Labcorp Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2022; comparisons are with the same periods in 2021. Dollar amounts are in millions unless stated otherwise.
Business context
Labcorp operates Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD). Each contributed approximately 61% and 39% of revenue, respectively, in both the quarter and nine-month period. The company announced plans to spin off its Clinical Development business, targeting completion by mid-2023, subject to customary approvals and conditions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3,606.1 | $4,062.6 | $11,202.6 | $12,064.8 |
| Gross profit | $1,059.7 | $1,385.5 | $3,415.3 | $4,249.3 |
| Operating income | $469.4 | $766.9 | $1,683.2 | $2,528.9 |
| Net earnings attributable to Labcorp | $352.8 | $587.3 | $1,203.0 | $1,824.3 |
| Diluted EPS | $3.90 | $6.05 | $13.02 | $18.63 |
Q3 revenue declined 11.2%; nine-month revenue declined 7.1%. Management attributed the nine-month decline to lower organic revenue (6.9%) and unfavorable foreign currency translation (0.9%), partly offset by acquisitions net of divestitures (0.6%). Organic Base Business revenue grew 1.1% in Q3 and 2.0% year to date, while COVID-19 testing revenue fell 11.8% and 8.9%, respectively.
Q3 gross margin was approximately 29.4% versus 34.1%; operating margin was 13.0% versus 18.9%; and net margin was 9.8% versus 14.5%. For the nine months, gross margin was 30.5% versus 35.2%, operating margin 15.0% versus 21.0%, and net margin 10.7% versus 15.1%. Lower COVID-19 testing revenue, personnel costs and inflation pressured margins; organic Base Business growth and LaunchPad savings provided partial offsets.
- Segments: Q3 Dx revenue fell 15.7% to $2,207.6, and operating income fell 47.6% to $378.7; its margin decreased to 17.2% from 27.6%. DD revenue fell 3.7% to $1,405.8, while operating income rose 10.7% to $156.7, helped by lower amortization and savings. Nine-month Dx revenue decreased 10.6%, while DD revenue decreased 1.7%.
- Cash flow: Nine-month operating cash flow was $1,302.3, down from $2,412.1, reflecting lower cash earnings and unfavorable working capital, including a $517.2 decrease in accrued expenses. Capital expenditures were $364.0. Investing cash outflow was $1,378.9, including $1,013.6 of business acquisitions; financing cash outflow was $949.6.
- Liquidity and debt: Cash was $409.9 at September 30, down from $1,472.7 at year-end 2021. Long-term debt was $5,334.3, with $1.7 of current debt; the $1,000 revolving facility was undrawn. The company reported covenant compliance and expected to remain compliant for the next 12 months.
- Capital returns: The company repurchased $800.0 of shares in the first nine months and paid $131.6 in dividends. Remaining repurchase authorization was $831.5. A $0.72-per-share fourth-quarter dividend was declared after quarter-end.
Changes, outlook and notable items
- Q3 and year-to-date revenue and earnings fell substantially year over year, primarily as pandemic-related testing revenue receded. Base Business revenue nevertheless grew.
- Nine-month restructuring and other charges increased to $72.1 from $35.3, mainly severance, facility closures, lease terminations and integration costs. The company recorded $1.2 of impairment charges related to assets in Ukraine and Russia.
- Other, net was a $27.8 expense for the nine months, versus $51.5 of income a year earlier, primarily reflecting investment losses of $19.4 compared with gains of $67.4. Q3 interest expense rose 9.9% year over year, although nine-month interest expense decreased 22.4%.
- Management said it remained on track to deliver approximately $350 of net savings from its three-year LaunchPad initiative by the end of 2024. The filing gives no clear consolidated revenue or earnings guidance.
- The planned Clinical Development spin-off is intended to be tax-free and structured as a distribution to shareholders. Completion is not assured; approvals, tax assurances, SEC filings and execution remain conditions and risks.
Risks and contingencies
- A jury found Labcorp willfully infringed a Ravgen patent and awarded $272. The plaintiff sought enhanced damages of up to $817 plus fees and costs; Labcorp disputed the verdict and planned to appeal. The company also challenged patent validity.
- The filing describes numerous other legal, regulatory, billing, employment, privacy and intellectual-property matters. Labcorp stated it could not estimate reasonably probable losses for certain proceedings; outcomes could be adverse.
- Other disclosed risks include reimbursement and payer changes, regulation of laboratory-developed tests, foreign-exchange exposure, inflation and labor costs, supply constraints, cybersecurity, acquisition integration and the planned spin-off. Foreign currency translation reduced nine-month comprehensive earnings, with translation adjustments of $(572.2).
- Disclosure controls were assessed as effective as of September 30, 2022; the filing reported no material quarter-period change in internal control over financial reporting.
Important facts for investors to verify
- Whether Base Business growth can offset continued declines in COVID-19 testing and pressure from inflation, staffing costs and foreign exchange.
- Whether operating cash flow and working capital recover, given the sharp year-over-year cash-flow decline and lower cash balance.
- Integration and returns from 2022 acquisitions, which used $1,013.6 in cash and added substantial goodwill and intangibles.
- Developments in the Ravgen appeal and other material legal matters, including potential losses not currently estimable.
- Timing, tax treatment, costs and execution of the proposed mid-2023 Clinical Development spin-off, as well as progress toward the $350 LaunchPad savings target.