Labcorp Holdings — Q3 2009 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. Financial statements are unaudited; amounts are in millions except per-share data.
Business context and results
Labcorp provides routine, genomic and esoteric laboratory testing, including operations in Ontario, Canada. Management attributed growth to managed-care and government-payer revenue, a richer test mix, pricing discipline and expense control. The August 3 acquisition of Monogram Biosciences was intended to expand esoteric testing and personalized-medicine capabilities.
| Metric | Q3 2009 | Q3 2008 | First 9 months 2009 | First 9 months 2008 |
|---|---|---|---|---|
| Net sales | $1,185.1 (+4.4%) | $1,135.1 | $3,529.6 (+4.2%) | $3,386.1 |
| Gross profit | $498.1 | $461.6 | $1,494.9 | $1,423.9 |
| Operating income | $234.9 | $202.2 | $720.1 | $638.5 |
| Net earnings attributable to Labcorp | $131.4 | $111.9 | $400.6 | $346.4 |
| Diluted EPS | $1.21 | $1.00 | $3.67 | $3.06 |
Gross margin was 42.0% in Q3 versus 40.7% a year earlier; operating margin was 19.8% versus 17.8%. For the first nine months, gross margin was 42.4% versus 42.1%, and operating margin was 20.4% versus 18.9%. Q3 revenue growth included routine testing up 3.0%, genomic and esoteric testing up 6.6%, and Ontario up 6.7%. Routine accession volume declined 2.5%, while genomic and esoteric volume increased 9.2%; total accessions rose 0.7%.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $637.7, up from $565.6. Capital expenditures were $77.1, implying approximate free cash flow of $560.6, versus $445.2 in 2008 (operating cash flow less capital expenditures).
- Cash declined to $126.8 at September 30 from $219.7 at year-end 2008. Investing used $249.8 and financing used $482.1, including $289.4 to redeem zero-coupon notes and $159.1 of cash share repurchases.
- Total reported debt was approximately $1,400.8, down from $1,721.3 at December 31, 2008. Long-term debt was $1,280.0; short-term borrowings and current debt were $120.8. The company reported compliance with debt covenants and said it expected liquidity to meet anticipated needs.
- Current assets were $977.5 and current liabilities $602.6. The $46.9 in letters of credit reduces availability under the revolving facility. A lender affiliated with Lehman Brothers had a $28.0 revolving-facility commitment; Labcorp said it did not expect Lehman to fund future borrowing requests and was discussing replacement of that commitment.
Material changes and management commentary
- Q3 operating income and attributable earnings increased year over year. Lower cost of sales as a percentage of revenue and the absence of 2008 restructuring and hurricane-related charges helped comparisons. Q3 SG&A rose 8.9%, partly reflecting Monogram costs and acquisition-related expenses.
- For the first nine months, restructuring charges were $10.2 versus $33.7 in 2008. The 2009 initiatives were expected to produce annualized savings of approximately $18.3.
- Monogram and other business acquisitions used $168.0 of cash in the first nine months; Monogram accounted for approximately $160.0. Its preliminary purchase allocation included $63.3 of identifiable intangible assets and $76.2 of goodwill; the company expected to finalize the allocation in Q4.
- Management expected 2009 capital expenditures of approximately $115.0. No full-year revenue or earnings guidance is stated in the supplied filing text.
- Labcorp expected an approximately $27.7 reduction in gross unrecognized tax-benefit reserves during Q4, with an estimated $17.3 net-of-tax benefit to earnings, subject to resolution of state tax matters.
Risks, contingencies and unusual items
- Pending matters include a California qui tam case alleging improper Medicaid billing, other state and federal billing inquiries, and an appeal in a patent dispute. Management did not expect the matters to materially harm financial position, but said outcomes could materially affect results or cash flows in the period resolved.
- The company highlighted extensive laboratory regulation, reimbursement and pricing pressures, payer and physician compliance, bad-debt and collection risks, acquisition integration, litigation, and technology and information-security risks. It added that failure to implement Version 5010 transactions or ICD-10 coding on schedule could adversely affect reimbursement and collections.
- The Ontario joint-venture partnership agreement gives noncontrolling holders a put right in defined future periods. Its reported fair value was $140.4; the contractual value in excess of the existing $24.1 noncontrolling interest was $116.3.
- On October 14, 2009, the board approved freezing future service-based credits in the defined-benefit plans after 2009 and closing the plans to new entrants; a new 3% non-elective 401(k) contribution was planned from January 2010. The company cited increased pension expense, projected at $33.8 for 2009 versus $19.5 in 2008.
- Disclosure controls were assessed as effective at September 30, 2009; the filing reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, pricing and higher genomic/esoteric volumes continue to offset falling routine-test volume and payer or reimbursement pressure.
- Monogram integration, final purchase accounting, and whether expected restructuring savings are realized.
- Cash generation and capital allocation, including remaining repurchase authorization of approximately $180.2, debt maturities, and actual revolving-credit availability after letters of credit and the Lehman commitment issue.
- Developments in the Medicaid billing inquiries and litigation, the Ontario put obligation, and the anticipated Q4 tax-reserve release.
- Actual 2009 capital expenditures, pension contributions and expense, and implementation readiness for Version 5010 and ICD-10.