01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
Laboratory Corporation of America Holdings (LabCorp) reported net revenues of $10.21 billiona for 2017, up 8.1% from $9.44 billion in 2016, with growth from acquisitions of 5.8% and organic growth of 2.3%.
Net earnings attributable to the company were $1.27 billionb ($12.21 diluted EPS), compared with $732.1 million in 2016; the 2017 result includes a provisional net benefit of $519.0 million from the Tax Cuts and Jobs Act. Operating income rose to $1.36 billion from $1.31 billion. The company operates two segments: LabCorp Diagnostics (70.3% of 2017 net revenues) and Covance Drug Development (29.7%), the latter expanded by the September 2017 acquisition of Chiltern International Group Limited for approximately $1.22 billion in cash.
The filing highlights margin pressure and reimbursement risk. Under the Protecting Access to Medicare Act (PAMA), the company estimates 2018 Clinical Laboratory Fee Schedule rates will reduce LCD revenue by approximately 8% ($70.0 millionc). CDD's operating margin fell to 6.8% from 9.6%, and the company expects the new revenue recognition standard to reduce LCD revenue while increasing CDD reported revenue.
Total debt includes $6.0 billiond of senior notes outstanding, and the company issued $1.2 billion of senior notes in August 2017 and a $750.0 million term loan in September 2017. The company has not historically paid dividends and repurchased $338.1 million of stock in 2017, with $401.4 million remaining under authorization.
02—Key points
Key Highlights
- Net revenues of $10,205.9 million in 2017, up 8.1% from 2016, driven by acquisitions (5.8%) and organic growth (2.3%).
- Net earnings attributable to Laboratory Corporation of America Holdings of $1,268.2 million ($12.21 diluted EPS), including a provisional $519.0 million net benefit from the Tax Cuts and Jobs Act.
- LCD net revenues of $7,170.5 million (up 8.7%) with operating margin of 18.1%; CDD net revenues of $3,037.2 million (up 6.8%) with operating margin of 6.8%, down from 9.6%.
- PAMA Clinical Laboratory Fee Schedule rates are estimated to reduce 2018 LCD revenue by approximately 8% ($70.0 million), with phase-in limits of 10.0% per year for 2018-2020.
- Acquired Chiltern International Group Limited on September 1, 2017 for approximately $1,224.5 million in cash; the acquisition contributed $188.4 million of net revenue in 2017.
- Cash from operations of $1,459.4 million in 2017; capital expenditures of $312.9 million; net cash used in investing activities of $2,228.7 million, mainly acquisitions.
- Adoption of the new revenue recognition standard on January 1, 2018 (full retrospective method) is expected to reduce LCD revenue and increase CDD revenue, with 2017 total revenue estimated 2.0% to 5.0% higher on restatement.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Labcorp Holdings kept $0.12.
- Revenue$10.31B100.0%
- Cost of revenue−$7.22B70.0%
- Gross profit$3.09B30.0%
- Operating costs−$1.79B17.3%
- Operating income$1.31B12.7%
- Interest, other & tax−$78.1M0.8%
- Net income$1.23B11.9%
Where FY2017 revenue went
$10.31B- Cost of revenue: $7.22B, 70% of revenue
- SG&A: $1.50B, 15% of revenue
- Net income: $1.23B, 12% of revenue
- Other operating costs: $287.4M, 2.8% of revenue
- Interest, other & tax: $78.1M, 0.8% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $10.31B$9.44B | +9.2% |
| Cost of Revenue | $7.22B$6.70B | +7.7% |
| Gross Profit | $3.09B$2.85B | +8.3% |
| SG&A Expenses | $1.50B$1.35B | +11.4% |
| Operating Income | $1.31B$1.27B | +2.7% |
| Interest Expense | $235.10M$219.10M | +7.3% |
| Net Income | $1.23B$711.80M | +72.4% |
| EPS (Basic) | $11.99$6.94 | +72.8% |
| EPS (Diluted) | $11.81$6.82 | +73.2% |
| Shares Outstanding (Basic) | 102.40M102.50M | −0.1% |
| Shares Outstanding (Diluted) | 103.90M104.30M | −0.4% |
05—Questions
Frequently Asked Questions
How did LabCorp's revenue and profitability change in 2017?
Net revenues rose 8.1% to $10.21 billion, with acquisitions contributing 5.8% and organic growth 2.3%. Operating income increased 3.9% to $1.36 billion. Net earnings attributable to the company more than doubled to $1.27 billion, largely because of a provisional $519.0 million net tax benefit from the Tax Cuts and Jobs Act.
What is the main reimbursement risk facing the laboratory business?
The company estimates that Clinical Laboratory Fee Schedule rates under PAMA will reduce LCD revenue from affected payers by about 8% ($70.0 million) in 2018. Rates for 2018-2020 cannot be reduced by more than 10.0% per year, and the company notes that a lawsuit by the American Clinical Laboratory Association challenges CMS's implementation. The long-term effect is not yet known.
Why did the CDD segment's profitability decline?
CDD operating earnings fell 24.4% to $206.2 million and its operating margin dropped to 6.8% from 9.6%. The filing attributes this mainly to acquisition and transaction costs, higher personnel costs, and increased restructuring and special charges tied to the LaunchPad expansion and a terminated software project, partially offset by cost synergies.
How is the company financing its growth and returning capital?
In 2017 the company issued $1.2 billion of senior notes, entered into a $750.0 million term loan, and borrowed and repaid $1,392.2 million under its revolving credit facility. It repurchased $338.1 million of common stock and had $401.4 million remaining under repurchase authorization at year-end. The company has not historically paid dividends and does not anticipate paying them in the foreseeable future.
What changes in accounting standards could affect reported results in 2018?
The company will adopt the new revenue recognition standard on January 1, 2018 using the full retrospective method. It expects LCD revenue to decline because bad debt expense will be recorded against net revenues, while CDD revenue will increase due to inclusion of reimbursable out-of-pocket and investigator fees. The company also expects its 2018 consolidated effective tax rate to be approximately 25.0%.
06—Continue