01—Abstract
Summary
Summary of the 10-K/A filed March 1, 2016. Cited figures are marked; the original filing is the authoritative source.
Laboratory Corporation of America Holdings (now Labcorp Holdings Inc.) 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 now reports two segments: LabCorp Diagnostics (LCD), contributing 72.9% of net revenues, and Covance Drug Development (CDD), contributing 27.1%. Net earnings attributable to the company fell to $436.9 millionb from $511.2 million, and diluted earnings per share fell to $4.34 from $5.91, reflecting higher interest expense of $274.9 million, restructuring and other special charges of $113.9 million, and amortization of intangibles of $164.5 million. LCD net revenues rose 6.2% to $6,199.3 million, with organic requisition volume growth of 3.2% and acquisitions adding 2.5%.
Management cites Project LaunchPad, which generated net savings of approximately $65.0 millionc in 2015 and is expected to deliver more than $150.0 million between 2015 and 2017. Reimbursement remains a headwind: the filing describes ongoing Medicare and Medicaid pressure, a PAMA-driven move toward market-based Clinical Laboratory Fee Schedule rates beginning in 2017, and a $10.7 million reduction in Physician Fee Schedule revenue over 2016 and 2017. Capital allocation has shifted: share repurchases were suspended after the Acquisition was announced, total debt rose to $6,417.0 million in long-term obligations, and the company reported a total debt to consolidated EBITDA ratio of 3.6 to 1.0 against a stated target of 2.5 to 1.0.
Cash flow from operations was $982.4 milliond, up from $739.0 million, while capital expenditures were $255.8 million. Shareholders' equity rose to $4,944.4 million. The company also disclosed pending litigation, including a $50.0 million jury verdict in the Wuth case that is under review by the Washington Supreme Court, and a False Claims Act suit (NPT Associates) that the company says it will vigorously defend.
02—Key points
Key Highlights
- Net revenues rose 41.5% to $8,505.7 million in 2015, driven primarily by the Covance acquisition, which contributed $2,209.7 million of revenue from the acquisition date.
- Net earnings attributable to the company declined to $436.9 million from $511.2 million, and diluted EPS fell to $4.34 from $5.91, with interest expense up to $274.9 million from $109.5 million.
- LCD revenues grew 6.2% to $6,199.3 million, with organic requisition growth of 3.2%; the segment's 2015 operating earnings were $1,061.4 million.
- CDD revenues increased to $2,306.4 million from $173.6 million, reflecting the Acquisition; CDD operating earnings were $71.9 million.
- Operating cash flow increased to $982.4 million from $739.0 million, while capital expenditures were $255.8 million.
- Share repurchases were suspended following the Covance announcement, with $789.5 million of authorization remaining; the company does not expect to resume until total debt to EBITDA approaches 2.5 to 1.0 from 3.6 to 1.0.
- Medicare reimbursement pressure continues: PAMA will move the Clinical Laboratory Fee Schedule to market-based rates starting in 2017, and PFS revenue will decline by a total of $10.7 million across 2016 and 2017.
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-K/AFY2015filed March 1, 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
How did the Covance acquisition change the company's financial profile?
The February 19, 2015 acquisition of Covance Inc. for $6,150.7 million added drug development services as a second reportable segment. Covance contributed $2,209.7 million of revenue and $167.2 million of operating income from the acquisition date through year-end 2015. The company financed the deal with $3,900.0 million of debt, $1,762.5 million of stock consideration, and $488.2 million of available cash, which increased long-term obligations to $6,417.0 million.
Why did net earnings decline despite revenue growth?
Net earnings attributable to the company fell to $436.9 million from $511.2 million. The filing attributes the decline to higher interest expense from acquisition financing, $113.9 million of restructuring and other special charges, $164.5 million of amortization of intangibles and other assets, and the company's historically lower margins at Covance. The effective tax rate also rose to 40.2% from 38.0%.
What are the main reimbursement risks facing LCD?
The filing identifies several pressures: the CLFS rate reduction of 0.25% in 2015, the 0.10% increase expected in 2016, PFS reductions totaling $10.7 million over 2016 and 2017, and the transition to market-based CLFS pricing under PAMA beginning in 2017. Medicare and Medicaid together accounted for approximately 16.0% of LCD's 2015 net revenue. The company states it cannot yet assess the full impact of PAMA because rulemaking has not been finalized.
What is the company's leverage and capital return outlook?
At December 31, 2015, the ratio of total debt to consolidated EBITDA was 3.6 to 1.0, and the company was in compliance with its credit facility covenants. Senior Notes outstanding totaled $5,525.0 million in aggregate principal, and a $715.0 million term loan was outstanding. The company says it is committed to maintaining its investment grade rating, does not anticipate resuming share repurchases until the leverage ratio approaches 2.5 to 1.0, and has not historically paid dividends.
What significant legal matters are disclosed?
The most notable is the Oliver Wuth prenatal genetic testing case, in which a Washington jury returned a $50.0 million verdict in December 2013 with liability split 50% to the company and 50% to a co-defendant. The Washington Court of Appeals affirmed the judgment in August 2015, and the Supreme Court was to decide on March 1, 2016 whether to review it. The company says it carries self-insurance reserves and excess liability insurance sufficient to cover the potential liability. The company also faces a False Claims Act suit, NPT Associates, alleging kickbacks to UnitedHealthcare, which it says it will vigorously defend.
06—Continue