Business context and reporting period
Labcorp Holdings filed its Form 10-K for the fiscal year ended December 31, 2012. It is a large U.S. independent clinical laboratory operator, with routine and specialty testing businesses and operations in the U.S. and several international markets. The filing also provides unaudited fourth-quarter results. Unless noted, financial amounts below are in USD millions.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $5,671.4 | $5,542.3 | +2.3% |
| Gross profit | $2,249.7 | $2,274.7 | -1.1% |
| Operating income | $1,023.5 | $948.4 | +7.9% |
| Net earnings attributable to Labcorp | $583.1 | $519.7 | +12.2% |
| Diluted EPS | $5.99 | $5.11 | +17.2% |
| Cash provided by operations | $841.4 | $855.6 | -1.7% |
| Capital expenditures | $173.8 | $145.7 | +$28.1 |
Gross margin declined to about 39.7% from 41.0%; operating margin increased to about 18.0% from 17.1%. Revenue rose 1.7% on volume and 0.6% on revenue per requisition. MEDTOX and Orchid acquisitions contributed to 2012 growth; acquired operations not yet fully integrated, inclement weather and slower volume growth weighed on gross margin. SG&A declined 3.9%, including lower bad-debt expense.
Fourth-quarter 2012 sales were $1,405.3 versus $1,366.1 in Q4 2011; attributable net earnings were $120.2 versus $135.4, and diluted EPS was $1.26 versus $1.34. Q4 gross profit was $538.0 versus $549.6.
At year-end, cash and cash equivalents were $466.8; total debt was approximately $2,655.0, comprising $480.0 current and $2,175.0 long-term. The reported debt-to-consolidated-EBITDA ratio was 2.0x against a 3.0x covenant limit. The $1.0 billion revolving facility had no borrowings outstanding at year-end; letters of credit of $37.4 reduced availability. Shareholders’ equity was $2,717.4. The company repurchased $516.5 of stock in 2012 and does not anticipate paying dividends in the foreseeable future.
Material changes, outlook and risks
- Medicare clinical laboratory fee reductions and other government payment changes effective in 2013 were expected by management to reduce revenue by more than $50 and diluted EPS by approximately $0.35. A further 2% sequestration reduction was conditional on implementation. No broader formal revenue or EPS guidance is provided in the filing.
- Management forecast 2013 capital expenditures of $200–$220, reflecting facility consolidation and replacement of a major testing platform. It expected operating cash, cash on hand and borrowing capacity to cover 2013 obligations. The company said it intended to raise its debt/EBITDA ratio over time from 2.0x toward 2.5x.
- Super Storm Sandy and other inclement weather reduced 2012 revenue by an estimated $16 and diluted EPS by $0.09. A year-end balance-sheet reclassification included a one-time correction reducing 2012 operating cash flow by $34; management said it was not material to previously reported statements.
- MEDTOX was acquired for $236.4 cash in July 2012. The company also acquired other laboratories and related assets for approximately $95.8 net of cash acquired. It recorded $25.3 of net restructuring charges and a $6.9 loss on disposal of a European subsidiary; $6.2 of accelerated amortization related to a terminated license.
- Key risks include further reimbursement cuts and utilization controls, intense pricing competition, patient collections and receivables, integration of acquisitions, regulatory and privacy/security compliance, and litigation. The company disclosed False Claims Act suits and government inquiries involving billing and alleged referral arrangements, as well as other class actions; it said it could not estimate reasonably probable losses for certain matters. The Hunter Labs settlement of $49.5 was paid in 2012, after $34.5 of expense (net of prior reserves) was recorded in 2011.
Important facts for investors to verify
- Whether 2013 reimbursement reductions, including any sequestration changes, matched management’s estimated revenue and EPS impacts.
- Whether acquisition integration and cost actions improve gross margins, given 2012’s lower gross profit despite sales growth.
- Cash conversion, bad-debt trends and days sales outstanding, including the effect of rising patient cost-sharing.
- Debt and liquidity after the $350 senior note due in February 2013 was repaid, and any conversion of zero-coupon notes during Q1 2013.
- Developments and potential financial exposure in the disclosed billing, False Claims Act and other legal matters.
- Execution of the planned $200–$220 capital program and the company’s stated leverage objective.