☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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)
Delaware
13-3757370
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
358 South Main Street
Burlington,
North Carolina
27215
(Address of principal executive offices)
(Zip Code)
(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 valueLHNew 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.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
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 84.9 million shares as of October 27, 2023.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
Laboratory Corporation of America® Holdings (Labcorp® or the Company) is a global leader of innovative and comprehensive laboratory service that serves physicians, hospitals, patients and biopharmaceutical clients. The Company provides insights and advances science to improve health and improve lives through its strong diagnostics and drug development laboratory capabilities.
On June 30, 2023 (the Distribution Date), Labcorp completed the previously announced separation (the Separation) of Fortrea Holdings Inc. (Fortrea) from the Company, see Note 2 (Discontinued Operations) to the condensed consolidated financial statements. The remainder of the Drug Development segment has been renamed as the Biopharma Laboratory Services segment. All current and historical operating results of Fortrea are presented as Discontinued Operations, net of tax, in the consolidated statement of operations. All historical assets and liabilities of Fortrea are classified as current and long-term assets of discontinued operations and current and long-term liabilities of discontinued operations in the accompanying balance sheet as of December 31, 2022. The spin-off is expected to be treated as tax-free for the Company and its shareholders for U.S. federal income tax purposes.
The Company reports its business in two segments, Diagnostics Laboratories (Dx) and Biopharma Laboratory Services (BLS). For further financial information about these segments, see Note 12 (Business Segment Information) to the Condensed Consolidated Financial Statements. During the three months ended September 30, 2023, Dx and BLS contributed approximately 77% and 23%, respectively, of revenues to the Company. During the nine months ended September 30, 2023, Dx and BLS contributed approximately 77% and 23%, respectively, of revenues to the Company.
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries for which it exercises control. Long-term investments in affiliated companies in which the Company exercises significant influence, but which it does not control, are accounted for using the equity method. Investments in which the Company does not exercise significant influence (generally, when the Company has an investment of less than 20.0% and no representation on the investee's board of directors) are accounted for at fair value, or at cost minus impairment adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer for those investments that do not have readily determinable fair values. All significant inter-company transactions and accounts have been eliminated. The Company does not have any significant variable interest entities or special purpose entities whose financial results are not included in the condensed consolidated financial statements.
The financial statements of the Company's operating foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average monthly exchange rates prevailing during the period. Resulting translation adjustments are included in “Accumulated other comprehensive income (loss).”
The accompanying condensed consolidated financial statements of the Company are unaudited. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows, and financial position have been made. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.
The condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and do not contain certain information included in the Company’s fiscal year 2022 Annual Report on Form 10-K (Annual Report). Therefore, these interim statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report.
2. DISCONTINUED OPERATIONS
A discontinued operation may include a component or a group of components of the Company's operations. A disposal of a component or a group of components is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company's operations and financial results when the following occurs: (1) a component (or group of components) meets the criteria to be classified as held for sale; (2) the component or group of components is disposed of by sale; or (3) the component or group of components is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spin-off).For any component classified as held for sale or disposed of by sale or other than by sale, qualifying for presentation as a discontinued operation, the Company reports the results of operations of the discontinued operations (including any gain or loss recognized on the disposal or loss recognized on classification as held for sale of a
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
discontinued operation), less applicable income taxes (benefit), as a separate component in the consolidated statement of operations for current and all prior periods presented. The Company also reports assets and liabilities associated with discontinued operations as separate line items on the consolidated balance sheet for prior periods.
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). 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 entered into three floating secured overnight financing rate (SOFR) credit facilities totaling $1,520.0. These are comprised of a $450.0 Revolver maturing June 30, 2028; a $500.0 Term Loan A maturing June 30, 2028; and a $570.0 Term Loan B maturing June 30, 2030.
In connection with the spin-off, the Company entered into several agreements with Fortrea on or prior to the Distribution Date that, among other things, provide a framework for the Company’s relationship with Fortrea after the spin-off, including a separation and distribution agreement, a tax matters agreement, an employee matters agreement, and a transition services agreement. These agreements contain the key provisions relating to the spin-off, including provisions relating to the principal intercompany transactions required to effect the spin-off, the conditions to the spin-off and provisions governing the relationship between Fortrea and the Company after the spin-off. The costs to provide these services are included in operating income but the service fees are included in other income.
Financial Information of Discontinued Operations
Earnings from Discontinued Operations, Net of Tax in the Consolidated Statements of Operations reflect the after-tax results of Fortrea's business and Separation-related fees, and do not include any allocation of general corporate overhead expense or interest expense of the Company.
