Business context and reporting period
Laboratory Corporation of America Holdings (Labcorp) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The company provides clinical laboratory testing, including routine, genomic and esoteric testing, and operates a Canadian joint venture.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,276.5m | $1,185.1m | $3,708.5m | $3,529.6m |
| Operating income | $235.3m | $234.9m | $740.0m | $720.1m |
| Net earnings attributable to Labcorp | $140.0m | $131.4m | $426.4m | $400.6m |
| Diluted EPS | $1.34 | $1.21 | $4.05 | $3.67 |
| Operating cash flow | Not separately stated | Not separately stated | $624.4m | $637.7m |
- Q3 sales increased 7.7%; nine-month sales rose 5.1%. Q3 operating income was nearly flat, while nine-month operating income grew 2.8%.
- Gross profit was $527.7m in Q3 and $1,568.2m for nine months. Cost of sales increased to 58.7% of sales in Q3 from 58.0%; for nine months it was 57.7% versus 57.6%.
- Q3 SG&A was 21.2% of sales versus 20.9%; the nine-month ratio was 20.5% versus 20.4%. Bad debt expense improved to 4.8% of Q3 sales and 4.9% for nine months, from 5.3% in both comparable periods.
- At September 30, cash was $96.9m; current assets were $948.7m and current liabilities $951.3m. Total debt, including current maturities, was $1,346.0m, down from $1,394.4m at December 31, 2009. The company reported compliance with existing credit-facility covenants.
- Nine-month capital expenditures were $93.3m, versus $77.1m. Operating cash flow less capital expenditures was approximately $531.1m, compared with $560.6m in 2009.
Material changes versus the prior comparable period
- Q3 growth reflected higher revenue per requisition, a shift toward genomic and esoteric testing, acquisitions and currency effects. Total requisitions increased 1.9% in Q3, while total revenue per requisition rose 5.7%.
- For nine months, total requisitions declined 1.0%, including a 3.1% reduction in routine testing volume; revenue per requisition increased 6.1%. Terminated government contracts continued to reduce routine volume.
- Severe winter weather reduced nine-month volume by an estimated 0.4% and revenue by about $23m. Management also cited acquisitions and unintegrated acquired operations as cost pressures.
- Q3 income tax expense fell to $73.5m from $88.5m; the effective rate was 33.9% versus 39.7%, primarily due to reversals of certain unrecognized tax benefits. The nine-month effective rate was 37.6% versus 39.9%.
- Share repurchases totaled approximately $337.5m for the nine months, covering 4.5m shares. Outstanding shares declined to 101.7m from 105.3m at year-end 2009.
Outlook, commentary, risks and unusual items
- Management cited pricing discipline, esoteric testing growth, outcome improvement, companion diagnostics and expense control as performance drivers. It expected 2010 capital expenditures of approximately $135m and projected annualized restructuring savings of $34.7m from initiatives recorded in the first and third quarters.
- Labcorp agreed to acquire Genzyme Genetics for $925m cash, subject to customary conditions, including antitrust clearance. The deal had not closed as of the report; management aimed to close before year-end. A $925m bridge facility was signed October 28, 2010, after quarter-end. Acquisition financing, integration, approval and potential added leverage are material uncertainties.
- Q3 included $7.0m of Genzyme-related financing fees in interest expense and $10.9m of acquisition-related professional fees in SG&A. Nine-month restructuring and special charges were $13.2m, including a $6.2m write-off of abandoned system development costs.
- Legal and regulatory matters include Medicaid billing investigations and litigation, a California False Claims Act case scheduled for trial in 2011, an FTC review of the Westcliff asset acquisition, an Aetna lawsuit seeking unspecified damages, and other litigation. Management said outcomes of some matters could affect results or cash flows in the period resolved; it did not expect the matters collectively to materially harm financial position.
- Other risks include reimbursement and regulatory changes, pricing and competition, customer retention, collection performance, acquisition integration, litigation, and foreign currency exposure. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Genzyme Genetics closed, the final purchase price and financing mix, and resulting debt, interest costs and integration performance.
- Whether volume and revenue-per-requisition trends persist, particularly in routine testing, and the contribution from pricing, test mix, contract losses and acquisitions.
- Whether acquired businesses achieve expected integration and margin improvements, and whether the stated restructuring savings are realized.
- Developments and potential financial exposure from Medicaid billing reviews, the California case, FTC Westcliff review and other disclosed litigation.
- Cash conversion, accounts receivable and bad debt trends, liquidity after acquisition funding, and any effect of note conversion rights or share-repurchase limits.