Labcorp Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. Dollar amounts are in millions unless otherwise noted.
Business context
Labcorp provides diagnostic laboratory and biopharma laboratory services through Diagnostics Laboratories (Dx) and Biopharma Laboratory Services (BLS). On June 30, 2023, Labcorp spun off Fortrea Holdings Inc.; Fortrea’s results are presented as discontinued operations, and comparative segment results were recast. In Q3 2023, Dx and BLS represented approximately 77% and 23% of revenue, respectively.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,056.8 | $2,866.8 | $9,128.3 | $8,934.2 |
| Gross profit | $851.2 | $886.2 | $2,543.5 | $2,910.8 |
| Operating income | $252.3 | $374.0 | $848.4 | $1,408.0 |
| Earnings from continuing operations | $183.6 | $277.3 | $547.2 | $966.4 |
| Net earnings attributable to Labcorp | $183.3 | $352.8 | $585.1 | $1,203.0 |
| Diluted EPS from continuing operations | $2.11 | $3.06 | $6.19 | $10.45 |
Revenue rose 6.6% in Q3 and 2.2% for the nine-month period. Q3 organic revenue increased 3.7%, with 10.1% growth in Base Business offset by a 6.3% decline in COVID-19 testing. Nine-month organic revenue increased 0.3%, as 10.0% Base Business growth was largely offset by a 9.6% decline in COVID-19 testing. Prior-year reported net earnings include Fortrea discontinued-operation earnings of $75.9 in Q3 and $237.8 for the nine-month period, so total net earnings comparisons are not like-for-like.
Q3 cost of revenues was 72.2% of revenue versus 69.1% a year earlier; nine-month cost of revenues was 72.1% versus 67.4%. The resulting gross margins were 27.8% and 30.9% in Q3, and 27.9% and 32.6% for the nine-month periods, respectively. Q3 operating margin was 8.3% versus 13.0%.
- Segments: Q3 Dx revenue increased 6.2% to $2,344.7; BLS revenue increased 7.9% to $719.1. Dx operating income declined 12.2% to $386.3, with margin down 3.4 percentage points to 16.5%. BLS operating income increased 3.8% to $109.0, while margin declined 0.6 points to 15.2%.
- Cash flow: Continuing operating cash flow was $622.7 for nine months, down from $1,157.6. Continuing investing cash use was $816.2, including $286.4 of capital expenditures and $516.7 for acquisitions. Continuing financing cash use was $1,112.5, including $1,009.0 of share repurchases and $192.9 of dividends paid.
- Liquidity and debt: Cash and equivalents were $727.9 at September 30, 2023, versus $320.6 at December 31, 2022. Total reported borrowings were approximately $5,418.6, comprising $991.0 short-term/current debt and $4,427.6 long-term debt. The company reported $910.0 of available revolving-credit borrowings and compliance with its covenants.
- Capital return: Labcorp paid $1,000.0 under accelerated share repurchase agreements in August and initially received approximately 3.7 million shares; final settlement was expected by the end of December 2023. A $0.72-per-share dividend, approximately $62.1 in aggregate, was announced after quarter-end.
Material changes, outlook and risks
Profitability weakened despite revenue growth, chiefly reflecting lower COVID-19 testing revenue, higher personnel and corporate costs, and the mix effect of the Ascension lab management agreement. Q3 general corporate and unallocated expenses increased to $169.6 from $111.8, primarily due to spin-off costs, personnel costs, bonus allocation and research and development costs. The company recorded $10.2 of Q3 impairment charges, primarily for a license related to a joint-venture divestiture; nine-month impairment charges were $15.2. Interest expense rose 8.7% in Q3 and 15.4% for the nine-month period, mainly due to higher variable rates and borrowings.
Management said it remains on track to deliver approximately $350.0 of net savings from its three-year LaunchPad initiative by the end of 2024. BLS backlog expected to convert to revenue within 12 months was $2,410.0. The filing provides no specific full-year revenue or earnings guidance. Management believes cash, borrowing capacity and operating cash generation will meet expected needs over the next 12 months and beyond.
Key risks include reimbursement and regulatory changes, privacy and cybersecurity exposure, acquisition integration, foreign exchange and interest-rate movements, and risks relating to the Fortrea separation, including tax-free treatment and transition arrangements. Labcorp is appealing a patent-infringement verdict in the Ravgen matter: a jury awarded $272.0 and the court subsequently awarded $100.0 in enhanced damages; the company disputes the verdict. Other disclosed matters include governmental inquiries and litigation, including claims related to patient data and billing. Management states it cannot estimate a reasonably probable loss range for certain proceedings and does not believe currently identified matters are expected to have a material adverse effect, based on information available.
After quarter-end, Labcorp announced an agreement to acquire Baystate Health’s outreach laboratory business and select operating assets for $151.1 in cash. The filing also identifies the risk that deposits above insured limits at financial institutions could become difficult to access in the event of an institution failure.
Important facts for investors to verify
- Whether base-business growth and margin performance can offset continued declines in COVID-19 testing and the Ascension contract’s mix impact.
- Final settlement of the $1,000.0 accelerated share repurchase, subsequent debt repayments and the effect of capital returns on liquidity and leverage.
- Execution of the Fortrea transition arrangements, any separation-related costs or liabilities, and the tax treatment of the spin-off.
- Developments in the Ravgen appeal, governmental inquiries and other material litigation or contingencies.
- Progress toward the stated $350.0 LaunchPad savings target and the contribution and integration costs of acquisitions, including the announced Baystate transaction.