filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
55K characters. Original on sec.gov · Markdown
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, the development and commercialization of laboratory-developed tests (LDTs), and the delivery of clinical laboratory test results, including, but not limited to, the U.S. Clinical Laboratory Improvement Act of 1967, the U.S. Clinical Laboratory Improvement Amendments of 1988, the European Union In Vitro Diagnostics Regulation, 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 development, validation, approval, clearance, commercialization, or utilization of laboratory tests;
9.changes in and failure to comply with applicable government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests, including LDTs, 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;
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 applicable 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 business from managed care organizations (MCOs) 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 invest in or effectively develop and deploy new systems, system modifications or enhancements required in response to evolving market, business, and customer trends and 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 and other 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, retain, and develop 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 beyond the Company’s control;
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;
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; geopolitical crises, including terrorism and war; public health crises and disease epidemics and pandemics, including, but not limited to the continued impact of COVID-19; and other events beyond 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, 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 incidents such as denial of service attacks, malware, ransomware, and computer viruses, delays or failures in the development and implementation of the Company’s automation platforms, or adverse effects from the use of or regulation of artificial intelligence and machine learning tools, any of which could result in a negative effect on the Company’s performance of services, a loss of business or increased costs, delays in cash collections, 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 (FCPA), 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, benefits, 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.changing global economic conditions and government and regulatory changes;
45.risks associated with the impacts and expected benefits and costs of the 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.risks and uncertainties as to the expected benefits of the Reorganization, including, but not limited to the effect of the Reorganization on the Company's business generally, and unexpected issues that may arise as a result of the Reorganization.
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.
Separation of Fortrea Holdings Inc.
On June 30, 2023, Labcorp completed the previously announced separation of Fortrea from the Company.
All historical operating results of Fortrea are presented as Discontinued Operations, net of tax, in the Condensed Consolidated Statements 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 have been renamed the Biopharma Laboratory Services segment.
GENERAL (dollars in millions, except per share data)
Revenues for the nine months ended September 30, 2024, were $9,679.5, an increase of 6.0% from $9,128.3 during the nine months ended September 30, 2023. The increase was due to organic revenue of 3.4%, acquisitions, net of divestitures, of 2.4%, and favorable foreign currency translation of 0.2%. The 3.4% increase in organic revenue was driven by a 4.5% increase in the Company's organic Base Business, partially offset by a 1.1% decrease in COVID-19 PCR testing (COVID-19 Testing). 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.
RESULTS OF OPERATIONS (dollars in millions)
Revenues
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Dx | $ | 2,553.5 | $ | 2,344.7 | 8.9 | % | |||||||||||
| BLS | 737.7 | 719.1 | 2.6 | % | |||||||||||||
| Intercompany eliminations and other | (9.2) | (7.0) | 33.2 | % | |||||||||||||
| Total | $ | 3,282.0 | $ | 3,056.8 | 7.4 | % | |||||||||||
Total revenues for the three months ended September 30, 2024, were $3,282.0, an increase of 7.4% over $3,056.8 in the third quarter of 2023. The increase was due to organic revenue of 4.2%, acquisitions, net of divestitures, of 3.1%, and favorable foreign currency translation of 0.1%. The 4.2% increase in organic revenue was driven by a 4.8% increase in the Company's organic Base Business, partially offset by a 0.6% decrease in COVID-19 Testing.
Dx revenues for the three months ended September 30, 2024, were $2,553.5, an increase of 8.9% over $2,344.7 in the third quarter of 2023. The increase was due to organic revenue of 5.0% and acquisitions, net of divestitures, of 4.0%, partially offset by unfavorable foreign currency translation of 0.1%. The 5.0% increase in organic growth was due to a 5.7% increase in the Base Business, partially offset by a 0.7% decrease in COVID-19 Testing.
Dx organic volume increased by 2.2% for the three months ended September 30, 2024, while total volume (measured by requisitions) increased by 5.1% as acquisition volume, net of divestitures, contributed 2.8%. Organic volume was up due to a 2.7% increase in the Base Business, partially offset by a 0.5% decrease in COVID-19 Testing. Price/mix increased by 3.8% due to organic Base Business growth of 3.0% and acquisitions, net of divestitures, of 1.2%, partially offset by a decrease in COVID-19 Testing of 0.3%.
