01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
Laboratory Corporation of America Holdings (LabCorp) reported 2015 net revenues of $8,505.7 milliona, up from $6,011.6 million in 2014, driven primarily by the February 19, 2015 acquisition of Covance Inc. for $6,150.7 million.
The company reports two segments: LabCorp Diagnostics (LCD), with net revenues of $6,199.3 millionb (72.9% of total), and Covance Drug Development (CDD), with $2,306.4 million (27.1%). Net earnings attributable to the company fell to $436.9 million from $511.2 million, reflecting $113.9 million of restructuring and other special charges, $164.5 million of amortization of intangibles, and higher interest expense of $274.9 million, which increased from $109.5 million after the acquisition financing. LCD faces ongoing reimbursement pressure.
The filing describes reductions from the Protecting Access to Medicare Act (PAMA) and related Medicare fee schedule changes, with a $10.7 millionc net revenue reduction over 2016 and 2017 in the physician fee schedule, and says PAMA will set future Clinical Laboratory Fee Schedule rates based on private payer data beginning in 2017. Capitated MCO contracts accounted for approximately $219.9 million, or 3.5% of LCD net revenues. The company also discloses several significant litigation matters, including a $50.0 million jury verdict in the Wuth prenatal testing case, which was affirmed on appeal, and multiple False Claims Act suits.
Balance sheet leverage increased materially: long-term debt rose to $5,992.1 milliond from $2,682.7 million, and total assets rose to $14,221.7 million from $7,301.8 million. Share repurchases were suspended following the Covance announcement, with $789.5 million of authorization remaining, and the company does not anticipate resuming buybacks until its total debt to consolidated EBITDA approaches 2.5 to 1.0, which was 3.6 to 1.0 at December 31, 2015. The company has not historically paid dividends.
02—Key points
Key Highlights
- Total net revenues rose to $8,505.7 million in 2015 from $6,011.6 million in 2014, with the filing attributing the increase primarily to the Covance acquisition, which contributed $2,209.7 million of revenue.
- Net earnings attributable to LabCorp declined to $436.9 million from $511.2 million, with diluted EPS of $4.34 versus $5.91 in 2014, reflecting restructuring charges of $113.9 million and higher interest expense.
- The LCD segment generated $6,199.3 million of net revenues (72.9%) and operating earnings of $1,061.4 million, while CDD contributed $2,306.4 million of net revenues (27.1%) and operating earnings of $71.9 million.
- Total long-term debt increased to $5,992.1 million from $2,682.7 million, and the company borrowed $3,900.0 million of debt to finance the acquisition; total debt to consolidated EBITDA was 3.6 to 1.0 at year-end 2015.
- The filing describes Medicare reimbursement pressure, including a 0.25% CLFS payment reduction in 2015 and a $10.7 million PFS reduction over 2016 and 2017, plus future CLFS rate changes under PAMA beginning in 2017.
- Project LaunchPad produced net savings of approximately $65.0 million in 2015 and is expected to drive net savings in excess of $150.0 million between 2015 and 2017.
- The company repurchased no shares in 2015 after suspending buybacks, holds $789.5 million of remaining repurchase authorization, and has not historically paid dividends.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Labcorp Holdings kept $0.05.
- Revenue$8.68B100.0%
- Cost of revenue−$5.78B66.6%
- Gross profit$2.90B33.4%
- Operating costs−$1.91B22.0%
- Operating income$996.8M11.5%
- Interest, other & tax−$559.2M6.4%
- Net income$437.6M5.0%
Where FY2015 revenue went
$8.68B- Cost of revenue: $5.78B, 67% of revenue
- SG&A: $1.63B, 19% of revenue
- Net income: $437.6M, 5.0% of revenue
- Other operating costs: $278.4M, 3.2% of revenue
- Interest, other & tax: $559.2M, 6.4% of revenue
Kept 5.0% as net incomeNet income $437.6M · 5.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $8.68B$6.01B | +44.4% |
| Cost of Revenue | $5.78B$3.81B | +51.7% |
| Gross Profit | $2.90B$2.20B | +31.8% |
| SG&A Expenses | $1.63B$1.20B | +35.9% |
| Operating Income | $996.80M$910.40M | +9.5% |
| Interest Expense | $274.90M$109.50M | +151.1% |
| Net Income | $437.60M$511.20M | −14.4% |
| EPS (Basic) | $4.43$6.03 | −26.5% |
| EPS (Diluted) | $4.35$5.91 | −26.4% |
| Shares Outstanding (Basic) | 98.80M84.80M | +16.5% |
| Shares Outstanding (Diluted) | 100.60M86.40M | +16.4% |
05—Questions
Frequently Asked Questions
What drove the large increase in revenue and debt in 2015?
The February 19, 2015 acquisition of Covance Inc. for $6,150.7 million drove both. Covance contributed $2,209.7 million of revenue from the acquisition date, and the company financed the deal with $3,900.0 million of debt, 15.3 million shares of common stock, and $488.2 million of available cash.
Why did net earnings decline in 2015?
Net earnings attributable to LabCorp fell to $436.9 million from $511.2 million. The filing cites restructuring and other special charges of $113.9 million, amortization of intangibles rising to $164.5 million from $76.7 million, interest expense rising to $274.9 million from $109.5 million, and a higher effective tax rate of 40.2%.
How exposed is LCD to government reimbursement changes?
The filing states that about 16.0% of LCD revenue in 2015 came directly from Medicare and Medicaid, and that about 12.3% was reimbursed under the Clinical Laboratory Fee Schedule and about 0.9% under the Physician Fee Schedule. It describes a $10.7 million PFS reduction over 2016 and 2017 and says PAMA will reset CLFS rates using private payer data starting in 2017, with the impact not yet assessable.
Will the company resume share repurchases or pay dividends?
The company suspended share repurchases after announcing the Covance acquisition and does not expect to resume until its total debt to consolidated EBITDA approaches 2.5 to 1.0, versus 3.6 to 1.0 at year-end 2015. It has $789.5 million of repurchase authorization remaining. The company has not historically paid dividends and does not anticipate paying them in the foreseeable future.
What are the most significant pending legal matters?
The filing describes the Wuth prenatal genetic testing case, where a jury returned a $50.0 million verdict in December 2013 with liability split 50% to the company, which the Washington Court of Appeals affirmed in August 2015; the company petitioned the state Supreme Court. It also describes a False Claims Act suit under NPT Associates, several state Medicaid overcharge suits, and a Florida Medicaid intervention complaint. The company states it believes these matters will not have a material adverse effect on its financial condition.
06—Continue