Labcorp Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; amounts in millions of dollars except per-share data. The company provides clinical laboratory testing through its Clinical Diagnostics Laboratory and Other segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $1,462.2 | $1,419.4 | $4,371.3 | $4,266.1 |
| Gross profit | $547.6 | $556.1 | $1,697.1 | $1,711.7 |
| Operating income | $244.6 | $245.1 | $775.9 | $808.2 |
| Net earnings attributable to Labcorp | $148.3 | $148.0 | $447.5 | $462.9 |
| Diluted EPS | $1.63 | $1.53 | $4.81 | $4.72 |
| Operating cash flow | Not separately provided | Not separately provided | $570.0 | $587.2 |
| Capital expenditures | Not separately provided | Not separately provided | $142.6 | $112.4 |
Q3 sales rose 3.0%, on 5.1% higher requisition volume, partly offset by a 1.9% decline in revenue per requisition. Nine-month sales increased 2.5%; volume grew 3.7%, while revenue per requisition declined 1.2%. Gross margin fell to 37.4% from 39.2% in Q3 and to 38.8% from 40.1% year to date. Operating margin was 16.7% versus 17.3% in Q3 and 17.8% versus 18.9% for nine months.
Q3 diluted EPS increased despite nearly flat attributable earnings, reflecting fewer weighted-average shares. Nine-month attributable earnings fell 3.3%, while diluted EPS rose 1.9%. Nine-month free cash flow, calculated as operating cash flow less capital expenditures, was approximately $427.4, versus $474.8 in 2012.
Liquidity, debt and capital allocation
- At September 30, cash was $174.1, down from $466.8 at December 31, 2012. Current assets were $1,212.9 and current liabilities $680.6.
- Total debt was approximately $2,663.9, compared with $2,655.0 at year-end 2012. Long-term debt included $372.0 outstanding on the $1.0 billion revolving facility. The company reported a 2.09-to-1 total-debt-to-consolidated-EBITDA ratio, below its 3.0-to-1 covenant limit, and stated it was in compliance with covenants.
- Financing cash outflow was $613.7 for the first nine months, including $765.5 of share repurchases. The company repurchased 7.9 million shares; $308.5 of authorization remained at September 30. On October 18, the board authorized an additional $1.0 billion of repurchases.
- Investing cash outflow was $246.8, including $109.0 for acquisitions and $142.6 of capital expenditures. The company expected 2013 capital expenditures of approximately $210.0.
Material changes and management commentary
- Revenue growth was supported by routine testing, toxicology and acquisitions, including MedTox. Genomic and esoteric testing revenue declined, despite higher volume, as mix shifted and reimbursement per requisition weakened.
- Federal laboratory fee reductions, sequestration and delayed pricing or coverage decisions for molecular pathology codes reduced revenue per requisition and pressured margins, cash flow and collections. Management said these effects could continue while unresolved.
- Patient accounts receivable increased amid greater uninsured utilization and patient cost-sharing. Management considered the allowance adequate but warned that continued growth in patient responsibility could require higher bad-debt expense.
- Nine-month restructuring charges rose to $17.8 from $4.6, principally for severance, facility closures and integration. Q3 charges were $3.7. Management expected savings from cost initiatives to more than offset related costs and said restructuring was not expected to materially affect operations or liquidity.
- Management said operating cash generation, cash on hand and borrowing capacity should be sufficient for obligations in 2013 and beyond. It described an intention to increase leverage toward 2.5-to-1 over time; the reported ratio was 2.09-to-1 at quarter-end.
Risks, contingencies and unusual items
- The filing describes multiple False Claims Act and other legal matters, including allegations concerning Medicaid billing, managed-care arrangements, laboratory coding and employment practices. The company said it would vigorously defend specified cases; for certain proceedings it could not estimate a reasonably probable loss range. Management did not expect currently described matters to materially affect financial condition, though outcomes could materially affect results in an individual period.
- Healthcare reimbursement and regulatory changes, payer coverage and pricing, competition, acquisition integration, collections and bad debt, litigation, cybersecurity and information systems, and foreign currency movements are among the disclosed risks. The company reported no material changes to the risk factors in its 2012 Form 10-K.
- The company entered $600.0 of fixed-to-variable interest-rate swaps tied to 2020 senior notes. It reported no material market-risk exposure and said the swaps had no effect on reported operations for the period.
- After quarter-end, holders became eligible to convert the zero-coupon subordinated notes during Q4 2013; the company expected to fund any cash settlement with cash on hand and/or revolver borrowings. The CFO announced plans to retire around Q2 2014.
- Management concluded disclosure controls were effective as of September 30, 2013, with no reported material change in internal control over financial reporting during the quarter.
Investor verification points
- Track payer decisions and reimbursement for molecular pathology testing, including whether delayed claims and denials improve.
- Monitor revenue per requisition, gross margin, patient receivables, collections and bad-debt expense alongside requisition volume.
- Confirm the impact of acquisitions and integration costs, and whether restructuring savings materialize.
- Review cash generation, planned capital spending, share repurchases, leverage and any Q4 note conversions against available liquidity and covenant headroom.
- Follow the status and potential financial exposure of disclosed legal and regulatory matters, and the CFO succession process.