Labcorp Holdings — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Amounts are in millions except per-share data. Labcorp provides clinical diagnostic laboratory testing, including core, genomic and esoteric testing.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,516.4 | $1,468.2 | $2,947.1 | $2,909.1 |
| Operating income | $246.7 | $269.3 | $450.0 | $531.3 |
| Net earnings attributable to Labcorp | $141.3 | $151.9 | $254.4 | $299.2 |
| Diluted EPS | $1.64 | $1.62 | $2.94 | $3.18 |
- Q2 gross profit was $568.6 million (37.5% of sales) versus $577.3 million (39.3%); operating margin was 16.3% versus 18.3%. For the first half, gross margin was 36.8% versus 39.5%, and operating margin was 15.3% versus 18.3%.
- First-half operating cash flow was $349.7 million, compared with $335.8 million. Capital expenditures were $104.6 million; cash and equivalents were $479.5 million at quarter-end.
- At June 30, current assets were $1,565.9 million and current liabilities $740.8 million. Debt was $3,007.5 million, including current debt; the reported debt-to-consolidated-EBITDA ratio was 2.51x, within the 3.0x covenant limit. The $1.0 billion revolver had no borrowings outstanding.
- First-half share repurchases totaled $164.2 million (1.7 million shares). The company reported $894.4 million of remaining authorization.
Changes versus prior comparable periods
- Q2 sales rose 3.3%, while first-half sales grew 1.3%. Q2 requisition volume increased 5.3%, but revenue per requisition declined 2.0%; first-half volume rose 4.0% and revenue per requisition fell 2.6%.
- Higher volume and acquisitions supported revenue, but adverse test and payer mix, reimbursement reductions and cost inflation pressured margins. Cost of sales as a share of revenue rose to 62.5% in Q2 from 60.7%, and to 63.2% for the first half from 60.5%.
- First-half operating income fell 15.3% and attributable net earnings fell 15.0%, despite revenue growth. Higher bad-debt expense, increased interest expense and lower equity-method income contributed. Diluted EPS increased slightly in Q2, helped by fewer weighted-average shares, but declined for the first half.
- First-half operating cash flow increased $13.9 million, primarily due to working-capital timing. Cash used in investing and financing was $147.2 million and $123.4 million, respectively; cash increased $75.5 million from year-end.
Outlook, commentary, risks and unusual items
- Management expected 2014 capital expenditures of approximately $185–$205 million, including continued chemistry-platform replacements. It stated that operating cash flow, cash on hand and borrowing capacity should fund obligations in 2014 and beyond. No full-year earnings or revenue guidance is provided in the filing text.
- Management reported ongoing payer coverage and payment challenges for newer molecular pathology codes, with no substantial improvement in their overall first-half financial impact. Patient receivables had grown, though the trend had begun to moderate; the impact of Affordable Care Act plan membership on patient responsibility remained uncertain.
- Q2 included a $4.7 million gain-related contribution from the sale of the remaining equity-security investment in “Other, net,” alongside $4.7 million of consulting costs tied to process improvement and one-time CFO transition costs. For the first half, the investment sale generated a reported $20.3 million net gain, partly offset by impairment of another investment. Restructuring charges were $9.6 million for the first half, down from $14.1 million.
- First-half acquisitions cost $65.7 million net of cash acquired, primarily extending geographic reach and testing capabilities. The filing reports $46.7 million of associated goodwill.
- Legal and regulatory exposure includes False Claims Act and Medicaid billing matters, employee class actions and professional-liability claims. The company said it could not estimate reasonably probable losses for certain matters. A jury verdict in the Wuth case was $50.0 million, with 50% liability assigned to Labcorp; the company appealed and said insurance was sufficient. In a separate Wisekal case, a July 28, 2014 court order reduced the judgment to $4.4 million, subject to the plaintiff’s acceptance or a new damages trial.
- Other risks highlighted include reimbursement and payer-policy changes, competition, bad debt and collections, acquisition integration, litigation, cybersecurity and foreign-exchange exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue-per-requisition and payer/test mix stabilize, and whether higher test volume translates into margin recovery.
- Trends in patient receivables, bad-debt expense and collections, including the effects of new health plans and molecular-test coverage decisions.
- Capital spending against the $185–$205 million outlook, acquisition returns, and cash conversion after working-capital movements.
- Debt leverage, upcoming note conversions and refinancing needs, and continued compliance with the 3.0x leverage covenant.
- Developments in significant litigation and government inquiries, including appeal outcomes, potential costs and any change to the company’s loss estimates.