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Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

LabCorp
Introduction:
As one of the industry leaders in diagnostic and medical laboratory, Laboratory Corporation of America
Holdings (LabCorp), operates a laboratory network with headquarters located in Burlington, NC. It is a global
company with 48,000 employees and they have over 220,000 clients. Their clients include physician offices,
hospitals, managed care organizations and biotechnology and pharmaceutical companies(LabCorp.com). Their
history dates back to 1905 when Hoffman-La Roche started his business in the U.S. In 1969 Hoffman- La Roche
acquired Kings County Research Laboratory which officially established it as a laboratory business. In 1995,
National Health Laboratories and Roche Biomedical Laboratories merged to become one of the largest clinical lab
providers in the world (LabCorp.com).
Industry Profile:
LabCorp satisfies the needs of patients and physicians, both large and small, routine or complex. They are
depended on to provide a full range of high quality diagnostic testing. They are directly involved in the medical
field through their industry of diagnostic and medical laboratories. This industry is able to identify the nature and
causes of injuries or diseases through the analytic services that they provide. With the use of patient history,
examinations and data they can provide a thorough evaluation. The services provided by this industry are used by
the providers as well as the patients to understand and better their health. This industry is heavily relied upon to
provide the patient's' medical evaluation and treatment.
Labs are vital to the healthcare industry due to the information that they provide and not to mention due to
the aging population, the movement of our era towards preventative care has stimulated this industry. So much so
that the industry is forecasted to grow at an annual rate of 3.3% from 2016 to 2021. This is due to an increase in
profitability allowed by contracts with hospitals that lack in-house laboratory testing. Unfortunately this growing
demand is one problem this industry faces. Labs are facing a shortage of workers and cannot keep up with the
demand. The baby boomers are a large part of the workforce and they are retiring, so to help with the decreased
supply and increased demand many players in this industry are forced to increase salaries to help incentivize
workforce retention.
The industry is also facing scientific advances that are allowing them to increase their service capabilities.
Furthermore with new healthcare reform all individuals are required to have healthcare and this means that out of
pocket costs for the lab services are going to decline but this will support the demand for industry services.
There are several reforms that are going to affect his industry. The Patient Protection and Affordable Care
Act (PPACA)'s focus on disease prevention has included lab services to its coverage. This will increase the access
of patients to this industry services. Unfortunately not all new regulations are positive, the Protecting Access to
Medicare Act requires labs to disclose their private insurance payments and testing volumes. This "would result in
significant cuts in laboratory payments from Medicare and Medicaid, which collectively accounts for about 20.5%
of total revenue"(IBISWorld). There will be more accurate and quicker diagnoses and treatments due to medical
advancements. One example is esoteric tests which include procedures in molecular diagnostics, protein chemistry,
cellular immunology, and advanced microbiology. These require more hands-on attention and furthermore they will
be performed less frequently.
The major types of lawsuits faced by this industry include fraud and violation lawsuits. One in particular
violation lawsuit stands out because it violated the Fair and Accurate Credit Transactions Act (FACTA). LabCorp
Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

was the target of this particular class action lawsuit. They printed debit and credit card transaction receipts that
showed expiration dates of the cards. With this lawsuit a settlement was reached where LabCorp paid 11 million
with was split between the 665,000 members who submitted a claim. Another major lawsuit faced by this industry
is fraud. There was another small player in this industry who declared bankruptcy due to their fraud. They were
accused of paying kickbacks to doctors who would send referrals to them. In this industry this is an illegal business
practice and the company was forced to pay $600 million in damages.
Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

LABCORP
Ratios 2014 Calculations 2015 Calculations

Days in A/R 49.5 815.7 /(6011.6/365) 52.3 1217.9/(8505.7/365)

Average Payment Period 553.8 1701.5/((1198.2-76.7)/365) 244.5 976.3/((16220-164.5)/365)

Operating Margin .151 910.4/6011.6 .116 1002.9/8680.1


Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

Return on Total Assets .0702 512.6/7301.8 .0307 436.9/1422.7


Current Ratio 1.73 1692.7/976.3 1.57 2663/1701.5
Property plant and equipment 8.05 6011.6/((786.5+707.4)/2) 6.85 8680.1/((1747.4+786.5)/2)
turnover
Total Debt Equity 1.57 4463.6/2838.2 1.87 9262.4/4959.3
Accounts Payable Turnover 20.5 6011.6/((304.5+282.3)/2) 21.87 8505.7/((497.4+282.3)/2)
Receivables Turnover 7.51 6011.6/((815.7+784.7)/2) 8.54 8680.1/((1217.9+815.7)/2)
Cash Equivalents Turnover 12.22 6011.6/((580+404)/2) 13.39 8680.1/((716.4+580)/2)

QUEST DIAGNOSTICS

Ratios 2014 Calculations 2015 Calculations

Days in A/R 45.7 932/(7435/365) 43.9 901/(7493/365)

Average Payment Period 214.4 1709((4637-1728)/365) 143.8 1173/((4657-1679)/365)

Operating Margin .132 983/7435 .187 1399/7493

Return on Total Assets .0563 556/9877 .0712 709/9962

Current Ratio 0.94 1603/1709 1.28 1501/1173

Property plant and equipment 8.56 7435/((933+805)/2) 8.07 7493/((925+933)/2)


turnover

Total Debt Equity 1.28 5527/4330 1.11 5249/4713

Accounts Payable Turnover 28.87 7435/((257+258)/2) 27.96 7493/((257+279)/2)