BLS revenues for the three months ended September 30, 2024, were $737.7, an increase of 2.6% over $719.1 in the third quarter of 2023. The increase was due to organic growth of 2.0% and favorable foreign currency translation of 0.6%.
Cost of Revenues
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Cost of revenues | $ | 2,377.6 | $ | 2,205.6 | 7.8 | % | |||||||||||
| Cost of revenues as a % of revenues | 72.4 | % | 72.2 | % |
Cost of revenues increased 7.8% during the three months ended September 30, 2024, as compared with the corresponding period in 2023. Cost of revenues as a percentage of revenues during the three months ended September 30, 2024, increased to 72.4% as compared to 72.2% in the corresponding period in 2023. This increase in cost of revenues as a percent of revenues was primarily due to higher personnel costs and the impact of the Invitae transaction, partially offset by demand and LaunchPad savings.
Selling, General and Administrative Expenses
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Selling, general and administrative expenses | $ | 568.6 | $ | 525.5 | 8.2 | % | |||||||||||
| Selling, general and administrative expenses as a % of revenues | 17.3 | % | 17.2 | % |
Selling, general and administrative expenses as a percentage of revenues was 17.3% and 17.2% during the three months ended September 30, 2024, and 2023, respectively. The increase is primarily due to higher personnel costs and the impact from Invitae, partially offset by LaunchPad savings and demand.
Amortization of Intangibles and Other Assets
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Amortization of intangibles and other assets | $ | 63.7 | $ | 55.7 | 14.3 | % |
The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to September 30, 2023.
Goodwill and Other Asset Impairments
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Goodwill and other asset impairments | $ | — | $ | 10.2 | (100.0) | % |
The Company recorded no impairment charges during the three months ended September 30, 2024. The Company recorded impairment charges of $10.2 in intangible assets during the three months ended September 30, 2023.
Restructuring and Other Charges
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Restructuring and other charges | $ | 18.0 | $ | 7.5 | 138.9 | % |
During the three months ended September 30, 2024, the Company recorded net restructuring and other charges of $18.0. The charges were comprised of $19.3 related to severance and other personnel costs. The charges were adjusted by the reversal of a previously established liability of $1.2 in unused severance-related costs and $0.1 in unused facility-related costs.
During the three months ended September 30, 2023, the Company recorded net restructuring and other charges of $7.5. The charges were comprised of $11.2 related to severance and other personnel costs and $0.9 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of a previously established liability of $0.1 in unused severance liabilities and the increase of a previously established liability of $4.5 in facility-related costs.
Interest Expense
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Interest expense | $ | (50.4) | $ | (50.3) | 0.3 | % |
For the three months ended September 30, 2024, interest expense remained relatively flat as compared to the same period in 2023. There was a decrease in interest expense related to the repayment of the November 2023 $300.0 senior notes which was offset by increased interest expense related to the revolving credit facility and the new accounts receivable securitization facility (AR Facility).
Equity Method Income
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Equity method income (expense), net | $ | (0.5) | $ | (0.3) | 66.3 | % |
Equity method income (expense) 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 September 30, 2024, as compared with the corresponding period in 2023, was partially due to the sale of the Company's interest in one joint venture and the acquisition of the remaining interest in another joint venture during 2023.
Other, net
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Other, net | $ | 4.3 | $ | 21.1 | 78.5 | % |
The change in Other, net for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, is partially due to a decrease of $4.3 of transition services fees charged to Fortrea related to administrative and IT systems support. The costs to provide these services are included in operating income but the service fees are included in other income. In addition, the Company recorded investment losses of $1.6 for the three months ended September 30, 2024 compared to investment gains of $4.0 for the corresponding period of 2023. Foreign currency transaction losses of $10.0 were recognized for the three months ended September 30, 2024, as compared to losses of $2.8 for the corresponding period of 2023.
Income Tax Expense
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Income tax expense | $ | 41.0 | $ | 55.1 | (25.6) | % | |||||||||||
| Income tax expense as a % of earnings before income taxes | 19.5 | % | 23.1 | % |
The year-over-year decrease in the effective tax rate for the three months ended September 30 is primarily attributable to the relative geographical mix of earnings among domestic and foreign entities resulting in favorable foreign rate differentials along with year-over-year increases in the U.S. research and development tax credits.
