Business context and reporting period
Labcorp Holdings reported unaudited results for the three months ended March 31, 2015. It completed its acquisition of Covance on February 19, 2015, and reorganized reporting into LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). Results include Covance only from the acquisition date, limiting comparability with the prior-year quarter.
Financial performance and position
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net revenue | $1,772.3 | $1,430.7 |
| Total revenues, including reimbursable expenses | $1,793.2 | $1,430.7 |
| Gross profit | $596.0 | $516.8 |
| Operating income | $130.2 | $203.3 |
| Net earnings attributable to Labcorp | $0.7 | $113.1 |
| Diluted EPS | $0.01 | $1.31 |
| Net cash from (used in) operating activities | $(86.9) | $142.3 |
- Net revenue rose 23.9%; total revenues rose 25.3%. Management attributed growth to Covance, organic LCD volume growth and smaller acquisitions, partly offset by price, mix and currency.
- LCD revenue increased 5.7% to $1,472.0, including 5.0% organic volume growth. CDD revenue was $300.3, largely reflecting the acquired Covance business.
- Gross margin on net revenue was 33.6%, versus 36.1% a year earlier; operating margin was 7.3%, versus 14.2%. Higher acquisition-related costs, acquired-award compensation expense, restructuring and increased amortization weighed on results.
- Interest expense increased to $104.3 from $25.7, primarily reflecting acquisition financing and related costs. The effective tax rate was 96.4%, affected by nondeductible deal costs and one-time tax charges.
- Cash and equivalents were $446.4 at quarter-end. Operating cash use included acquisition-related payments and seasonal working-capital use at CDD. Investing cash use was $3,651.3, including $3,622.2 for acquisitions; financing provided $3,629.7.
- Total debt, including current maturities, was approximately $6,946.3, compared with $3,029.8 at year-end 2014. The company reported a 4.2-to-1 total-debt-to-LTM-EBITDA ratio and compliance with debt covenants. Its $1,000 revolving facility had $60 drawn; $42.5 of letters of credit also reduced availability.
Material changes and unusual items
- Covance was acquired for $6,150.7 of cash and stock consideration. The preliminary purchase allocation included $3,176.1 of goodwill. Covance contributed $267.2 of revenue and a $56.2 net loss from closing through March 31.
- Reported acquisition-related costs were $166.0 across operating and interest expense; the company also expensed a $37.4 make-whole payment for repaid Covance notes. Restructuring and other special charges were $19.3. The company recorded $6.0 of Project LaunchPad consulting expenses.
- Foreign-currency translation drove a $120.6 after-tax other comprehensive loss, primarily reflecting currency movements.
- The company issued $2,900 of senior notes and drew a $1,000 term loan to help fund the acquisition; the bridge loan was repaid in March. Acquisition shares increased outstanding common shares to 100.5 million from 84.6 million at year-end.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected 2015 capital expenditures of approximately $325–$350. Project LaunchPad was expected to generate savings exceeding $150 over three years, with approximately $30 of associated one-time costs.
- Share repurchases were suspended after the acquisition; management said it did not expect to resume them until leverage reached its 2.5-to-1 target.
- Key risks include integrating Covance and achieving expected benefits, customer or contract losses, reimbursement and regulatory changes, privacy and cybersecurity exposure, foreign exchange, and litigation or government investigations.
- Contingencies include healthcare billing and False Claims Act matters, employment and professional-liability cases, and investigations. The company said it could not estimate reasonably probable losses for certain proceedings; outcomes could affect results in a particular period.
- A Canadian laboratory joint venture’s challenge to an Alberta Health Services contract award remained pending. If unsuccessful and the award stands, the venture’s revenue could decline substantially and Labcorp’s investment could be impaired; its existing contract ran through March 2016.
- Unaudited pro forma results assuming the acquisition had occurred at the start of each comparative period showed Q1 2015 revenue of $2,146.4 and net income of $110.4, versus Q1 2014 revenue of $2,097.0 and a net loss of $25.1. These figures are illustrative, exclude anticipated synergies and are not forecasts.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects the partial-quarter Covance contribution versus ongoing organic performance.
- The final Covance purchase-price allocation, integration costs, and realization and timing of expected synergies.
- Debt reduction, covenant headroom, interest expense and progress toward the stated 2.5-to-1 leverage target.
- Whether seasonal working-capital use at CDD reverses and operating cash flow improves after the acquisition quarter.
- Developments in significant litigation, investigations and the Alberta contract appeal, including any financial impact.