Labcorp Holdings Inc. — Q2 2013 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2013, compared with the same periods in 2012. Labcorp operates clinical diagnostic testing businesses in the United States and internationally. Amounts are in millions, except per-share data and where noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,468.2 | $1,423.4 | $2,909.1 | $2,846.7 |
| Gross profit | $577.3 | $579.5 | $1,149.5 | $1,155.6 |
| Operating income | $269.3 | $276.0 | $531.3 | $563.1 |
| Net earnings attributable to Labcorp | $151.9 | $153.3 | $299.2 | $314.9 |
| Diluted EPS | $1.62 | $1.56 | $3.18 | $3.19 |
| Operating cash flow | Not separately provided | Not separately provided | $335.8 | $383.4 |
Q2 sales grew 3.1%, with requisition volume up 5.0% and revenue per requisition down 1.8% to $44.57. Six-month sales rose 2.2%, with volume up 3.0% and revenue per requisition down 0.8% to $44.81. Growth was led by routine testing and the MedTox acquisition; genomic and esoteric testing revenue declined. Approximate gross margin was 39.3% in Q2 versus 40.7% a year earlier, and operating margin was 18.3% versus 19.4%. For the six-month periods, gross margin was approximately 39.5% versus 40.6%, and operating margin 18.3% versus 19.8%.
Q2 cost of sales increased 5.6%, faster than revenue, while SG&A rose 0.5%. Six-month SG&A increased 2.4%. Restructuring charges were $6.6 in Q2 and $14.1 for the first half, compared with $3.4 and a $0.2 net credit, respectively, in 2012. Interest expense rose 8.5% in Q2 and 11.2% for the first half, mainly reflecting debt issued in August 2012. Lower equity-method income also weighed on earnings; the prior-year comparison included a $2.9 joint-venture liquidation gain.
Cash, debt and liquidity
- Cash and cash equivalents were $111.3 at June 30, 2013, down from $466.8 at year-end 2012. First-half cash decreased $355.5.
- First-half operating cash flow of $335.8 was down from $383.4; capital expenditures were $90.5, versus $68.3. Operating cash flow less capital expenditures was $245.3, compared with $315.1.
- Investing activities used $199.6, including $104.2 for acquisitions; financing activities used $486.9, including $479.2 of share repurchases.
- Total short- and long-term debt was approximately $2,509.9 at June 30, 2013, versus $2,655.0 at December 31, 2012. Revolver borrowings were $225.0. The $1.0 billion revolving facility had $1.0 billion capacity before outstanding borrowings and letters of credit.
- The debt-to-consolidated-EBITDA ratio was 1.95 to 1.0, below the 3.0-to-1.0 covenant limit; the company reported compliance with all covenants. The company said cash from operations, cash on hand and borrowing capacity should meet obligations in 2013 and beyond.
- Current assets were $1,148.0 and current liabilities $655.1 at June 30. The company repurchased 5.0 million shares for $479.2 in the first half and had $594.8 remaining under its repurchase authorization.
Management commentary, outlook and risks
- Management attributed pressure on revenue per requisition, margins and cash collections to government fee reductions, sequestration, and delays or denials of coverage and payment for molecular pathology tests. Some payers required additional claims information or prior authorization; management said the effects could continue until resolved.
- The 2013 Clinical Lab Fee Schedule reductions included a 0.95% baseline update, a further 2% rebaseline, and an additional 2% sequestration reduction effective April 1. Management also cited Medicare physician-fee reductions and the loss of direct Medicare billing for certain inpatient pathology technical services.
- Expected 2013 capital expenditures were approximately $220, above historical levels, for facility consolidation and replacement of a major testing platform, among other investments. Management expected cash flow and, if needed, revolver borrowings to fund investment needs.
- Management stated an intention to increase debt to EBITDA over time from 2.0 at year-end 2012 toward 2.5. No earnings or revenue guidance was provided in the supplied filing text.
- Key risks include reimbursement and regulatory changes, government audits and investigations, litigation, payer coverage decisions, acquisition integration, competition, collections and bad debt, cybersecurity and IT disruption, labor issues, and foreign-currency exposure. The filing reported multiple pending False Claims Act, billing, consumer and employment matters; outcomes and potential losses for certain cases could not be estimated. Management did not believe currently available information indicated a material adverse effect on financial condition, but noted results for a particular period could be affected.
- After quarter-end, holders of zero-coupon subordinated notes could elect conversion during the quarter ending September 30, 2013. Labcorp said any cash settlement could be funded with cash on hand and/or revolver borrowings.
Important facts for investors to verify
- Whether payer pricing, coverage and claims-processing issues for molecular pathology tests improve, and their continued effects on revenue per requisition, margins and cash collections.
- Whether operating cash flow recovers from the first-half decline and whether receivables and collection trends remain manageable.
- Execution and cost of the planned $220.0 million 2013 capital program, acquisition integration, and expected restructuring savings.
- Debt levels, revolver usage, note conversions and share repurchases, including the balance between capital returns and liquidity.
- Developments in billing-related investigations and litigation, including potential financial or operational consequences not presently estimable.