Labcorp Holdings — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited consolidated results. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,423.3 | $1,368.4 | +4.0% |
| Gross profit | $576.1 | $568.4 | +1.4% |
| Operating income | $287.1 | $235.8 | +21.8% |
| Net earnings attributable to Labcorp | $161.6 | $127.1 | +27.1% |
| Diluted EPS | $1.63 | $1.23 | +32.5% |
| Operating cash flow | $197.1 | $215.3 | −8.4% |
- Margins: Gross margin was 40.5%, down from 41.5%; operating margin was 20.2%, up from 17.2%. The operating-income comparison benefited substantially from a $3.6 restructuring and special-charge credit in 2012 versus $27.9 of charges in 2011, including a $14.8 investment write-off.
- Cash and investment: Cash ended at $129.9, down from $159.3 at year-end. Capital expenditures were $34.2, implying operating cash flow less capital expenditures of $162.9. The company expects approximately $155 of capital expenditures for 2012.
- Debt and liquidity: Debt totaled approximately $2,121.4, including $136.0 current debt and $1,985.4 long-term debt, versus approximately $2,221.0 at December 31, 2011. Revolver borrowings declined by $100 to $460.0 under a $1 billion facility; its reported effective rate was 1.22%. The company reported compliance with its 3.0-to-1.0 maximum debt-to-consolidated-EBITDA covenant. Current assets were $1,081.9 and current liabilities $769.2.
- Shareholder returns: Labcorp repurchased 1.4 million shares for $122.3 during the quarter. Remaining authorization at March 31 was $462.1.
Business context and changes versus prior period
- Routine testing sales rose 2.6%; genomic and esoteric testing rose 5.0%; Ontario sales rose 11.7%. Total requisition volume grew 2.8% and revenue per requisition rose 1.2%.
- Management attributed growth partly to unusually mild winter weather, which it estimated increased revenue and volume by approximately 1.5% versus Q1 2011, and to the Orchid acquisition, which contributed approximately 1.1% to revenue and 0.4% to volume.
- Cost of sales grew 5.9%, faster than sales, and increased to 59.5% of revenue from 58.5%, reflecting acquisition costs, labor increases, test mix, and lower margins at recently acquired operations. SG&A fell 4.1%; SG&A as a share of sales improved to 19.1% from 20.7%, reflecting integration efficiencies and lower bad-debt expense.
- Interest expense declined 10.4% to $21.5, attributed to prior note settlements and lower-rate revolving-facility financing. Equity-method income increased to $4.3 from $1.5.
- The effective tax rate increased to 39.9% from 38.9%, primarily due to nondeductible foreign losses and employee stock purchase plan expenses.
Outlook, risks, and unusual items
- No full-year revenue or earnings guidance is provided in the filing. Management cited pricing discipline, growth in esoteric testing and companion diagnostics, and expense control as performance supports; interim results may not indicate full-year results.
- The zero-coupon subordinated notes accrued contingent cash interest for the March–September 2012 period. Holders could convert notes during the quarter ending June 29, 2012; Labcorp said it would fund any cash settlement with cash on hand and/or revolver borrowings.
- Key risks include changes in healthcare reimbursement and regulation, government audits and billing investigations, pricing competition, customer and test-volume retention, acquisition integration, litigation, collection performance, information security and systems, and foreign-currency exposure.
- Legal matters include False Claims Act allegations concerning managed-care discounts and alleged Stark/anti-kickback relationships, Medicaid billing inquiries, wage-and-hour class actions, and Orchid-related shareholder claims. The company said it would vigorously defend specified cases; for certain proceedings it could not estimate a reasonably possible loss range. It did not believe currently available information indicated a material adverse effect on financial condition, while outcomes could affect results in a particular period.
- In April 2012, a state supreme court reversed a roughly $10 million wrongful-termination judgment against a subsidiary and ordered further proceedings on a separate claim. The filing reports no material change in the company’s annual-report risk factors. Disclosure controls were judged effective.
Important facts for investors to verify
- How much of sales and volume growth was sustained after the estimated weather benefit and Orchid contribution, and whether acquisition integration improves acquired-operation margins.
- Whether the increase in cost of sales and lower gross margin persist as test mix and labor costs evolve.
- Cash conversion and working-capital trends, especially receivables and the timing of accrued compensation payments.
- Debt maturities, potential note conversions, revolver availability, and covenant headroom; also the pace of share repurchases relative to cash generation.
- Developments in government billing inquiries and litigation, including any potential financial exposure not estimable in this filing.