Business context and reporting period
Laboratory Corporation of America Holdings (LabCorp) filed this unaudited Form 10-Q for the three months ended March 31, 2014. It operates clinical laboratory testing businesses, reported in Clinical Diagnostics Laboratory and Other (primarily Ontario, Canada). Amounts are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,430.7 | $1,440.9 |
| Gross profit / margin | $516.8 / 36.1% | $572.2 / 39.7% |
| Operating income / margin | $203.3 / 14.2% | $262.0 / 18.2% |
| Net earnings attributable to LabCorp | $113.1 | $147.2 |
| Diluted EPS | $1.31 | $1.56 |
| Operating cash flow | $142.3 | $198.2 |
| Capital expenditures | $56.5 | $41.7 |
| Cash and cash equivalents, March 31 | $338.9 | $185.8 |
Cash from operations less capital expenditures was $85.8, versus $156.5 in Q1 2013. At March 31, current assets were $1,420.9 and current liabilities $753.6. Total debt, including current maturities, was approximately $3,008.3; the $1,000 revolving facility had no borrowings outstanding. Debt/EBITDA was 2.48x against a 3.0x covenant limit, and the company reported covenant compliance.
Material changes and management commentary
- Sales declined 0.7%, despite requisition volume rising 2.6%; revenue per requisition fell 3.3% to $43.59. Management attributed the decline to Medicare payment reductions, test mix and Canadian business, and estimated severe winter weather cost more than $40 in revenue.
- Core testing sales grew 4.6%, while genomic and esoteric testing sales fell 8.0%; Other-segment sales fell 7.5% (up 1.1% in local currency). Management cited mix and molecular pathology payment issues for the genomic and esoteric decline.
- Cost of sales rose 5.2%, increasing from 60.3% to 63.9% of sales; bad debt expense rose to 4.55% of sales from 4.30%. Management noted increasing patient receivables and warned that continued growth in patient responsibility could increase allowances and bad debt expense.
- Operating cash flow fell $55.9, which management attributed to weather-related lost revenue and operating income, government payment reductions, and working-capital timing. Interest expense increased to $25.7 from $24.5, principally reflecting senior notes issued in November 2013.
- Q1 included $7.6 of restructuring charges. The company spent $65.7 cash on acquisitions and repurchased $107.7 of shares (1.2 million shares). Goodwill rose to $3,067.1, including $46.7 of acquisition-related additions.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided in the filing. Management expects 2014 capital expenditures of approximately $185–$205, largely reflecting chemistry platform replacements, and believes operating cash flow, cash on hand and borrowing capacity can fund obligations in 2014 and beyond.
- Management expects any 2014 restructuring costs to be more than offset by subsequent savings and not to materially affect operations or liquidity.
- Q1 other income included gains on an investment sale, partly offset by impairment; the filing reports $15.0 of sale proceeds and an $11.0 net gain. The effective tax rate rose to 39.5% from 38.9%, reflecting expiration of the R&D tax credit and a valuation allowance on an investment write-off.
- Significant risks include reimbursement and regulatory changes, payer pricing and mix, patient collections, acquisition integration, competition, cybersecurity and litigation. The company described multiple government billing inquiries and False Claims Act and other lawsuits; it said it could not estimate reasonably probable losses for certain matters. A Florida jury verdict of $15.6 was reported on April 17, after quarter-end, and a separate $50.0 verdict with 50% liability apportioned to LabCorp was under appeal. The company stated insurance and self-insurance reserves were sufficient for these verdicts.
- Zero-coupon subordinated noteholders could convert during Q2 2014; any cash settlement could use cash on hand or the revolver, with any remaining amount settled in shares. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether volume growth can offset lower revenue per requisition, government reimbursement pressure and adverse test mix.
- Whether patient receivables, bad debt expense and cash collections continue to deteriorate.
- How litigation outcomes, appeals, insurance coverage and regulatory inquiries may affect results or cash flows.
- Progress on planned capital spending, acquisition integration and expected restructuring savings.
- Potential cash and share effects of zero-coupon note conversions, and headroom under the 3.0x debt covenant.