LabCorp Holdings — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results; amounts below are in millions of dollars except per-share data. LabCorp operates LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). The prior-year six-month comparison includes Covance only from its February 19, 2015 acquisition date, so year-over-year growth is not fully comparable.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $2,382.0 | $2,218.7 | $4,677.2 | $3,991.0 |
| Operating income | $366.9 | $323.3 | $668.8 | $455.7 |
| Net earnings attributable to LabCorp | $198.2 | $169.8 | $358.4 | $172.9 |
| Diluted EPS | $1.91 | $1.66 | $3.46 | $1.76 |
- Q2 net revenue rose 7.4%; six-month revenue rose 17.2%. Q2 growth reflected organic volume and tuck-in acquisitions, partly offset by currency. Six-month growth also reflects inclusion of a full six months of Covance versus a partial period in 2015.
- Q2 operating margin was about 15.4% of net revenue versus 14.6% a year earlier; six-month operating margin was about 14.3% versus 11.4%. Gross margin was approximately 34.7% in Q2, slightly below 34.8% a year earlier.
- Q2 LCD revenue increased 5.4% and CDD revenue increased 12.2%. LCD volume (requisitions) grew 1.2%; price and mix added 2.5%, tuck-in acquisitions 1.9%, and currency reduced growth by 0.3%. CDD growth reflected broad-based demand, partly offset by an expired minimum-volume contract and currency.
- For the first half, LCD revenue increased 6.7%; CDD increased 51.2%, primarily reflecting the Covance acquisition comparison. LCD requisitions grew 2.2%, with price/mix adding 2.3% and tuck-in acquisitions 2.0%, partly offset by currency.
- Operating cash flow was $466.6, up from $309.8. Capital expenditures were $138.4, implying operating cash flow less capex of approximately $328.2, versus $206.9 in the prior-year period. Investing cash use was $258.4; financing cash use was $297.9. Cash declined $76.8 to $639.6.
- At June 30, cash was $639.6 and current assets were $2,644.1 against current liabilities of $1,271.6 (current ratio about 2.1). Debt carrying amounts totaled approximately $6,055.0, including $87.4 current and $5,967.6 long-term; the revolving facility had no borrowings. Net debt was approximately $5,415.4.
- Debt to trailing-12-month EBITDA was 3.3x; the company reported compliance with credit covenants. Its stated target is 2.5x before it expects to resume share repurchases. Credit ratings were BBB from S&P and Baa2 from Moody’s.
Changes, outlook and notable items
- Interest expense declined to $53.5 in Q2 from $57.9 and to $108.0 for the half from $162.2. Management attributed the decline principally to debt repayment and lower term-loan balances; the 2015 comparison included acquisition-related financing costs.
- Six-month SG&A was $819.9 versus $832.8, while SG&A as a share of net revenue fell to 17.5% from 20.9%. Excluding specified special items, the respective ratios were 17.2% and 17.6%. Cost of revenue as a share of net revenue rose to 65.7% from 65.0%, reflecting the full-period CDD mix.
- Six-month restructuring and other special charges were $25.8, mainly personnel and facility-closure costs, including planned closures of duplicative data-center operations. Other 2016 items included acquisition integration and retention costs, executive accelerated equity compensation, LaunchPad system implementation costs, and a $1.1 one-time tax liability. The 2015 period included substantial Covance acquisition and financing charges.
- Management expects 2016 capital expenditures of approximately 3.0% of net revenue, mainly for core-business growth, LaunchPad and Covance integration. No full-year revenue or earnings guidance is provided in the filing.
- After quarter-end, LabCorp agreed to acquire Sequenom for $2.40 per share, an equity value of approximately $302.0, subject to regulatory review; closing was expected in Q4 2016. This is a subsequent event, not part of Q2 results.
- The PAMA final rule delays new Medicare Clinical Laboratory Fee Schedule rates until January 1, 2018; reductions for existing tests are to phase in over six years. Medicare CLFS reimbursement is less than 10% of consolidated revenue. Management was assessing the full impact.
- Key exposures include reimbursement and payer-policy changes, extensive healthcare regulation and investigations, litigation, integration and execution risks, foreign exchange, and uncertainty following the UK Brexit vote. A Canadian laboratory joint venture’s contract extension runs through March 31, 2017; nonrenewal could substantially reduce its revenue and potentially impair LabCorp’s investment.
Important facts for investors to verify
- How much reported growth reflects sustainable organic volume, pricing and mix versus acquisitions and the Covance comparison effect.
- Whether operating cash flow and receivables collection remain strong as accounts receivable and unbilled services increased; LCD bad-debt expense was 4.6% of segment revenue for the first half, versus 4.4%.
- Progress on debt reduction toward the 2.5x leverage target, and the cash or credit-facility needs that could arise from conversions of zero-coupon subordinated notes.
- The realized effects of PAMA reimbursement changes, payer policies, and the Alberta joint venture contract renewal.
- Outcomes and potential financial effects of disclosed billing, False Claims Act, and other legal matters; the filing says certain loss ranges cannot be estimated.
- Sequenom transaction approval, closing, integration and expected financial impact.