Labcorp Holdings 10-Q 2023-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 1-11353

LABORATORY CORPORATION OF AMERICA HOLDINGS

(Exact name of registrant as specified in its charter)

(Registrant's telephone number, including area code) 336-229-1127

Securities registered pursuant to Section 12(b) of the Exchange Act.

Title of Each Class Trading Symbol Name of exchange on which registered

Common Stock, $0.10 par value LH New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

The number of shares outstanding of the issuer's common stock is 88.6 million shares as of August 3, 2023.

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PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION

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PART I – FINANCIAL INFORMATION

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)

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FORWARD-LOOKING STATEMENTS

The Company has made in this report, and from time to time may otherwise make in its public filings, press releases, and discussions by Company management, forward-looking statements concerning the Company’s operations, performance, and financial condition, as well as its strategic objectives. Some of these forward-looking statements relate to future events and expectations and can be identified by the use of forward-looking words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or the negative of those words or other comparable terminology. Such forward-looking statements speak only as of the time they are made and are subject to various risks and uncertainties and the Company claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those currently anticipated due to a number of factors in addition to those discussed elsewhere herein, including in the “Summary of Material Risks” and “Risk Factors” section of the Annual Report on Form 10-K, and in the Company’s other public filings, press releases, and discussions with Company management, including:

1.changes in government and third-party payer regulations, reimbursement, or coverage policies or other future reforms in the U.S. healthcare system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (e.g., health insurance exchanges) affecting governmental and third-party coverage or reimbursement for commercial laboratory testing, including the impact of the U.S. Protecting Access to Medicare Act of 2014 (PAMA);

2.significant monetary damages, fines, penalties, assessments, refunds, repayments, damage to the Company's reputation, unanticipated compliance expenditures, and/or exclusion or debarment from or ineligibility to participate in government programs, among other adverse consequences, arising from enforcement of anti-fraud and abuse laws and other laws applicable to the Company in jurisdictions in which the Company conducts business;

3.significant fines, penalties, costs, unanticipated compliance expenditures, and/or damage to the Company’s reputation arising from the failure to comply with applicable privacy and security laws and regulations, including the U.S. Health Insurance Portability and Accountability Act of 1996, the U.S. Health Information Technology for Economic and Clinical Health Act, the European Union's General Data Protection Regulation and similar laws and regulations in jurisdictions in which the Company conducts business;

4.loss or suspension of a license or imposition of fines or penalties under, or future changes in, or interpretations of applicable licensing laws or regulations regarding the operation of clinical laboratories and the delivery of clinical laboratory test results, including, but not limited to, the U.S. Clinical Laboratory Improvement Act of 1967 and the U.S. Clinical Laboratory Improvement Amendments of 1988 and similar laws and regulations in jurisdictions in which the Company conducts business;

5.penalties or loss of license arising from the failure to comply with applicable occupational and workplace safety laws and regulations, including the U.S. Occupational Safety and Health Administration requirements, the U.S. Needlestick Safety and Prevention Act, and similar laws and regulations in jurisdictions in which the Company conducts business;

6.fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, damage to the Company's reputation, injunctions, or criminal prosecution arising from failure to maintain compliance with current good manufacturing practice regulations and similar requirements of various regulatory agencies in jurisdictions in which the Company conducts business;

7.sanctions or other remedies, including fines, unanticipated compliance expenditures, enforcement actions, injunctions or criminal prosecution arising from failure to comply with the Animal Welfare Act or applicable national, state and local laws and regulations in jurisdictions in which the Company conducts business;

8.changes in testing guidelines or recommendations by government agencies, medical specialty societies, and other authoritative bodies affecting the utilization of laboratory tests;

9.changes in applicable government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests, drug development, or the conduct of drug development and medical device and diagnostic studies and trials, including regulations and policies of the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the Medicine and Healthcare products Regulatory Agency in the United Kingdom, the National Medical Products Administration in China, the Pharmaceutical and Medical Devices Agency in Japan, the European Medicines Agency, the European Union and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business;

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10.changes in government regulations or reimbursement pertaining to the pharmaceutical, biotechnology and medical device and diagnostic industries, changes in reimbursement of pharmaceutical products, or reduced spending on research and development by pharmaceutical, biotechnology and medical device and diagnostic customers;

11.liabilities that result from the failure to comply with corporate governance requirements;

