Business context and reporting period
Laboratory Corporation of America Holdings (Labcorp) filed this Form 10-K for the fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Labcorp is a large U.S. independent clinical laboratory provider, with routine and specialty testing operations, including genomic and esoteric testing. It reports one operating segment.
Financial performance and liquidity
Amounts are in millions, except per-share data and percentages.
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $5,542.3 | $5,003.9 | +10.8% |
| Gross profit / margin | $2,274.7 / 41.0% | $2,097.8 / 41.9% | Margin down 0.9 points |
| Operating income / margin | $948.4 / 17.1% | $978.8 / 19.6% | Income down 3.1% |
| Net earnings attributable to Labcorp | $519.7 | $558.2 | Down 6.9% |
| Diluted EPS | $5.11 | $5.29 | Down 3.4% |
| Cash from operations | $855.6 | $883.6 | Down 3.2% |
Fourth-quarter 2011 sales were $1,366.1, up 5.5% from $1,295.4 in Q4 2010. Gross profit was $549.6 versus $529.6; attributable net earnings were $135.4 versus $131.8; and diluted EPS was $1.34 versus $1.26. Q4 gross margin was approximately 40.2%, compared with 40.9% a year earlier.
Genomic and esoteric testing sales rose 20.9% to $2,089.0; routine testing increased 5.0% to $3,143.9. Total testing volume grew 3.5%, and revenue per requisition increased 7.0%. Genzyme Genetics contributed approximately 6.8 percentage points of the 10.8% full-year sales growth.
Capital expenditures were $145.7, leaving approximate operating-cash-flow less capex of $709.9. Year-end cash was $159.3. Total reported debt was approximately $2,221.0, compared with $2,188.4 at year-end 2010. Current assets were $1,084.8 and current liabilities $797.4. The company had $560.0 drawn on its new $1 billion revolving facility and reported compliance with its maximum 3.0-to-1 debt-to-consolidated-EBITDA covenant. It repurchased $643.9 of shares during 2011.
Material changes, outlook, and risks
- Sales growth and improved volumes were offset by lower operating income and earnings. Cost of sales rose to 59.0% of sales from 58.1%; management attributed the increase largely to acquisitions not yet fully integrated and a higher-cost specialty-testing mix. SG&A included a $34.5 litigation settlement expense.
- Restructuring and other special charges totaled $80.9, including $44.6 of net restructuring charges, $18.9 of asset impairments, and $14.8 of investment-related write-offs. Management estimated annualized savings of approximately $99.7 from restructuring actions.
- Management cited pricing discipline, specialty-testing growth, expense control, scientific innovation, IT investment, and acquisitions as strategic priorities. It expected 2012 capital expenditures of approximately $155.0 and pension contributions of $14.6. The filing provides no specific 2012 revenue or earnings guidance.
- Labcorp extended its UnitedHealthcare agreement through 2018. It acquired Orchid Cellmark in December 2011, subject to divestiture of certain U.S. government paternity-testing assets, and increased its Ontario joint-venture ownership to 98.2%.
- Reimbursement pressure is a significant risk. The filing describes Medicare clinical-lab fee schedule reductions under health reform, a further 2% reduction scheduled for 2013, and a separate scheduled 2% sequestration reduction. Expansion of insured populations and demand for genetic and companion diagnostics may support volumes, but payer controls and utilization limits could offset growth.
- Labcorp paid $49.5 to settle the California Medicaid billing case, without admitting liability, and recorded $34.5 of incremental expense after prior reserves. Other matters include a False Claims Act suit alleging improper discounts to UnitedHealthcare for Medicare business, state Medicaid billing inquiries, two overtime class actions, and an appeal of a roughly $10.0 judgment against a subsidiary. The company says it cannot estimate reasonably possible losses for certain proceedings.
- Other key risks include changes in reimbursement and regulation, billing and collection performance, data security or IT disruptions, acquisition integration, competition and pricing, and foreign reimbursement and currency exposure.
Important facts for investors to verify
- Whether specialty-testing growth and acquisition integration deliver the expected margins and the projected $99.7 of annualized savings.
- Actual effects of Medicare and other payer reductions, capitated arrangements, and patient cost-sharing on prices, volumes, collections, and bad debt.
- Debt and liquidity after share repurchases and any conversions of the zero-coupon notes; the filing disclosed possible note conversions during Q1 2012.
- Developments and potential financial exposure from billing investigations and litigation, including the UnitedHealthcare-related False Claims Act case.
- Whether Q4 sales and EPS trends continue; seasonal and weather-related testing fluctuations can make quarter-to-quarter comparisons less indicative of full-year performance.