Labcorp Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited. Unless stated otherwise, amounts are in millions of dollars.
Business context
Labcorp operates two segments: Labcorp Diagnostics (Dx) and Labcorp Drug Development (DD). Each represented approximately 64% and 36% of revenue, respectively, for the first nine months of 2021. COVID-19 testing remained a meaningful, but changing, contributor to performance.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $4,062.6 | $3,896.1 | $12,064.8 | $9,488.7 |
| Gross profit | $1,385.5 | $1,559.4 | $4,249.3 | $3,047.9 |
| Operating income | $766.9 | $1,047.1 | $2,528.9 | $1,152.2 |
| Net earnings attributable to Labcorp | $587.3 | $703.4 | $1,824.3 | $617.8 |
| Diluted EPS | $6.05 | $7.17 | $18.63 | $6.31 |
| Operating cash flow | Not separately provided | Not separately provided | $2,412.1 | $1,360.7 |
- Q3 gross margin was approximately 34.1%, versus 40.0%; operating margin was 18.9%, versus 26.9%. For the nine-month periods, gross margin was 35.2%, versus 32.1%, and operating margin was 21.0%, versus 12.1%.
- Revenue increased 4.3% in Q3 and 27.1% year to date. Nine-month organic growth was 25.2%, including 18.2% from Base Business and 7.0% from COVID-19 testing.
- Q3 Dx revenue declined 3.2%, while DD revenue rose 17.5%. Year-to-date revenue grew 26.9% in Dx and 26.3% in DD.
- Nine-month operating cash flow less capital expenditures was approximately $2,101.7, compared with $1,078.4 in 2020. Capital expenditures were $310.4, versus $282.3.
- Cash was $2,036.5 at September 30, 2021. Total debt was approximately $5,418.8, largely long-term; the company also had $1,000.0 available under its revolving facility, with no borrowings outstanding. The current ratio was approximately 2.1x.
Changes versus comparable periods
Q3 earnings and margins fell year over year despite higher revenue, primarily reflecting lower COVID-19 testing and higher personnel costs; COVID testing had contributed unusually strong results in the prior-year quarter. Q3 Dx operating income declined 25.1%, while DD operating income was nearly flat. In contrast, nine-month operating income more than doubled, partly because 2020 included $460.9 of goodwill and other asset impairments; no such impairments were recorded in 2021. Nine-month earnings also benefited from stronger Base Business activity and COVID testing.
Q3 SG&A increased 23.9% to $519.9, including $25.4 of identified retention, transaction, transition, COVID-related, systems implementation, and other costs. Nine-month SG&A as a percentage of revenue improved to 11.7% from 12.8%. Intangible amortization rose, including accelerated Covance trade-name amortization of $30.2 in Q3 and $87.4 year to date.
Liquidity, capital allocation and outlook
- Cash from operations increased by $1,051.4 year over year for the first nine months; management attributed the increase to higher cash earnings and favorable working capital.
- The company issued $1,000.0 of notes in May and used the proceeds with cash on hand to redeem $1,000.0 of notes due in 2022. It also repaid its $375.0 term loan. The revolving facility matures in 2026; the company reported covenant compliance and expected to remain compliant for the next 12 months.
- Share repurchases totaled $668.5 in the first nine months, including $300.0 in Q3. At September 30, $131.5 remained authorized for repurchase.
- Management said it remained on track to deliver approximately $200.0 of net savings from the three-year Dx LaunchPad initiative by year-end 2021. It also anticipated an acceleration of acquisitions.
- The board’s review of company structure and capital allocation strategy was ongoing. Management expected to provide an update in Q4, but gave no assurance about the outcome or timing. The filing does not provide specific financial guidance for future periods.
Risks, contingencies and unusual items
- Management cited uncertainties including COVID-19’s duration and effects, reimbursement and regulatory changes, pricing and competition, customer demand, labor and supply constraints, acquisitions and integration, cybersecurity, foreign exchange, and litigation.
- Material legal matters include government and qui tam claims alleging healthcare billing or inducement violations, patient data litigation related to the AMCA collection-agency incident, and other employment, consumer and commercial disputes. The company said it could not estimate a reasonably probable loss range for certain proceedings; it did not believe currently available information indicated a material adverse effect on financial condition, while period results or cash flows could be affected.
- Q3 other income included $36.9 of investment gains. Nine-month other income included $67.4 of investment gains and a $6.1 loss on sale of a business. Results also reflect tax benefits related to GILTI and FDII elections, partly offset by a new uncertain tax position.
- Foreign currency translation reduced nine-month comprehensive earnings, with a $114.6 translation adjustment. The company disclosed currency and interest-rate exposures and uses derivatives for risk management.
Investor verification points
- Assess the sustainability of Base Business growth and the effect of declining or fluctuating COVID-19 testing on revenue, volumes, pricing and margins.
- Review Q3 cost pressures, segment margins, personnel expenses, accelerated amortization and the timing and realization of LaunchPad savings.
- Track operating cash conversion, working-capital movements, acquisition spending, leverage and share repurchases.
- Monitor the structure and capital allocation review, including any announced decisions and potential impact on investment-grade ratings.
- Follow developments in significant litigation, regulatory inquiries, tax positions and cybersecurity-related claims; outcomes and potential financial exposure may remain uncertain.