12.increased competition, including price competition, potential reduction in rates in response to price transparency initiatives and consumerism, competitive bidding and/or changes or reductions to fee schedules, and competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry;

13.changes in payer mix or payment structure or process, including insurance carrier participation in health insurance exchanges, an increase in capitated reimbursement mechanisms, the impact of clearinghouses on the claims reimbursement process, the impact of a shift to consumer-driven health plans or plans carrying an increased level of member cost-sharing, and adverse changes in payer reimbursement or payer coverage policies (implemented directly or through a third-party utilization management organization) related to specific diagnostic tests, categories of testing or testing methodologies;

14.failure to retain or attract MCO business as a result of changes in business models, including risk based or network approaches, out-sourced laboratory network management or utilization management companies, or other changes in strategy or business models by MCOs;

15.failure to obtain and retain new customers, an unfavorable change in the mix of testing services ordered, or a reduction in tests ordered, specimens submitted, or services requested by existing customers, and delays in payments from customers;

16.consolidation and convergence of customers, competitors, and suppliers, potentially causing material shifts in insourcing, utilization, pricing, reimbursement and supply chain access;

17.failure to effectively develop and deploy new systems, system modifications or enhancements required in response to evolving market and business needs;

18.customers choosing to insource services that are or could be purchased from the Company;

19.failure to identify, successfully close and effectively integrate and/or manage acquisitions of new businesses or failure to maintain key customers and/or employees as a result of uncertainty surrounding the integration of acquisitions;

20.inability to achieve the expected benefits and synergies of newly-acquired businesses, including due to items not discovered in the due diligence process, and the impact on the Company's cash position, levels of indebtedness and stock price;

21.termination, loss, delay, reduction in scope or increased costs of contracts, including large contracts and multiple contracts;

22.liability arising from errors or omissions in the performance of testing services, contract research services or other contractual arrangements;

23.changes or disruption in the provision or transportation of services or supplies provided by third parties; or their termination for failure to follow the Company's performance standards and requirements;

24.damage or disruption to the Company's facilities;

25.damage to the Company's reputation, loss of business, or other harm from acts of animal rights activists or potential harm and/or liability arising from animal research activities;

26.adverse results in litigation matters;

27.inability to attract and retain experienced and qualified personnel or the loss of significant personnel as a result of illness, increased competition for talent, wage growth, or other market factors;

28.failure to develop or acquire licenses for new or improved technologies, such as point-of-care testing, mobile health technologies, and digital pathology, or potential use of new technologies by customers and/or consumers to perform their own tests;

29.substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests;

30.failure to obtain, maintain, and enforce intellectual property rights for protection of the Company's products and services and defend against challenges to those rights;

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31.scope, validity, and enforceability of patents and other proprietary rights held by third parties that may impact the Company's ability to develop, perform, or market the Company's products or services or operate its business;

32.business interruption, receivables impairment, delays in cash collection impacting days sales outstanding, supply chain disruptions or inventory obsolescence, increases in material cost or other operating costs, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes; political crises, including terrorism and war; public health crises and disease epidemics and pandemics; changes in the global economy; and other events outside of the Company's control;

33.discontinuation or recalls of existing testing products;

34.a failure in the Company's information technology systems, including with respect to testing turnaround time and billing processes, or the failure of the Company or its third-party suppliers and vendors to maintain the security of business information or systems or to protect against cybersecurity attacks such as denial of service attacks, malware, ransomware, and computer viruses, or delays or failures in the development and implementation of the Company’s automation platforms, any of which could result in a negative effect on the Company’s performance of services, a loss of business or increased costs, damages to the Company’s reputation, significant litigation exposure, an inability to meet required financial reporting deadlines, or the failure to meet future regulatory or customer information technology, data security and connectivity requirements;

35.business interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, general labor unrest or failure to comply with labor or employment laws;

36.failure to maintain the Company's days sales outstanding levels, cash collections (in light of increasing levels of patient responsibility), profitability and/or reimbursement arising from unfavorable changes in third-party payer policies, payment delays introduced by third-party utilization management organizations, and increasing levels of patient payment responsibility;

37.impact on the Company's revenues, cash collections, and the availability of credit for general liquidity or other financing needs arising from a significant deterioration in the economy or financial markets or in the Company's credit ratings by Standard & Poor's and/or Moody's;

38.failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment grade rating, or leverage ratio covenants under its revolving credit facility;

39.changes in reimbursement by foreign governments and foreign currency fluctuations;

