Business context and reporting period
Laboratory Corporation of America Holdings (Labcorp) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company provides routine, genomic and esoteric laboratory testing, including operations in Ontario, Canada.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2011 periods.
| Metric | Third quarter 2012 | Third quarter 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,419.4 | $1,404.5 | $4,266.1 | $4,176.2 |
| Gross profit | $556.1 | $568.5 | $1,711.7 | $1,725.1 |
| Operating income | $245.1 | $239.4 | $808.2 | $700.9 |
| Net earnings attributable to Labcorp | $148.0 | $134.3 | $462.9 | $384.3 |
| Diluted EPS | $1.53 | $1.31 | $4.72 | $3.76 |
| Operating cash flow | Not presented separately | Not presented separately | $587.2 | $577.0 |
- Third-quarter sales increased 1.1%; requisition volume rose 1.4%, while revenue per requisition declined 0.3%. The quarter had one fewer revenue day year over year; volume per revenue day grew 3.1%.
- Gross margin was approximately 39.2% in the quarter versus 40.5% a year earlier, and 40.1% for the nine months versus 41.3%. Management attributed pressure primarily to lower-margin acquired operations not yet fully integrated and slower volume growth.
- Operating margin was approximately 17.3% in the quarter versus 17.0%; the nine-month margin was 18.9% versus 16.8%. The prior-year comparison included substantially higher restructuring and special charges.
- Operating cash flow was $587.2 for the nine months. After $112.4 of capital expenditures, implied free cash flow was $474.8; this is a simple calculation, not a company-reported measure.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $466.0 at September 30, 2012, compared with $159.3 at December 31, 2011. Current assets were $1,455.8 and current liabilities $1,119.4.
- Total debt was approximately $2,660.1, comprising $485.1 of short-term/current debt and $2,175.0 of long-term debt; year-end 2011 total debt was approximately $2,221.0. The current balance included $350.1 of senior notes due in 2013 and $135.0 of zero-coupon convertible subordinated notes.
- Labcorp issued $1.0 billion of senior notes in August 2012: $500 million at 2.20% due 2017 and $500 million at 3.75% due 2022. Proceeds repaid $625 million of revolving-facility borrowings; the facility had no balance outstanding at quarter-end and provides $1.0 billion of capacity.
- The company reported a 2.0-to-1.0 total-debt-to-consolidated-EBITDA ratio, below its 3.0-to-1.0 covenant limit, and stated it was in compliance with covenants. It expected cash generation, cash on hand and borrowing capacity to cover the $350 million 2013 note maturity.
- Share repurchases totaled $380.5 for the nine months, representing 4.3 million shares. Remaining authorization at quarter-end was $204.0. Expected 2012 capital expenditures were approximately $145.0.
Material changes, outlook and risks
- MEDTOX was acquired on July 31, 2012 for $236.4 in cash, excluding transaction fees. Management said the acquisition expands specialty toxicology and esoteric testing capabilities. MEDTOX and Orchid together contributed to reported third-quarter growth; acquisitions also added costs and weighed on margins. Labcorp reported $283.1 of net cash used for business acquisitions in the nine-month cash flow statement.
- Nine-month SG&A fell 6.0% to $835.8, including the absence of the $34.5 Hunter Labs litigation settlement expense recorded in 2011. Restructuring and other special charges were $4.6 for the nine months, versus $70.3 in 2011; the 2011 period included restructuring, impairment and investment write-off charges.
- Management expected 2012 capital expenditures of about $145 million and said potential fourth-quarter restructuring costs would be more than offset by subsequent savings and would not materially affect operations or liquidity. The filing provides no clear revenue or EPS guidance.
- Management cited reimbursement and payer-policy changes, pricing pressure, competition, test volumes and mix, collections, acquisition integration, regulation, information security and systems, litigation, foreign exchange, and access to capital as risks. The filing says no material risk-factor changes had occurred since the 2011 Form 10-K.
- Legal matters include False Claims Act and billing-related inquiries and suits, a putative consumer class action, a DNA-sample matter, and a proposed settlement of MEDTOX shareholder litigation subject to court approval. Management said it could not estimate reasonably probable losses for certain matters; it did not believe currently known outcomes would materially harm financial condition, though period results could be affected.
- California enacted changes to Medi-Cal laboratory reimbursement, including temporary reductions; Labcorp said the changes, taken together, were not expected to have a material effect on consolidated revenue or results. The company also disclosed zero-coupon notes could be converted during the fourth quarter of 2012; any cash settlement could use cash on hand or revolving borrowings.
Important facts for investors to verify
- Whether acquired businesses integrate as planned and improve margins, given the reported gross-margin decline and acquisition-related costs.
- Performance of underlying testing volume and revenue per requisition, separating acquisition contributions, foreign-exchange effects and the extra or fewer revenue days.
- Cash generation, working-capital and collection trends, and the funding plan for the 2013 note maturity, potential note conversions and repurchases.
- Debt levels, interest costs, ratings and continued compliance with the revolving-credit covenant.
- Developments in reimbursement policy, litigation and government inquiries, and any resulting financial exposure or operating restrictions.