TEXT-S&P rates Laboratory Corp. of America Holdings notes 'BBB+'

Aug 20 - Overview
-- Laboratory Corp. of America Holdings (LabCorp), a U.S. provider
of clinical laboratory services, is refinancing some of its debt.
-- We are assigning our 'BBB+' rating to LabCorp's proposed senior
unsecured notes due 2017 and senior unsecured notes due 2022.
-- We expect proceeds to be used to repay borrowing from LabCorp's
revolving credit facility ($450 million outstanding as of June 30, 2012) and
$350 million of notes maturing in January 2013.
-- The stable rating outlook reflects our expectation LabCorp will
continue to generate substantial discretionary cash flow and will maintain
adjusted debt leverage near 2x.
Rating Action
On Aug. 20, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+'
corporate credit rating on Burlington, N.C.-based Laboratory Corp. of America
Holdings. The rating outlook is stable.

We assigned our 'BBB+' rating, the same as the corporate credit rating, to its
proposed senior unsecured notes due 2017 and senior unsecured notes due 2022.
Rationale
The ratings on Burlington, N.C.-based Laboratory Corp. of America Holdings
(LabCorp) reflect its "satisfactory" business risk profile (according to our
criteria), as a highly efficient U.S. provider of clinical laboratory
services. Its "intermediate" financial risk profile is supported by its
generation of robust discretionary cash flow (DCF). Over the next few years,
we expect low-single-digit annual organic revenue growth, supplemented by
growth from acquisitions. This assumes very modest volume growth in routine
testing (57% of 2011 net sales) in 2012 and 2013 and somewhat higher volume
growth in genomic and esoteric testing (38%), consistent with continued
gradual improvement in the U.S. economy. Organic revenue growth in the first
half of 2012 was in line with our expectations. With minimal organic growth,
we expect LabCorp's profit margins to contract, but it should continue to
generate robust cash flow. This will allow LabCorp to make frequent
acquisitions and large share repurchases while maintaining an adjusted debt to
EBITDA ratio below 2.5x. As of June 30, 2012, adjusted debt to EBITDA was
2.4x, pro forma for the new notes, repayment of the revolver, and the
acquisition of MEDTOX Scientific Inc. on July 31, 2012.

We believe acquisitions of higher margin, esoteric testing companies will
remain a core strategy for revenue growth and margin preservation. However, we
have lowered our forecast for near-term volume growth of LabCorp's esoteric
testing business, and we believe a further shift in mix to more profitable
esoteric testing is less likely. In the second quarter of 2012, genomic and
esoteric test volume rose only 1.3% and net sales for this segment declined
1.3%, both year over year. We project costs will rise more than revenues over
the next few quarters, despite LabCorp's ongoing efforts to enhance
efficiency. In 2012 and 2013, we estimate LabCorp's adjusted EBITDA margin
will be approximately 24.5%, compared with 24.9% in 2011 and 25.8% in 2010.

LabCorp's satisfactory business risk profile recognizes its superior operating
efficiency, track record of relatively strong and fairly stable profit
margins, and the industry's significant barriers to entry. Still, we believe
intensifying price pressure, competitive challenges, and volume growth and
service mix uncertainties somewhat offset these advantages. Although LabCorp
provides essential health care services, we believe its business has some
sensitivity to economic conditions, particularly employment levels. Also, it
could suffer as a result of certain broad trends in the health care industry.
Beginning in 2014, we expect newly insured individuals to cause an unfavorable
shift in service mix. We believe a migration to integrated accountable care
(with fixed per capita payments) from fee-for-service health care, which is
far from certain, could potentially hurt the volume and pricing of testing
performed by independent labs.

Third-party reimbursement pressure constrains LabCorp's profitability and is a
key credit factor in its business risk profile. We believe managed care
payors, which account for about 46% of LabCorp's revenue, are trying to reduce
payments to clinical laboratories, especially the larger independent labs with
which they have national contracts. Payors are endeavoring to restrain prices
and curb test utilization. While contracts with managed care payors are not
directly linked to government reimbursement levels, government rates can
influence private rates. LabCorp will negotiate upcoming contract renewals
against a backdrop of declining government reimbursement rates. Medicare
reimbursement rates for clinical lab services, which account for about 15% of
LabCorp's total revenue, rose a modest 0.65% in 2012. This rate will fall
2.95% in 2013. Sequestration will cut the rate a further 2% in 2013 unless the
2011 Budget Control Act is amended. Our economists believe there will be an
amendment.

