Business context and reporting period
Laboratory Corporation of America Holdings (Labcorp) filed this unaudited Form 10-Q for the three months ended March 31, 2010, with comparison to the three months ended March 31, 2009. Amounts are in millions of dollars unless stated otherwise. The company provides clinical laboratory testing, including routine, genomic and esoteric testing, and operates a Canadian joint venture.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 or prior date | Change |
|---|---|---|---|
| Net sales | $1,193.6 | $1,155.7 | +3.3% |
| Gross profit | $506.9 | $489.4 | +3.6% |
| Operating income | $234.2 | $240.5 | -2.6% |
| Net earnings attributable to Labcorp | $132.7 | $132.8 | Essentially flat |
| Diluted EPS | $1.25 | $1.22 | +2.5% |
| Cash from operations | $232.0 | $208.9 | +11.1% |
| Capital expenditures | $24.5 | $30.7 | -20.2% |
| Cash and cash equivalents | $172.2 | $148.5 at Dec. 31, 2009 | +$23.7 |
| Total debt, current and long-term | $1,328.3 | $1,394.4 at Dec. 31, 2009 | -$66.1 |
Gross margin was approximately 42.5%, versus 42.3% a year earlier; operating margin was approximately 19.6%, versus 20.8%. The effective tax rate declined to 39.0% from 40.0%. Operating cash flow less capital expenditures was approximately $207.5. The company reported $981.0 of current assets and $886.4 of current liabilities at March 31, 2010.
Material changes versus the prior comparable period
- Routine testing revenue rose 0.6% to $718.3, while requisitions fell 5.7%. Genomic and esoteric revenue increased 5.2% to $406.4, with volume up 5.3%. Ontario revenue grew 24.0% to $68.9, including the effect of a stronger Canadian dollar; growth in Canadian-dollar terms was 3.6%.
- Total requisitions declined 3.0% to 29.1 million, while revenue per requisition increased 6.4% to $41.07. Management attributed sales growth principally to a shift toward higher-priced genomic and esoteric tests and currency effects.
- Operating income was lower despite higher sales. SG&A rose 5.2%, amortization rose 15.2%, and the quarter included $9.3 of restructuring and other special charges, versus none in Q1 2009. Interest expense declined 14.1% to $14.6.
- Operating cash flow increased, primarily reflecting no defined-benefit plan contribution in Q1 2010, compared with $41.0 in Q1 2009. Cash flow figures are reported net of UnitedHealthcare transition payments of $14.5 and $5.5, respectively.
- The company repurchased approximately 1.5 million shares for $105.7; the quarter-end authorization remaining was $216.1. Shares outstanding were 104.2 million at March 31, compared with 105.3 million at year-end.
Outlook, commentary, risks and unusual items
- Management estimated severe winter weather reduced testing volumes by 1.3% and revenue by approximately $23.0 during the quarter. Management cited pricing discipline, esoteric testing growth, outcome-improvement and companion-diagnostics offerings, and expense control as performance drivers.
- Labcorp expected 2010 capital expenditures of approximately $135.0. First-quarter restructuring initiatives were expected to produce annualized savings of approximately $15.4.
- Retirement-plan changes were expected to reduce 2010 defined-benefit and supplemental-plan expense to $10.4 from $36.6 in 2009; the company said it did not plan to contribute to the defined-benefit plan in 2010. A new minimum 3% 401(k) non-elective contribution was expected to add approximately $22.5 to 2010 costs and contributions.
- Management said it believed liquidity would be sufficient for anticipated short- and long-term needs, based on operations and credit-facility availability. The company was in compliance with debt covenants at quarter-end. Variable-rate term and revolving facilities bore effective rates of 3.67% and 0.58%, respectively.
- Ontario joint-venture put transactions were completed in February: units were acquired for $137.5 and resold for the same amount, with Labcorp’s ownership remaining 85.6%. The combined contractual value of the puts, above the current noncontrolling interest, was $141.0 at quarter-end.
- Zero-coupon subordinated notes continued to accrue contingent cash interest under announced terms. On April 6, 2010, holders were notified they could convert eligible notes into cash and common stock during the quarter ending June 30, 2010. These post-quarter developments may affect financing or share dilution.
- Legal and regulatory exposures include a wrongful-termination judgment against subsidiary DIANON of approximately $10.0, which it appealed, and ongoing inquiries and litigation concerning laboratory billing, including a California Medicaid qui tam action. Management could not predict outcomes of certain matters; it said their resolution was not expected to materially harm financial position, though charges or cash impacts could be material in the period resolved. The filing also identifies reimbursement, healthcare regulation, billing audits, competition, volume, collections, acquisitions, litigation, technology and currency risks.
- Other notable items included a $6.2 write-off of abandoned system-development costs, $3.1 of net restructuring charges, and $3.4 of Monogram Biosciences research and development expense. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether testing volumes recover from severe weather impacts, particularly the decline in routine requisitions, and whether higher revenue per requisition is sustainable.
- Progress against restructuring savings and the effect of special charges, acquisition-related expenses and ongoing Monogram investment on operating margins.
- Cash conversion, receivables and collections: accounts receivable increased to $614.3 from $574.2 at year-end, while management cited improved bad-debt trends.
- Debt and potential dilution: terms and holder participation for the convertible notes, future debt maturities, repurchase activity, and the Ontario joint-venture put obligations.
- Developments in billing investigations, litigation and reimbursement policy, including any change to management’s assessment of possible financial or cash-flow effects.
- Execution of the $135.0 capital-spending plan, retirement-plan cost changes, and the company’s liquidity and covenant position.