Operating Income by Segment
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Dx segment operating income | $ | 387.4 | $ | 386.3 | 0.3 | % | |||||||||||
| Dx segment operating margin | 15.2 | % | 16.5 | % | (1.3) | % | |||||||||||
| BLS segment operating income | 120.9 | 109.0 | 10.8 | % | |||||||||||||
| BLS segment operating margin | 16.4 | % | 15.2 | % | 1.2 | % | |||||||||||
| Segment operating income | 508.3 | 495.3 | 2.6 | % | |||||||||||||
| General corporate and unallocated expenses | (172.5) | (169.6) | 1.7 | % | |||||||||||||
| Amortization of intangibles and other assets | (63.7) | (55.7) | 14.3 | % | |||||||||||||
| Goodwill and other asset impairments | — | (10.2) | (100.0) | % | |||||||||||||
| Restructuring and other charges | (18.0) | (7.5) | 138.9 | % | |||||||||||||
| Total operating income | $ | 254.1 | $ | 252.3 | 0.7 | % |
Dx operating income was $387.4 for the three months ended September 30, 2024, an increase of $1.1 over operating income of $386.3 in the corresponding period of 2023, and Dx operating margin decreased 130 basis points year-over-year. The decrease in operating margin was due to the Invitae transaction and the unfavorable impact of weather and days.
BLS operating income was $120.9 for the three months ended September 30, 2024, an increase of $11.9 over operating income of $109.0 in the corresponding period of 2023, and BLS operating margin increased 120 basis points year-over-year. The increase was due to organic growth and LaunchPad savings, partially offset by higher personnel costs.
General corporate, unallocated expenses, and other are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. General corporate and unallocated expenses were $172.5 for the three months ended September 30, 2024, an increase of $2.9 over corporate expenses of $169.6 in the corresponding period of 2023, primarily due to costs related to acquisitions and personnel costs.
The Company remains on track to deliver approximately $100.0 to $125.0 of Launchpad savings in fiscal 2024.
Revenues
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Dx | $ | 7,558.1 | $ | 7,068.3 | 6.9 | % | |||||||||||
| BLS | $ | 2,155.6 | $ | 2,079.4 | 3.7 | % | |||||||||||
| Intercompany eliminations and other | (34.2) | (19.4) | 76.6 | % | |||||||||||||
| Total | $ | 9,679.5 | $ | 9,128.3 | 6.0 | % | |||||||||||
The increase in revenues for the nine months ended September 30, 2024, as compared with the corresponding period in 2023 was 6.0%. The increase was due to organic revenue of 3.4%, acquisitions, net of divestitures, of 2.4%, and favorable foreign currency translation of 0.2%. The 3.4% increase in organic revenue was driven by a 4.5% increase in the Company's organic Base Business, partially offset by a 1.1% decrease in COVID-19 Testing.
Dx revenues for the nine months ended September 30, 2024, were $7,558.1, an increase of 6.9% over $7,068.3 during the nine months ended September 30, 2023. The increase was due to organic revenue of 3.8% and acquisitions, net of divestitures, of 3.2%. The 3.8% increase in organic growth was due to a 5.2% increase in the Base Business, partially offset by a 1.4% decrease in COVID-19 Testing. Total Base Business growth compared to the Base Business in the prior year was 8.5%.
Dx total volume (measured by requisitions) for the nine months ended September 30, 2024, increased by 4.7% as acquisition volume, net of divestitures, contributed 2.6%, while organic volume increased by 2.1%. Organic volume was up due to a 2.9% increase in the Base Business, partially offset by a 0.8% decrease in COVID-19 Testing. Price/mix increased by 2.2% due to organic Base Business growth of 2.3% and acquisitions, net of divestitures of 0.5%, partially offset by a decrease in COVID-19 Testing of 0.6%. Base Business volume increased 5.6% compared to the Base Business last year. Price/mix was up 2.9% in the Base Business compared to the Base Business last year.
BLS revenues for the nine months ended September 30, 2024, were $2,155.6, an increase of 3.7% over $2,079.4 during the nine months ended September 30, 2023. The increase was due to organic growth of 2.7% and favorable foreign currency translation of 0.9%.
