Labcorp Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; amounts in millions except per-share data. Labcorp operates Diagnostics (Dx) and Drug Development (DD), contributing approximately 63% and 37% of revenue, respectively.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $3,777.9 | $3,899.6 | (3.1%) |
| Gross profit / margin | $974.7 / 25.8% | $1,232.9 / 31.6% | Margin down 5.8 pts |
| Operating income / margin | $341.0 / 9.0% | $687.9 / 17.6% | (50.4%) |
| Net earnings attributable to Labcorp | $212.9 | $491.6 | (56.7%) |
| Diluted EPS | $2.39 | $5.23 | (54.3%) |
| Operating cash flow | $121.2 | $356.0 | (66.0%) |
| Capital expenditures | $93.9 | $117.2 | Lower by $23.3 |
Revenue declined mainly because COVID-19 testing fell 11.6% and foreign currency translation was unfavorable by 0.7%; acquisitions, net of divestitures, added 1.2%. Organic Base Business revenue grew 7.9%. Cost of revenues rose 5.1% despite lower sales, increasing to 74.2% of revenue from 68.4%; management cited lower COVID-19 revenue, the Ascension lab management agreement and higher personnel costs, partly offset by Base Business growth and LaunchPad savings. SG&A increased 19.3%, including spin-off transaction costs.
- Dx: Revenue decreased 2.9%; segment operating income fell 35.4% to $441.5 and margin declined to 18.5% from 27.8%. Organic revenue fell 4.7%, reflecting an 18.4% decline in COVID-19 testing, partly offset by 13.7% Base Business growth.
- DD: Revenue decreased 4.0%; segment operating income fell 26.5% to $123.9 and margin declined to 8.8% from 11.6%. Headwinds included non-human-primate constraints, reduced COVID-19 vaccine and therapeutic work, loss of an FSP contract and credit-loss provisions on certain biotech receivables.
Cash, debt and liquidity
Cash and cash equivalents were $393.9 at March 31, 2023, down $36.1 from year-end. Operating cash flow was $121.2, versus $356.0 a year earlier; management attributed the decrease primarily to lower cash earnings. Investing outflow was $99.7, compared with $573.1, including $455.1 of acquisition spending in Q1 2022. Financing outflow was $60.6, including $64.4 of dividends paid.
Total debt, including current maturities, was approximately $5,353.7; cash less debt was approximately $(4,959.8). The $1,000 revolving credit facility had no balance outstanding, and $84.5 of letters of credit were outstanding. The company reported covenant compliance and said it expects liquidity from cash, operating cash flow and borrowing capacity to cover requirements, dividends and repurchases for the next 12 months. It paid a $0.72-per-share Q2 dividend, approximately $64.7 in total; no shares were repurchased in Q1. Current assets were $4,695.0 and current liabilities $2,885.6.
Outlook, developments and risks
- Labcorp targeted a mid-2023 spin-off of its Clinical Development and Commercialization Services business, to be named Fortrea, subject to customary approvals and conditions. Completion and timing were not assured.
- Management said the company remained on track to deliver approximately $350 of net savings from its three-year LaunchPad initiative by the end of 2024. No full-year revenue or earnings guidance is provided in the supplied filing text.
- DD backlog expected to be recognized within 12 months was approximately 29.5% at quarter-end, down from approximately 30% at December 31, 2022; management attributed the change to longer average contract length. Unsatisfied DD long-term contract obligations totaled $4,720.0.
- On May 3, 2023, Labcorp announced strategic arrangements with Jefferson Health, expected to close by mid-year subject to customary conditions and regulatory approvals.
- Notable litigation exposure includes a $272.0 jury verdict in the Ravgen patent case, with plaintiff seeking enhanced damages of up to $817.0 plus fees and costs. Labcorp disputes the verdict and is pursuing appeals. The filing does not provide a clear estimate of the ultimate loss or a specific reserve for this matter.
- The company disclosed ongoing legal and regulatory inquiries and litigation, including Medicare/Medicaid billing matters, data-security litigation related to the AMCA incident, and employment claims. It stated that it could not estimate reasonably probable losses for certain proceedings.
- Risks highlighted include reimbursement and regulatory changes, litigation and compliance, cybersecurity, customer and contract losses, foreign exchange and interest-rate movements, and the planned spin-off. The filing added risk concerning potential failure of financial institutions where cash is held, including uninsured deposits.
Key investor verification points
- Track whether Base Business growth and LaunchPad savings can offset declining COVID-19 testing and the sharp year-over-year margin compression.
- Monitor cash conversion, receivables and biotech customer credit exposure, given lower operating cash flow and increased credit-loss expense.
- Confirm the spin-off’s completion timing, separation costs, tax treatment and resulting capital structures; assess progress toward the $350 savings target.
- Review developments in the Ravgen case and other legal matters, including any change in potential exposure or recorded reserves.
- Check debt maturities, variable-rate exposure, covenant headroom and the company’s liquidity outlook alongside dividend and repurchase plans.