In the past decade, the diagnostic testing industry consolidated rapidly,
partly because of pricing pressure from third-party payors. LabCorp cemented
its No. 2 position, with a current market share of about 8%, through a series
of acquisitions and contract wins. But its position (and that of other
independent labs) has eroded in recent years because of customer in-sourcing
of anatomic pathology services. In addition, we believe hospital laboratories,
which serve more than 60% of the market, are gaining share from the
independent labs as a result of doctors becoming hospital employees. Industry
leader Quest Diagnostics Inc. has a market share of only about 11%, which we
do not view as a significant competitive advantage relative to LabCorp.

LabCorp's highly efficient operations give it competitive advantages that will
help it withstand market pressures and enable it to reap benefits from
acquired businesses. Its EBITDA margins have been more than 200 basis points
higher than Quest's. We believe this reflects LabCorp's standardized lab and
billing systems and overall low cost structure. LabCorp has a good track
record of successfully integrating acquisitions.

We expect acquisitions and share repurchases to consume much of LabCorp's free
operating cash flow, so significant debt reduction (apart from the upcoming
$350 million debt maturity) is unlikely. However, we do not expect
company-transforming, debt-financed acquisitions or share repurchases. As of
June 30, 2012, pro forma adjusted total debt to EBITDA was 2.4x. We capitalize
operating leases, we exclude non-recurring 2011 expenses from EBITDA, and we
make other customary adjustments when calculating this ratio. We expect
LabCorp to operate at 1.5x to 2.5x adjusted debt to EBITDA, below or at the
low end of the guideline for an intermediate financial risk profile.

Liquidity
We view LabCorp's liquidity as "strong." Relevant aspects of LabCorp's
liquidity are:
-- We expect sources of liquidity, including more than $800 million of
operating cash flow in 2012, to exceed uses by more than 1.5x over the next
12-24 months. Even if EBITDA is 30% below our expectations, sources would
still exceed uses.
-- Sources of liquidity as of June 30, 2012, included cash on hand of
$124 million. Pro forma for the refinancing, we expect LabCorp to have an
additional $355 million of cash and $963 million available from its $1 billion
revolving credit facility (after deducting letters of credit).
-- We assume acquisitions and share repurchases will consume at least
$600 million per year. However, these activities are discretionary and could
be curtailed if cash flow unexpectedly weakens. LabCorp does not pay cash
dividends.
-- We expect uses of cash to include capital expenditures of about $150
million to $160 million per year in 2012 and 2013. LabCorp's effective
management of working capital contributes to our expectation that working
capital needs will be modest.
-- Our assumed cash uses in 2012 include LabCorp's potential cash
obligation upon conversion of its zero-coupon convertible subordinated notes.
If they convert, LabCorp must settle the conversion in cash for the accreted
value of the notes-- $134.4 million as of June 30, 2012.
-- We expect LabCorp to maintain substantial headroom under its loan
agreement covenant.

Outlook
Our rating outlook on LabCorp is stable, reflecting our expectation that it
will continue to generate substantial DCF. We expect LabCorp to remain
acquisitive over the intermediate term, as it seeks to further expand its
footprint. Because we expect cash flows to remain robust, we believe it can
maintain an intermediate financial risk profile. We could lower the rating if
it makes debt-financed acquisitions or share repurchases that keep leverage
above 2.5x for an extended period of time. With pro forma debt leverage at
2.4x, there is only about $165 million of debt capacity without the benefit of
incremental EBITDA. We might also consider a downgrade if the lease-adjusted
EBITDA margin declines more than 200 basis points, suggesting a weaker
business risk profile. This could occur if prices erode more than we expect,
the service mix shifts unfavorably or volume falters and these developments
are not mitigated by cost reductions. We believe an upgrade is unlikely within
the next two years, because of the market conditions we expect and LabCorp's
financial policies. If cash flow is stronger than we forecast and acquisition
opportunities are limited, we would expect LabCorp to return much of its DCF
to shareholders.

Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings List
Laboratory Corp. of America Holdings

Ratings Affirmed
Corporate Credit Rating BBB+/Stable/--
Senior Unsecured BBB+
Subordinated BBB

New Rating
Sr. unsecured notes due 2017 BBB+
Sr. unsecured notes due 2022 BBB+

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