The following table summarizes the significant line items included in Earnings from Discontinued Operations, Net of Tax in the Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Revenues
$
—
$
739.5
$
1,506.6
$
2,268.5
Cost of revenues
—
566.0
1,244.5
1,764.0
Gross profit
—
173.5
262.1
504.5
Selling, general and administrative expenses
—
56.8
184.1
152.5
Amortization of intangibles and other assets
—
16.2
31.9
49.7
Restructuring and other charges
—
5.1
3.0
27.1
Operating income
—
95.4
43.1
275.2
Other income (expense):
Interest expense
—
—
(0.5)
(0.3)
Investment income (expense)
—
0.4
(1.2)
1.0
Other, net
—
10.3
4.2
35.0
Earnings before income taxes
—
106.1
45.6
310.9
Provision for income taxes
—
30.2
6.8
73.1
Net earnings attributable to Laboratory Corporation of America Holdings
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The following table summarizes the carrying value of the significant classes of assets and liabilities classified as discontinued operations as of December 31, 2022:
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
109.4
Accounts receivable, net
436.5
Unbilled services
583.6
Prepaid expenses and other
96.6
Total current assets
1,226.1
Property, plant and equipment, net
162.1
Goodwill, net
1,997.3
Intangible assets, net
823.3
Deferred income taxes
1.2
Other assets, net
54.3
Total assets
$
4,264.3
LIABILITIES
Current liabilities:
Accounts payable
$
82.6
Accrued expenses and other
281.8
Unearned revenue
271.5
Short-term operating lease liabilities
21.7
Total current liabilities
657.6
Operating lease liabilities
26.8
Deferred income taxes and other tax liabilities
192.8
Other liabilities
21.7
Total liabilities
898.9
3. REVENUES
The Company's revenues by segment and by payers/customer groups for the three and nine months ended September 30, 2023, and 2022, were as follows:
For the Three Months Ended September 30, 2023
For the Three Months Ended September 30, 2022
North America
Europe
Other
Total
North America
Europe
Other
Total
Payer/Customer
Dx
Clients
24
%
—
%
—
%
24
%
23
%
—
%
—
%
23
%
Patients
9
%
—
%
—
%
9
%
8
%
—
%
—
%
8
%
Medicare and Medicaid
8
%
—
%
—
%
8
%
8
%
—
%
—
%
8
%
Third party
36
%
—
%
—
%
36
%
38
%
—
%
—
%
38
%
Total Dx revenues by payer
77
%
—
%
—
%
77
%
77
%
—
%
—
%
77
%
BLS
Pharmaceutical, biotechnology and medical device companies
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
For the Nine Months Ended September 30, 2023
For the Nine Months Ended September 30, 2022
North America
Europe
Other
Total
North America
Europe
Other
Total
Payer/Customer
Dx
Clients
24
%
—
%
—
%
24
%
22
%
—
%
—
%
22
%
Patients
9
%
—
%
—
%
9
%
8
%
—
%
—
%
8
%
Medicare and Medicaid
8
%
—
%
—
%
8
%
8
%
—
%
—
%
8
%
Third party
36
%
—
%
—
%
36
%
39
%
—
%
—
%
39
%
Total Dx revenues by payer
77
%
—
%
—
%
77
%
77
%
—
%
—
%
77
%
BLS
Pharmaceutical, biotechnology and medical device companies
10
%
9
%
4
%
23
%
10
%
9
%
4
%
23
%
Total revenues
87
%
9
%
4
%
100
%
87
%
9
%
4
%
100
%
Revenues in the U.S. were $2,550.6 (83.4%) and $2,392.4 (83.5%) for the three months ended September 30, 2023, and 2022, respectively, and for the nine months ended September 30, 2023, and 2022, were $7,645.0 (83.8%) and $7,454.0 (83.4%), respectively.
Accounts Receivable, Unbilled Services and Unearned Revenue
The following table provides information about accounts receivable, unbilled services, and unearned revenue from contracts with customers:
September 30, 2023
December 31, 2022
Dx accounts receivable
$
1,160.0
$
1,046.9
BLS accounts receivable
829.8
769.3
Less BLS allowance for doubtful accounts
(32.8)
(30.7)
Accounts receivable
$
1,957.0
$
1,785.5
Gross unbilled services
$
116.9
$
222.3
Less reserve for unbilled services
(8.9)
(10.5)
Unbilled services
$
108.0
$
211.8
Unearned revenue
$
360.8
$
310.6
Revenues recognized during the period that were included in the unearned revenue balance at the beginning of the period were $6.3 and $9.3 for the three months ended September 30, 2023 and 2022, respectively, and $79.1 and $65.9 for the nine months ended September 30, 2023, and 2022, respectively.
Credit Loss Rollforward
The Company estimates future expected losses on accounts receivable, unbilled services and notes receivable over the remaining collection period of the instrument. The rollforward for the allowance for credit losses for the nine months ended September 30, 2023, is as follows:
Accounts Receivable
Unbilled Services
Note and Other Receivables
Total
Balance as of December 31, 2022
$
30.7
$
10.5
$
0.7
$
41.9
Plus, credit loss expense
6.2
—
—
6.2
Less, write offs
(4.1)
(1.6)
—
(5.7)
Balance as of September 30, 2023
$
32.8
$
8.9
$
0.7
$
42.4
The credit loss expense in the first nine months primarily related to the collection risk from several biotech receivable balances in the first quarter.
