Laboratory Corporation of AmericaHoldings
(
LH
), has priced its senior notes to be used primarily to repay
certain amounts outstanding under its existing credit facility
(announced in December, 2011), for an aggregate purchase price of
$1 billion. The company is issuing the notes in two installments -
$500 million of 2.20% senior notes due 2017 and another $500
million of 3.75% senior notes due 2022. The issuance of the notes
that will close on August 23, 2012, will pay semi-annual
interest.
Besides the repayment of dues under its credit facility, the
company also intends to use the net proceeds of this offering for
general corporate purposes. LabCorp is well capitalized and exited
the second quarter with cash and short-term investments of $124.4
million ($159.3 million at the end of 2011) and $450 million of
borrowings outstanding under its $1 billion revolving credit
facility. Year-to-date, cash flow from continuing operations stood
at $383.4 million with free cash flow of $315.1 million (net
capital expenditures being $68.3 million).
Historically, the company has been using its cash balance to
make strategic acquisitions as well as rewarding its shareholders
through share repurchases. LabCorp noted that it is interested in
acquisitions in the field of pathology, including hematopathology
at an attractive valuation.
During the last reported quarter, the company repurchased 1.5
million shares for $130.3 million and was left with $332 million
under the existing authorization. As a result of this continuous
buyback program, the outstanding share count at the end of the
reported quarter stood at 98.0 million, down 4.7% from the year-ago
period.
Earlier on October 28, 2010, to fund the acquisition of Genzyme
Genetics, LabCorp entered into a $925.0 million Bridge Term Loan
Credit Agreement which was again replaced and terminated in
November 2010 by making an offering in the debt capital markets. On
November 19, 2010, the company sold $925.0 million in debt
securities, consisting of $325.0 million of 3.125% Senior Notes
(due May 15, 2016) and $600.0 million of 4.625% Senior Notes (due
November 15, 2020). On December 1, 2010, the acquisition of Genzyme
Genetics was funded by combining the net proceeds from the issuance
of these Notes ($915.4 million) and cash on hand.
Genzyme Genetics is not the only acquisition in recent times. On
July 31, 2012, LabCorp completed its acquisition of Medtox for
$248.2 million in cash. Here too, financing was through borrowings
from the company's Revolving Credit Facility, supplemented with
some cash on hand. We believe that LabCorp's acquisitions have
added complementary technologies, expanded its presence in
high-growth esoteric markets, and generated cost and revenue
synergies, thereby creating shareholder value. Although the debt
burden has been increasing along with an increase in the company's
acquisitions, we believe that LabCorp's strong cash flow supports
the acquisition strategy.
However, LabCorp reported a disappointing second quarter with
both revenues and adjusted EPS lagging the Zacks Consensus
Estimates. The low growth environment is reflected in flat testing
volume (measured by requisitions) with a 0.5% decline in organic
volume. The company also lagged its peer
Quest Diagnostics
(
DGX
), which clocked 0.7% organic volume growth. It is also exposed to
the reduction in clinical and physician lab fee schedule, effective
January 2013. Because of this, LabCorp narrowed its growth outlook
for 2012.
Despite near-term challenges from reimbursement issues, the
company is working on portfolio expansion to drive its top line. It
is focusing more on the high-margin esoteric testing business,
which is expected to contribute 45% of total sales in the next 3-5
years.
We have a Neutral recommendation on LabCorp. The stock retains a
Zacks# 3 Rank ('Hold' rating in the short term).
QUEST DIAGNOSTC (DGX): Free Stock Analysis
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LABORATORY CP (LH): Free Stock Analysis Report
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