LabCorp Prices Senior Notes

Zacks

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).

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