Labcorp(LH) - 2023 Q1 - Quarterly Report

Financial Information Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2023, including balance sheets, statements of operations, comprehensive income, changes in shareholders' equity, and cash flows, along with related notes Condensed Consolidated Balance Sheets As of March 31, 2023, total assets were $20.20 billion, a slight increase from $20.16 billion at year-end 2022, while total liabilities decreased from $10.04 billion to $9.84 billion, and total shareholders' equity increased from $10.10 billion to $10.34 billion Balance Sheet Summary (Millions of USD) | Item | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $20,200.0 | $20,155.1 | | Total Current Assets | $4,695.0 | $4,625.0 | | Goodwill, net | $8,116.0 | $8,121.0 | | Total Liabilities | $9,839.2 | $10,039.6 | | Total Current Liabilities | $2,885.6 | $3,078.5 | | Long-term Debt (excluding current portion) | $5,052.3 | $5,038.8 | | Total Shareholders' Equity | $10,341.5 | $10,096.6 | Condensed Consolidated Statements of Operations For the three months ended March 31, 2023, revenue was $3.78 billion, down from $3.90 billion in the prior year, with net income attributable to the company significantly decreasing from $491.6 million to $212.9 million, and diluted earnings per share falling from $5.23 to $2.39 Operating Performance Summary (Millions of USD, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Revenue | $3,777.9 | $3,899.6 | | Gross Profit | $974.7 | $1,232.9 | | Operating Income | $341.0 | $687.9 | | Net Income Attributable to Company | $212.9 | $491.6 | | Diluted Earnings Per Share | $2.39 | $5.23 | Condensed Consolidated Statements of Cash Flows In Q1 2023, net cash provided by operating activities significantly decreased to $121.2 million from $356.0 million in Q1 2022, primarily due to lower net income, while net cash used in investing activities was $99.7 million, down from $573.1 million due to reduced acquisition spending, with cash and cash equivalents at period end totaling $393.9 million Cash Flow Summary (Millions of USD) | Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $121.2 | $356.0 | | Net Cash Used in Investing Activities | $(99.7) | $(573.1) | | Net Cash Used in Financing Activities | $(60.6) | $(17.7) | | Net Decrease in Cash and Cash Equivalents | $(36.1) | $(239.2) | | Cash and Cash Equivalents at Period End | $393.9 | $1,233.5 | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide detailed explanations of the financial statements, covering basis of presentation, revenue recognition, business acquisitions, segment information, and legal contingencies, including the planned spin-off of the clinical development business (Fortrea), segment revenue contributions (Dx 63%, DD 37%), and details of various legal proceedings - The company announced plans to spin off its Clinical Development Services (CDCS) business into an independent publicly traded company, Fortrea, targeting completion by mid-2023[18][95][96] - In Q1 2023, the Diagnostics (Dx) and Drug Development (DD) segments contributed approximately 63% and 37% of revenue, respectively[17] - The company faces multiple legal proceedings, including a patent infringement case by Ravgen Inc., where a jury awarded $272 million in damages against the company, which is currently under appeal[64] - On May 3, 2023, the company entered into a comprehensive strategic partnership with Jefferson Health[85] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial performance, highlighting a 3.1% year-over-year revenue decrease to $3.78 billion, primarily due to an 11.6% decline in COVID-19 testing revenue, offset by 7.9% organic growth in core business, with detailed analysis of Dx and DD segment performance, the impact of the upcoming Fortrea spin-off, and cost, expense, and profitability analysis Results of Operations Total revenue in Q1 2023 decreased 3.1% year-over-year to $3.78 billion, primarily due to a 3.6% organic revenue decline from reduced COVID-19 testing, while Dx segment revenue fell 2.9% due to an 18.4% drop in COVID-19 testing revenue offsetting 13.7% base business growth, and DD segment revenue decreased 4.0% due to organic decline and unfavorable foreign exchange, leading to a 50.4% drop in operating income to $341 million and significant margin contraction from lower COVID-19 testing revenue and increased SG&A, including spin-off costs Q1 2023 vs. Q1 2022 Performance Comparison (Millions of USD) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $3,777.9 | $3,899.6 | (3.1)% | | Dx Revenue | $2,382.8 | $2,454.1 | (2.9)% | | DD Revenue | $1,401.3 | $1,459.3 | (4.0)% | | Total Operating Income | $341.0 | $687.9 | (50.4)% | | Dx Operating Income | $441.5 | $683.1 | (35.4)% | | DD Operating