4. BUSINESS ACQUISITIONS
During the nine months ended September 30, 2023, the Company acquired several businesses and related assets for cash of approximately $516.7. These acquisitions consisted of the clinical and outreach businesses of Jefferson Health ($108.0), Enzo BioChem ($112.8), Providence Health & Services - Oregon ($110.0), Tufts Medicine ($157.0), and other smaller acquisitions
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
($28.9). The preliminary purchase considerations for these acquisitions were allocated under the acquisition method of accounting to the estimated fair market value of the net assets acquired, including approximately $284.6 in identifiable intangible assets. A residual amount of non-tax deductible goodwill of approximately $230.5 was recorded as of September 30, 2023. The amortization period for non-compete agreements and customer list assets acquired from these businesses are 5 and 15 years, respectively. The purchase price allocations for these acquisitions have not been finalized as of September 30, 2023. The preliminary valuation of acquired assets and assumed liabilities, include the following:
Business Acquisitions
Measurement Period Adjustments
Amounts Acquired During the Nine Months Ended September 30, 2023
Cash and cash equivalents
$
—
$
0.2
$
0.2
Accounts receivable
(3.0)
—
(3.0)
Inventories
1.3
—
1.3
Prepaid expenses and other
0.4
0.6
1.0
Property, plant and equipment
4.7
(1.5)
3.2
Goodwill
230.5
(29.4)
201.1
Intangible assets
284.6
19.5
304.1
Other assets
2.1
—
2.1
Total assets acquired
$
520.6
$
(10.6)
$
510.0
Accrued expenses and other
3.9
(8.3)
(4.4)
Deferred income taxes
—
(2.3)
(2.3)
Total liabilities acquired
3.9
(10.6)
(6.7)
Net assets acquired
$
516.7
$
—
$
516.7
During the nine months ended September 30, 2022, the Company acquired several businesses and related assets for approximately $1,013.6 in cash. The purchase considerations for these acquisitions were allocated under the acquisition method of accounting to the estimated fair market value of the net assets acquired, including approximately $407.4 in identifiable intangible assets and a residual amount of non-tax deductible goodwill of approximately $571.3. The amortization period for intangible assets acquired from this businesses range from 5 to 23 years for customer relationships and non-compete agreements. These acquisitions were made primarily to complement and accelerate the Company’s existing liquid biopsy capabilities and enhance the Company's diagnostic footprint and capabilities. The preliminary valuation of acquired assets and assumed liabilities, include the following:
Preliminary Personal Genome Diagnostics Inc.
Preliminary Ascension Healthcare
Other Acquisitions
Measurement Period Adjustments
Amounts Acquired During the Nine Months Ended September 30, 2022
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Pro Forma Information
Had the Company's total 2023 and 2022 acquisitions been completed as of January 1, the Company's pro forma results would have been as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2023
2022
2022
Revenues
$
3,073.4
$
9,218.6
$
2,933.5
$
9,205.7
Net earnings from continuing operations attributable to Laboratory Corporation of America Holdings
$
185.2
$
597.1
$
358.5
$
1,228.7
5. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings attributable to the Company by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings including the impact of dilutive adjustments by the weighted average number of common shares outstanding plus potentially dilutive shares, as if they had been issued at the earlier of the date of issuance or the beginning of the period presented. Potentially dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, restricted stock units, and performance share awards.
The following represents a reconciliation of basic earnings per share to diluted earnings per share:
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Earnings
Shares
Per Share Amount
Earnings
Shares
Per Share Amount
Earnings
Shares
Per Share Amount
Earnings
Shares
Per Share Amount
Basic earnings per share:
Net earnings
$
183.3
86.6
$
2.12
$
276.9
90.2
$
3.07
$
546.3
87.9
$
6.22
$
965.2
91.9
$
10.50
Dilutive effect of employee stock options and awards
—
0.4
—
0.5
—
0.4
—
0.5
Net earnings including impact of dilutive adjustments
$
183.3
87.0
$
2.11
$
276.9
90.7
$
3.06
$
546.3
88.3
$
6.19
$
965.2
92.4
$
10.45
Diluted earnings per share represent the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. These potential shares include dilutive stock options and unissued restricted stock awards. The following table summarizes the potential common shares not included in the computation of diluted earnings per share because their impact would have been antidilutive:
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Employee stock options and awards
0.2
0.2
0.4
0.2
6. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended September 30, 2023, are as follows:
Dx
BLS
Total
Balance as of December 31, 2022
$
4,533.5
$
1,590.2
$
6,123.7
Goodwill acquired during the period
230.5
—
230.5
Foreign currency impact and other adjustments to goodwill
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Company assesses goodwill and indefinite-lived intangibles for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company recognizes an impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value.
Although the Company believes that the current assumptions and estimates used in its goodwill analysis are reasonable, supportable, and appropriate, the Company's business could be impacted by unfavorable changes, including those that impact the existing assumptions used in the impairment analysis. Various factors could reasonably be expected to unfavorably impact existing assumptions: primarily, a worsening economic environment and protracted economic downturn and related impacts, including delays in revenue from new customers; increases in customer termination activity; or increases in operating costs. Accordingly, there can be no assurance that the estimates and assumptions made for the purposes of the goodwill impairment analysis will prove to be accurate predictions of future performance. During the fourth quarter of 2022, the company recorded a goodwill impairment, related to the early development reporting unit, at which time the amount of fair value in excess of carrying value was reduced to zero. As such, the company continues to closely monitor the performance of the early development reporting unit.
The Company will continue to monitor the financial performance of, and assumptions for, its reporting units. A significant increase in the discount rate, decrease in the revenue and terminal growth rates, decreased operating margin, or substantial reductions in end markets and volume assumptions, could have a negative impact on the estimated fair value of the reporting units. A future impairment charge for goodwill or intangible assets could have a material effect on the Company's consolidated financial position and results of operations.
The components of identifiable intangible assets are as follows:
September 30, 2023
December 31, 2022
Gross Carrying Amount
Accumulated Amortization
Net
Gross Carrying Amount
Accumulated Amortization
Net
Customer relationships
$
3,735.5
$
(1,298.8)
$
2,436.7
$
3,489.9
$
(1,169.6)
$
2,320.3
Patents, licenses and technology
520.5
(263.1)
257.4
520.4
(243.3)
277.1
Non-compete agreements
120.7
(54.7)
66.0
80.1
(46.8)
33.3
Trade name
16.4
(5.4)
11.0
16.4
(3.5)
12.9
Land use right
3.5
(2.5)
1.0
3.5
(2.2)
1.3
Canadian licenses
495.6
—
495.6
468.7
—
468.7
Other
14.2
(6.3)
7.9
14.2
(4.2)
10.0
4,906.4
(1,630.8)
3,275.6
4,593.2
(1,469.6)
3,123.6
Amortization of intangible assets for the three and nine months ended September 30, 2023, and 2022, was $55.7 and $49.0 and $160.6 and $149.0, respectively. The amortization expense for the net carrying amount of intangible assets is estimated to be $57.0 for the remainder of fiscal 2023, $228.0 in fiscal 2024, $218.2 in fiscal 2025, $209.3 in fiscal 2026, $198.1 in fiscal 2027, and $1,784.0 thereafter.
