01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
Laboratory Corporation of America Holdings (now Labcorp Holdings Inc.), headquartered in Burlington, North Carolina, describes itself as the second largest independent clinical laboratory company in the United States based on 2011 net revenues.
It operates 54 primary laboratories, over 1,700 patient service centers, and has over 31,000 employees. Net sales for 2011 were $5,542.3 milliona, up 10.8% from $5,003.9 million in 2010. The filing attributes 6.8 points of that growth to the December 2010 acquisition of Genzyme Genetics.
Net earnings attributable to the company were $519.7 millionb ($5.11 diluted earnings per share), compared with $558.2 million ($5.29) in 2010. Genomic and esoteric testing revenue rose 20.9% to $2,089.0 million. Margins and earnings were pressured by several items.
Cost of sales rose to 59.0% of sales from 58.1%, which the company attributes mainly to recently acquired businesses not yet fully integrated. Restructuring and other special charges were $80.9 millionc, and a $34.5 million net litigation settlement expense was recorded in selling, general and administrative expenses. Government payers remain a key exposure: Medicare and Medicaid represented approximately 19.0% of 2011 net sales, and legislation passed on February 17, 2012 will reduce the Medicare clinical laboratory fee schedule by 2% effective January 1, 2013.
Capitated contracts accounted for approximately 2.9% of net sales. The company generated $855.6 milliond of operating cash flow in 2011 and spent $145.7 million on capital expenditures. It repurchased $643.9 million of stock (7.4 million shares), and its Board authorized an additional $500.0 million repurchase program on February 10, 2012.
The company entered a $1,000.0 million senior unsecured revolving credit facility on December 21, 2011, with $560.0 million outstanding at year-end. It does not pay dividends. Debt ratings were Baa2 from Moody's and BBB+ from Standard & Poor's.
Open legal matters include a False Claims Act lawsuit (United States ex rel. NPT Associates) and a DIANON wrongful termination judgment of approximately $10.0 million that is under appeal.
02—Key points
Key Highlights
- Net sales grew 10.8% to $5,542.3 million in 2011, with Genzyme Genetics contributing 6.8 points of that growth.
- Net earnings attributable to the company declined to $519.7 million from $558.2 million, and diluted EPS fell to $5.11 from $5.29.
- Genomic and esoteric testing revenue reached $2,089.0 million, up 20.9%, while routine testing revenue was $3,143.9 million, up 5.0%.
- Cost of sales increased to 59.0% of sales from 58.1%, and restructuring and other special charges totaled $80.9 million.
- Medicare and Medicaid accounted for approximately 19.0% of net sales, and a 2% Medicare clinical lab fee schedule reduction takes effect January 1, 2013.
- Operating cash flow was $855.6 million, and $643.9 million was used to repurchase 7.4 million shares; a new $500.0 million repurchase authorization was announced February 10, 2012.
- The company completed the Orchid Cellmark acquisition on December 15, 2011, and the $1,000.0 million revolving credit facility had $560.0 million outstanding at year-end.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Labcorp Holdings kept $0.09.
- Revenue$5.54B100.0%
- Cost of revenue−$3.27B59.0%
- Gross profit$2.27B41.0%
- Operating costs−$1.33B23.9%
- Operating income$948.4M17.1%
- Interest, other & tax−$428.7M7.7%
- Net income$519.7M9.4%
Where FY2011 revenue went
$5.54B- Cost of revenue: $3.27B, 59% of revenue
- SG&A: $1.16B, 21% of revenue
- Net income: $519.7M, 9.4% of revenue
- Other operating costs: $166.7M, 3.0% of revenue
- Interest, other & tax: $428.7M, 7.7% of revenue
Kept 9.4% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $5.54B$5.00B | +10.8% |
| Cost of Revenue | $3.27B$2.91B | +12.4% |
| Gross Profit | $2.27B$2.10B | +8.4% |
| SG&A Expenses | $1.16B$1.03B | +12.1% |
| Operating Income | $948.40M$978.80M | −3.1% |
| Interest Expense | $87.50M$70.00M | +25.0% |
| Net Income | $519.70M$558.20M | −6.9% |
| EPS (Basic) | $5.20$5.42 | −4.1% |
| EPS (Diluted) | $5.11$5.29 | −3.4% |
| Shares Outstanding (Basic) | 100.00M103.00M | −2.9% |
| Shares Outstanding (Diluted) | 101.80M105.40M | −3.4% |
05—Questions
Frequently Asked Questions
What drove revenue growth in 2011?
Net sales rose 10.8% to $5,542.3 million. The filing says growth came from acquisitions made in all three years (most significantly Genzyme Genetics in late 2010), managed care business growth, increased Medicare and Medicaid revenue, a shift toward higher-priced genomic and esoteric tests, and higher revenue per requisition in routine testing. Genzyme Genetics contributed 6.8% of the 10.8% growth.
How much exposure does the company have to government reimbursement?
In 2011, approximately 19.0% of net sales came directly from Medicare and Medicaid, and approximately 14.7% of revenue was reimbursed under the Medicare clinical laboratory fee schedule. Legislation passed February 17, 2012 reduces payment rates by 2% effective January 1, 2013, after the productivity adjustment and the 1.75% reduction under the ACA, and before the scheduled 2% sequestration reduction. The filing states that continued reimbursement pressure could have a material adverse effect.
What is the company's capital allocation approach?
The company's stated strategy is to deploy capital first to acquisitions that enhance its footprint and test menu, then to repurchase shares. It invested a total of $1,531.2 million in acquisitions over the past three years and repurchased $643.9 million of stock in 2011. The Board authorized $500.0 million of additional repurchases on February 10, 2012. The company has not historically paid dividends and does not presently anticipate paying any in the foreseeable future.
What are the main legal and debt-related items to watch?
The company recorded a $34.5 million net litigation settlement expense in 2011 related to the California ex rel. Hunter Laboratories lawsuit, which was settled with a $49.5 million payment. The United States ex rel. NPT Associates False Claims Act lawsuit alleges kickbacks to UnitedHealthcare, and the company will vigorously defend it. Separately, the zero-coupon convertible subordinated notes had a carrying value of $135.5 million at year-end, and holders could convert during the first quarter of 2012, with the company planning to settle the cash portion with cash on hand and/or revolver borrowings.
06—Continue