Labcorp Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Amounts are in millions of dollars, except per-share data. Labcorp provides clinical laboratory services through LabCorp Diagnostics (LCD) and drug development services through Covance Drug Development (CDD). COVID-19 materially affected both businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2,768.8 | $2,881.7 | $5,592.6 | $5,672.9 |
| Gross profit | $760.5 | $824.8 | $1,488.5 | $1,614.5 |
| Operating income (loss) | $297.7 | $335.7 | $105.1 | $653.9 |
| Net earnings (loss) attributable to Labcorp | $231.6 | $190.4 | $(85.6) | $376.0 |
| Diluted earnings (loss) per share | $2.37 | $1.93 | $(0.88) | $3.79 |
- Q2 revenue fell 3.9% year over year; reported gross margin was approximately 27.5% versus 28.6%, and operating margin approximately 10.8% versus 11.6%.
- Six-month revenue declined 1.4%. Gross margin was approximately 26.6% versus 28.5%; operating margin was approximately 1.9% versus 11.5%.
- Q2 operating income fell 11.3%, although attributable net earnings rose to $231.6. The quarter included $55.9 of CARES Act provider-relief funding in other non-operating income.
- Six-month results included $437.4 of goodwill and other asset impairment charges, primarily $426.4 in CDD. The impairment drove the reported six-month operating-income decline and contributed to the net loss. The filing also reports $25.4 of investment write-downs, $23.3 of additional implicit price concessions, and $16.0 of credit-loss expense.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $574.5, compared with $419.3 in 2019; capital expenditures were $205.1 versus $179.4. The filing does not provide standalone Q2 cash flow.
- Investing cash use was $230.0, compared with $891.3 in 2019, mainly reflecting lower acquisition spending. Financing cash use was $119.7, versus $311.7 of cash provided in 2019. Cash increased by $219.5 to $557.0.
- At June 30, cash was $557.0 and available revolving-credit capacity was $997.0. Reported current and long-term debt totaled approximately $6,207.4, including debt issuance costs and current maturities; the comparable December 2019 total was approximately $6,205.0.
- Labcorp had $790.8 of short-term borrowings and current debt, including $414.6 of 4.625% notes due in November 2020 and $375.0 of term-loan principal. It planned to redeem $412.2 of notes at par on August 17 using cash and revolver borrowings.
- May amendments temporarily raised the maximum leverage covenant to 5.0x through December 2020, then 4.5x for the quarter ending March 2021, before reverting to 4.0x. The company reported covenant compliance at June 30 and expected to remain compliant for the next 12 months. If leverage exceeds 4.5x, share repurchases are restricted and borrowing costs rise.
Changes, outlook and key risks
- COVID-19 reduced six-month organic Base Business revenue by 11.7%, partly offset by 8.1% from COVID-19-related business. In Q2, Base Business declined 20.9%, partly offset by COVID-19 business of 15.4%. LCD’s routine testing volumes improved from the April trough; June daily Base Business volume remained about 17% below the prior-year level, while COVID-19 testing represented about 23% of total volume.
- CDD faced delayed clinical trials, reduced site access and supply interruptions. Management expected the pandemic’s impact on CDD to ease through the year, while continuing vaccine and treatment-development work. The company reported more than 9.2 million molecular and 2.2 million antibody tests performed by July 30, with stated daily capacity of 180,000 and 300,000, respectively.
- Management said its outlook had improved, but emphasized that the pandemic and related restrictions and customer behavior left a wide range of possible 2020 results. It expected positive operating cash flow under current assumptions; a more severe or prolonged impact could materially reduce cash flow. No formal numerical full-year revenue or earnings guidance is provided in the filing.
- Labcorp remained on track for approximately $200 of LCD LaunchPad savings by the end of 2021 and $150 of CDD savings by the end of 2020. It was resuming regular work schedules and merit adjustments and planned to reinstate U.S. 401(k) contributions retroactively.
- Additional goodwill impairment remains possible: one CDD reporting unit had less than 10% fair-value headroom, and a 1% higher discount rate would reduce that headroom to about 2%. For an LCD unit, a 1% higher discount rate could result in an approximately $40 impairment.
- Material uncertainties include pandemic-related demand, testing supplies and capacity, reimbursement and payer policies, cash collections, leverage-covenant compliance, and access to financing. Legal matters include AMCA-related patient-data litigation and investigations, False Claims Act and billing allegations, and other class actions. The company said it could not estimate a reasonably probable loss range for certain matters; it did not expect currently known proceedings to materially affect financial condition, though period results could be affected.
- Subsequent events: in July, Labcorp acquired two businesses for approximately $200 cash. It also announced the planned August redemption of the $412.2 notes. The filing notes a planned three-month no-charge antibody-testing program to support blood-plasma donations; its financial impact was still being evaluated.
Most important facts for investors to verify
- Whether routine diagnostic volumes recovered further and COVID-19 testing revenue, capacity, supply availability and turnaround times developed as expected.
- Whether CDD clinical-trial activity and supply chains normalized, and whether additional goodwill or other asset impairments were required.
- Actual cash generation, working-capital needs and the effects of CARES Act funding and tax deferrals on reported operating cash flow.
- Completion and funding of the August 2020 note redemption, subsequent debt levels, and compliance with amended leverage covenants.
- Financial and operational effects of the July acquisitions, the antibody-testing program, and any material developments in legal or regulatory proceedings.