Business context and reporting period
Laboratory Corporation of America Holdings (Labcorp) filed this unaudited Form 10-Q for the three months ended March 31, 2020. Its two segments are LabCorp Diagnostics (LCD) and Covance Drug Development (CDD), contributing approximately 60% and 40% of quarterly revenue, respectively. The period was materially affected by the COVID-19 pandemic, particularly from mid-March.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $2,823.8 million | $2,791.2 million |
| Gross profit / margin | $728.0 million / 25.8% | $789.7 million / 28.3% |
| Operating income (loss) | $(192.6) million | $318.2 million |
| Net income (loss) attributable to Labcorp | $(317.2) million | $185.6 million |
| Diluted EPS | $(3.27) | $1.86 |
| Operating cash flow | $203.8 million | $165.8 million |
| Capital expenditures | $106.6 million | $94.2 million |
Revenue rose 1.2%, primarily reflecting acquisitions (+3.4%), partly offset by divestitures (-0.5%) and lower organic growth (-1.8%). Cost of revenue increased 4.7%; gross margin fell 2.5 percentage points. The operating loss included $437.4 million of goodwill and other asset impairments and $25.4 million of restructuring and other charges. COVID-19 also drove $20.2 million of investment write-downs and $17.0 million of additional implicit price concessions.
LCD revenue decreased 1.2% to $1,702.0 million; segment operating income fell to $188.4 million from $268.3 million, with margin down to 11.1% from 15.6%. CDD revenue increased 6.4% to $1,143.8 million, largely due to acquisitions, but the segment recorded an operating loss of $338.7 million versus income of $88.0 million, including $426.4 million of impairment charges. Company operating margin was negative 6.8%, versus 11.4% in Q1 2019.
Cash, debt and liquidity
Cash and cash equivalents were $323.6 million at March 31, 2020, down $13.9 million from year-end. Operating cash flow improved by $38.0 million year over year, which management attributed mainly to favorable working capital despite lower cash earnings. Net cash used in investing and financing was $106.6 million and $102.8 million, respectively.
Current and long-term debt totaled approximately $6.21 billion at carrying value; cash-adjusted debt was approximately $5.88 billion. The company had $923.7 million of available revolving-credit capacity and reported compliance with its debt covenants at quarter-end. Approximately $412.2 million of senior notes were due in Q4 2020. In May, lenders amended the credit facilities, temporarily raising the maximum leverage covenant to 5.0x through 2020 and 4.5x for the quarter ending March 31, 2021; specified conditions above 4.5x restrict share repurchases and increase borrowing costs.
Outlook, commentary and risks
- Management said daily LCD testing volume had fallen 50%–55% versus normal levels by quarter-end, with routine testing disproportionately affected. It expected volumes to recover through the rest of 2020, but emphasized substantial uncertainty.
- CDD faced study-site closures, delayed patient recruitment and delayed trial starts. Management expected deferrals to continue at least through the first half of 2020, potentially longer.
- Labcorp reported capacity for 55,000–65,000 COVID-19 molecular tests per day. Subsequent to quarter-end, it announced self-collection kits and expanded antibody testing; stated antibody capacity was over 50,000 daily, with a target of 200,000 by mid-May subject to supplies.
- To protect liquidity, the company suspended share repurchases, delayed some capital spending, tightened acquisition requirements, adjusted staffing and suspended U.S. 401(k) contributions and 2020 merit increases. It received approximately $56 million in HHS pandemic-related payments in April; accounting treatment was still under evaluation.
- Management stated it expected positive operating cash flow and sufficient liquidity to meet obligations, but warned that a prolonged or more severe pandemic could materially reduce cash flows and affect operations, collections, supply availability, and covenant compliance.
- Goodwill impairment testing showed limited valuation headroom in other reporting units. Management noted a 1% discount-rate increase could cause an approximately $40 million impairment in one LCD unit; a 1% change could reduce headroom in a CDD unit to about 2%. Further impairment is possible if forecasts worsen.
- Other material exposures include healthcare reimbursement and regulatory risks, litigation and investigations, and class actions related to the AMCA third-party patient-data incident. The filing states that loss ranges for certain legal matters could not be estimated; management did not believe currently available information indicated a material adverse effect on financial condition.
Most important facts for investors to verify
- Subsequent quarterly results: recovery in routine testing, COVID-19 testing volumes and economics, and the effect of price concessions and customer collections.
- CDD trial activity and whether study delays or cancellations persist beyond the first half of 2020.
- Operating cash generation, available revolver capacity, the Q4 2020 note repayment or refinancing, and compliance with amended leverage covenants.
- Whether further goodwill, intangible-asset, investment or receivable impairments are recorded as pandemic forecasts evolve.
- Implementation and financial effects of liquidity measures, including suspended buybacks and retirement-plan contributions, and the accounting for the $56 million HHS payment.
- Developments in the AMCA-related litigation and investigations, and any material changes to other legal contingencies.