Labcorp Holdings Inc. — Q2 2017 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2017, compared with the same periods in 2016. Labcorp operates LabCorp Diagnostics (LCD) and Covance Drug Development (CDD); Q2 net revenue mix was 72% LCD and 28% CDD.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $2,498.4m | $2,382.0m | $4,906.5m | $4,677.2m |
| Operating income | $336.0m | $365.5m | $668.7m | $665.0m |
| Net earnings attributable to Labcorp | $188.6m | $204.1m | $380.8m | $368.2m |
| Diluted EPS | $1.82 | $1.96 | $3.66 | $3.54 |
- Q2 net revenue rose 4.9%, while operating income fell 8.1% and attributable earnings fell 7.6%. First-half net revenue rose 4.9%, operating income 0.6%, and attributable earnings 3.4%.
- Q2 gross profit was $861.8m; gross margin was approximately 34.5% of net revenue, versus 34.7% a year earlier. First-half gross profit was $1,665.4m, approximately 33.9% of net revenue, versus 34.3%.
- Q2 consolidated operating margin was approximately 13.4%, versus 15.3% a year earlier; first-half margin was approximately 13.6%, versus 14.2%. CDD was the principal pressure: Q2 operating earnings fell 52.1% to $35.8m, and first-half earnings fell 33.6% to $91.9m. LCD operating earnings rose 1.5% in Q2 and 6.6% in the first half.
- Cash from operations was $544.5m for the first half, versus $477.1m. Investing cash use was $736.9m, including $568.0m for acquisitions, and capital expenditures were $141.5m. Financing provided $46.9m; cash decreased $133.7m to $299.9m. Operating cash flow less capital expenditures was approximately $403m, a derived measure.
- At June 30, cash was $299.9m, current assets $2,515.7m, and current liabilities $1,805.5m. Total debt was approximately $6.13bn, derived from current and long-term debt, versus $5.85bn at year-end 2016. Debt-to-trailing-12-month EBITDA was 3.2x; the company reported covenant compliance.
Changes, outlook and notable items
- LCD revenue grew 8.4% in Q2 and 8.2% in the first half, supported by acquisitions and organic growth. CDD revenue declined 3.1% and 2.6%, respectively, mainly due to sponsor cancellations of two large studies in late 2016 and unfavorable currency effects. Q2 LCD organic growth was 3.5%; requisition volume grew 1.9%, with calendar effects reducing volume by about 1.5%.
- Q2 restructuring and special charges were $39.1m, including a $15.1m impairment for termination of a software project; first-half charges were $43.0m. Management attributed CDD margin weakness to lower study revenue, personnel costs, and restructuring, partly offset by synergies.
- CDD LaunchPad restructuring was expected to generate approximately $20m pretax savings in 2017 and $45m annualized thereafter, with approximately $30m in 2017 charges. Management said the broader LaunchPad initiative remained on track for $150m of net savings through 2017, and Covance integration synergies on track for $100m through 2017.
- No full-year revenue or earnings guidance is provided in the supplied filing text. The company expected 2017 capital expenditures of approximately 3% of net revenue. It continued to monitor two CDD reporting units for potential goodwill or intangible-asset impairment.
- The $500m 2.20% senior notes due August 2017 were classified as current; management expected repayment using available facilities or debt markets. On July 31, 2017, Labcorp announced a proposed $1.2bn all-cash acquisition of Chiltern, expected to close in Q4 2017, funded with bank financing and bonds, subject to customary conditions.
- Other notable matters include the May 2017 PAML acquisition and assumption of interests in five joint ventures; preliminary acquisition purchase-price allocations; ongoing healthcare billing, employment, consumer and other litigation; and a Florida Medicaid case with a settlement in principle. The company said it could not estimate reasonably probable losses for certain proceedings. Risk factors were reported as unchanged from the 2016 Form 10-K.
Key facts for investors to verify
- Whether CDD study cancellations persist and whether the announced cost actions deliver expected savings without further disruption.
- Funding, closing conditions, integration costs and leverage impact of the proposed Chiltern acquisition, alongside the August 2017 note maturity and potential convertible-note settlements.
- Acquisition-related growth and the final PAML purchase-price allocation, including joint-venture interests.
- Potential impairment exposure in the two monitored CDD reporting units and the effect of restructuring and other special charges.
- Developments in material legal and regulatory matters, reimbursement and payer trends, and adoption of the new revenue-recognition standard in 2018, whose reported revenue and margin effects were still being evaluated.