7. DEBT
Short-term borrowings and the current portion of long-term debt at September 30, 2023, and December 31, 2022, consisted of the following:
September 30, 2023
December 31, 2022
Revolving line of credit
$
90.0
$
—
4.00% senior notes due 2023
300.0
300.0
3.25% senior notes due 2024
600.0
—
Debt issuance costs
(0.8)
(0.4)
Current portion of note payable
1.8
1.7
Total short-term borrowings and current portion of long-term debt
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Long-term debt at September 30, 2023, and December 31, 2022, consisted of the following:
September 30, 2023
December 31, 2022
2.30% senior notes due 2024
$
400.0
$
400.0
3.25% senior notes due 2024
—
600.0
3.60% senior notes due 2025
1,000.0
1,000.0
1.55% senior notes due 2026
500.0
500.0
3.60% senior notes due 2027
600.0
600.0
2.95% senior notes due 2029
650.0
650.0
2.70% senior notes due 2031
405.1
420.3
4.70% senior notes due 2045
900.0
900.0
Debt issuance costs
(28.5)
(33.8)
Note payable
1.0
2.3
Total long-term debt
$
4,427.6
$
5,038.8
During the second quarter of 2021, the Company entered into fixed-to-variable interest rate swap agreements for its 2.70% senior notes due 2031 with an aggregate notional amount of $500.0 and variable interest rates based on three-month SOFR plus 1.0706% to hedge against changes in the fair value of a portion of the Company's long-term debt. These interest rate swaps are included in other long-term liabilities and deducted from the value of the senior notes with an aggregate fair value of $94.9 at September 30, 2023.
Credit Facilities
The Company maintains a senior revolving credit facility, which was amended and restated on April 30, 2021. It consists of a five-year facility in the principal amount of up to $1,000.0, with the option of increasing the facility by up to an additional $500.0, subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. The revolving credit facility also provides for a subfacility of up to $100.0 for swing line borrowings and a subfacility of up to $150.0 for issuances of letters of credit. The Company is required to pay a facility fee on the aggregate commitments under the revolving credit facility, at a per annum rate ranging from 0.10% to 0.225%, depending on the Company's debt ratings. The revolving credit facility is permitted to be used for general corporate purposes, including working capital, capital expenditures, funding of share repurchases and certain other payments, acquisitions, and other investments. The revolving credit facility also provides for the issuance of letters of credit without a reduction of the availability of borrowings under the facility. There was $90.0 outstanding on the Company's current revolving credit facility as of September 30, 2023. As of September 30, 2023, the effective interest rate on the revolving credit facility was 6.42%. The credit facility expires on April 30, 2026.
Under the 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 in the revolving credit facility at September 30, 2023, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.
There were $85.4 in outstanding letters of credit as of September 30, 2023.
8. PREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY
The Company is authorized to issue up to 265.0 shares of common stock, par value $0.10 per share. The Company is authorized to issue up to 30.0 shares of preferred stock, par value $0.10 per share. There were no preferred shares outstanding as of September 30, 2023, and December 31, 2022.
The changes in common shares issued are summarized below:
Issued and Outstanding
Common shares at December 31, 2022
88.2
Shares issued under employee stock plans
0.6
Shares retired due to Fortrea spin
(0.2)
Shares repurchased
(3.7)
Common shares at September 30, 2023
84.9
Share Repurchase Program
On August 8, 2023, the Company entered into accelerated share repurchase agreements (collectively, the ASR Agreements) with two different banks, Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC (collectively, the Financial Institutions),
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
to repurchase approximately $1,000.0 in the aggregate of the Company’s common stock (Common Stock), as part of the Company’s Common Stock repurchase program. The remaining repurchase authorization has no expiration date.
Under the ASR Agreements, the Company made an aggregate payment of $1,000.0 to the Financial Institutions and received an aggregate initial number of approximately 3.7 shares of Common Stock from the Financial Institutions, which were removed from the outstanding share count in connection with entering into the ASR Agreements. The 3.7 shares reflects the 80% of the shares that would ultimately be repurchased under the ASR Agreements if the price of the Common Stock established in the ASR Agreement as the inception of the ASR Agreements remains constant. The specific number of shares that the Company ultimately will repurchase under the ASR Agreements will be based generally on the average of the daily volume-weighted average price per share of the Common Stock during a repurchase period, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Agreements. At settlement, under certain circumstances, the Financial Institutions may be required to deliver additional shares of Common Stock to the Company, or the Company may be required, at its election, either to make cash payments or deliver shares of Common Stock to the Financial Institutions. The ASR Agreements contain provisions customary for agreements of this type, including provisions for adjustments to the transaction terms, the circumstances generally under which the ASR Agreements may be accelerated, extended or terminated early by the Financial Institutions, and various acknowledgments, representations and warranties made by the parties to one another. Repurchases and settlements under the ASR Agreements are expected to be completed by the end of December 2023.
