Business context and reporting period
Laboratory Corporation of America Holdings (LabCorp) filed this Form 10-K for the fiscal year ended December 31, 2009. It is the second-largest independent U.S. clinical laboratory company, with routine and specialty testing operations, including genomic and esoteric testing. The filing also presents unaudited fourth-quarter results.
Financial performance and position
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $4,694.7 million | $4,505.2 million | +4.2% |
| Gross profit | $1,970.9 million | $1,873.8 million | +5.2% |
| Operating income | $935.9 million | $842.9 million | +11.0% |
| Net earnings attributable to LabCorp | $543.3 million | $464.5 million | +17.0% |
| Diluted earnings per share | $4.98 | $4.16 | +19.7% |
| Cash from operating activities | $862.4 million | $780.9 million | +$81.5 million |
| Capital expenditures | $114.7 million | $156.7 million | -$42.0 million |
Gross margin was approximately 42.0% versus 41.6%; operating margin was approximately 19.9% versus 18.7%. Operating cash flow improved primarily with stronger collections. Cash and equivalents were $148.5 million at year-end, down from $219.7 million. Total assets were $4,837.8 million and shareholders’ equity was $2,106.1 million.
Debt totaled approximately $1,394.4 million at December 31, 2009: $417.2 million of short-term borrowings/current maturities and $977.2 million of long-term debt. The company repaid $289.4 million to redeem about half of its zero-coupon subordinated notes and made $50.0 million in term-loan principal payments. It reported compliance with credit-facility covenants and stated that available liquidity and operating cash flow were sufficient for anticipated needs.
Fourth-quarter results
Fourth-quarter 2009 sales were $1,165.1 million, compared with $1,119.1 million in fourth-quarter 2008. Net earnings attributable to LabCorp were $142.7 million versus $118.1 million; diluted EPS was $1.33 versus $1.08.
Material changes versus the prior comparable period
- Routine testing revenue rose 2.4%, while genomic and esoteric testing revenue increased 8.3% to $1,601.6 million. Routine testing volume fell 1.6%; genomic and esoteric volume grew 8.9%.
- Total volume increased 1.5%, and revenue per requisition rose 2.6% to $39.29. Management cited pricing discipline, specialty-testing growth, operational efficiencies and expense control.
- Cost of sales declined to 58.0% of sales from 58.4%. SG&A declined to 20.4% of sales from 20.8%; bad-debt expense fell to 5.3% of sales from 6.2%, following a $45.0 million increase in the doubtful-account provision in 2008.
- Interest expense declined 12.6% to $62.9 million, reflecting lower average borrowings, debt repayments and the absence of contingent cash interest on the zero-coupon notes for part of 2009.
- Medicare and Medicaid directly accounted for 19.1% of sales, up from 17.7% in 2008. The Ontario joint venture was consolidated beginning in 2008, limiting direct year-over-year comparability.
Outlook, risks and unusual items
Management emphasized scientific differentiation, managed-care relationships and customer service, with personalized medicine and companion diagnostics as growth priorities. It expected 2010 capital expenditures of approximately $135 million. Pension expense for the defined-benefit and supplemental plans was projected to decline from $36.6 million in 2009 to $10.4 million in 2010 after the plans were closed to new entrants and future service credits were frozen; the new 401(k) non-elective contribution was expected to add $22.5 million in 2010. The filing does not provide formal earnings or revenue guidance.
- Key business risks include reimbursement cuts and utilization controls, managed-care pricing and contract changes, patient collection and bad-debt risk, intense competition, regulation and compliance, cybersecurity and information-system disruption, acquisition integration, and dependence on specialized personnel and testing technologies.
- Congress had temporarily extended the 2009 Medicare physician-fee conversion factor through February 28, 2010; absent further legislation, a 21.2% reduction was scheduled to take effect. Approximately 2.3% of company revenue was reimbursed under that fee schedule.
- Unusual 2009 items included a favorable $21.5 million tax adjustment for state tax audit resolutions and foreign tax credits, $13.5 million of net restructuring charges, and a $2.8 million pension curtailment charge. Monogram was acquired in August 2009 for approximately $160 million net of cash acquired.
- Legal matters include a California qui tam case alleging improper Medicaid billing, subpoenas and inquiries concerning billing practices, and a $10.0 million wrongful-termination judgment against DIANON that it appealed. Management said the matters were not expected to materially affect financial position, but could affect results or cash flows in the period resolved.
- Other obligations and contingencies include a $142.4 million Ontario noncontrolling-interest put liability, $366.6 million of operating lease obligations, a potential $302.2 million cash put of zero-coupon notes in 2011, and an estimated remaining $22.8 million of UnitedHealthcare transition payments.
Most important facts for investors to verify
- Whether specialty-testing growth can offset declining routine-testing volume and ongoing reimbursement or pricing pressure.
- Cash collection trends, patient-related bad debt, and the adequacy of the $173.1 million allowance for doubtful accounts.
- Debt maturities and refinancing or conversion outcomes for the zero-coupon notes, alongside covenant headroom and share repurchases.
- Developments in Medicaid billing investigations, the California qui tam litigation and the DIANON appeal, including any financial accruals or resolutions.
- Whether 2010 capital spending, pension-cost savings and Monogram integration progress align with management’s stated plans.