40.inability to obtain certain billing information from physicians, resulting in increased costs and complexity, a temporary disruption in receipts, and ongoing reductions in reimbursements and revenues;

41.expenses and risks associated with international operations, including, but not limited to, compliance with the U.S. Foreign Corrupt Practices Act (FPCA), the U.K. Bribery Act, other applicable anti-corruption laws and regulations, trade sanction laws and regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions;

42.failure to achieve expected efficiencies and savings in connection with the Company's business process improvement initiatives;

43.changes in tax laws and regulations or changes in their interpretation;

44.global economic conditions and government and regulatory changes;

45.risks associated with the impacts and expected benefits and costs of the recently completed spin-off of Fortrea, including but not limited to factors that could adversely affect the Company's ability to realize the expected benefits of the spin-off, the failure of the spin-off to qualify as a tax-free transaction for U.S. federal income tax purposes, and potential exposure to unexpected claims, liabilities, or costs under the Company's agreements with Fortrea and/or otherwise in connection with the spin-off; and

46.the effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, supplies, liquidity, and collections, as well as the impact of past or future actions or omissions by the Company or governments in response to the COVID-19 pandemic including, but not limited to, the end of the federal Public Health Emergency, and damage to the Company's reputation or loss of business resulting from the perception of the Company's response to the COVID-19 pandemic.

Except as may be required by applicable law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Given these uncertainties, one should not put undue reliance on any forward-looking statements.

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GENERAL (dollars in millions, except per share data)

Revenues for the six months ended June 30, 2023, were $6,071.5, an increase of 0.1% from $6,067.5 during the six months ended June 30, 2022. The increase was due to acquisitions, net of divestitures, of 1.6%, partially offset by lower organic revenue of 1.3% and unfavorable foreign currency translation of 0.2%. The 1.3% decrease in organic revenue was driven by an 11.2% decrease in COVID-19 PCR and antibody testing (COVID-19 Testing), partially offset by a 9.9% increase in the company's organic Base Business. Base Business includes Labcorp's operations except for COVID-19 Testing.

The Company defines organic growth as the increase in revenue excluding the year-over-year impact of acquisitions, divestitures, and currency. Acquisition and divestiture impact is considered for a twelve month period following the close of each transaction.

Separation of Fortrea Holdings Inc.

On June 30, 2023, Labcorp completed the previously announced separation of Fortrea from the Company.

The spin-off of Fortrea from Labcorp was achieved through the Company’s pro-rata distribution of 100% of the outstanding shares of Fortrea common stock to holders of record of Labcorp common stock. Each holder of record of Labcorp common stock received one share of Fortrea common stock for every share of Labcorp common stock held at 5:00 p.m., Burlington, North Carolina time on June 20, 2023, the record date for the distribution.

In June 2023, Fortrea, prior to the Separation and while a subsidiary of the Company, issued $570.0 of 7.500% senior secured notes due 2030 (the Fortrea Notes). As of June 30, 2023, the initial proceeds were held in escrow for release to Fortrea upon satisfaction of certain conditions, including completion of the Separation. The proceeds from the Fortrea Notes were used to fund cash payments of approximately $1,600.0 to the Company in connection with the Separation. The Company does not guarantee the Fortrea Notes following the Separation. Also in June 2023, Fortrea Holdings Inc. entered into three floating secured overnight financing rate (SOFR) credit facilities totaling $1,520.0. These are comprised of $450.0 Revolver maturing June 30, 2028; $500.0 Term Loan A maturing June 30, 2028; and $570.0 Term Loan B maturing June 30, 2030.

Upon closing of the spin transaction, Fortrea made a cash distribution to the Company of approximately $1,600.0 as consideration for the assets that the Company contributed to Fortrea in connection with the spin-off. The Company intends to use these proceeds toward a $1,000.0 accelerated share repurchase program and paying down $300.0 of debt maturing this year, with the remaining funds to be returned to shareholders through additional future share repurchases and/or cash dividends.

All current and historical operating results of Fortrea are presented as Discontinued Operations, net of tax, in the consolidated statement of operations. The spin-off is expected to be treated as tax-free for the Company and its shareholders for U.S. federal income tax purposes.

As a result of the separation of Fortrea, the Company recast segment results to exclude the historical results of the CDCS business for all periods presented. The remaining operations of the previously reported Drug Development segment has been renamed the Biopharma Laboratory Services segment.