When the Company repurchases shares of Common Stock, the amount paid to repurchase the shares in excess of the par or stated value is allocated to additional paid-in-capital unless subject to limitation or the balance in additional paid-in-capital is exhausted. Remaining amounts are recognized as a reduction in retained earnings.
As of September 30, 2023, the Company had outstanding authorization from the board of directors to purchase up to $531.5 of the Company's common stock.
Dividends
For the nine months ended September 30, 2023, the Company paid $192.9 in common stock dividends. On October 12, 2023, the Company announced a cash dividend of $0.72 per share of common stock for the fourth quarter, or approximately $62.1 in the aggregate. The dividend will be payable on December 12, 2023, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on November 8, 2023. The declaration and payment of any future dividends will be at the discretion of the Company's board of directors.
Accumulated Other Comprehensive Earnings (Loss)
The components of accumulated other comprehensive earnings (loss) are as follows:
Foreign Currency Translation Adjustments
Net Benefit Plan Adjustments
Accumulated Other Comprehensive Earnings (Loss)
Balance as of December 31, 2022
$
(462.3)
$
(30.9)
$
(493.2)
Fortrea Holdings Inc. spin off
231.6
6.4
238.0
Current year adjustments
43.8
17.6
61.4
Pension settlement charge
—
(10.8)
(10.8)
Amounts reclassified from accumulated other comprehensive income
—
(3.4)
(3.4)
Tax effect of adjustments
—
(0.8)
(0.8)
Balance as of September 30, 2023
$
(186.9)
$
(21.9)
$
(208.8)
9. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various claims and legal actions, including arbitrations, class actions, and other litigation (including those described in more detail below), arising in the ordinary course of business. Some of these actions involve claims that are substantial in amount. These matters include, but are not limited to, intellectual property disputes, commercial and contract disputes, professional liability claims, employee-related matters, transaction-related disputes, securities and corporate law matters, and inquiries, including subpoenas and other civil investigative demands, from governmental agencies, Medicare or Medicaid payers and managed care organizations (MCOs) reviewing billing practices or requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or third parties. The Company receives civil investigative demands or other inquiries from various governmental bodies in the ordinary course of its business. Such inquiries can relate to the Company or other parties, including physicians and other health care providers. The Company works cooperatively to respond to appropriate requests for information.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Company also is named from time to time in suits brought under the qui tam provisions of the False Claims Act and comparable state laws. These suits typically allege that the Company has made false statements and/or certifications in connection with claims for payment from U.S. federal or state healthcare programs. The suits may remain under seal (hence, unknown to the Company) for some time while the government decides whether to intervene on behalf of the qui tam plaintiff. Such claims are an inevitable part of doing business in the healthcare field today.
The Company believes that it is in compliance in all material respects with all statutes, regulations, and other requirements applicable to its commercial laboratory operations and biopharma laboratory services. These industries are, however, subject to extensive regulation, and the courts have not interpreted many of the applicable statutes and regulations. Therefore, the applicable statutes and regulations could be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these statutes and regulations include significant civil and criminal penalties, fines, the loss of various licenses, certificates and authorizations, additional liabilities from third-party claims, and/or exclusion from participation in government programs.
Many of the current claims and legal actions against the Company are in preliminary stages, and many of these cases seek an indeterminate amount of damages. The Company records an aggregate legal reserve, which is determined using calculations based on historical loss rates and assessment of trends experienced in settlements and defense costs. In accordance with FASB Accounting Standards Codification Topic 450 “Contingencies,” the Company establishes reserves for judicial, regulatory, and arbitration matters outside the aggregate legal reserve if and when those matters present loss contingencies that are both probable and reasonably estimable and would exceed the aggregate legal reserve. When loss contingencies are not both probable and reasonably estimable, the Company does not establish separate reserves.
The Company is unable to estimate a range of reasonably probable loss for the proceedings described in more detail below in which damages either have not been specified or, in the Company's judgment, are unsupported and/or exaggerated and (i) the proceedings are in early stages, (ii) there is uncertainty as to the outcome of pending appeals or motions, (iii) there are significant factual issues to be resolved, and/or (iv) there are novel legal issues to be presented. For these proceedings, however, the Company does not believe, based on currently available information, that the adverse outcomes are probable and reasonably estimable, and it does not believe they will have a material adverse effect on the Company's financial statements.
The Company has received various subpoenas and other civil investigative demands related to Medicaid billing. In October 2009, the Company received a subpoena from the State of Michigan Department of Attorney General seeking documents related to its billing to Michigan Medicaid. The Company cooperated with this request. In October 2013, the Company received a Civil Investigative Demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The Company cooperated with this request. On October 5, 2018, the Company received a second Civil Investigative Demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The Company cooperated with this request. On January 26, 2021, the Company was notified that a qui tam Petition was pending under seal in the District Court, 250th Judicial District, Travis County, Texas, and that the State of Texas has intervened. On April 14, 2021, the Petition was unsealed. The Petition alleges that the Company submitted claims for reimbursement to Texas Medicaid that were higher than permitted under Texas Medicaid’s alleged “best price” regulations, and that the Company offered remuneration to Texas health care providers in the form of discounted pricing for certain laboratory testing services in exchange for the providers’ referral of Texas Medicaid business to the Company. The Petition seeks actual and double damages and civil penalties, as well as recovery of costs, attorney's fees, and legal expenses. On August 1, 2022, the District Court entered an order granting the Company's Motion for Partial Summary Judgment with respect to the claim that the Company submitted claims for reimbursement to Texas Medicaid that were higher than permitted under Texas Medicaid's alleged “best price” regulations. Plaintiffs filed a Notice of Non-Suit and Motion for Entry of Final Judgment and, on November 11, 2022, the court entered a Judgment. Plaintiffs filed a Notice of Appeal with respect to the court's order granting the Company's Motion for Partial Summary Judgment, referenced above. The Company will vigorously defend the lawsuit.
