Labcorp Holdings — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated results; dollar amounts in millions except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,440.9 | $1,423.3 |
| Gross profit | $572.2 | $576.1 |
| Operating income | $262.0 | $287.1 |
| Net earnings attributable to Labcorp | $147.2 | $161.6 |
| Diluted EPS | $1.56 | $1.63 |
| Cash from operations | $198.2 | $197.1 |
| Capital expenditures | $41.7 | $34.2 |
Sales rose 1.2%, while operating income declined 8.7% and attributable earnings declined 8.9%. Gross margin was approximately 39.7%, versus 40.5%; operating margin was approximately 18.2%, versus 20.2%. The effective tax rate fell to 38.9% from 39.9%. Operating cash flow less capital expenditures was $156.5, compared with $162.9.
Business trends and changes
- Management reported total requisition volume growth of 1.1% and revenue per requisition growth of 0.2%; on a per-revenue-day basis, revenue rose 2.9% and volume 2.7%. Q1 2013 had one fewer revenue day, and inclement weather reduced volume growth by about 0.5%.
- Routine Testing sales increased 3.8% to $826.8; Genomic and Esoteric Testing declined 3.1% to $527.2; Ontario sales increased 5.0% to $86.9. Medtox, acquired in July 2012, contributed 2.4% to revenue growth and 3.2% to volume growth.
- Cost of sales grew faster than revenue, rising to 60.3% of sales from 59.5%. SG&A increased 4.4% and reached 19.7% of sales, compared with 19.1%. Management cited acquisition-related costs and integration, employee benefit costs, weather, fewer revenue days, and Medicare payment reductions as pressures. Lower genomic/esoteric pricing reflected test mix and Medicare-related changes.
- Q1 2013 included $7.5 of net restructuring charges, versus a $3.6 net credit in Q1 2012. Q1 2013 also included a $2.0 reduction in amortization expense from reversal of certain contingent acquisition payments.
Cash, debt, and liquidity
Cash and equivalents were $185.8 at March 31, down from $466.8 at year-end. Total short- and long-term debt was $2,322.9, including $30.0 drawn on the revolving facility; long-term debt was $2,175.0. The quarter included repayment of $350.0 of senior notes due 2013, share repurchases of $113.9, and $12.9 of cash payments related to convertible-note settlements. The $1,000.0 revolving credit facility had $30.0 outstanding; $37.4 of letters of credit also used facility availability.
Labcorp reported a total debt-to-consolidated-EBITDA ratio of 1.8, within its 3.0 covenant limit, and compliance with all credit covenants. Management said cash from operations, cash on hand, and borrowing capacity should be sufficient for 2013 obligations. It stated an intention to increase leverage over time toward 2.5 from 2.0 at December 2012. The board authorized an additional $1,000.0 share-repurchase program in February; $954.1 remained authorized at quarter-end.
Outlook, risks, and contingencies
- Management forecast 2013 capital expenditures of approximately $220.0, citing facility consolidation and replacement of a major testing platform. No revenue or earnings guidance was provided in the filing text.
- Management expected potential 2013 restructuring costs to be more than offset by subsequent savings and not to materially affect operations or liquidity.
- Key risks include changes to healthcare reimbursement and regulation, Medicare/Medicaid audits and billing inquiries, competitive pricing, customer and test-volume trends, acquisition integration, collections, cybersecurity and IT disruption, and foreign exchange exposure.
- The filing describes False Claims Act and other billing-related investigations or lawsuits, putative class actions, and other legal matters. Management said it could not estimate a reasonably probable loss range for certain cases; it did not believe currently available information indicated a material adverse effect on financial condition, though results in a particular period could be affected.
- California Medi-Cal reimbursement changes were not expected by management to have a material effect on consolidated revenue or results. The filing reported ongoing federal, state, and Canadian tax examinations and $48.6 of tax reserves including interest and penalties.
- Zero-coupon subordinated notes could be converted during Q2 2013 under the stated terms; any cash settlement was expected to use cash on hand and/or revolver borrowings. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether routine-testing growth and Medtox contributions persist, and whether genomic/esoteric pricing and test mix stabilize.
- Whether acquisition integration, reimbursement changes, weather, and revenue-day comparisons continue to weigh on margins.
- Execution and funding of the planned $220.0 capital program, debt and leverage objectives, and the pace of share repurchases.
- Cash collection and receivables trends, given the $75.8 operating cash-flow use from increased accounts receivable.
- Developments in the described legal, billing, regulatory, and tax matters, including any outcomes or exposures not quantifiable in this filing.