RESULTS OF OPERATIONS (dollars in millions)

Three months ended June 30, 2023, compared with three months ended June 30, 2022

Revenues

Total revenues for the three months ended June 30, 2023, were $3,033.7, an increase of 3.8% over $2,923.0 in the second quarter of 2022. The increase was due to organic growth of 2.0%, acquisitions, net of divestitures, of 1.6% and favorable foreign currency translation of 0.2%. The 2.0% increase in organic revenue was driven by a 9.8% increase in the Company's organic Base Business, partially offset by a 7.8% decrease in COVID-19 Testing.

Dx revenues for the three months ended June 30, 2023, were $2,340.8, an increase of 3.8% over $2,255.4 in the second quarter of 2022. The increase was due to organic revenue of 1.8% and acquisitions of 2.2%, partially offset by unfavorable foreign currency translation of 0.2%. The 1.8% increase in organic revenue was due to an 11.9% increase in the Base Business, partially offset by a 10.1% decrease in COVID-19 Testing. Total Base Business growth compared to the Base Business in the

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prior year was 15.7%. The increase was due to the Ascension lab management agreement of approximately 7% as well as continued volume recovery compared to last year, which was negatively impacted by COVID-19.

Dx total volume (measured by requisitions) for the three months ended June 30, 2023, increased by 1.4% as acquisition volume contributed 2.5%, while organic volume decreased by 1.1%. Organic volume was impacted by a 6.1% decrease in COVID-19 Testing, partially offset by a 5.1% increase in the Base Business. Price/mix increased by 2.4% due to organic Base Business growth of 6.8%, partially offset by a decrease in COVID-19 Testing of 3.9%, lower acquisitions of 0.3%, and unfavorable foreign currency translation of 0.2%. Base Business volume increased 8.1% compared to the Base Business last year. Price/mix was up 7.5% in the Base Business compared to the Base Business last year, which includes the benefit of the Ascension lab management agreement.

BLS revenues for the three months ended June 30, 2023, were $699.0, an increase of 3.1% over $677.9 in the second quarter of 2022. The increase was primarily due to organic growth of 2.1% and favorable foreign currency translation of 1.5%, partially offset by divestitures of 0.4%. The increase in organic revenue was negatively impacted by approximately 5.0% due to non-human primate (NHP) related constraints in its Early Development business.

Cost of Revenues

Cost of revenues increased 10.7% during the three months ended June 30, 2023, as compared with the corresponding period in 2022. Cost of revenues as a percentage of revenues during the three months ended June 30, 2023, increased to 72.2% as compared to 67.8% in the corresponding period in 2022. This increase in cost of revenues as a percent of revenues was primarily due to a reduction in COVID-19 Testing revenues and higher personnel costs, partially offset by a recovery in the organic Base Business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenues were 16.7% and 14.8% during the three months ended June 30, 2023, and 2022, respectively. The increase is primarily due to a reduction in COVID-19 Testing revenues and spin-off transaction costs, partially offset by the impact of the Ascension lab management agreement.

Amortization of Intangibles and Other Assets

The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to June 30, 2022.

Goodwill and Other Asset Impairments

The Company recorded impairment charges of $2.8 in intangible assets during the three months ended June 30, 2023. The Company recorded no impairment charges during the three months ended June 30, 2022.

Restructuring and Other Charges

During the three months ended June 30, 2023, the Company recorded net restructuring and other charges of $15.8. The charges were comprised of $5.2 related to severance and other personnel costs and $8.9 in facility closures, lease terminations,

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and general integration activities. The charges were adjusted by the reversal of a previously established liability of $0.6 in unused severance liabilities and the increase of a previously established liability of $2.3 in unused facility-related costs.

During the three months ended June 30, 2022, the Company recorded net restructuring and other charges of $31.5. The charges were comprised of $15.1 related to severance and other personnel costs and $16.9 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of a previously established liability of $0.5 in unused severance costs.

Interest Expense

The increase in interest expense for the three months ended June 30, 2023, as compared with the corresponding period in 2022, is primarily due to the increased interest rates on variable rate debt and higher borrowings under the Credit Facility.

Equity Method Income

Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. The decrease in income for the three months ended June 30, 2023, as compared with the corresponding period in 2022, was primarily due to the decreased profitability of the Company's joint ventures in 2023.

