Labcorp Holdings Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Amounts are in millions of dollars, except per-share data. Labcorp operates Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD).
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3,696.9 | $3,840.7 | $7,596.5 | $8,002.2 |
| Gross profit | $1,122.7 | $1,264.8 | $2,355.6 | $2,863.8 |
| Operating income | $525.9 | $704.1 | $1,213.8 | $1,762.0 |
| Net earnings attributable to Labcorp | $358.6 | $467.4 | $850.2 | $1,237.0 |
| Diluted EPS | $3.87 | $4.76 | $9.11 | $12.58 |
- Revenue declined 3.7% in Q2 and 5.1% for the first half. Management attributed the first-half decline to organic revenue lower by 4.9% and unfavorable currency translation of 0.7%, partly offset by acquisitions net of divestitures of 0.6%.
- Q2 gross margin was 30.4% versus 32.9% a year earlier; operating margin was 14.2% versus 18.3%. First-half gross and operating margins were 31.0% and 16.0%, compared with 35.8% and 22.0%, respectively.
- Q2 Dx revenue fell 4.7% to $2,255.4 and operating income fell 24.5% to $455.5; its operating margin decreased to 20.2% from 25.5%. DD revenue fell 2.9% to $1,451.9 while operating income rose 2.4% to $150.9; its margin increased to 10.4% from 9.9%.
- For the first half, COVID-19 testing revenue declined 7.4% overall, while organic Base Business revenue grew 2.5%. Q2 organic revenue declined 3.4%, including a 4.8% fall in COVID-19 testing, partly offset by 1.4% Base Business growth.
- Operating cash flow was $928.5 for the first half, down from $1,644.8. Capital expenditures were $260.5; cash used in investing was $815.6, including $554.9 for acquisitions. Cash used in financing was $497.4, including $400.0 of share repurchases and $66.7 of dividends.
Balance sheet and liquidity
- At June 30, 2022, cash and cash equivalents were $1,068.8; total assets were $20,403.1 and total liabilities were $9,982.4.
- Long-term debt was $5,360.3, with $1.6 of short-term borrowings and current debt. The company had no balance outstanding on its $1,000.0 revolving credit facility, available through 2026; it reported covenant compliance and expected to remain compliant for the next 12 months.
- Cash declined $403.9 from year-end 2021. Management attributed lower operating cash flow principally to lower cash earnings and unfavorable working-capital requirements.
- Labcorp repurchased $400.0 of common stock in Q2 and paid a quarterly dividend of $0.72 per share. Board authorization for additional repurchases was $1,231.5 at June 30.
Material changes, outlook and risks
- Management cited lower COVID-19 testing, personnel costs and inflation as pressures on margins. LaunchPad savings and Base Business growth partly offset these pressures. Labcorp remained on track to deliver approximately $350.0 of net savings from the three-year LaunchPad initiative by the end of 2024.
- Q2 restructuring and other charges were $44.4, primarily severance and facility closures, lease terminations and integration activity. First-half charges were $57.0. The company also recorded $1.2 of impairment charges related to assets in Ukraine and Russia.
- First-half acquisitions were made primarily to expand liquid biopsy capabilities and diagnostic footprint. They added approximately $332.8 of goodwill and $325.3 of identifiable intangible assets; purchase-price allocations remained preliminary.
- Other, net was a loss of $10.4 in Q2 and $20.5 for the first half, reflecting investment and foreign-currency transaction losses. Foreign-currency translation reduced first-half comprehensive earnings by $315.7.
- On July 28, 2022, Labcorp announced plans to pursue a tax-intended spin-off of its Clinical Development business, targeting completion in the second half of 2023. Completion depends on customary conditions, including board approval, tax assurances and SEC filings; there is no assurance the transaction will close on the stated timeline or at all. The filing provides no specific revenue or earnings guidance.
- Risks include healthcare reimbursement and regulatory changes, litigation and government inquiries, cybersecurity and privacy exposure, labor and inflationary costs, foreign-currency effects, and execution and separation risks associated with the proposed spin-off. The company disclosed multiple pending legal matters and stated that outcomes could affect results or cash flows in a particular period, although it did not expect the described proceedings to materially adversely affect financial condition based on information then available.
Important facts for investors to verify
- Whether Base Business growth can offset continued normalization in COVID-19 testing and sustain margins amid inflation and personnel costs.
- Cash conversion and working-capital trends, especially unbilled services and accrued expenses, alongside acquisition and capital-spending requirements.
- Debt, share repurchases and dividends relative to operating cash flow and the company’s liquidity needs.
- Progress, costs, tax treatment, regulatory steps and expected separation arrangements for the Clinical Development spin-off.
- Updates on material litigation, government inquiries and diagnostic regulation, including potential LDT oversight changes.