01—Abstract
Summary
Summary of the 10-K filed February 26, 2015. Cited figures are marked; the original filing is the authoritative source.
Laboratory Corporation of America Holdings (LabCorp), headquartered in Burlington, North Carolina, reported 2014 net sales of $6,011.6 milliona, up from $5,808.3 million in 2013, with net earnings attributable to the company of $511.2 million, down from $573.8 million, and diluted EPS of $5.91 versus $6.25.
Total test volume (requisitions) rose 5.3% year over year, while revenue per requisition fell 1.7%, reflecting changes in test and payer mix. Operating income declined to $910.4 millionb from $990.9 million, with SG&A rising to 19.9% of net sales from 19.4%, and higher interest expense of $109.5 million. The company is the second largest independent clinical laboratory in the U.S. by 2014 net revenues, with 39 primary laboratories and about 1,750 patient service centers.
The dominant event is the acquisition of Covance Inc., which closed on February 19, 2015 for approximately $6.2 billionc, consisting of $75.76 in cash and 0.2686 shares per Covance share, with former Covance stockholders owning about 15.5% of the combined company. Funding included a $1.0 billion five-year term loan, $2.9 billion of senior notes issued January 30, 2015, and a $400.0 million 60-day cash bridge loan. Management expects a significant increase in the total debt to consolidated EBITDA ratio, which was 2.5 to 1.0 at December 31, 2014, and has suspended share repurchases until the ratio reaches a target of 2.5 to 1.0.
Reimbursement pressure remains a central risk. Medicare and Medicaid accounted for about 15.0% of 2014 revenues, the clinical laboratory fee schedule was reduced by 0.75% in 2014 (a $6.0 milliond revenue reduction), and the Physician Fee Schedule faces a 21.2% conversion factor decrease on April 1, 2015 unless Congress acts.
The Canadian Alberta joint venture faces a contract award appeal that could substantially reduce its revenues if the award stands. Management also points to Project LaunchPad, which it expects to generate savings in excess of $150.0 million over three years.
02—Key points
Key Highlights
- 2014 net sales rose 3.5% to $6,011.6 million, while net earnings attributable to the company fell to $511.2 million from $573.8 million.
- Test volume grew 5.3% to 138.0 million requisitions, but revenue per requisition declined 1.7% to $43.56 due to test and payer mix changes.
- Covance acquisition closed February 19, 2015 for approximately $6.2 billion, with Covance stockholders receiving $75.76 cash and 0.2686 LabCorp shares per share, and former Covance holders owning about 15.5% of the combined company.
- Financing for the Covance deal included a $1.0 billion five-year term loan and $2.9 billion of senior notes issued January 30, 2015, with a weighted average interest rate of about 3.15% on $3.9 billion of long-term debt.
- Management anticipates a significant increase in the total debt to consolidated EBITDA ratio, which stood at 2.5 to 1.0 at year-end 2014, and has suspended share repurchases.
- Government reimbursement pressure persists, including a 0.25% CLFS reduction and a 21.2% Physician Fee Schedule conversion factor decrease on April 1, 2015 absent Congressional action.
- Project LaunchPad is expected to deliver savings in excess of $150.0 million over three years, with one-time costs of approximately $30.0 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Labcorp Holdings kept $0.09.
- Revenue$6.01B100.0%
- Cost of revenue−$3.81B63.4%
- Gross profit$2.20B36.6%
- Operating costs−$1.29B21.5%
- Operating income$910.4M15.1%
- Interest, other & tax−$399.2M6.6%
- Net income$511.2M8.5%
Where FY2014 revenue went
$6.01B- Cost of revenue: $3.81B, 63% of revenue
- SG&A: $1.20B, 20% of revenue
- Net income: $511.2M, 8.5% of revenue
- Other operating costs: $94.5M, 1.6% of revenue
- Interest, other & tax: $399.2M, 6.6% of revenue
Kept 8.5% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 26, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $6.01B$5.81B | +3.5% |
| Cost of Revenue | $3.81B$3.59B | +6.2% |
| Gross Profit | $2.20B$2.22B | −0.9% |
| SG&A Expenses | $1.20B$1.13B | +6.1% |
| Operating Income | $910.40M$990.90M | −8.1% |
| Interest Expense | $109.50M$96.50M | +13.5% |
| Net Income | $511.20M$573.80M | −10.9% |
| EPS (Basic) | $6.03$6.36 | −5.2% |
| EPS (Diluted) | $5.91$6.25 | −5.4% |
| Shares Outstanding (Basic) | 84.80M90.20M | −6.0% |
| Shares Outstanding (Diluted) | 86.40M91.80M | −5.9% |
05—Questions
Frequently Asked Questions
How did LabCorp perform financially in 2014?
Net sales grew 3.5% to $6,011.6 million from $5,808.3 million. Operating income fell to $910.4 million from $990.9 million, and net earnings attributable to the company declined to $511.2 million from $573.8 million, with diluted EPS of $5.91 versus $6.25. Cost of sales rose to 63.4% of sales from 61.7%, and SG&A increased to 19.9% of net sales.
What did LabCorp pay for Covance and how was it financed?
The acquisition was valued at approximately $6.2 billion and closed February 19, 2015. The company used about $4.3 billion in cash and issued about 15.3 million shares. Financing included a $4.25 billion bridge facility later reduced, a $1.0 billion five-year term loan, $2.9 billion of senior notes issued January 30, 2015 (net proceeds $2,870.2 million), and a $400.0 million 60-day cash bridge loan.
What are the main risks to LabCorp's clinical laboratory revenue?
The filing highlights government reimbursement cuts, including reductions to the Medicare Clinical Laboratory Fee Schedule and a potential 21.2% cut to the Physician Fee Schedule effective April 1, 2015 unless Congress intervenes. Managed care payer concentration is significant, with managed care representing 49.7% of requisitions. Pricing pressure from consolidation and payer delays in pricing new molecular codes also weigh on revenue.
Will LabCorp resume share repurchases?
Not in the near term. The company suspended repurchases after announcing the Covance acquisition and does not anticipate resuming them until it reaches its targeted ratio of total debt to consolidated EBITDA of 2.5 to 1.0. The company also states it does not anticipate any share repurchase activity in 2015, and it has no present plans to pay dividends.
What is the outlook for the combined company's leverage and earnings?
Management expects a significant increase in the total debt to consolidated EBITDA ratio and intends to maintain an investment grade credit profile, using free cash flow to pay down debt and make small fold-in acquisitions. The company expects Covance's 2015 results to be affected by increased interest expense and lower margins, and it expects Covance's 2014 net revenues were approximately $2,500.0 million, with cost synergies above $100.0 million to be realized within three years.
06—Continue