Other, net

The change in Other, net for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, is primarily due to investment losses of $4.1 for the three months ended June 30, 2023 compared to investment losses of $6.2 for the corresponding period of 2022. In addition, foreign currency transaction losses of $11.2 were recognized for the three months ended June 30, 2023 as compared to losses of $23.5 for the corresponding period of 2022.

Income Tax Expense

The current year effective tax rate differs from the U.S. federal statutory rate of 21.0% primarily due to state income taxes and the disallowance of certain executive compensation which are partially offset by research and development tax credits and favorable foreign rate differentials. The prior year effective tax rate differed from the U.S. federal statutory rate of 21.0% primarily due to state income taxes which were partially offset by windfall stock compensation deductions and favorable foreign rate differentials.

Operating Income by Segment

As a result of the spin-off of Fortrea, which was completed on June 30, 2023, the Company recast the segment results to exclude the historical results of the CDCS business for all periods presented. The remaining operations of the previously reported Drug Development segment has been renamed the Biopharma Laboratory Services segment.

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Dx operating income was $409.7 for the three months ended June 30, 2023, a decrease of $105.9 over operating income of $515.6 in the corresponding period of 2022, and Dx operating margin decreased 540 basis points year-over-year. The decrease was due to a reduction in COVID-19 Testing. Excluding the mix impact from Ascension, Base Business margin increased due to the benefit of organic growth and LaunchPad savings, which was partially offset by higher personnel expense.

BLS operating income was $104.6 for the three months ended June 30, 2023, an increase of $11.6 over operating income of $93.0 in the corresponding period of 2022. The increase was due to demand growth and LaunchPad savings, partially offset by higher personnel expense. The improvement in operating income and margin was impacted by NHP-related constraints.

General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were $177.9 for the three months ended June 30, 2023, an increase of $79.4 over corporate expenses of $98.5 in the corresponding period of 2022, primarily due to spin-off transaction costs, personnel costs, bonus allocation, and research and development costs.

The Company remains on track to deliver approximately $350.0 of net savings from its three-year LaunchPad initiative by the end of 2024.

Six Months Ended June 30, 2023, compared with six months ended June 30, 2022

Revenues

The increase in revenues for the six months ended June 30, 2023, as compared with the corresponding period in 2022 was 0.1%. The increase was due to acquisitions net of divestitures of 1.6%, partially offset by lower organic revenue of 1.3% and unfavorable foreign currency translation of 0.2%. The 1.3% decrease in organic revenue was driven by an 11.2% decrease in COVID-19 Testing, partially offset by a 9.9% increase in the Company's organic Base Business.

Dx revenues for the six months ended June 30, 2023, were $4,723.6, an increase of 0.3% over $4,709.5 during the six months ended June 30, 2022. The increase was due to acquisitions of 2.1%, partially offset by lower organic revenue of 1.6% and unfavorable foreign currency translation of 0.2%. The 1.6% decrease in organic revenue was due to a 14.4% decrease in COVID-19 Testing, partially offset by a 12.8% increase in the Base Business. Total Base Business growth compared to the Base Business in the prior year was 17.7%, which includes the benefit from the Ascension lab management agreement of approximately 7%.

Dx total volume (measured by requisitions) for the six months ended June 30, 2023, decreased by 1.0% as organic volume decreased by 3.4% and acquisition volume contributed 2.4%. Organic volume was impacted by a 9.5% decrease in COVID-19 Testing, partially offset by a 6.1% increase in Base Business. Price/mix increased by 1.3% due to organic Base Business growth of 6.7%, partially offset by a decrease in COVID-19 Testing of 4.9%, unfavorable foreign currency translation of 0.3%, and lower acquisitions of 0.2%. Base Business volume increased 9.5% compared to the Base Business last year. Price/mix was up 8.2% in the Base Business compared to the Base Business last year, which includes the benefit of the Ascension lab management agreement.

BLS revenues for the six months ended June 30, 2023, were $1,360.3, a decrease of 1.6% over $1,382.1 during the six months ended June 30, 2022. The decrease was primarily due to an organic decline of 1.1%, unfavorable foreign currency

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translation of 0.1%, and divestitures net of acquisitions of 0.3%. The decrease in organic revenue was negatively impacted by approximately 6.0% due to NHP related constraints. BLS backlog expected to convert to revenue in the next 12 months is $2,460.0 or 30.9%.

