On October 26, 2023 Labcorp (NYSE: LH), a global leader of innovative and comprehensive laboratory services, reported results for the third quarter ended September 30, 2023, and updated full-year guidance (Press release, LabCorp, OCT 26, 2023, View Source [SID1234636376]).

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"Labcorp delivered strong third quarter results in our Diagnostics Laboratories and Biopharma Laboratory Services businesses," said Adam Schechter, chairman and CEO. "The company has momentum in our health system strategy and is significantly advancing our specialty testing capabilities. We continue to harness science and technology to drive innovation and accelerate growth."

The company continues to advance its hospital and health system strategy by establishing and expanding strategic collaborations to enhance laboratory services for patients and providers. During the quarter Labcorp achieved a number of important milestones:

Tufts Medicine: Closed the acquisition of the outreach laboratory business and select operating assets, and entered into a separate agreement to manage the hospital laboratories
Providence Health & Services – Oregon: Closed the acquisition of select outreach laboratory assets
Legacy Health: Signed an agreement to acquire the outreach laboratory business and manage the hospital laboratories
Baystate Health: Signed an agreement to acquire the outreach laboratory business and select operating assets
Additionally, in September Labcorp introduced its ATN Profile, a first-of-its-kind blood-based test that combines three well-researched blood biomarkers to identify and assess biological changes associated with Alzheimer’s disease, aiming to accelerate the path to diagnosis and intervention. The ATN Profile is available through physicians for use with patients being evaluated for possible Alzheimer’s disease or other causes of cognitive impairment and supports more informed decision-making and improved personalized patient care.

On September 14, 2023, Labcorp hosted an Investor Day highlighting the company’s go-forward strategy followed by business overviews and a longer-term financial outlook provided by members of the leadership team. A replay of the webcast and supporting materials are available on the Investor Relations section of the Company’s website at View Source

On October 12, 2023, the company announced a quarterly cash dividend of $0.72 per share of common stock, payable on December 12, 2023, to stockholders of record at the close of business on November 8, 2023.

Consolidated Results

Third Quarter Results

Revenue for the quarter was $3.06 billion, an increase of 6.6% from $2.87 billion in the third quarter of 2022. The increase was due to organic revenue of 3.7%, acquisitions, net of divestitures, of 2.2%, and foreign currency translation of 0.7%. The 3.7% increase in organic revenue was driven by a 10.1% increase in the company’s organic Base Business, partially offset by a (6.3%) decrease in COVID-19 PCR and antibody testing (COVID-19 Testing). Compared to the Base Business last year, Base Business revenue grew 14.0%. Base Business includes Labcorp’s operations except for COVID-19 Testing.

Operating income for the quarter was $252.3 million, or 8.3% of revenue, compared to $374.0 million, or 13.0%, in the third quarter of 2022. The company recorded amortization, restructuring charges, and special items, which together totaled $171.6 million in the quarter, compared to $116.6 million during the same period in 2022. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $423.9 million, or 13.9% of revenue, compared to $490.6 million, or 17.1%, in the third quarter of 2022. The decrease in operating income was due to a reduction in COVID-19 Testing. The margin decline was due to lower COVID-19 Testing as well as the mix impact from the Ascension lab management agreement.

Net earnings from continuing operations for the quarter were $183.6 million compared to $277.3 million in the third quarter of 2022. Diluted EPS from continuing operations were $2.11 in the quarter compared to $3.06 during the same period in 2022. Adjusted EPS (excluding amortization, restructuring charges, and special items) were $3.38 in the quarter compared to $4.01 in the third quarter of 2022.

Operating cash flow from continuing operations for the quarter was $275.5 million compared to $253.0 million in the third quarter of 2022. The increase in operating cash flow was due to higher cash earnings. Capital expenditures totaled $104.9 million compared to $82.8 million a year ago. As a result, free cash flow from continuing operations (operating cash flow from continuing operations less capital expenditures) was $170.6 million compared to $170.2 million in the third quarter of 2022.

At the end of the quarter, the company’s cash balance was $0.73 billion and total debt was $5.42 billion, respectively. During the quarter, the company invested $379.8 million on acquisitions, paid out $63.9 million in dividends, and used $1.00 billion for share repurchases that we expect will be completed by year end.

Year-To-Date Results

Revenue was $9.13 billion, an increase of 2.2% from $8.93 billion, in the first nine months of 2023. The increase was due to acquisitions, net of divestitures, of 1.8%, organic revenue of 0.3% and favorable foreign currency translation of 0.1%. The 0.3% increase in organic revenue was driven by a 10.0% increase in the company’s organic Base Business, partially offset by a (9.6)% decrease in COVID-19 Testing.

