LABCORP HOLDINGS INC. quarterly report, Q2 FY2022

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

MetricQ2 2022Q2 2021Six months 2022Six 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.