Cost of Revenues
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Cost of revenues | $ | 6,951.4 | $ | 6,584.8 | 5.6 | % | |||||||||||
| Cost of revenues as a % of revenues | 71.8 | % | 72.1 | % |
Cost of revenues increased 5.6% during the nine months ended September 30, 2024, as compared with the corresponding period in 2023. Cost of revenues as a percentage of revenues during the nine months ended September 30, 2024, decreased to 71.8% as compared to 72.1% in the corresponding period in 2023. This decrease in cost of revenues as a percent of revenues was primarily due to demand, LaunchPad savings, and CDCS costs in 2023 that do not qualify as discontinued operations, largely offset by higher personnel costs, lower COVID-19 Testing, and the impact from the Invitae transaction.
Selling, General and Administrative Expenses
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Selling, general and administrative expenses | $ | 1,634.8 | $ | 1,488.5 | 9.8 | % | |||||||||||
| Selling, general and administrative expenses as a % of revenues | 16.9 | % | 16.3 | % |
Selling, general and administrative expenses as a percentage of revenues were 16.9% and 16.3% during the nine months ended September 30, 2024, and 2023, respectively. The increase is primarily due to higher personnel costs, a reduction in COVID-19 Testing revenues, and the impact from the Invitae transaction, partially offset by LaunchPad savings and demand.
Amortization of Intangibles and Other Assets
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Amortization of intangibles and other assets | $ | 186.0 | $ | 160.6 | 15.8 | % |
The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to September 30, 2023.
Goodwill and Other Asset Impairments
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Goodwill and other asset impairments | $ | 2.5 | $ | 15.2 | (83.8) | % |
The Company recorded impairment charges of $2.5 related to a decommissioned robotic asset during the nine months ended September 30, 2024. The Company recorded impairment charges of $15.2 in capitalized software costs and other intangible assets nine months ended September 30, 2023.
Restructuring and Other Charges
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Restructuring and other charges | $ | 34.6 | $ | 30.8 | 12.3% |
During the nine months ended September 30, 2024, the Company recorded net restructuring and other charges of $34.6. The charges were comprised of $34.4 related to severance and other personnel costs and $1.8 in facility-related costs. The charges were adjusted by the reversal of a previously established liability of $1.2 in unused severance-related costs and $0.4 in unused facility-related costs.
During the nine months ended September 30, 2023, the Company recorded net restructuring and other charges of $30.8. The charges were comprised of $20.4 related to severance and other personnel costs and $14.0 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of a previously established liability of $1.1 in unused severance liabilities and the increase of a previously established liability of $2.5 in facility-related costs.
Interest Expense
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Interest expense | $ | (144.9) | $ | (150.8) | (3.9) | % |
The decrease in interest expense for the nine months ended September 30, 2024, as compared with the corresponding period in 2023, is primarily due to the repayment of the November 2023 $300.0 senior notes.
Equity Method Income
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Equity method income (expense), net | $ | (0.7) | $ | (1.5) | (50.7) | % |
Equity method income (expense) 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 equity method expense for the nine months ended September 30, 2024, as compared with the corresponding period in 2023, was partially due to the sale of the Company's interest in one joint venture and the acquisition of the remaining interest in another joint venture during 2023.
Other, net
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Other, net | $ | 43.8 | $ | (2.7) | 1,721.5 | % |
The change in Other, net for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, is primarily due to $41.0 of additional transition services fees charged to Fortrea related to administrative and IT systems support during the nine months ended September 30, 2024 as compared to the same period in 2023. The costs to provide these services are included in operating income but the service fees are included in other income. In addition, the Company recorded investment losses of $7.3 for the nine months ended September 30, 2024 compared to investment losses of $1.6 for the corresponding period of 2023. Foreign currency transaction losses of $15.2 were recognized for the nine months ended September 30, 2024, as compared to losses of $8.6 for the corresponding period of 2023. The Company also recorded a $4.9 gain on the sale of the assets of its Beacon Laboratory Benefit Solutions, Inc. business in 2024.
Income Tax Expense
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Income tax expense | $ | 172.2 | $ | 168.8 | 2.0 | % | |||||||||||
| Income tax expense as a % of earnings before income taxes | 22.2 | % | 23.6 | % |
The current year and prior 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 were partially offset by research and development tax credits 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.
