Labcorp(LH) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) Unaudited condensed consolidated financial statements for Q3 and 9M 2023 are presented, covering balance sheets, operations, cash flows, and notes, detailing the Fortrea spin-off Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (as of Sep 30, 2023 vs. Dec 31, 2022) | Account | Sep 30, 2023 ($ million) | Dec 31, 2022 ($ million) | Change | | :--- | :--- | :--- | :--- | | Total Assets | 16,886.0 | 20,155.1 | (16.2%) | | Cash and cash equivalents | 727.9 | 320.6 | +127.0% | | Goodwill, net | 6,331.9 | 6,123.7 | +3.4% | | Assets of discontinued operations | — | 4,264.3 | (100.0%) | | Total Liabilities | 8,993.5 | 10,039.6 | (10.4%) | | Long-term debt, less current portion | 4,427.6 | 5,038.8 | (12.1%) | | Liabilities of discontinued operations | — | 898.9 | (100.0%) | | Total Shareholders' Equity | 7,873.1 | 10,096.6 | (22.0%) | - The significant decrease in total assets and liabilities is primarily due to the spin-off of Fortrea, now classified as discontinued operations. As of September 30, 2023, there are no assets or liabilities of discontinued operations, compared to over $4.2 billion in assets and nearly $0.9 billion in liabilities at year-end 2022[9][21] Condensed Consolidated Statements of Operations Statement of Operations Summary (YoY Comparison) | Metric ($ million, except EPS) | Q3 2023 | Q3 2022 | YoY Change | 9M 2023 | 9M 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | 3,056.8 | 2,866.8 | +6.6% | 9,128.3 | 8,934.2 | +2.2% | | Gross Profit | 851.2 | 886.2 | (4.0%) | 2,543.5 | 2,910.8 | (12.6%) | | Operating Income | 252.3 | 374.0 | (32.5%) | 848.4 | 1,408.0 | (39.7%) | | Earnings from continuing operations | 183.6 | 277.3 | (33.8%) | 547.2 | 966.4 | (43.4%) | | Net Earnings | 183.6 | 353.2 | (48.0%) | 586.0 | 1,204.2 | (51.3%) | | Diluted EPS (Continuing Ops) | $2.11 | $3.06 | (31.0%) | $6.19 | $10.45 | (40.8%) | - While revenues increased year-over-year for both the third quarter and nine-month periods, operating income and net earnings from continuing operations declined significantly, primarily due to higher cost of revenues and selling, general, and administrative expenses[11] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Nine Months Ended Sep 30) | Cash Flow Activity ($ million) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 748.1 | 1,302.3 | (42.6%) | | Net cash used for investing activities | (840.9) | (1,378.9) | (39.0%) | | Net cash provided by (used in) financing activities | 387.2 | (949.6) | N/A | | Net increase (decrease) in cash | 297.9 | (1,062.8) | N/A | - Cash from operating activities decreased significantly year-over-year. Net cash from financing activities was positive in 2023, driven by $1.5 billion in cash provided by discontinued financing activities related to the Fortrea spin-off, which offset cash used for a $1.0 billion share repurchase and dividend payments[18] Notes to Unaudited Condensed Consolidated Financial Statements - On June 30, 2023, Labcorp completed the spin-off of its Clinical Development and Commercialization Services business, Fortrea Holdings Inc. (Fortrea), with Fortrea's historical results now presented as Discontinued Operations and the remaining Drug Development segment renamed Biopharma Laboratory Services (BLS)[21][94] - In connection with the spin-off, Fortrea made cash payments of approximately $1.6 billion to Labcorp[29] - For the nine months ended September 30, 2023, the company acquired several businesses for approximately $516.7 million in cash, adding $230.5 million in goodwill[38][43] - The company is involved in a patent infringement lawsuit where a jury awarded $272.0 million in damages, with the court adding $100.0 million in enhanced damages, which the company strongly disagrees with and is appealing[75] Segment Revenue and Operating Income (Nine Months Ended Sep 30, 2023) | Segment | Revenues ($ million) | Operating Income ($ million) | Operating Margin | | :--- | :--- | :--- | :--- | | Diagnostics Laboratories (Dx) | 7,068.3 | 1,237.5 | 17.5% | | Biopharma Laboratory Services (BLS) | 2,079.4 | 287.2 | 13.8% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, including revenue growth, COVID-19 testing impact, segment performance, margin compression, liquidity, capital resources, and Fortrea spin-off proceeds utilization Results of Operations Q3 2023 Revenue Performance vs. Q3 2022 | Metric | Change | | :--- | :--- | | Total Revenue | +6.6% | | Organic Revenue | +3.7% | | Acquisitions, net | +2.2% | | Foreign Currency | +0.7% | | Organic Base Business | +10.1% | | COVID-19 Testing | (6.3%) | 9M 2023 Revenue Performance vs. 9M 2022 | Metric | Change | | :--- | :--- | | Total Revenue | +2.2% | | Organic Revenue | +0.3% | | Acquisitions, net | +1.8% | | Foreign Currency | +0.1% | | Organic Base Business | +10.0% | | COVID-19 Testing | (9.6%) | - For Q3 2023, Dx segment operating margin decreased to 16.5% from 19.9% year-over-year, primarily due to reduced higher-margin COVID-19 testing and the mix impact from the Ascension lab management agreement[130] - For Q3 2023, BLS segment operating income increased by 3.8% to $109.0 million, driven by demand growth and LaunchPad savings, partially offset by higher personnel expenses and NHP-related constraints[130][131] Liquidity and Capital Resources - Net cash provided by continuing operating activities for the first nine months of 2023 was $622.7 million, a significant decrease from $1,157.6 million in the same period of 2022, primarily due to lower earnings from COVID-19 testing and spin-related items[155][157] - The company received approximately $1.6 billion in cash from the Fortrea spin-off, using $1.0 billion for an Accelerated Share Repurchase (ASR) program and intending to use approximately $300 million to pay down maturing debt[110][159] - On August 8, 2023, the company entered into ASR agreements to repurchase $1.0 billion of its common stock, receiving an initial 3.7 million shares[161][162] - As of September 30, 2023, the company had $727.9 million in cash and $910.0 million available under its revolving credit facility[160] Quantitative and Qualitative Disclosures about Market Risk The company details market risk exposure, primarily foreign currency and interest rates, noting 13.7% of nine-month revenue in foreign currencies and derivative instrument usage - Approximately 13.7% of revenues for the nine months ended September 30, 2023, were denominated in currencies other than the U.S. Dollar, with significant exposures to the Canadian dollar, Swiss Franc, Euro, and British Pound[168] - The company uses derivative financial instruments, including foreign currency forward contracts and interest rate and cross-currency swap agreements, to manage market risk[167] - To hedge against changes in the fair value of its 2.70% senior notes due 2031, the company has fixed-to-variable interest rate swap agreements with a notional value of $500.0 million[173] Controls and Procedures Management, including CEO and CFO, concluded disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting - Based on an evaluation as of the end of the period, the company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective[174] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[175] PART II. OTHER INFORMATION Legal Proceedings This section incorporates by reference the detailed discussion of legal matters from Note 9 of the financial statements, covering claims, lawsuits, and governmental inquiries - Information regarding legal proceedings is incorporated by reference from Note 9 (Commitments and Contingencies) to the condensed consolidated financial statements[176] Risk Factors The company updates risk factors, highlighting new risks from the Fortrea spin-off, including potential failure to achieve benefits, adverse tax consequences, and financial institution failures - A new risk factor was added regarding dependency on U.S. and international financial institutions, noting that their default or failure could adversely affect the company's business and financial condition[178] - The company highlights risks that the Fortrea spin-off may not achieve intended results, could adversely impact business relationships, and may result in unexpected costs or liabilities[179][180] - To preserve the tax-free status of the Fortrea spin-off, the company's ability to engage in certain capital-raising or strategic transactions may be limited or restricted for a period[181] Unregistered Sales of Equity Securities and Use of Proceeds The company details share repurchase activity, including the $1 billion ASR agreements initiated in August 2023, with 3.7 million shares repurchased and $531.5 million remaining authorized Share Repurchases under ASR (Q3 2023) | Period | Total Shares Repurchased (millions) | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | July 1 - July 31 | — | — | | August 1 - August 31 | 3.7 | 267.34 | | September 1 - September 30 | — | — | - As of September 30, 2023, the company had $531.5 million remaining under its board authorization for share repurchases, with no expiration date[183] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the third quarter of 2023 - During the third quarter of 2023, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement[184] Exhibits This section lists the exhibits filed with the Form 10-Q, including an employment separation agreement, executive certifications, and Interactive Data Files (XBRL) - The exhibits filed with this report include CEO and CFO certifications pursuant to Sarbanes-Oxley rules and Inline XBRL documents[185]