A leading player in the diagnostic testing space, Laboratory Corporation of America Holdings (LH) intends to purchase all or a portion of its Zero Coupon Convertible Subordinated Notes due 2021. The purchase price for the notes is $819.54 per $1,000 principal amount at maturity.
On the liquidity front, LabCorp is quite well capitalized. The company exited the second quarter of fiscal 2011 with cash and short-term investment of $118.9 million ($230.7 million at the end of 2010) and $463 million under the revolving line of credit. The company has been using its cash balance to make strategic acquisitions as well as reward its shareholders through share repurchases.
Cash flow trends of the company remain robust with free cash flow for the first half of the year at $325 million; in line with the expectation and historical performance. However, cash flow was reduced by $20 million due to delays in the Genzyme Genetics enrollment process. The company is confident that these delays will be resolved in due course and reiterated 2011 operating cash flow guidance of $900 million. LabCorp also believes that free cash flow should record a healthy increase in 2012-2013 as Genzyme Genetics starts contributing to the bottom line.
During last the reported quarter, LabCorp converted a portion of its zero-coupon subordinated bonds. The conversion amount of $231 million was settled partly by cash ($143 million) and issuance of 900,000 shares. As a result, the remaining balance of zero-coupon subordinated bonds was $140.1 million compared with $286.7 million at the end of fiscal 2010. At the end of June 2011, the company’s debt level was $2 billion without any borrowings outstanding under the revolving credit facility.
Recommendation
LabCorp continues to focus on strategic initiatives to drive growth and profitability. It includes the introduction of innovative tests in the genomic/esoteric arena, specifically in the area of cancer, greater focus on managed care organizations in addition to aggressive penetration into the hospital market. However, the tough competitive landscape with the presence of Quest Diagnostics (DGX) is of primary concern, especially in the current economic scenario.
We have a Neutral rating on the stock, which also corresponds to a Zacks #3 Rank (Hold) in the short term.
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