Business context and reporting period
LabCorp Holdings is a large U.S. independent clinical laboratory company, operating 44 primary laboratories and approximately 1,700 patient service centers. This Form 10-K reports the fiscal year ended December 31, 2013; quarterly figures below compare fourth-quarter 2013 with fourth-quarter 2012. Unless noted, amounts are in millions.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $5,808.3 | $5,671.4 | +2.4% |
| Gross profit / margin | $2,223.2 / 38.3% | $2,249.7 / 39.7% | Profit down 1.2% |
| Operating income / margin | $990.9 / 17.1% | $1,023.5 / 18.1% | Down 3.2% |
| Net earnings attributable to LabCorp | $573.8 | $583.1 | Down 1.6% |
| Diluted EPS | $6.25 | $5.99 | +4.3% |
| Cash from operations | $818.7 | $841.4 | Down 2.7% |
| Capital expenditures | $202.2 | $173.8 | Up 16.3% |
| Cash and cash equivalents at year-end | $404.0 | $466.8 | Down $62.8 |
| Total debt, including current portion | $3,000.4 | $2,655.0 | Up $345.4 |
Fourth-quarter sales were $1,437.0 versus $1,405.3 (+2.3%); gross profit was $526.1 versus $538.0 (down 2.2%); attributable net earnings were $126.4 versus $120.2 (+5.2%); and diluted EPS was $1.43 versus $1.26 (+13.5%). The filing does not provide a clear fourth-quarter operating cash flow value.
Volume rose 4.0% for the year, while revenue per requisition fell 1.6% to $44.33. Core-testing sales increased 6.1% to $3,445.1; genomic and esoteric testing sales decreased 3.3% to $2,020.1. Patient and payer mix, testing volume, acquisitions, and share repurchases affected reported results. The company repurchased 10.4 million shares for $1,015.6, supporting EPS despite lower annual net earnings.
Year-end current assets were $1,432.1 and current liabilities $735.7 (current ratio approximately 1.95). The $1 billion revolving credit facility had no borrowings outstanding at year-end; availability was reduced by $42.5 of letters of credit. Debt-to-consolidated-EBITDA was 2.4x, below the 3.0x covenant limit. Management said operating cash, cash on hand and borrowing capacity should be sufficient for 2014 and beyond.
Material changes, outlook, risks and unusual items
- Management estimated government reimbursement reductions and molecular pathology payment issues lowered year-over-year margins by about 150 basis points, reduced revenue per requisition by about 2%, and reduced operating cash flow by more than $100. Payer delays and denials also adversely affected 2013 revenue, margins and collections.
- Weather reduced 2013 revenue by an estimated $12.7 and diluted EPS by $0.07. Net restructuring charges were $21.8. Effective tax rate declined to 37.2% from 38.1%, favorably affected by tax-credit and valuation-allowance items.
- For 2014, the company expected capital expenditures of $185–$205. It disclosed a 0.75% Medicare clinical laboratory fee schedule payment reduction and estimated a $6.6 million physician fee schedule reduction, assuming Congress prevented further SGR-related cuts. It did not provide earnings or revenue guidance.
- Key risks include further reimbursement cuts, payer coverage and coding changes, rising patient responsibility and bad debt, price competition, regulatory and privacy requirements, and integration or acquisition risks. CMS planned annual reviews of clinical laboratory fee schedule codes, with initial payment adjustments scheduled to begin in 2015.
- Legal matters include False Claims Act and other billing-related actions; the company said it could not estimate reasonably probable losses for certain cases. A jury awarded $50 million in a prenatal-testing case, allocating 50% liability to LabCorp; the company planned to appeal and stated insurance coverage was sufficient for potential liability.
- The CFO announced plans to retire in or around the second quarter of 2014; the company was conducting a successor search. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether molecular pathology coverage, coding, and payer payment delays improve, and how reimbursement changes affect revenue per requisition and margins.
- Whether higher patient receivables and bad debt expense affect cash collections; net accounts receivable rose to $784.7 from $718.5.
- Debt repayment, refinancing and conversion developments, including the zero-coupon notes eligible for conversion in first-quarter 2014.
- Outcomes and potential financial exposure from the disclosed billing and professional-liability litigation, including the planned appeal of the $50 million verdict.
- Execution of the 2014 capital spending plan and expected benefits from efficiency initiatives and acquisitions.