On August 31, 2015, the Company was served with a putative class action lawsuit, Patty Davis v. Laboratory Corporation of America, et al., filed in the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The complaint alleges that the Company violated the Florida Consumer Collection Practices Act by billing patients who were collecting benefits under the Workers' Compensation Statutes. The lawsuit seeks injunctive relief and actual and statutory damages, as well as recovery of attorney's fees and legal expenses. In April 2017, the Circuit Court granted the Company’s Motion for Judgment on the Pleadings. The Plaintiff appealed the Circuit Court’s ruling to the Florida Second District Court of Appeal. On October 16, 2019, the Florida Second District Court of Appeal reversed the Circuit Court’s dismissal, but certified a controlling issue of Florida law to the Florida Supreme Court. On February 17, 2020, the Florida Supreme Court accepted jurisdiction of the lawsuit. The court held oral arguments on December 9, 2020. On May 26, 2022, the Florida Supreme Court issued an
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
opinion approving the result of the Florida Second District Court of Appeal in favor of the Plaintiff. The Company will vigorously defend the lawsuit.
On March 10, 2017, the Company was served with a putative class action lawsuit, Victoria Bouffard, et al. v. Laboratory Corporation of America Holdings, filed in the U.S. District Court for the Middle District of North Carolina. The complaint alleges that the Company's patient list prices unlawfully exceed the rates negotiated for the same services with private and public health insurers in violation of various state consumer protection laws. The lawsuit also alleges breach of implied contract or quasi-contract, unjust enrichment, and fraud. The lawsuit seeks statutory, exemplary, and punitive damages, injunctive relief, and recovery of attorney's fees and costs. In May 2017, the Company filed a Motion to Dismiss Plaintiffs' Complaint and Strike Class Allegations; the Motion to Dismiss was granted in March 2018 without prejudice. On October 10, 2017, a second putative class action lawsuit, Sheryl Anderson, et al. v. Laboratory Corporation of America Holdings, was filed in the U.S. District Court for the Middle District of North Carolina. The complaint contained similar allegations and sought similar relief to the Bouffard complaint, and added additional counts regarding state consumer protection laws. On August 10, 2018, the Plaintiffs filed an Amended Complaint, which consolidated the Bouffard and Anderson actions. In September 2023, the lawsuit was dismissed with prejudice. On December 29, 2021, a related lawsuit, Nathaniel J. Nolan, et al. v. Laboratory Corporation of America Holdings, was filed in the U.S. District Court for the Middle District of North Carolina. The complaint alleges that the Company's patient acknowledgement of estimated financial responsibility form is misleading. The lawsuit seeks a declaratory judgment under the consumer protection laws of Nevada and Florida that the form is materially misleading and deceptive, an injunction barring the use of the form, damages on behalf of an alleged class, and attorney's fees and expenses. On February 28, 2022, the Company filed a Motion to Dismiss all claims. On February 13, 2023, the court entered an order granting the Company's Motion to Dismiss. On March 13, 2023, Plaintiffs filed a Notice of Appeal. The Company will vigorously defend the Nolan lawsuit.
On April 1, 2019, Covance Research Products was served with a Grand Jury Subpoena issued by the Department of Justice (DOJ) in Miami, Florida requiring the production of documents related to the importation into the United States of live non-human primate shipments originating from or transiting through China, Cambodia, and/or Vietnam from April 1, 2014 through March 28, 2019. The Company is cooperating with the DOJ.
On May 14, 2019, Retrieval-Masters Creditors Bureau, Inc. d/b/a American Medical Collection Agency (AMCA), an external collection agency, notified the Company about a security incident AMCA experienced that may have involved certain personal information about some of the Company’s patients (the AMCA Incident). The Company referred patient balances to AMCA only when direct collection efforts were unsuccessful. The Company’s systems were not impacted by the AMCA Incident. Upon learning of the AMCA Incident, the Company promptly stopped sending new collection requests to AMCA and stopped AMCA from continuing to work on any pending collection requests from the Company. AMCA informed the Company that it appeared that an unauthorized user had access to AMCA’s system between August 1, 2018, and March 30, 2019, and that AMCA could not rule out the possibility that personal information on AMCA’s system was at risk during that time period. Information on AMCA’s affected system from the Company may have included name, address, and balance information for the patient and person responsible for payment, along with the patient’s phone number, date of birth, referring physician, and date of service. The Company was later informed by AMCA that health insurance information may have been included for some individuals, and because some insurance carriers utilize the Social Security Number as a subscriber identification number, the Social Security Number for some individuals may also have been affected. No ordered tests, laboratory test results, or diagnostic information from the Company were in the AMCA affected system. The Company notified individuals for whom it had a valid mailing address. For the individuals whose Social Security Number was affected, the notice included an offer to enroll in credit monitoring and identity protection services that was provided free of charge for 24 months.