Cost of Revenues

Cost of revenues increased 8.3% during the six months ended June 30, 2023, as compared with the corresponding period in 2022. Cost of revenues as a percentage of revenues during the six months ended June 30, 2023, increased to 72.1% as compared to 66.6% in the corresponding period in 2022. This increase in cost of revenues as a percent of revenues was primarily due to a reduction in COVID-19 Testing revenues, the impact of the Ascension Management Service Agreement, and higher personnel expenses, partially offset by organic Base Business growth and LaunchPad savings.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenues were 15.9% and 14.1% during the six months ended June 30, 2023, and 2022, respectively. The increase is primarily due to a reduction in COVID-19 Testing revenues and spin-off transaction costs, partially offset by the impact of the Ascension lab management agreement.

Amortization of Intangibles and Other Assets

The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to June 30, 2022.

Goodwill and Other Asset Impairments

The Company recorded impairment charges of $5.0 in capitalized software costs and other intangible assets during the six months ended June 30, 2023. The Company recorded impairment charges of $1.2 in other assets in Ukraine and Russia during the six months ended June 30, 2022.

Restructuring and Other Charges

During the six months ended June 30, 2023, the Company recorded net restructuring and other charges of $23.3. The charges were comprised of $9.2 related to severance and other personnel costs and $13.2 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of $1.1 of previously established severance liabilities and the increase of a previously established liability of $2.0 in unused facility-related costs.

During the six months ended June 30, 2022, the Company recorded net restructuring and other charges of $35.0. The charges were comprised of $17.4 related to severance and other personnel costs and $17.6 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of a previously established liability of $1.0 in unused severance costs and $0.1 in unused facility-related costs.

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Interest Expense

The increase in interest expense for the six months ended June 30, 2023, as compared with the corresponding period in 2022, is primarily due to the increased interest rates on variable rate debt and higher borrowings under the Credit Facility.

Equity Method Income

Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. The decrease in income for the six months ended June 30, 2023, as compared with the corresponding period in 2022, was primarily due to the decreased profitability of the Company's joint ventures in 2023.

Other, net

The change in Other, net for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, is primarily due to investment losses of $5.6 for the three months ended June 30, 2023 compared to investment losses of $14.2 for the corresponding period of 2022. In addition, foreign currency transaction losses of $18.0 were recognized for the six months ended June 30, 2023 as compared to losses of $31.7 for the corresponding period of 2022.

Income Tax Expense

The current year effective tax rate differs from the U.S. federal statutory rate of 21.0% primarily due to state income taxes and the disallowance of certain executive compensation which are partially offset by research and development tax credits and favorable foreign rate differentials. The prior year effective tax rate differed from the U.S. federal statutory rate of 21.0% primarily due to state income taxes which were partially offset by windfall stock compensation deductions and favorable foreign rate differentials.

Operating Income by Segment

During the fourth quarter of 2022, the Company modified the segment performance measure to exclude the amortization of intangibles and other assets, restructuring and other charges, goodwill and other asset impairments, and certain corporate charges for items such as transaction costs, remaining unallocated costs of the CDCS business, COVID-19-related costs, and other special items. These changes align with how the CODM now evaluates segment performance and allocates resources. Prior periods have been conformed for comparability.

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Dx operating income was $851.2 for the six months ended June 30, 2023, a decrease of $347.5 over operating income of $1,198.7 in the corresponding period of 2022, and Dx operating margin decreased 740 basis points year-over-year. The decrease was due to a reduction in COVID-19 Testing and higher personnel costs, partially offset by a recovery in the Base Business.

BLS operating income was $178.2 for the six months ended June 30, 2023, a decrease of $10.7 over operating income of $188.9 in the corresponding period of 2022. The decrease was due to NHP-related constraints and higher personnel costs, partially offset by demand growth and LaunchPad savings.

General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were $300.1 for the six months ended June 30, 2023, a increase of $82.7 over corporate expenses of $217.4 in the corresponding period of 2022, primarily due to spin-off transaction costs, personnel costs, bonus allocation, and research and development costs.

The Company remains on track to deliver approximately $350.0 of net savings from its three-year LaunchPad initiative by the end of 2024.

LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

The Company's cash-generating ability and financial condition typically have provided ready access to capital markets. The Company's principal source of liquidity is operating cash flow, supplemented by proceeds from debt offerings. The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated from operations, will be sufficient to satisfy its cash requirements, cash dividends, and share repurchases over the next twelve months. The Company's senior unsecured revolving credit facility is further discussed in Note 7 (Debt) to the Company's condensed consolidated financial statements.

