Business context and reporting period
Laboratory Corporation of America Holdings (Labcorp) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company provides clinical laboratory testing. Results include the Orchid acquisition, completed in December 2011; the MEDTOX acquisition closed on July 31, 2012, after quarter-end.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,423.4 million | $1,403.3 million | $2,846.7 million | $2,771.7 million |
| Operating income | $276.0 million | $225.7 million | $563.1 million | $461.5 million |
| Net earnings attributable to Labcorp | $153.3 million | $122.9 million | $314.9 million | $250.0 million |
| Diluted EPS | $1.56 | $1.20 | $3.19 | $2.44 |
| Operating cash flow | Not separately provided for the quarter | $383.4 million | $400.2 million |
Q2 sales increased 1.4%; operating income rose 22.3% and diluted EPS rose 30.0%. Six-month sales increased 2.7%, operating income 22.0%, and diluted EPS 30.7%. Gross margin was 40.7% in Q2 versus 41.9% a year earlier; operating margin was 19.4% versus 16.1%. For the six months, gross margin was 40.6% versus 41.7%, and operating margin was 19.8% versus 16.7%.
Q2 requisition volume was essentially flat at 31.4 million; revenue per requisition increased 1.5%. Six-month volume increased 1.3% to 63.0 million and revenue per requisition rose 1.4%. Six-month capital expenditures were $68.3 million; operating cash flow less capital expenditures was $315.1 million, a derived measure.
Balance sheet, debt and liquidity
At June 30, 2012, cash was $124.4 million, total assets $6,098.3 million, and total liabilities $3,446.3 million. Total debt was approximately $2,109.6 million, comprising $134.4 million current and $1,975.2 million long-term, down from approximately $2,221.0 million at December 31, 2011. The revolving facility balance was $450 million; its effective rate was 1.22%. The company reported a 1.6-to-1 total-debt-to-consolidated-EBITDA ratio and compliance with its 3.0-to-1 covenant.
Cash declined $34.9 million in the first half. Financing cash outflow was $316.7 million, including $252.6 million of share repurchases; investing cash outflow was $101.6 million. The company had $331.9 million of remaining repurchase authorization at June 30. It expected 2012 capital expenditures of approximately $155 million. MEDTOX was acquired for $248.2 million in cash after quarter-end, funded with cash and revolving-facility borrowings.
Changes, outlook and notable items
- Sales growth reflected Orchid, higher routine-testing revenue per requisition, genomic and esoteric testing growth, and Ontario growth. Q2 routine-testing sales rose 3.0%, while genomic and esoteric sales declined 1.3%; Ontario sales rose 3.7% in U.S. dollars.
- Cost of sales increased faster than revenue, and its share of sales rose to 59.3% in Q2 from 58.1%, partly because acquired businesses had lower margins and were not fully integrated. SG&A fell 13.4% in Q2; comparison benefited from the $34.5 million Hunter Labs settlement expense recorded in Q2 2011, as well as expense management and improved collections.
- First-half operating cash flow was lower year over year, primarily due to timing of accrued compensation payments and $15.3 million more net income taxes paid. Management said it continued to focus on collections and claims processes.
- The company expects to generate sufficient operating cash and borrowing capacity to meet its $350 million senior-note maturity in early 2013. No earnings or revenue guidance is provided in the filing. Management expected any restructuring charges in the second half of 2012 to be more than offset by later savings and not to materially affect operations or liquidity.
- Unusual items included a $6.9 million Q2 loss on disposal of a European subsidiary, a $2.9 million equity-method income increase associated with a joint-venture liquidation, and a first-half $0.2 million net restructuring credit. The effective tax rate rose to 40.0% in Q2 from 38.9%, and 39.9% for the first half from 38.9%, in part due to nondeductible foreign losses and employee stock-purchase-plan expenses.
- Risks include extensive healthcare reimbursement and laboratory regulation, payer pricing and volume changes, acquisition integration, litigation and investigations, and foreign-exchange exposure. The filing describes False Claims Act matters, billing inquiries, employment and other lawsuits; management said it could not estimate reasonably probable losses for certain cases and did not believe currently known outcomes would materially affect financial condition. California Medi-Cal reimbursement changes were not expected to have a material effect on consolidated revenue or results.
Most important facts for investors to verify
- Whether revenue growth and requisition trends persist, particularly excluding acquisition contributions, and whether revenue per requisition and test mix support margins.
- Progress integrating Orchid and MEDTOX, including acquired-business margins and the financing impact of the post-quarter MEDTOX purchase.
- Cash conversion, receivables and collections, planned capital expenditures, share repurchases, and funding of the 2013 note maturity.
- Developments in billing, reimbursement, tax and other legal matters, including whether any contingency becomes probable and estimable.
- Potential effects of variable-rate debt and currency movements; the filing describes market-risk exposure as not material but identifies these exposures.