Operating income was $848.4 million, or 9.3% of revenue, compared to $1,408.0 million, or 15.8%, in the first nine months of 2023. The company recorded amortization, restructuring charges, special items, and impairments, which together totaled $471.6 million in the first nine months of 2023 compared to $352.0 million during the same period in 2022. Adjusted operating income (excluding amortization, restructuring charges, special items, and impairments) was $1,320.0 million, or 14.5% of revenue, compared to $1,760.0 million, or 19.7%, in the first nine months of 2022. The decrease in operating income was due to a reduction in COVID-19 Testing. The margin decline was due to lower COVID-19 Testing as well as the mix impact from the Ascension lab management agreement.

Net earnings from continuing operations were $547.2 million compared to $966.4 million in the first nine months of 2022. Diluted EPS were $6.19 in the first nine months of 2023 compared to $10.45 during the same period in 2022. Adjusted EPS (excluding amortization, restructuring charges, special items, and impairments) were $10.26 in the first nine months of 2023 compared to $13.57 during the same period in 2022.

Operating cash flow from continuing operations was $622.7 million compared to $1,157.6 million in the first nine months of 2022. The decrease in operating cash flow was due to lower COVID-19 Testing earnings, spin-related items and higher working capital, partially offset by increased Base Business earnings. Capital expenditures totaled $286.4 million compared to $330.2 million during the same period in 2022. As a result, free cash flow from continuing operations (operating cash flow from continuing operations less capital expenditures) was $336.3 million compared to $827.4 million in the first nine months of 2022.

Third Quarter Segment Results

The company’s two segments include Diagnostics Laboratories and Biopharma Laboratory Services (comprised of Central Laboratories and Early Development Research Laboratories). The following segment results exclude amortization, restructuring charges, special items, and unallocated corporate expenses.

Diagnostics Laboratories

Revenue for the quarter was $2.34 billion, an increase of 6.2% from $2.21 billion in the third quarter of 2022. The increase was due to organic growth of 3.4% and acquisitions of 3.0%, partially offset by foreign currency translation of (0.1%). The 3.4% increase in organic revenue was due to an 11.6% increase in the Base Business, partially offset by a (8.2%) decrease in COVID-19 Testing. Total Base Business growth compared to the Base Business in the prior year was 15.9%. The Ascension lab management agreement contributed approximately 6% of the Base Business growth.

Total volume (measured by requisitions) increased by 2.3% as acquisition volume contributed 3.4%, while organic volume decreased by (1.1%). Organic volume was impacted by a (4.5%) decrease in COVID-19 Testing, partially offset by a 3.4% increase in the Base Business. Price/mix increased by 3.9% due to organic Base Business growth of 8.2%, partially offset by COVID-19 Testing of (3.7%), acquisitions of (0.4%), and currency of (0.1%). Base Business volume increased 7.2% compared to the Base Business last year. Price/mix was up 8.8% in the Base Business compared to the Base Business last year, which includes the benefit of the Ascension lab management agreement.

Adjusted operating income for the quarter was $386.3 million, or 16.5% of revenue, compared to $439.8 million, or 19.9%, in the third quarter of 2022. The decrease in adjusted operating income was due to a reduction in COVID-19 Testing, while the margin was also affected by the mix impact from Ascension. Excluding the mix impact from Ascension, Base Business margin was up as the benefit of organic growth and LaunchPad savings were partially offset by higher personnel expense.

Biopharma Laboratory Services

Revenue for the quarter was $719.1 million, an increase of 7.9% from $666.4 million in the third quarter of 2022. The increase was primarily due to organic growth of 4.9% and foreign currency translation of 3.3%, partially offset by divestitures of (0.2%).

Adjusted operating income for the quarter was $109.0 million, or 15.2% of revenue, compared to $105.0 million, or 15.8%, in the third quarter of 2022. Adjusted operating margin decreased due to stranded costs as a result of the spin of Fortrea, which is timing related. Excluding stranded costs, margins were up as the benefit of top line growth and LaunchPad savings were mostly offset by higher personnel costs.

Net orders and net book-to-bill during the trailing twelve months were $3.05 billion and 1.12, respectively. Backlog at the end of the quarter was $7.79 billion, an increase of 7.7% compared to last year. The company expects approximately $2.41 billion of its backlog to convert into revenue in the next twelve months.

Outlook for 2023

Labcorp is updating 2023 full year guidance to reflect its third quarter performance and full year outlook. The following guidance assumes foreign exchange rates effective as of September 30, 2023, for the remainder of the year. Enterprise level guidance includes the estimated impact from currently anticipated capital allocation, including acquisitions, share repurchases and dividends.