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||
| Dx segment operating income | $ | 1,246.8 | $ | 1,237.5 | 0.7 | % | |||||||||||
| Dx segment operating margin | 16.5 | % | 17.5 | % | (1.0) | % | |||||||||||
| BLS segment operating income | 328.2 | 287.2 | 14.2 | % | |||||||||||||
| BLS segment operating margin | 15.2 | % | 13.8 | % | 1.4 | % | |||||||||||
| Segment operating income | 1,575.0 | 1,524.7 | 3.3 | % | |||||||||||||
| General corporate and unallocated expenses | (481.7) | (469.7) | 2.6 | % | |||||||||||||
| Amortization of intangibles and other assets | (186.0) | (160.6) | 15.8 | % | |||||||||||||
| Goodwill and other asset impairments | (2.5) | (15.2) | (83.8) | % | |||||||||||||
| Restructuring and other charges | (34.6) | (30.8) | 12.3 | % | |||||||||||||
| Total operating income | $ | 870.2 | $ | 848.4 | 2.6 | % | |||||||||||
Dx operating income was $1,246.8 for the nine months ended September 30, 2024, an increase of $9.3 over operating income of $1,237.5 in the corresponding period of 2023, and Dx operating margin decreased 100 basis points year-over-year. The decrease in operating margin was due to a reduction in COVID-19 Testing, higher personnel costs, and the impact from the Invitae transaction, partially offset by growth in the Base Business.
BLS operating income was $328.2 for the nine months ended September 30, 2024, an increase of $41.0 over operating income of $287.2 in the corresponding period of 2023, and BLS operating margin increased 140 basis points year-over-year. The increase was due to organic growth and LaunchPad savings, partially offset by higher personnel expense.
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 $481.7 for the nine months ended September 30, 2024, an increase of $12.0 over corporate expenses of $469.7 in the corresponding period of 2023, primarily due to costs related to acquisitions, and personnel costs.
The Company remains on track to deliver approximately $100.0 to $125.0 of Launchpad savings in fiscal 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 and beyond. 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 nine months ended September 30, 2024, and 2023, respectively:
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net cash provided by operating activities from continuing operations | $ | 808.6 | $ | 622.7 | |||||||
| Net cash used for investing activities from continuing operations | (1,157.2) | (816.2) | |||||||||
| Net cash provide by (used for) financing activities from continuing operations | 1,326.6 | (1,112.5) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 2.5 | 3.5 | |||||||||
| Net increase (decrease) in cash and cash equivalents from continuing operations | $ | 980.5 | $ | (1,302.5) |
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2024, and 2023, totaled $1,517.3 and $727.9, 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 nine months ended September 30, 2024, the Company's continuing operations used $808.6 of cash as compared to providing $622.7 during the same period in 2023. The $185.9 increase in cash provided from operations in 2024 as compared with the corresponding 2023 period is primarily due to higher cash earnings.
Cash Flows from Investing Activities
Net cash used for investing activities from continuing operations for the nine months ended September 30, 2024, was $1,157.2 as compared to $816.2 for the nine months ended September 30, 2023. The change in cash used for investing activities was primarily due to an increase in business acquisitions and higher capital expenditures during the nine months ended September 30, 2024. Capital expenditures were $377.8 and $286.4 for the nine months ended September 30, 2024, and 2023, respectively.
On September 17, 2024, the Company announced that it entered into an agreement with Cinven, Inc. to acquire a 15% minority interest in SYNLAB, a leader in medical diagnostic services and specialty testing in Europe, for approximately $155.9 (€140.0). The transaction is anticipated to close in early 2025, subject to customary closing conditions for a transaction of this type, including applicable regulatory approvals. The Company will acquire the minority interest through an intermediate holding company that will be established to hold the investment with SYNLAB and will be represented on the holding company board with Cinven, Inc. and other investors.
Cash Flows from Financing Activities
Net cash provided by financing activities from continuing operations for the nine months ended September 30, 2024, was $1,326.6 as compared to net cash used for financing activities of $1,112.5 for the nine months ended September 30, 2023. The change in cash flows from financing activities from continuing operations for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to $2,000.0 of proceeds for new debt securities, and $300.0 of proceeds for the AR Facility, offset by the $600.0 payment of the 3.25% senior notes due September 2024.
