Labcorp Holdings — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the provided text does not give a standalone fourth-quarter income statement. Labcorp operates through Diagnostics (Dx) and Drug Development (DD), serving customers in more than 100 countries.
Financial results and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $14.877 billion | $16.121 billion | (7.7%) |
| Gross profit | $4.385 billion | $5.624 billion | (22.0%) |
| Operating income | $1.774 billion | $3.260 billion | (45.6%) |
| Net earnings attributable to Labcorp | $1.279 billion | $2.377 billion | (46.2%) |
| Diluted EPS | $13.97 | $24.39 | (42.7%) |
| Cash from operating activities | $1.956 billion | $3.110 billion | (37.1%) |
Gross margin was approximately 29.5%, versus 34.9% in 2021; operating margin was approximately 11.9%, versus 20.2%. The filing attributes margin pressure mainly to lower volumes of higher-margin COVID-19 testing, personnel expense and inflation, partly offset by Base Business growth and LaunchPad savings.
Revenue fell primarily because COVID-19 testing declined 10.0%; organic Base Business revenue grew 2.5%. Dx revenue declined 11.2% (including a 15.6% fall in COVID-19 testing, partly offset by 3.4% Base Business growth). DD revenue declined 2.3%, reflecting currency translation and lower COVID-related work, partly offset by 0.5% organic Base Business growth. Segment operating income was $2.026 billion for Dx, down 36.8%, and $801 million for DD, down 9.7%.
Operating cash flow was $1.956 billion. Investing activities used $1.652 billion, including $1.164 billion for acquisitions; capital expenditures were $482 million. Financing activities used $1.322 billion, including $1.100 billion of share repurchases and $195 million of dividends. Cash and equivalents were $430 million at year-end, down from $1.473 billion. Current assets were $4.625 billion and current liabilities $3.079 billion.
Debt carrying value was approximately $5.340 billion, including $301 million current and $5.039 billion long term; outstanding senior notes had $5.450 billion aggregate principal. The $1.0 billion revolving facility had no balance outstanding at year-end, and the company reported compliance with covenants and expected continued compliance for the next 12 months. Management said cash flows and available revolver capacity were sufficient for anticipated needs in the next 12 months and foreseeable future.
Material changes, outlook and key risks
- Impairment and supplier issue: Labcorp recorded $271.5 million of goodwill and other asset impairment charges, including $260 million for DD’s early development reporting unit. A supplier ceased providing critical testing supplies in December, leading to expectations of lower near-term revenue and profitability and potentially higher costs.
- COVID-19 outlook: Management expected COVID-19 to continue affecting the business in 2023 and beyond, but anticipated testing demand below 2022 levels, with possible temporary or regional increases.
- Reimbursement: Legislation delayed PAMA data reporting and Medicare laboratory fee cuts through 2023. The company estimated approximately $100 million of additional reductions in 2024 from all payers affected by the CLFS, absent further changes. A 2023 increase in the specimen-collection fee was estimated to add $38.6 million to Dx CLFS revenue.
- Spin-off: Labcorp targeted a mid-2023 tax-free spin-off of its Clinical Development and Commercialization Services business, to be named Fortrea. Completion depended on customary conditions, including tax assurances and SEC filing effectiveness; timing and completion were not assured. 2022 results include this business for the full year.
- Capital allocation and efficiency: LaunchPad targeted $350 million of savings through 2025. The board authorized an additional $1 billion share repurchase plan in February 2023, on top of $531.5 million remaining authorization. 2023 capital expenditures were expected to be approximately 3.5% of revenue. The company announced a $0.72-per-share first-quarter 2023 dividend, subject to board action for future dividends.
- Legal and operational exposures: A jury awarded Ravgen $272 million in a patent case and found willful infringement; Ravgen sought enhanced damages of up to $817 million plus fees, and Labcorp said it would appeal. Other disclosed risks include AMCA-related litigation and inquiries, reimbursement pressure, cybersecurity, clinical-trial contract estimates, foreign currency and the planned spin-off.
Important facts for investors to verify
- Whether Base Business growth and Dx margin performance can offset the continued normalization of COVID-19 testing.
- The outcome and financial exposure of the Ravgen appeal, including any enhanced-damages ruling, and the status of AMCA-related matters.
- Whether the CDCS/Fortrea spin-off closes on the expected timeline and tax-free terms, and how separation costs and transitional arrangements affect both companies.
- The supplier replacement plan and updated outlook for DD early development, including the risk of further impairment.
- The actual timing and size of PAMA-related reimbursement reductions beginning in 2024, and the effect on Dx revenue and margins.
- Cash conversion, patient and payer collections, acquisition integration, and the capacity to fund dividends, repurchases, capital spending and debt obligations.