In summary, the Company's cash flows from continuing operations were as follows for the six months ended June 30, 2023, and 2022, respectively:

Cash and Cash Equivalents

Cash and cash equivalents at June 30, 2023, and 2022, totaled $1,930.6 and $978.3, respectively. Cash and cash equivalents consist of highly liquid instruments, such as time deposits, commercial paper, and other money market investments, which have original maturities of three months or less.

Cash Flows from Operating Activities

During the six months ended June 30, 2023, the Company's continuing operations provided $347.2 of cash as compared to $904.6 during the same period in 2022. The $557.4 decrease in cash provided from operations in 2023 as compared with the corresponding 2022 period is primarily due to lower cash earnings.

Cash Flows from Investing Activities

Net cash used for investing activities for the six months ended June 30, 2023, was $328.6 as compared to $802.5 for the six months ended June 30, 2022. The change in cash used for investing activities was primarily due to a decrease in business acquisitions and lower capital expenditures during the six months ended June 30, 2023. Capital expenditures were $181.5 and $247.4 for the six months ended June 30, 2023, and 2022, respectively.

Cash Flows from Financing Activities

Net cash used by financing activities for the six months ended June 30, 2023, was $124.7 as compared to $497.4 for the six months ended June 30, 2022. The change in cash flows from financing activities for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, was primarily due to no share repurchase activity during the six months ended June 30, 2023 as compared to $400.0 during the corresponding period in 2022. Upon closing of the spin transaction, Fortrea made a cash distribution to the Company of approximately $1,600.0 as partial consideration for the assets that the Company contributed to Fortrea in connection with the spin-off. The Company intends to use approximately $1.0 billion of the proceeds toward an accelerated share repurchase program and $300.0 to pay down debt maturing this year.

At June 30, 2023, the Company had $1,930.6 of cash and $1,000.0 of available borrowings under its revolving credit

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facility, which does not mature until 2026. Under the Company's revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios. The Company was in compliance with all covenants under the revolving credit facility at June 30, 2023, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.

For the six months ended June 30, 2023, the Company did not repurchase any of the Company's common stock. As of June 30, 2023, the Company had an outstanding authorization from the board of directors to purchase up to $1,531.5 more of the Company's common stock with no expiration date.

For the six months ended June 30, 2023, the Company paid $129.0 in common stock dividends. On July 13, 2023, the Company announced a cash dividend of $0.72 per share of common stock for the second quarter, or approximately $64.8 in the aggregate. The dividend will be payable on September 8, 2023, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on August 8, 2023. The declaration and payment of any future dividends will be at the discretion of the Company's board of directors.

Credit Ratings

The Company’s investment grade debt ratings from Moody’s and from Standard and Poor’s (S&P) contribute to its ability to access capital markets.

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange and interest rates, and the Company regularly evaluates its exposure to such changes. The Company addresses its exposure to market risks, principally the market risks associated with changes in foreign currency exchange rates and interest rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such as foreign currency forward contracts, and interest rate and cross currency swap agreements.

Foreign Currency Exchange Rates

Approximately 13.6% of the Company's revenues for the six months ended June 30, 2023, and approximately 14.3% of the Company's revenue for the six months ended June 30, 2022, were denominated in currencies other than the U.S. Dollar (USD). The Company's financial statements are reported in USD and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into USD for purposes of reporting the Company's consolidated financial results. In the second quarter of 2023 and the year ended December 31, 2022, the most significant currency exchange rate exposures were to the Canadian dollar, Swiss Franc, Euro and British Pound. Excluding the impacts from any outstanding or future hedging transactions, a hypothetical change of 10% in average exchange rates used to translate all foreign currencies to USD would have impacted income before income taxes for the six months ended June 30, 2023, by approximately $12.1. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $51.7 and $(241.1) at June 30, 2023 and 2022, respectively. The Company does not have significant operations in countries in which the economy is considered to be highly inflationary.

The Company earns revenue from service contracts over a period of time, ranging from months to years. Accordingly, exchange rate fluctuations during this period may affect the Company's profitability with respect to such contracts. The Company is also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in some of its contracts with customers, or it may hedge transaction risk with foreign currency forward contracts. At June 30, 2023, the Company had 10 open foreign exchange forward contracts with various amounts maturing monthly through July 2023 with a notional value totaling approximately $415.3. At December 31, 2022, the Company had 27 open foreign exchange forward contracts with various amounts maturing monthly through January 2023 with a notional value totaling approximately $629.5.