On September 23, 2024, LCAH entered into an indenture with U.S. Bank Trust Company, National Association, as trustee (the Trustee) (the Indenture). Also, on September 23, 2024, the Company, LCAH, and the Trustee entered into certain first, second, and third supplemental indentures to the Indenture under each of which LCAH issued, and the Company guaranteed, $650.0 aggregate principal amount of 4.35% Senior Notes due 2030 (the 2030 Notes), $500.0 aggregate principal amount of 4.55% Senior Notes due 2032 (the 2032 Notes) and $850.0 aggregate principal amount of 4.80% Senior Notes due 2034, respectively (the 2034 Notes and, together with the 2030 Notes and the 2032 Notes, the Notes), totaling $2,000.0. Interest on the Notes is payable semi-annually on April 1 and October 1 of each year, commencing April 1, 2025. Net proceeds from the offering of the Notes were approximately $1,982.1 after deducting underwriting discounts and other estimated expenses of the offering. The net proceeds were used to redeem or repay indebtedness and, to the extent not used for such purpose, for other general corporate purposes. Indebtedness redeemed or repaid at or prior to maturity were the Company's 2.30% senior notes due 2024, its 3.60% senior notes due 2025 and $350.0 of borrowings under its revolving credit facility.
On August 23, 2024, the Company and a bankruptcy-remote special purpose vehicle entered into an AR Facility with PNC Bank, National Association with a three-year term. The AR Facility provides for purchases of accounts receivable by PNC in an amount of up to $300.0 through August of 2027 and may increase to up to $700.0, subject to the satisfaction of certain conditions.
During the three months ended September 30, 2024, the Company received loan proceeds of $300.0 under the AR Facility, which is included in cash from financing activities in the Condensed Consolidated Statement of Cash Flows.
At September 30, 2024, the Company had $1,517.3 of cash and $1,000.0 of available borrowings under its revolving credit facility, which does not mature until 2026. Under the Company's credit facilities and indentures relating to the Company's senior notes, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers , and with respect to the credit facilities, the Company is required to maintain certain leverage ratios. The Company was in compliance with all covenants under the credit facilities and the indentures related to the Company's outstanding senior notes at September 30, 2024. The Company expects that it will remain in compliance with all covenants associated with its existing debt obligations for the next twelve months.
On July 24, 2024, the Board adopted a new share repurchase plan authorizing up to $1,000.0 of the Company's shares in addition to the remaining amount outstanding under the previous plan. As of September 30, 2024, the Company had outstanding authorization from the board of directors to purchase up to $1,355.4 of the Company's common stock.
For the nine months ended September 30, 2024, the Company paid $183.0 in common stock dividends. On October 10, 2024, the Company announced a cash dividend of $0.72 per share of common stock for the fourth quarter, or approximately $61.0 in the aggregate. The dividend will be payable on December 13, 2024, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on November 26, 2024. The declaration and payment of any future dividends will be at the discretion of the Company’s board of directors.
Guarantor Information
In connection with the Reorganization, the Company, LCAH and the Trustee entered into a seventeenth supplemental indenture (the Seventeenth Supplemental Indenture) to an indenture, dated as of November 19, 2010, between LCAH and the Trustee (the 2010 Indenture). In addition, the Company, LCAH and the Trustee entered into the 2024 Indenture (the 2010 Indenture, together with the 2024 Indenture, the Indentures). The Seventeenth Supplemental Indenture, among other things, provides for the full and unconditional guarantee by the Company of LCAH’s obligations under the 2010 Indenture, and each series of senior unsecured notes issued and outstanding thereunder, and the 2024 Indenture provides for the full and unconditional guarantee by the Company of LCAH’s obligations, and each series of senior unsecured notes issued and outstanding, thereunder (collectively, the Labcorp Holdings Guarantees). Also, the Indentures permit the Company to satisfy LCAH’s reporting obligations so long as the Labcorp Holdings Guarantees remain in place and the Company’s financial statements and other information comply with the requirements of Rule 3-10 of Regulation S-X and the Exchange Act (Regulation S-X).
As of September 30, 2024, there was $4,492.9 and $2,000.0 aggregate principal amount of issued and outstanding senior notes of LCAH, issued under the 2010 Indenture and the 2024 Indenture, respectively, that are fully and unconditionally guaranteed by the Company. Accordingly, pursuant to Rule 3-10 of Regulation S-X, separate consolidated financial statements of LCAH have not been presented. As permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for LCAH because the assets, liabilities and results of operations of LCAH are not materially different than the corresponding amounts in the Company’s consolidated financial statements and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
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.
Previous: Item 1. Financial Statements (unaudited) · Next: Item 3. Quantitative and Qualitative Disclosures about Market Risk (dollars in millions)