LabCorp Holdings — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. Unless otherwise noted, financial amounts are in U.S. dollars and millions. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are identified below.
Business context
LabCorp provides clinical laboratory testing through LabCorp Diagnostics (LCD) and contract research and drug-development services through Covance Drug Development (CDD). In 2018, LCD contributed 62% of revenue and CDD 38%, compared with 67% and 33%, respectively, in 2017. The company reported nearly 61,000 employees and services spanning more than 120 million patient encounters annually.
Financial results
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Revenue | $11,333.4 | $10,308.0 | Up 9.9%; acquisitions contributed 7.6%, organic growth 2.7%, foreign exchange 0.3%, and divestitures reduced growth 0.7%. |
| Gross profit / margin | $3,176.4 / 28.0% | $3,091.8 / 30.0% | Margin contracted 2.0 percentage points. |
| Operating income / margin | $1,325.7 / 11.7% | $1,305.2 / 12.7% | Income up 1.6%; margin declined. |
| Net earnings attributable to LabCorp | $883.7 | $1,227.1 | Down 28.0%, substantially reflecting the unusually large 2017 tax benefit from U.S. tax reform. |
| Diluted EPS | $8.61 | $11.81 | Prior-year EPS included the tax-reform benefit. |
| Operating cash flow | $1,305.4 | $1,498.1 | Down $192.7, mainly due to higher working capital needs and approximately $105 in net tax paid on divestitures. |
| Capital expenditures | $379.8 | $312.9 | 3.4% of 2018 revenue. |
LCD revenue rose 2.5% to $7,030.8, with requisitions up 3.6%; price and mix reduced revenue by 1.0%. LCD operating income fell 10.3% to $1,166.7 and margin declined to 16.6% from 19.0%, amid PAMA reimbursement cuts, ransomware and Hurricane Florence disruption, higher personnel costs, and a one-time employee bonus. CDD revenue increased 25.0% to $4,313.1, including 17.5% growth from acquisitions and 6.6% organic growth. CDD operating income rose to $303.6 from $144.9 and margin improved to 7.0% from 4.2%, driven by acquisitions, organic growth and lower restructuring charges.
Fourth quarter: Revenue was $2,787.5 versus $2,744.7 in Q4 2017; operating income was $307.7 versus $330.6. Net earnings attributable to LabCorp were $157.9 versus $687.8, with the prior-year quarter materially boosted by tax-reform accounting. Diluted EPS was $1.56 versus $6.63.
Cash, debt and liquidity
Cash and cash equivalents were $426.8 at year-end, up from $316.6. Total assets were $16,185.3 and shareholders’ equity was $6,971.4. Balance-sheet debt was $6,059.8, including $6,041.9 of long-term debt; cash-adjusted debt was approximately $5,633.0. The company reported a 3.0-to-1.0 total debt-to-EBITDA ratio, compliance with debt covenants, and no revolver balance at year-end. Its revolving facility provides up to $1.0 billion, reduced by $72.2 of outstanding letters of credit. Management said operating cash flow and revolver availability were sufficient for anticipated short- and long-term needs.
Cash from investing activities was $206.7, compared with $2,228.7 used in 2017, reflecting lower acquisition spending and $708.3 of proceeds from asset and business dispositions. Financing activities used $1,389.9, including $704.6 in debt and lease repayments and $700.0 in share repurchases. The board authorized a new share repurchase plan of up to $1.25 billion in February 2019. LabCorp does not anticipate paying common-stock dividends in the foreseeable future.
Material changes, outlook and risks
- Reimbursement pressure: PAMA reduced revenue by approximately $70 in 2018; LabCorp estimated a further reduction of approximately $115 in 2019 absent delay or change. LCD also anticipated a $2.1 reduction in 2019 PFS revenue from flow-cytometry reimbursement changes.
- Efficiency plans: Management expected CDD LaunchPad to deliver $150 of net savings over three years by the end of 2020, and Chiltern integration synergies of $30 by the end of 2019. LCD LaunchPad phase II was expected to generate approximately $200 of net savings over three years, with approximately $40 of one-time implementation costs and about one-third of savings realized annually.
- Spending outlook: 2019 capital expenditures were expected to be approximately 4.0% of revenue. The filing does not provide clear consolidated revenue or EPS guidance.
- Divestitures and unusual items: The CFS sale generated a $258.3 gain; sales of U.K. and U.S. forensic businesses generated losses of $48.9 and $24.5. The company also recorded $48.1 of restructuring charges, a $31.1 one-time employee bonus, and $7.5 of pension settlement expense in 2018.
- Cyber incident: A July 2018 ransomware attack temporarily disrupted certain LCD systems; operations returned to normal within days. LabCorp reported no patient or client data theft or misuse, but incurred $12.6 in response costs and estimated $9.8 of lost revenue. It filed an insurance claim but recognized no expected recovery; potential claims or regulatory action remained possible.
- Key risks and contingencies: The filing highlights further reimbursement and utilization cuts, payer and customer consolidation, competition, acquisition integration, clinical-trial contract cancellations or cost overruns, foreign-exchange exposure, cybersecurity and privacy compliance, and extensive laboratory and drug-development regulation. Litigation includes False Claims Act, billing, employment and other matters; the company could not estimate reasonably probable losses for certain proceedings.
Most important facts for investors to verify
- Whether the anticipated 2019 PAMA reduction of approximately $115 materialized and whether subsequent policy or legal changes altered its impact.
- Whether LCD margins stabilized after 2018’s reimbursement cuts, weather and cyber disruptions, and employee bonus costs.
- Progress and realized net savings versus the stated LaunchPad and Chiltern synergy targets, including implementation costs.
- Debt reduction, leverage and cash conversion, particularly given $700 of 2018 repurchases and planned additional repurchases.
- Whether the CFS and forensic divestiture gains and losses, and the 2017 tax benefit, distort comparisons of recurring earnings.
- Developments in material litigation, ransomware-related insurance recovery or claims, and compliance obligations affecting reimbursement and operations.