Business context and reporting period
Laboratory Corporation of America Holdings (LabCorp) filed this unaudited Form 10-Q for the three months ended March 31, 2011. The company provides clinical laboratory testing. Results include the December 2010 acquisition of Genzyme Genetics; comparisons with first-quarter 2010 are therefore affected by acquisitions and mix changes.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,368.4 million | $1,193.6 million | +14.6% |
| Gross profit / margin | $568.4 million / 41.5% | $506.9 million / 42.5% | Margin down 1.0 point |
| Operating income / margin | $235.8 million / 17.2% | $234.2 million / 19.6% | Income +0.7% |
| Net earnings attributable to LabCorp | $127.1 million | $132.7 million | -4.2% |
| Diluted EPS | $1.23 | $1.25 | -1.6% |
| Operating cash flow | $215.3 million | $232.0 million | -7.2% |
| Capital expenditures | $29.4 million | $24.5 million |
Revenue growth reflected acquisitions, higher genomic and esoteric testing activity and revenue per requisition, and favorable Canadian currency translation. Total requisitions rose 5.9%; total revenue per requisition increased 8.2%. Cost of sales grew faster than revenue, and SG&A as a share of sales edged up to 20.7% from 20.6%. Lower margins at recently acquired operations that were not yet fully integrated contributed to margin pressure. Interest expense rose 64.4% to $24.0 million, principally reflecting debt issued to fund the Genzyme Genetics acquisition.
Liquidity, debt and capital allocation
Cash was $195.4 million at March 31, 2011, versus $230.7 million at year-end. Total debt was approximately $2.205 billion, compared with $2.188 billion at December 31, 2010; cash-adjusted debt was approximately $2.009 billion. Current assets were $1.148 billion and current liabilities $1.200 billion. Operating cash flow was lower mainly because Genzyme Genetics billing and collections were delayed during payer enrollment and contract assignment. The company expected these processes to catch up in Q2.
LabCorp reported compliance with credit covenants; leverage was 1.8x and interest coverage 15.9x, against limits of no more than 2.5x and at least 5.0x, respectively. Management said available cash flow and credit capacity were sufficient for anticipated needs. The company repurchased about 2.9 million shares for $265.3 million in Q1 and had $469.0 million remaining under its authorization. The Ontario joint-venture noncontrolling interest put is classified as a $152.3 million current liability and may be exercised on December 31, 2011.
Outlook, commentary and notable items
- Management cited core and esoteric testing volume growth, pricing discipline and expense control. Severe winter weather reduced estimated Q1 revenue by $22 million in 2011, versus $23 million in 2010.
- Genzyme Genetics was expected to dilute 2011 EPS by approximately $0.25–$0.35. Management expected its billing and collections delays to be resolved during Q2.
- Expected 2011 capital expenditures were approximately $140–$150 million. Restructuring initiatives were expected to yield about $13.3 million in annualized savings.
- Q1 restructuring and special charges totaled $27.9 million: $13.1 million net restructuring charges, primarily for Genzyme Genetics integration, and a $14.8 million write-off related to a prior-year investment.
- After quarter-end, LabCorp agreed to acquire Orchid Cellmark for approximately $85.4 million, subject to customary conditions; closing was expected in Q2 2011. Orchid shareholder lawsuits were pending.
- Approximately $42 million principal amount at maturity of zero-coupon notes was converted in April for a total conversion value of approximately $53.8 million. Further conversion notices were possible before the September 2011 final put date.
Risks and contingencies
The filing describes ongoing regulatory and payer scrutiny of Medicaid billing, including a California qui tam matter seeking alleged refunds and damages, and state and federal inquiries. A California billing lawsuit had a stated $97.5 million interest-calculated alleged overpayment amount, plus other requested damages; the filing does not provide a clear estimate of reasonably possible loss. LabCorp also disclosed a wrongful-termination appeal, an Aetna lawsuit seeking unspecified damages, and other ordinary-course claims. Management stated that it did not believe the described proceedings would materially adversely affect financial condition, while outcomes could affect results in a particular period. The FTC challenge to the Westcliff acquisition was dismissed in April 2011 in LabCorp’s favor. The filing also highlights reimbursement and regulatory changes, competition and pricing, integration execution, collections, litigation, data security, and international operating risks.
Key facts for investors to verify
- Whether Genzyme Genetics billing delays were resolved as expected and receivables and days sales outstanding normalized.
- Whether acquired operations were integrated sufficiently to improve gross and operating margins and realize planned savings.
- Cash generation, debt levels, note conversions and the funding implications of the Ontario put obligation and share repurchases.
- Developments in Medicaid billing reviews and litigation, including any change in potential exposure or reserves.
- Completion and financial impact of the proposed Orchid acquisition, including its conditions and related lawsuits.