Receivables Turnover 8.34 7435/((932+852)/2) 8.18 7493/((901+932)/2)

Cash Equivalents Turnover 39.23 7435/((192+187)/2) 46.11 7493/((133+192)/2)

Recommendations:
The days in accounts receivables is evaluated by how long the customers are taking to pay back the
company. Comparing LabCorp with Quest, Quest is doing better based on our data. Quests days in accounts
receivable decreased in 2015 while Labcorp increased their days in accounts receivable. Reducing the days in
accounts receivables will help our company by putting that cash into use again. We would recommend our company
to hire a staff that can handle all the paperwork for the collections personnel so that way there is more time used to
contact customers.By installing a collections software will also help reduce the days in A/R for our company. By
doing this, it will increase the collections staff efficiency.
Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

The average payment period for LabCorp was 553.8 days in 2014 and it went down to 244.5 in 2015.
Quest's average payment period dropped from 214.4 in 2014 to 143.8 in 2015. There is a huge difference in these
two companies with paying its creditors back. A shorter payment period indicates how prompt their creditors are
being paid back. But a very short payment period indicates that the company may not be taking full advantage of
the credit terms by the creditor. Although it is good to keep more cash on hand, we recommend that LabCorp
decrease their average payment period even more so they can keep their larger suppliers happy and take advantage
of possible trade discounts given.

In year 2014 LabCorps operating margin was 15.1 % and Quest was 13.2%. LabCorp had a higher
operating margin, which indicated that it was holding onto more operating income due to low costs. In 2015
however our entitys margin decreased to 11.6% and Quest increased to 18.7%. Quests 2015 Annual report indicated
that the company cut costs by adopting a course of action related to its multi-year Invigorate program to further
reduce its cost structure through 2017(Quest Diagnostic Annual Report, Pg. F-16). One action LabCorp could take
to reduce costs is by either changing suppliers or making better use of their materials.
Labcorp could also improve its debt to equity. Their debt to equity ratio increased from 1.57 in 2014 to
1.87 in 2015, this is an indication that LabCorp is holding on to its debt instead of paying them off. Compared to its
competitor, Quest, Labcorp is not doing well. Quests debt to equity ratio decreased slightly from 1.28 in 2014 to
Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

1.11 in 2015. According to their 2015 balance sheet, LabCorps accounts payable increased by $215,100,00 and their
PPE increased by $960,600,000. LabCorp is expanding to keep up with the changes in the industry, but it is
recommended that they pay off their short term debt.

Based off the Return on Assets (ROA) ratio which shows how efficient the company's management is at
using its assets in order to generate profit. Comparing Quest to Labcorp, Quest is being more efficient than our
company based off the data. Quests ROA actually increased from 2014 to 2015 by 1.49% showing growth in
profitability. Labcorps ROA actually decreased from 2014 to 2015 by 3.95% showing a decrease in profitability.
Reducing Labcorps asset costs will help them raise their ROA ratio by monitoring their asset expenses on a more
monthly basis. We would recommend our company should try and reduce equipment costs by renting or leasing
more equipment instead. Additionally, reducing expenses will help in this situation because when you cut expenses,
you increase the revenues you get to keep. We would recommend trying to reduce the cost of materials by
renegotiating with suppliers or finding new suppliers and try lowering shipping costs with renegotiation or by
charging a shipping fee to customers.
Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

The current ratio for LabCorp in 2014 is at 1.73, and in 2015 it goes down to 1.57. This is not a bad
number for a current ratio because this shows that the current assets of LabCorp outweigh their current liabilities.
Unfortunately the current ratio is unique in which a high ratio and a low ratio both show inefficiencies. If a ratio is
too high it can show signs of problems in managing the working capital. If a ratio is too low it can indicate
problems in meeting current obligations. Generally a good current ratio is as close to 1 as possible; this will indicate
short-term financial strength. LabCorp is moving in the right direction but they need to move some more. Both
their current assets and current liabilities increased from 2014 to 2015. To move their ratio close to 1 LabCorp
would have to increase their current liabilities. Because of the increase in demand of the industry, we recommend
that LabCorp increase their supply through hiring more workers. An increase in workforce would cause an increase
in salaries/wages expense. This is an increase in current liabilities which means LabCorp's current ratio would move
closer to 1.

Works Cited

Burns, Tamara. "LabCorp Settles FACTA Class Action Lawsuit For $11M." Top Class Actions. N.p., 16
May 2016. Web. 28 Nov. 2016.

Curran, Jack. "Diagnostic & Medical Laboratories in the US." IBISWorld. IBISWorld, Sept. 2016. Web. 28 Nov.
2016.
Team 3 (Labcorp), Hmgt 3311-002, Fall 2016

"Eugene McDermott Library - The University of Texas at Dallas." Eugene McDermott Library - The
University of Texas at Dallas. Mergent Online, n.d. Web. 28 Nov. 2016.

"How to Improve a Return on Total Assets." How to Improve a Return on Total Assets | Chron.com. N.p.,
n.d. Web. 27 Nov. 2016.

Stech, Katy. "Health Diagnostic Laboratory Executives Accused of Fraud." The Wall Street Journal. Dow Jones &
Company, 22 Sept. 2016. Web. 28 Nov. 2016.