The Company is party to U.S. to Swiss Franc cross-currency swap agreements with an aggregate notional amount of $600.0, $300.0 maturing in 2024 and $300.0 maturing in 2025, as a hedge against the impact of foreign exchange movements on its net investment in a Swiss Franc functional currency subsidiary.

Interest Rates

Some of the Company's debt from time to time is subject to interest at variable rates. As a result, fluctuations in interest rates can affect the business. The Company attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of fixed and variable rate debt including by the utilization of derivative financial instruments, primarily interest rate swaps.

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Borrowings under the Company's term loan credit facility, now repaid, and revolving credit facility are subject to variable interest rates, unless fixed through interest rate swaps or other agreements.

In May 2021, to hedge against changes in the fair value portion of the Company's long-term debt, the Company entered into fixed-to-variable interest rate swap agreements for the 2.70% senior notes due 2031 with an aggregate notional value of $500.0 and variable interest rates based on three-month LIBOR plus 1.0706%.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 9 (Commitments and Contingencies) to the Company’s condensed consolidated financial statements, above, which is incorporated herein by reference.

The risk factors set forth below revise and supplement the corresponding risk factors set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. With the exception of the following, there have been no material changes in the risk factors that appear in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

The Company depends on a variety of U.S. and international financial institutions to provide us with banking services. The default or failure of one or more of the financial institutions that we rely on may adversely affect the Company's business and financial condition.

The Company maintains the majority of its cash and cash equivalents in accounts with major U.S. and international financial institutions, and our deposits at certain of these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where the Company maintains its cash and cash equivalents, there can be no assurance that the Company would be able to access uninsured funds in a timely manner or at all. Additionally, bank payment processes could become unavailable which could temporarily impact the Company's ability to conduct business with suppliers and pay its employees on a timely basis. Any inability to access or delay in accessing these funds could adversely affect the Company's business and financial condition.

The recently completed spin-off of Fortrea Holdings Inc. may not achieve the intended results.

On June 30, 2023, Labcorp completed the previously announced spin-off of Fortrea Holdings Inc. (Fortrea). The spin-off poses risks and challenges that could impact the Company’s business, including, but not limited to, the failure to achieve the intended benefits from the spin-off, the failure to receive tax-free treatment for U.S. federal income purposes, and potential exposure to unexpected claims, liabilities, or costs under the Company’s agreements with Fortrea in connection with the spin-off.

The spin-off may adversely impact relationships with customers, suppliers, employees, and other business counterparties and the Company may experience delays, business disruption, increased costs, including from lost synergies, which could adversely affect the Company’s business, financial condition, and results of operations. The Company may also experience increased challenges in attracting, retaining, and motivating key personnel, which could harm the Company’s business. The Company's ongoing transitional and commercial arrangements with Fortrea intend to provide for a seamless delivery of services to the customers and other stakeholders of the independent companies following the spin-off, but those arrangements may not meet the intended objectives and could have unexpected costs or challenges, which could negatively impact the Company’s business, including relationships with customers and other business counterparties, and which could also result in a decline in value of the Company.

The Company might not be able to engage in certain desirable capital-raising or strategic transactions.

The Company’s ability to engage in certain transactions could be limited or restricted in order to preserve, for U.S. federal income tax purposes, the tax-free qualification of the Fortrea spin-off and certain related transactions under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code. Even if the spin-off and certain related transactions otherwise qualify for tax-free treatment under Section 355 of the Code, they may result in corporate-level taxable gain to the Company if there is a 50% or greater change in ownership, by vote or value, of shares of the Company’s stock, Fortrea’s stock, or the stock of a successor of either occurring as part of a plan or series of related transactions that includes the spin-off, which is generally presumed to include any acquisitions or issuances of stock within two years of the spin-off. To avoid realizing such taxable gain, the Company may be restricted or limited in its capital-raising or in the strategic transactions that it elects to pursue during such time period.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (dollars and shares in millions, except per share data)

The Board of Directors has authorized the repurchase of specified amounts of the Company's stock since 2007. During the three months ended June 30, 2023, the Company did not repurchase any of its common stock. As of June 30, 2023, the Company had outstanding authorization from the board of directors to purchase up to $1,531.5 of the Company's common stock. The repurchase authorization has no expiration date.

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During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LABORATORY CORPORATION OF AMERICA HOLDINGS

Registrant

August 4, 2023