Moody's changes LabCorp's outlook to stable from positive
Moody's Investors Service changed the rating outlook of Laboratory Corporation of America Holdings (LabCorp) to stable from positive. Moody's also affirmed LabCorp's Baa2 senior unsecured rating.
"The change in LabCorp's rating outlook reflects our expectation that leverage will increase given the change in the company's stated tolerance for using incremental debt to fund share repurchases and other investment in the business," said Dean Diaz, a Moody's Senior Credit Officer. "LabCorp will also face headwinds growing revenue and maintaining profit margins in 2013 as the lab sector sees increasing pricing pressure, especially from changes in Medicare reimbursement," continued Diaz.
The following ratings are affirmed.
- 5.625% senior notes due 2015, Baa2
- 3.125% senior notes due 2016, Baa2
- 2.2% senior notes due 2017, Baa2
- 4.625% senior notes due 2020, Baa2
- 3.75% senior notes due 2022, Baa2
RATINGS RATIONALE
LabCorp's Baa2 senior unsecured rating reflects Moody's anticipation that the company will continue to see stable cash flow generation and maintain modest leverage and strong interest coverage. Moody's expects that the company will continue to pursue acquisitions and share repurchases and could use additional debt to fund those initiatives. The rating also incorporates the continuation of headwinds resulting from broader economic factors, given the still high unemployment levels and stagnant growth in enrollment in managed care plans, and pressure on reimbursement rates that could result in slower growth of revenue and EBITDA.
The stable outlook reflects Moody's expectation that although adjusted debt to EBITDA could increase for share repurchase or acquisition activity, it will remain moderate at around 3.0 times. Moody's also believes that the company could see slower growth in revenue and cash flow as the operating environment remains challenging. Moody's also believes that the company is well positioned to benefit in the longer term if the economic environment continues to stabilize and from positive demographic trends, including the aging of the population and continued growth in esoteric testing.
Moody's could upgrade the ratings if the company maintains a disciplined approach toward acquisitions and share repurchases and maintains its good liquidity profile. Specifically, if debt to LTM EBITDA was expected to sustainably approach 2.0 times and free cash flow to debt was expected to approach 25%, Moody's could upgrade the rating.
A significant increase in the frequency and magnitude of debt financed share repurchases or acquisitions resulting in sustained debt to EBITDA above 3.5 times could result in a rating downgrade. Also, deterioration in cash flow coverage of debt metrics such that free cash flow coverage of debt was expected to approach 15% could result in a rating downgrade.
For further details refer to Moody's Credit Opinion for Laboratory Corporation of America Holdings on moodys.com.
The principal methodology used in this rating was Global Business & Consumer Service Industry Rating Methodology published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Laboratory Corporation of America Holdings, headquartered in Burlington, North Carolina, is the second largest independent clinical laboratory company in the United States. The company offers a broad range of clinical laboratory tests that are used by the medical profession in routine testing, patient diagnosis, and in the monitoring and treatment of disease. In addition, the company has developed specialty testing such as oncology testing, HIV genotyping and phenotyping, diagnostic genetics and clinical trials. The company recognized approximately $5.7 billion of revenue for the year ended December 31, 2012.