Income | $123.9 | $168.6 | (26.5)% | - Diagnostics (Dx) segment revenue decreased 2.9% to $2.38 billion, impacted by an 18.4% decline in COVID-19 testing revenue[101] - Drug Development (DD) segment revenue decreased 4.0% to $1.40 billion, affected by non-human primate (NHP) related restrictions and reduced COVID-related work[103] - Selling, General, and Administrative (SG&A) expenses increased 19.3% to $553.6 million, primarily due to reduced COVID-19 testing revenue and spin-off transaction costs[106] Liquidity and Capital Resources The company's primary liquidity source is operating cash flow, which significantly decreased to $121.2 million in Q1 2023 from $356.0 million in Q1 2022 due to lower profitability, while $64.4 million in dividends were paid with no share repurchases, and as of March 31, 2023, the company held $393.9 million in cash and a $1.0 billion revolving credit facility, deeming its liquidity sufficient for the next twelve months Cash Flow Summary (Millions of USD) | Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $121.2 | $356.0 | | Net Cash Used in Investing Activities | $(99.7) | $(573.1) | | Net Cash Used in Financing Activities | $(60.6) | $(17.7) | - As of March 31, 2023, the company had $1.5315 billion remaining under its share repurchase authorization[130][145] - Dividends of $64.4 million were paid in Q1 2023[128][131] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency exchange rates and interest rate fluctuations, with approximately 14.2% of Q1 2023 revenue denominated in non-USD currencies, where a hypothetical 10% change in average exchange rates would impact pre-tax income by approximately $6.1 million, and these risks are managed using derivative financial instruments like foreign currency forward contracts and interest rate swaps - Approximately 14.2% of Q1 2023 revenue was denominated in non-USD currencies[134] - A hypothetical 10% change in average exchange rates is estimated to impact Q1 2023 pre-tax income by approximately $6.1 million[134] - The company uses foreign currency forward contracts (with a notional value of $663.5 million at quarter-end) and interest rate swaps to hedge risks[135][139] Controls and Procedures The company's management, including the CEO and CFO, assessed the disclosure controls and procedures and concluded they were effective as of March 31, 2023, with no significant changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[140] - No significant changes in internal control over financial reporting occurred during the quarter[141] Other Information Legal Proceedings This section references detailed information on commitments and contingencies in Note 8 to the financial statements, which describes various legal proceedings, including class action lawsuits, intellectual property disputes, and government investigations, notably a patent infringement lawsuit by Ravgen Inc. where a jury awarded $272 million against the company, currently under appeal - This section refers to Note 8 of the financial statements for detailed information on the company's legal proceedings[142] - Key legal matters include government subpoenas, class action lawsuits, and a patent infringement case where a jury ruled against the company for $272 million in damages, currently under appeal[48][64] Risk Factors This section supplements the risk factors from the 2022 Annual Report on Form 10-K, adding a new risk factor concerning the company's reliance on banking services from multiple financial institutions, where default or failure of these institutions could adversely affect the company's business and financial condition, especially if deposits exceed insured limits - A new risk factor has been added regarding the company's reliance on financial institutions and the potential impact of their failure[144] - The company's cash deposits at certain institutions exceed insured limits, posing a risk to fund access in the event of bank failure[144] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the three months ended March 31, 2023, and as of that date, the Board of Directors still had an outstanding share repurchase authorization of up to $1.5315 billion with no expiration date - No common stock was repurchased in Q1 2023[145] - The company has an outstanding share repurchase authorization of up to $1.5315 billion[145] Other Information No other information is required to be reported for this period - No[146] Exhibits This section lists exhibits filed with Form 10-Q, including credit agreement amendments, executive employment agreements, and CEO and CFO certifications required under the Sarbanes-Oxley Act - Lists filed exhibits, including credit agreement amendments, executive employment agreements, and CEO/CFO certification documents[148]