LabCorp Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Amounts are in millions, except per-share data. LabCorp completed its $6,150.7 acquisition of Covance on February 19, 2015, materially changing the business and making year-over-year comparisons less directly comparable.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $2,218.7 | $1,516.4 | $3,991.0 | $2,947.1 |
| Operating income | $321.3 | $246.7 | $452.4 | $450.0 |
| Net earnings attributable to LabCorp | $168.4 | $141.3 | $169.7 | $254.4 |
| Diluted EPS | $1.64 | $1.64 | $1.73 | $2.94 |
- Q2 net revenue rose 46.3%; management attributed 40.9 percentage points of the increase to Covance. LCD revenue increased 6.9%, including 5.4% requisition-volume growth; CDD revenue reflected Covance’s inclusion.
- Q2 net earnings attributable to LabCorp increased about 19%, while diluted EPS was unchanged. For the six-month period, net earnings attributable to LabCorp declined about 33% and diluted EPS declined about 41%.
- Q2 gross profit was $774.6; net cost of revenue was 65.1% of net revenue versus 62.5% a year earlier. SG&A was 17.7% of net revenue versus 19.6%. Operating margin, calculated on net revenue, was approximately 14.5% versus 16.3%.
- Six-month operating cash flow was $309.8, versus $349.7. Capital expenditures were $102.9. Investing cash use was $3,783.6, principally reflecting the Covance acquisition; financing provided $3,510.9. Cash increased $39.0 to $619.0.
- At June 30, total debt was $6,787.3, including $674.1 current debt; cash was $619.0. Debt-to-last-twelve-month EBITDA was 4.0x. The company reported compliance with credit covenants and had no revolving-facility borrowings outstanding.
- Total assets were $14,465.2 and shareholders’ equity was $4,769.7. The balance sheet expanded substantially following the acquisition.
Material changes and unusual items
- Covance contributed $620.8 of Q2 revenue and $35.8 of Q2 net income; for the six-month period it contributed $888.0 of revenue and $20.4 of net income. Acquisition-related debt, stock issuance, goodwill, and acquired intangibles materially changed the financial statements.
- Six-month acquisition deal costs totaled $166.0, including $80.6 in SG&A, $32.8 in cost of revenue, and $52.6 in interest expense. Interest expense rose to $162.2 from $51.5, including a $37.4 make-whole payment on prepaid Covance notes.
- Six-month restructuring and special charges were $33.6; additional integration and Project LaunchPad consulting expenses were $11.9. Amortization increased to $79.0 from $43.0, primarily due to acquired intangibles.
- The six-month effective tax rate was 42.4% versus 39.3%, affected by nondeductible acquisition costs and a one-time $12.8 tax charge related to legal-entity restructuring. Q2’s rate was 36.2% versus 39.1%.
- Foreign-currency translation contributed a $89.3 after-tax comprehensive loss for the six-month period.
Liquidity, outlook, and risks
- Management expected 2015 capital expenditures of approximately $270–$295 and planned to fund investment and acquisitions through operating cash flow and, as needed, borrowing. It suspended share repurchases and did not expect to resume them until debt-to-EBITDA approaches its 2.5x target.
- No explicit full-year revenue or earnings guidance is provided in the filing. Management said future restructuring savings are expected to more than offset related costs, without quantifying the expected savings.
- California approved a 10% Medi-Cal payment reduction, being implemented from July 2015 with retroactive recoupment expected over about six months. The company disputed aspects of the rate methodology but did not expect the changes, taken together, to materially affect consolidated revenue or operating results.
- Material risks include Covance integration and realization of expected benefits, elevated leverage and debt service, payer reimbursement and test-pricing pressure, and CDD project delays, cancellations, or cost overruns. The filing also describes ongoing government inquiries and litigation; outcomes may be material to results in a particular period, although the company did not believe currently available information indicated a material adverse effect on financial condition.
- The Canadian laboratory joint venture’s challenge to an Alberta contract award was pending; its existing contract ran through March 2016. An adverse outcome could substantially reduce revenue and potentially impair the investment.
Key facts for investors to verify
- How much of reported growth reflects Covance versus organic volume, pricing, mix, and currency, and how the combined segments perform in subsequent quarters.
- Debt repayment progress, covenant headroom, refinancing needs, and the path from 4.0x leverage toward the stated 2.5x repurchase threshold.
- Actual acquisition integration costs, restructuring savings, and the final Covance purchase-price allocation, which remained preliminary at June 30.
- The realized effect of California Medi-Cal reductions and other payer coding, coverage, and reimbursement changes on revenue, collections, and margins.
- Developments in material legal matters and the Alberta joint-venture contract appeal, including any resulting financial exposure or impairment.