Labcorp Holdings Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Labcorp operates Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD). Unless otherwise noted, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $4,161.5 | $2,823.8 |
| Gross profit / gross margin | $1,599.0 / 38.4% | $728.0 / 25.8% |
| Operating income (loss) | $1,057.9 | $(192.6) |
| Net earnings (loss) attributable to Labcorp | $769.6 | $(317.2) |
| Diluted EPS | $7.82 | $(3.27) |
| Operating cash flow | $1,157.6 | $203.8 |
| Capital expenditures | $95.4 | $106.6 |
Revenue grew 47.4%, comprising 45.1% organic growth, 0.9% from acquisitions and 1.4% favorable foreign currency translation. Organic growth included a 32.9% contribution from COVID-19 testing and 12.2% growth in the base business. Dx revenue rose 62.0% to $2,757.8; DD revenue rose 25.7% to $1,438.2. U.S. revenue was $3,472.5, or 83% of total revenue.
Dx operating income was $949.1, with a 34.4% margin, versus $205.2 and 12.1%. DD operating income was $156.4, with a 10.9% margin, compared with a $338.7 loss and negative 29.6% margin. The prior-year DD result included substantial goodwill and other asset impairments.
Cash and equivalents were $1,890.8 at quarter-end, up from $1,320.8 at year-end 2020. Total debt, including current maturities, was $5,422.3; cash less debt implies net debt of approximately $3,531.5. The company repaid its $375.0 term loan during the quarter. It reported $1,000.0 available under its revolving credit facility and compliance with its covenants. The current portion includes $500.0 of 3.20% senior notes due 2022.
Material changes and notable items
- Cost of revenues fell to 61.6% of revenue from 74.2%, reflecting COVID-19 testing, base-business growth and acquisitions, partly offset by higher personnel costs. SG&A declined to 10.3% of revenue from 14.0%, primarily from operating leverage.
- No impairment charges were recorded in Q1 2021; Q1 2020 included $437.4 of goodwill and other asset impairments, including $418.7 for DD and $3.7 for Dx goodwill.
- Amortization rose to $92.1 from $62.3, including $29.2 of accelerated amortization following the decision to retire the Covance trade name by December 2021.
- Operating cash flow increased by $953.8 year over year, which management attributed primarily to higher cash earnings and lower working capital. Investing cash use was $132.4, including $34.1 for an acquisition; financing cash use was $450.1, including the term-loan repayment and $68.5 of share repurchases.
- At March 31, the company had $731.5 remaining under its share-repurchase authorization. It repurchased 0.3 million shares in the quarter at an average price of $218.27.
Outlook, risks and contingencies
- Management said Dx remained on track to deliver approximately $200.0 in net savings from its three-year LaunchPad initiative by year-end 2021. The company continues to pursue DD LaunchPad programs; the filing provides no formal revenue or earnings guidance.
- In March 2021, the board and management began a review of the company’s structure and capital-allocation strategy, with Goldman Sachs as financial adviser. There is no assurance of an outcome, timing or value-enhancing changes; uncertainty could disrupt operations, retention, business relationships, financing or stock-price stability.
- Management cited ongoing COVID-19-related uncertainty and risks including reimbursement and payer changes, regulation and compliance, competition, customer demand, acquisitions, litigation, cybersecurity, foreign exchange and access to personnel and supplies.
- The company disclosed multiple legal proceedings and investigations, including healthcare billing and False Claims Act matters, data-security litigation related to the AMCA incident, and employment and other class actions. It stated that it could not estimate reasonably probable losses for certain proceedings; it did not believe currently available information indicated a material adverse effect on financial condition, though outcomes could affect results or cash flows in a particular period.
- On April 30, 2021, the company amended and restated its revolving credit facility, retaining $1,000.0 of commitments with an option to increase by up to $500.0; no borrowings or letters of credit were outstanding on that date. On May 3, it agreed to acquire select assets and intellectual property from Myriad Genetics’ autoimmune business unit, including the Vectra RA assay, for $150.0.
Key facts for investors to verify
- How much of the unusually strong revenue and margin performance is attributable to COVID-19 testing versus durable base-business growth, and how results evolve as testing demand changes.
- Whether working-capital improvements and elevated operating cash flow are repeatable, and how cash is allocated among debt, repurchases and acquisitions.
- Execution and realized savings from LaunchPad, alongside the effect of accelerated trade-name amortization on reported earnings.
- Developments and potential financial exposure from the structure and capital-allocation review, disclosed legal matters and the AMCA-related litigation.
- Completion, integration and expected returns from the announced Myriad asset acquisition, as well as ongoing covenant compliance and debt maturities.