LabCorp Holdings, Inc. — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. LabCorp operates LabCorp Diagnostics (LCD) and Covance Drug Development (CDD); they contributed 60% and 40% of 2019 revenue, respectively.
Financial performance
Amounts are in millions of dollars except per-share data.
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $11,554.8 | $11,333.4 | +2.0% |
| Gross profit | $3,252.5 | $3,176.4 | +2.4% |
| Operating income | $1,330.2 | $1,325.7 | +0.3% |
| Net earnings attributable to LabCorp | $823.8 | $883.7 | -6.8% |
| Diluted EPS | $8.35 | $8.61 | -3.0% |
| Operating cash flow | $1,444.7 | $1,305.4 | +10.7% |
| Capital expenditures | $400.2 | $379.8 | +5.4% |
- Gross margin was approximately 28.2% versus 28.0% in 2018; operating margin was approximately 11.5% versus 11.7%.
- LCD revenue was $7,000.1 million, down 0.4%; operating income fell 6.9% to $1,086.0 million and margin declined to 15.5% from 16.6%.
- CDD revenue rose 6.1% to $4,578.1 million; operating income increased 35.5% to $411.5 million and margin improved to 9.0% from 7.0%.
- Fourth-quarter revenue was $2,953.4 million versus $2,787.5 million; operating income was $336.4 million versus $307.7 million; attributable net earnings were $227.1 million versus $157.9 million; diluted EPS was $2.32 versus $1.56.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $337.5 million at year-end, down from $426.8 million. Net cash from operations was $1,444.7 million; investing activities used $1,283.1 million and financing activities used $252.7 million.
- Debt totaled approximately $6.2 billion at carrying value, including $5.86 billion of senior notes and a $375 million term-loan balance. Total debt to pro forma trailing-12-month EBITDA was 3.1x. The company reported compliance with debt covenants.
- The $1.0 billion revolving facility had $923.7 million available at year-end, net of letters of credit. Management said operating cash flow and revolver availability were sufficient for anticipated short- and long-term needs.
- 2019 capital expenditures were 3.5% of revenue. The company expects 2020 capex of approximately 3.5%–4.0% of revenue. It repurchased $450 million of stock in 2019 and had $900 million remaining under its authorization.
Material changes and unusual items
- Revenue growth reflected 2.3% growth from acquisitions and 1.6% organic growth, offset by business dispositions of 1.4% and foreign-currency translation of 0.5%. Organic growth included a 0.9% negative PAMA impact.
- PAMA-related reimbursement reductions were approximately $107 million in 2019, versus $70 million in 2018. LabCorp expected a further reduction of approximately $90 million in 2020; the LAB Act delayed the next rate-setting cycle by one year.
- CDD acquired Envigo’s nonclinical contract research services business in June for $601 million cash and a $110 million secured note receivable, while divesting Covance Research Products. Envigo contributed $124.2 million of revenue and $17.9 million of operating income in 2019. Other acquisitions cost $286.4 million net of cash acquired.
- 2019 included $54.6 million of restructuring charges and $82.8 million of specified items that increased SG&A, including acquisition/divestiture, management transition, AMCA incident, and system implementation costs, partly offset by a ransomware-related reimbursement and contingent-purchase-price settlement gain.
- 2018 net earnings benefited from a $258.3 million gain on the sale of Covance Food Solutions; the prior year also included losses on forensic business divestitures. These items make reported net-income comparisons less representative of underlying operating trends.
Outlook, commentary and risks
- Management expected CDD’s LaunchPad initiative to deliver $150 million of net savings by the end of 2020. LCD phase II was expected to deliver approximately $200 million of net savings by the end of 2021, with approximately $40 million of one-time implementation costs.
- The filing does not provide a clear consolidated revenue or EPS forecast. Management cited ongoing reimbursement pressure, particularly PAMA, and anticipated 2020 capital expenditures of 3.5%–4.0% of revenue.
- The AMCA third-party collections-agency breach may have exposed some patients’ identifying, contact, billing and, for some individuals, insurance or Social Security information. LabCorp reported related costs, consolidated class-action litigation and government inquiries; it said test results and diagnostic information were not in the affected system.
- Key risks include reimbursement and utilization changes, patient collection exposure, competition and pricing, regulatory and fraud-and-abuse compliance, cybersecurity and privacy incidents, clinical-trial contract execution, acquisition integration, foreign currency, and significant debt.
- Goodwill was $7.9 billion. One CDD reporting unit with $2.2 billion of goodwill had only approximately 10% fair-value headroom; management said a 1% increase in the discount rate would reduce headroom to approximately 1%.
Most important facts for investors to verify
- Whether LCD can offset continuing PAMA and payer-policy pressure through volume, pricing, productivity and LaunchPad savings.
- Whether CDD’s organic growth and margin improvement persist after accounting for acquisitions and pass-through costs.
- The realized timing and net benefit of both LaunchPad programs, including implementation costs.
- The eventual financial and regulatory exposure from the AMCA incident and related proceedings.
- Debt reduction, leverage, cash generation and the company’s use of remaining share-repurchase authorization.
- Performance and valuation assumptions for the CDD goodwill reporting unit with limited impairment headroom.