabCorp paid $601 million cash and received a $110 million secured note; the acquisition was funded in part with a new $850 million term loan. Purchase accounting remains preliminary.
- The company repurchased $400 million of shares during the first nine months of 2019. At September 30, $950 million remained authorized for repurchases.
Outlook, risks and unusual items
- Management said it remained on track for approximately $150 million of CDD LaunchPad savings by the end of 2020 and approximately $200 million of LCD phase-II savings over three years, by the end of 2021. LCD phase II is expected to incur about $40 million in one-time implementation costs. The company also expected $30 million of Chiltern and $10 million of Envigo integration synergies by year-end 2019.
- Management expected 2019 capital expenditures of approximately 3.5% of revenue. PAMA had reduced revenue by approximately $80.8 million through the first nine months of 2019; absent delay or change in implementation, a further approximately $30 million reduction was expected for 2019.
- Q3 SG&A included $11.3 million of AMCA incident-related costs and a $13.9 million benefit from reducing contingent acquisition consideration. Nine-month restructuring and special charges were $48.4 million, versus $36.5 million in 2018.
- Patient information held by third-party collection agency AMCA may have been exposed. LabCorp said its own systems were not affected and that test results and diagnostic information were not in the affected AMCA system. Related class actions and governmental inquiries are ongoing; financial exposure is not clearly quantified in the filing.
- The filing also discusses prior ransomware disruption in 2018, multiple healthcare billing, employment and other lawsuits, and a DOJ subpoena concerning non-human primate shipments. For several proceedings, the company said it could not estimate a reasonably probable loss range; outcomes could affect results in a particular period.
- Other key risks include reimbursement and payer changes, competition and pricing, acquisition integration, cybersecurity and privacy, regulatory compliance, foreign currency and variable-rate debt exposure. The filing reports no material change to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether PAMA reductions, managed-care contract changes and other volume pressures continue to weigh on LCD revenue and margins.
- Whether the Envigo acquisition delivers expected growth and synergies, and how final purchase-price allocations affect goodwill and intangible assets.
- Progress toward the stated LaunchPad savings targets, including implementation costs and timing.
- Developments in AMCA-related litigation and regulatory inquiries, and any changes in estimated costs or insurance recoveries.
- Debt levels, leverage, variable-rate interest costs, the 2020 senior-note maturity and any conversions of zero-coupon notes.