Twenty-three putative class action lawsuits were filed against the Company related to the AMCA Incident in various U.S. District Courts. Numerous similar lawsuits have been filed against other health care providers who used AMCA. These lawsuits were consolidated into a multidistrict litigation in the District of New Jersey. On November 15, 2019, the Plaintiffs filed a Consolidated Class Action Complaint in the U.S. District Court of New Jersey. The consolidated Complaint generally alleged that the Company did not adequately protect its patients’ data and failed to timely notify those patients of the AMCA Incident. The Complaint asserted various causes of action, including but not limited to negligence, breach of implied contract, unjust enrichment, and the violation of state data protection statutes. The Complaint sought damages on behalf of a class of all affected Company customers. On January 22, 2020, the Company filed Motions to Dismiss all claims. On December 16, 2021, the court granted in part and denied in part the Company's Motion to Dismiss. On March 31, 2022, the Plaintiffs filed an Amended Complaint alleging claims for negligence, negligence per se, breach of confidence, invasion of privacy, and various state statutory claims, including a claim under the California Confidentiality of Medical Information Act. The Company filed a Motion to Dismiss certain claims of the Amended Complaint. On May 5, 2023, the court granted in part and denied in part the Company's Motion to Dismiss. The Company will vigorously defend the remaining claims in the multi-district litigation.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Company was served with a shareholder derivative lawsuit, Raymond Eugenio, Derivatively on Behalf of Nominal Defendant, Laboratory Corporation of America Holdings v. Lance Berberian, et al., filed in the Court of Chancery of the State of Delaware on April 23, 2020. The complaint asserts derivative claims on the Company’s behalf against the Company’s board of directors and certain executive officers. The complaint generally alleges that the defendants failed to ensure that the Company utilized proper cybersecurity safeguards and failed to implement a sufficient response to data security incidents, including the AMCA Incident. The complaint asserts derivative claims for breach of fiduciary duty and seeks relief including damages, certain disclosures, and certain changes to the Company’s internal governance practices. On June 2, 2020, the Company filed a Motion to Stay the lawsuit due to its overlap with the multi-district litigation referenced above. On July 2, 2020, the Company filed a Motion to Dismiss. On July 14, 2020, the court entered an order staying the lawsuit pending the resolution of the multi-district litigation. The lawsuit will be vigorously defended.
Certain governmental entities have requested information from the Company related to the AMCA Incident. The Company received a request for information from the Office for Civil Rights (OCR) of the Department of Health and Human Services. On April 28, 2020, OCR notified the Company of the closure of its inquiry. The Company has also received requests from a multi-state group of state Attorneys General and is cooperating with these requests for information.
On January 31, 2020, the Company was served with a putative class action lawsuit, Luke Davis and Julian Vargas, et al. v. Laboratory Corporation of America Holdings, filed in the U.S. District Court for the Central District of California. The lawsuit alleges that visually impaired patients are unable to use the Company's touchscreen kiosks at Company patient service centers in violation of the Americans with Disabilities Act and similar California statutes. The lawsuit seeks statutory damages, injunctive relief, and attorney's fees and costs. On March 20, 2020, the Company filed a Motion to Dismiss Plaintiffs' Complaint and to Strike Class Allegations. In August 2020, the Plaintiffs filed an Amended Complaint. On April 26, 2021, the Plaintiffs and the Company each filed Motions for Summary Judgment and the Plaintiffs filed a Motion for Class Certification. On May 23, 2022, the court entered an order granting Plaintiffs’ Motion for Class Certification. On June 6, 2022, the Company filed a Petition for Permission to Appeal the Order Granting Class Certification with the U.S. Court of Appeals for the Ninth Circuit. On September 22, 2022, the Ninth Circuit granted the Company's Petition for Permission to Appeal the Order Granting Class Certification. The Company will vigorously defend the lawsuit.
On October 16, 2020, Ravgen Inc. filed a patent infringement lawsuit, Ravgen Inc. v. Laboratory Corporation of America Holdings, in the U.S. District Court for the Western District of Texas, alleging infringement of two Ravgen-owned U.S. patents. The lawsuit seeks monetary damages, enhancement of those damages for willfulness, and recovery of attorney’s fees and costs. On September 28, 2022, a jury rendered a verdict in favor of the Plaintiff on the remaining patent at issue, finding that the Company willfully infringed Ravgen's patent, and awarded damages of $272.0. Plaintiff filed post-trial motions seeking enhanced damages of up to $817.0 based on the finding of willfulness, as well as attorney's fees and costs. On May 12, 2023, the court issued an order granting Plaintiff's motion in part and awarding enhanced damages of $100.0. The Company strongly disagrees with the verdict, based on a number of legal factors, and will vigorously defend the lawsuit through the appeal process. On June 4, 2021, the Company also instituted proceedings before the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office challenging the validity of the Ravgen patent at issue in the trial. In November 2022, the Patent Trial and Appeal Board issued a decision upholding the validity of the Ravgen patent, and the Company has filed an appeal of this decision.
