Labcorp Holdings Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Labcorp operates Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD), contributing approximately 63% and 37% of revenue, respectively.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $3,899.6 million | $4,161.5 million | (6.3%) |
| Gross profit / margin | $1,232.9 million / 31.6% | $1,599.0 million / 38.4% | Margin down 6.8 percentage points |
| Operating income / margin | $687.9 million / 17.6% | $1,057.9 million / 25.4% | Income down 35.0% |
| Net earnings attributable to Labcorp | $491.6 million | $769.6 million | Down 36.1% |
| Diluted EPS | $5.23 | $7.82 | Down 33.1% |
| Operating cash flow | $356.0 million | $1,157.6 million | Down $801.6 million |
Revenue and earnings margins above are calculated from reported figures. Cost of revenue rose 4.1% to $2,666.7 million; as a share of revenue it increased to 68.4% from 61.6%. SG&A was $464.1 million, or 11.9% of revenue, versus $429.8 million, or 10.3%.
- Segments: Dx revenue fell 11.0% to $2,454.1 million, with operating income down 34.3% to $623.3 million and margin down to 25.4% from 34.4%. DD revenue increased 1.5% to $1,459.3 million, while operating income declined 20.6% to $124.2 million and margin fell to 8.5% from 10.9%.
- Cash and liquidity: Cash was $1,233.5 million at quarter-end, down from $1,472.7 million at December 31, 2021. The company had $1,000 million available under its revolving credit facility, with no balance outstanding. Operating cash flow fell primarily due to lower cash earnings and higher working-capital needs. Investing used $573.1 million, including $455.1 million for an acquisition; capital expenditures were $117.2 million.
- Debt: Long-term debt was $5,383.3 million, plus $1.6 million current debt. The company reported compliance with credit-facility covenants and expected to remain compliant over the next 12 months.
- Balance sheet: Total assets were $20,728.4 million and total liabilities were $9,986.7 million at March 31, 2022.
Material changes and management commentary
- The overall organic revenue decline of 6.3% reflected a 9.8% decrease in COVID-19 testing, partly offset by 3.5% organic growth in the base business. Dx COVID-19 testing revenue declined 14.7%; DD COVID-19 testing declined 1.7%.
- Dx base-business revenue grew 3.2% organically; total base-business growth was 5.6%. DD organic base-business revenue grew 4.3%.
- Management attributed margin pressure to reduced COVID-19 testing, higher personnel expense, and inflationary costs, partly offset by savings from the LaunchPad initiative. DD was also affected by reduced COVID-19 vaccine and therapeutic work and interruption of some clinical trials due to the conflict in Ukraine.
- Labcorp acquired Personal Genome Diagnostics (PGDx) on February 18 for approximately $455.1 million in cash, to expand oncology and genomic profiling capabilities. The preliminary allocation included $270.0 million of identifiable intangible assets, $286.2 million of goodwill, and an estimated $90.0 million contingent consideration liability.
- Management said it remained on track to deliver approximately $350 million of net savings from LaunchPad by the end of 2024. A $0.72-per-share second-quarter dividend was announced after quarter-end, payable June 9, 2022. The board also retained authorization for up to $1,631.5 million in additional share repurchases.
Outlook, risks, contingencies, and unusual items
- The filing references a longer-term outlook provided with the 2021 year-end results but does not include specific forward guidance values in the supplied text.
- Q1 included $1.2 million of impairment charges on assets in Ukraine and Russia and $12.6 million of restructuring and other charges. Amortization declined to $67.1 million from $92.1 million, primarily because accelerated amortization of the Covance trade name had ended.
- Foreign currency translation reduced reported revenue by 0.4 percentage points. Foreign currencies represented approximately 15.7% of Q1 revenue. The company uses forward contracts and currency and interest-rate swaps to manage exposure.
- The company disclosed ongoing litigation and government inquiries, including healthcare billing and False Claims Act matters, patient-data litigation associated with the AMCA incident, and employment and other claims. It said it could not estimate reasonably possible losses for certain proceedings; it did not expect currently described outcomes to materially affect financial condition, though they could affect results or cash flow in an individual period.
- Risk factors include healthcare reimbursement and regulation, privacy and cybersecurity, litigation, acquisitions and integration, competition, staffing and inflation, foreign exchange and interest rates, and the effects of COVID-19. The filing reported no material changes to the 2021 Form 10-K risk factors.
Important facts for investors to verify
- Whether the decline in COVID-19 testing continues and whether base-business growth can offset it.
- Whether cost inflation and personnel expenses ease, and whether LaunchPad savings reach the stated $350 million target by 2024.
- Cash conversion and working-capital trends, including unbilled services and accrued expenses, alongside acquisition and capital-spending requirements.
- PGDx integration, contingent earnout exposure, and the status and financial impact of announced health-system relationships.
- Developments in material legal matters, regulatory inquiries, and data-security litigation, including any changes to loss estimates or reserves.
- Progress on the dividend and repurchase plans, and any changes in debt levels, covenant headroom, or credit ratings.