Labcorp Holdings — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Labcorp operates Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD). Figures are unaudited and in millions of dollars, except per-share data.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3,840.7 | $2,768.8 | $8,002.2 | $5,592.6 |
| Operating income | $704.1 | $297.7 | $1,762.0 | $105.1 |
| Net earnings attributable to Labcorp | $467.4 | $231.6 | $1,237.0 | $(85.6) |
| Diluted EPS | $4.76 | $2.37 | $12.58 | $(0.88) |
- Q2 revenue rose 38.7%; first-half revenue rose 43.1%. Q2 gross margin was 32.9% versus 27.5% a year earlier; operating margin was 18.3% versus 10.8%.
- First-half operating cash flow was $1,644.8, compared with $574.5; capital expenditures were $192.6. Cash and equivalents were $1,963.2 at June 30, up from $1,320.8 at year-end.
- Debt totaled approximately $5,424.4 at June 30, comprising $1.8 current and $5,422.6 long-term, compared with $5,795.7 at December 31. Cash less debt was approximately $3,461.2. The $1,000 revolving facility was undrawn; the company reported covenant compliance and expected to remain compliant for 12 months.
- First-half cash used in investing was $222.8 and cash used in financing was $775.5. The company repurchased $368.5 of shares in the first half; $431.5 remained authorized at June 30.
Changes versus comparable periods
- Q2 Dx revenue increased 39.7% to $2,365.5; DD revenue increased 36.7% to $1,495.2. Segment operating margins were 25.5% for Dx and 9.9% for DD.
- Management attributed first-half revenue growth to organic growth of 40.3%, acquisitions of 1.1%, and favorable currency translation of 1.7%. Organic growth included a 23.8% contribution from COVID-19 testing and 16.6% growth in the base business. Q2 COVID-19 testing revenue was $444.0, flat year over year.
- First-half operating income increased substantially from 2020, when Labcorp recorded $437.4 of goodwill and other asset impairment charges. First-half DD operating income was $303.7, versus a $273.2 operating loss in 2020.
- First-half interest expense increased to $126.8 from $107.7. SG&A as a share of revenue fell to 11.1% from 14.2%, reflecting revenue leverage.
Outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance is provided in the supplied filing text. Management said it remained on track to deliver approximately $200 of net savings from the three-year Dx LaunchPad initiative by year-end 2021, anticipated accelerating acquisitions in the second half, and expected to accelerate share repurchases.
- The board’s review of corporate structure and capital allocation, announced in March 2021, was ongoing; Labcorp said it expected to provide an update in Q4, without assurance of the outcome or timing. The filing identifies uncertainty around the review as a risk to business continuity, financing, personnel, and share-price stability.
- In May, Labcorp issued $1,000 of notes—$500 at 1.55% due 2026 and $500 at 2.70% due 2031—and used the proceeds with cash to redeem $1,000 of notes due in 2022. It also entered into a $500 fixed-to-variable interest-rate swap tied to three-month LIBOR plus 1.0706%.
- Unusual comparability items include $28.0 of accelerated Q2 amortization ($57.2 in the first half) from the Covance trade-name rebranding. Other, net included first-half investment gains of $30.5 and a $5.0 loss on sale of a business. The 2020 comparison included $55.9 of provider-relief funding, returned to the government in Q4 2020.
- Key exposures include COVID-19-related demand normalization, healthcare reimbursement and regulation, competition, cybersecurity and privacy, and litigation. The filing describes multiple legal matters, including a Texas Medicaid qui tam action in which the state intervened, other billing and referral-related claims, and class actions arising from the AMCA patient-data incident. Labcorp says it will vigorously defend the matters; it could not estimate reasonably probable losses for certain proceedings.
- First-half cash taxes paid, net of refunds, were $591.6 versus $15.1 in 2020. The filing attributes the year-over-year tax-rate comparison partly to non-deductible or valuation-allowanced 2020 impairments and a UK deferred-tax revaluation in 2021.
Important facts for investors to verify
- How much revenue and margin growth persists as COVID-19 testing demand and base-business activity normalize.
- Progress and final outcome of the structure and capital-allocation review, including implications for buybacks, acquisitions, and leverage.
- Execution of the $200 LaunchPad savings target and the timing and returns of anticipated acquisitions.
- Developments in Medicaid/billing, AMCA-related privacy litigation, and other contingencies, including any changes to reserves or potential financial exposure.