Labcorp Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results. Unless stated otherwise, financial amounts are in millions of dollars.
Business context
Labcorp provides diagnostic laboratory and biopharma laboratory services. On June 30, 2023, it completed the spin-off of Fortrea, its clinical development business. Fortrea’s current and historical results are reported as discontinued operations; the continuing segments are Diagnostics Laboratories (Dx) and Biopharma Laboratory Services (BLS). Q2 revenue mix was approximately 77% Dx and 23% BLS.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3,033.7 | $2,923.0 | $6,071.5 | $6,067.5 |
| Gross profit | $842.2 | $942.5 | $1,692.3 | $2,024.6 |
| Operating income | $266.3 | $428.8 | $596.1 | $1,034.0 |
| Continuing-operations earnings | $155.2 | $268.0 | $363.6 | $689.1 |
| Net earnings, including discontinued operations | $189.1 | $358.9 | $402.4 | $851.0 |
| Diluted EPS, continuing operations | $1.74 | $2.89 | $4.08 | $7.38 |
Margins: Q2 gross margin was 27.8% versus 32.2% a year earlier; operating margin was 8.8% versus 14.7%. For the first half, gross margin was 27.9% versus 33.4%, and operating margin was 9.8% versus 17.0%.
Cash flow and liquidity: First-half continuing operating cash flow was $347.2, down from $904.6; continuing investing cash use was $328.6 and continuing financing cash use was $124.7. Capital expenditures were $181.5. Cash and equivalents were $1,930.6 at June 30, up from $320.6 at December 31, 2022, largely reflecting the Fortrea separation-related cash distribution. Labcorp reported $1,000 of available revolver capacity and said it expects cash, borrowing capacity and operating cash generation to cover requirements over the next 12 months.
Debt: Short-term borrowings and current debt were $301.4 and long-term debt was $5,042.4, for approximately $5,343.8 in total carrying value. The $1,000 revolving facility had no balance outstanding at quarter-end; Labcorp was in covenant compliance and expected to remain compliant over the next 12 months.
Changes versus prior periods
- Q2 revenue rose 3.8%; first-half revenue was nearly flat, up 0.1%. Q2 organic revenue grew 2.0%, while first-half organic revenue declined 1.3%, chiefly due to lower COVID-19 testing. Base Business organic revenue increased 9.8% in Q2 and 9.9% in the first half.
- Q2 operating income fell 37.9%; first-half operating income fell 42.4%. Cost of revenues rose faster than sales, and SG&A increased 17.0% in Q2 and 12.7% in the first half.
- Dx Q2 revenue increased 3.8%, but segment operating income declined 20.5%; BLS revenue increased 3.1% and operating income increased 12.5%. For the first half, Dx operating income fell 29.0% and BLS operating income fell 5.7%.
- Continuing operating cash flow declined substantially year over year, which management attributed primarily to lower cash earnings. Interest expense rose 17.7% in Q2 and 19.1% in the first half, mainly from higher variable rates and borrowings.
Outlook, commentary and notable items
- No formal earnings or revenue guidance is stated in the provided filing text. Management said it remains on track for approximately $350 million of net savings from its three-year LaunchPad initiative by the end of 2024.
- Management attributed Dx pressure to lower COVID-19 testing and higher personnel costs; Base Business recovery and LaunchPad savings provided offsets. BLS results were affected by non-human-primate-related constraints in Early Development. BLS backlog expected to convert to revenue in the next 12 months was $2,460, or 30.9%.
- Fortrea distributed approximately $1.6 billion to Labcorp in connection with the spin-off. Labcorp stated its intention to use approximately $1.0 billion for an accelerated share repurchase and $300 million to repay debt maturing in 2023, with remaining proceeds intended for shareholder returns. No common shares were repurchased in the first half; $1,531.5 remained authorized for repurchases at June 30.
- Q2 included $15.8 of restructuring and other charges, $2.8 of impairment charges, and increased corporate costs, primarily related to spin-off costs and personnel-related items. First-half impairment charges were $5.0.
- A jury awarded $272 million in a patent case brought by Ravgen; the court subsequently awarded $100 million in enhanced damages. Labcorp disputes the verdict and is appealing. The filing does not provide a clear value for any specific reserve related to this matter.
- Risks highlighted include the Fortrea spin-off’s execution and tax-free status, healthcare reimbursement and regulatory changes, litigation, cybersecurity and privacy matters, and access to uninsured cash deposits at financial institutions. The company also disclosed ongoing government inquiries and other litigation; outcomes and potential losses may be uncertain.
- Subsequent events include an agreement to acquire Legacy Health outreach laboratory assets, completion of an acquisition of certain Enzo Biochem assets, and an agreement involving Tufts Medicine outreach laboratory operations. The stated combined purchase price for these transactions was approximately $385 million.
Investor verification priorities
- Confirm post-spin operating trends and comparable-period reporting, including the separation of Fortrea results from continuing operations.
- Track whether the planned $1.0 billion accelerated repurchase and $300 million debt repayment were completed, and assess remaining cash and debt after these actions.
- Monitor recovery in Base Business volumes and margins against continuing declines in COVID-19 testing, and the effect of Ascension and personnel costs.
- Assess BLS operating performance and whether non-human-primate constraints ease; compare backlog conversion with reported revenue.
- Follow the Ravgen appeal and other significant legal or regulatory matters, including potential financial exposure and any disclosed reserve changes.
- Evaluate whether the Fortrea separation qualifies for tax-free treatment and whether transition arrangements or other separation costs affect Labcorp’s results.