Labcorp Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. Labcorp operates LabCorp Diagnostics (LCD) and Covance Drug Development (CDD).
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3,896.1 million | $2,928.5 million | $9,488.7 million | $8,601.4 million |
| Operating income | $1,047.1 million | $339.9 million | $1,152.2 million | $993.8 million |
| Net earnings attributable to Labcorp | $703.4 million | $220.7 million | $617.8 million | $596.7 million |
| Diluted EPS | $7.17 | $2.25 | $6.31 | $6.04 |
| Operating cash flow | Not separately provided | Not separately provided | $1,360.7 million | $874.9 million |
- Q3 revenue rose 33.0%; operating income rose 208.1%. Q3 cost of revenues was 60.0% of revenue versus 72.1% a year earlier, while SG&A was 10.8% versus 13.7%.
- Nine-month revenue increased 10.3%, but net earnings attributable to Labcorp rose only 3.5%. Nine-month operating income included $460.9 million of goodwill and other asset impairments; the effective tax rate increased to 36.7% from 26.4%, partly because impairment charges were nondeductible or required valuation allowances.
- Q3 LCD revenue increased 53.7% to $2,704.2 million, primarily reflecting COVID-19 testing. CDD revenue increased 5.7% to $1,241.9 million; excluding COVID-19 testing, CDD organic revenue was flat year over year. For the first nine months, LCD operating income was $1,451.5 million, while CDD recorded an operating loss of $131.2 million, largely reflecting impairments.
- Nine-month operating cash flow rose $485.8 million year over year. Working capital absorbed cash, including increases in accounts receivable ($546.9 million), unbilled services ($117.8 million) and supplies inventory ($147.5 million). Cash flow also benefited from tax deferrals and included $132.1 million of provider-relief funds that Labcorp expects to return.
- Cash and cash equivalents were $667.2 million at September 30, 2020, versus $337.5 million at year-end 2019. Debt consisted of $376.6 million of current borrowings and debt plus $5,417.3 million of long-term debt. The company had $997.0 million available under its revolving facility and reported covenant compliance.
Material changes and unusual items
- COVID-19 testing materially boosted revenue, particularly in LCD, while routine diagnostic volumes and clinical-trial activity were pressured. For the nine months, COVID-19 testing contributed 16.4% to organic revenue growth, partly offset by an 8.1% decline in the organic base business.
- Labcorp recorded $460.9 million in goodwill and other asset impairments for the first nine months, including $418.7 million of CDD goodwill impairment. It also recorded $25.4 million of investment impairments related to COVID-19 impacts.
- The company received $55.9 million and $76.2 million in CARES Act provider-relief funds. It reversed recognition of the earlier amount, recognized no income on the later payment, recorded a $132.1 million liability, and planned to return the funds in Q4 2020.
- On August 17, Labcorp redeemed $412.2 million of 4.625% senior notes using available cash and revolving-credit borrowings. It reinstated share repurchases in October after suspending them in March; the remaining authorization at September 30 was $800 million.
- Management said it remained on track for approximately $200 million of net LCD LaunchPad savings by the end of 2021 and $150 million of CDD savings by the end of 2020.
Outlook, risks and contingencies
Labcorp did not provide a numerical full-year earnings or revenue forecast in the filing. Management said the range of feasible 2020 financial outcomes remained wide because the pandemic, restrictions, customer behavior and recovery were uncertain. The company expected positive operating cash flow under its current assumptions, while warning that a worsening or prolonged pandemic could significantly reduce cash flow.
Key risks include the duration and severity of COVID-19; recovery in routine testing and clinical trials; availability of testing supplies and personnel; reimbursement and payer changes, including PAMA; collections and credit losses; cybersecurity and data privacy; and compliance with debt covenants. Covenant amendments temporarily raised the maximum leverage ratio to 5.0x for specified 2020 periods, with a planned step-down thereafter. If leverage exceeds 4.5x, share repurchases are generally restricted and borrowing costs increase. The filing also describes multiple pending legal and regulatory matters, including litigation related to the AMCA patient-data incident; outcomes and potential losses are not clearly quantifiable in the filing.
Investor verification points
- Track COVID-19 testing revenue against the recovery or continued weakness of the base business, especially in LCD and CDD clinical-trial services.
- Assess cash conversion and receivable, unbilled-service and inventory growth; determine the timing and cash-flow effect of returning the $132.1 million in provider-relief funds.
- Review impairment assumptions and the potential for further goodwill or intangible-asset charges, particularly in CDD and the reporting units with limited valuation headroom.
- Monitor leverage, covenant headroom, the term-loan maturity in 2021, and the consequences of renewed share repurchases.
- Follow material litigation, cybersecurity matters and other contingencies for developments or changes in estimated exposure.