On May 14, 2020, the Company was served with a putative class action lawsuit, Jose Bermejo v. Laboratory Corporation of America (Bermejo I) filed in the Superior Court of California, County of Los Angeles Central District, alleging that certain non-exempt California-based employees were not properly compensated for driving time or properly paid wages upon termination of employment. The Plaintiff asserts these actions violate various California Labor Code provisions and Section 17200 of the Business and Professional Code. The lawsuit seeks monetary damages, civil penalties, and recovery of attorney’s fees and costs. On June 15, 2020, the lawsuit was removed to the U.S. District Court for the Central District of California. On June 16, 2020, the Company was served with a Private Attorney General Act lawsuit by the same plaintiff in Jose Bermejo v. Laboratory Corporation of America (Bermejo II), filed in the Superior Court of California, County of Los Angeles Central District, alleging that certain Company practices violated California Labor Code penalty provisions related to unpaid and minimum wages, unpaid overtime, unpaid meal and rest break premiums, untimely payment of wages following separation of employment, failure to maintain accurate pay records, and non-reimbursement of business expenses. The second lawsuit seeks to recover civil penalties and recovery of attorney's fees and costs. On October 28, 2020, the court issued an order staying proceedings in Bermejo II pending resolution of Bermejo I. The second lawsuit seeks to recover civil penalties and recovery of attorney's fees and costs. On February 24, 2022, the parties entered into a Memorandum of Understanding of the terms of a settlement of the Bermejo I and Bermejo II lawsuits and on March 17, 2023, the court issued a preliminary approval of the parties’ settlement agreement of the Bermejo I lawsuit, but the Bermejo II lawsuit settlement is still pending Court approval.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
On June 14, 2021, a single plaintiff filed a Private Attorney General Act lawsuit, Becker v. Laboratory Corporation of America, in the Superior Court of California, County of Orange, alleging various violations of the California Labor Code, including that the Plaintiff was not properly compensated for work and overtime hours, not properly paid meal and rest break premiums, not reimbursed for certain business-related expenses, and received inaccurate wage statements. The lawsuit seeks monetary damages, civil penalties, and recovery of attorney’s fees and costs. A settlement of the Bermejo I and Bermejo II lawsuits, if approved by the court, will resolve the Becker lawsuit.
On November 23, 2021, the Company was served with a single plaintiff Private Attorney General Act lawsuit, Poole v. Laboratory Corporation of America, filed in the Superior Court of California, County of Kern, alleging various violations of the California Labor Code, including that Plaintiff was not properly paid wages owed, not properly paid meal and rest break premiums, not reimbursed for certain business related expenses, and other allegations including the untimely payment of wages and receipt of inaccurate wage statements. The lawsuit seeks monetary damages, civil penalties, and recovery of attorney's fees and costs. The case was removed to the U.S. District Court for the Eastern District of California. A settlement of the Bermejo I and Bermejo II lawsuits, if approved by the court, will resolve the portion of the Poole lawsuit relating to service representatives and senior service representatives.
On October 5, 2020, the Company was served with a putative class action lawsuit, Williams v. LabCorp Employer Services, Inc. et al., filed in the Superior Court of California, County of Los Angeles, alleging that certain non-exempt California-based employees were not properly compensated for work and overtime hours, not properly paid meal and rest break premiums, not reimbursed for certain business-related expenses, not properly paid for driving or wait times, and received inaccurate wage statements. The Plaintiff also asserts claims for unfair competition under Section 17200 of the Business and Professional Code. On November 4, 2020, the lawsuit was removed to the U.S. District Court for the Central District of California. The lawsuit seeks monetary damages, liquidated damages, civil penalties, and recovery of attorney's fees and costs. On June 24, 2021, the District Court remanded the case to the Superior Court of California, County of Los Angeles on the grounds that potential damages did not meet the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d), jurisdictional threshold. The parties entered into a settlement agreement dated September 9, 2022, which is pending court approval.
On June 7, 2023, the Company was served with a putative class action lawsuit, Connie Howard, Yadira Yazmin Hernandez, and Deborah Reynolds, et al. v. Laboratory Corporation of America, Laboratory Corporation of America Holdings, and Meta Platforms, Inc., filed in the U.S. District Court for the Northern District of California, alleging that the Company’s website includes a tracking code created by Meta, known as the Meta Pixel, that sent information related to Plaintiffs and their online activities to Meta. Plaintiffs assert claims against the Company under California and Pennsylvania law and seek to represent classes of all persons in California, or in Pennsylvania, who allegedly entered search terms into the Company’s website and who used Facebook during a time that Plaintiffs allege the Meta Pixel was active on the Company’s website. Plaintiffs seek an injunction, damages, attorneys’ fees, and costs. On August 23, 2023, the Company filed a Motion to Dismiss. On September 5, 2023, the lawsuit was transferred to the U.S. District Court for the Middle District of North Carolina. On September 9, 2023, Plaintiffs filed an Amended Complaint. Among other things, the Amended Complaint contains allegations that in addition to the Meta Pixel, the Company's website uses Google Analytics and other online tracking technologies. The Company will vigorously defend the lawsuit.
On August 14, 2020, the Company was served with a Subpoena Duces Tecum issued by the State of Colorado Office of the Attorney General requiring the production of documents related to urine drug testing in all states. The Company is cooperating with this request.
On February 7, 2022, the Company was served with a Subpoena Duces Tecum issued by the DOJ in Camden, New Jersey requiring the production of documents related to non-invasive prenatal screening tests. The Company is cooperating with the DOJ.
On June 27, 2022, the Company was served with a Subpoena Duces Tecum issued by the DOJ in Boston, Massachusetts requiring the production of documents related to urine drug testing. The Company is cooperating with the DOJ.
In April 2023, the Company received Civil Investigative Demands issued by the DOJ in Washington, D.C. requiring the production of information related to the Medicare billing rule regarding reimbursement for laboratory testing performed for hospital patients. The Company is cooperating with the DOJ.
There are various other pending legal proceedings involving the Company including, but not limited to, additional employment-related lawsuits, professional liability lawsuits, and commercial lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, the likelihood of loss is remote and any reasonably possible loss
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
associated with the resolution of such proceedings is not expected to be material to the Company’s financial condition, results of operations, or cash flows, either individually or in the aggregate.
Under the Company's present insurance programs, coverage is obtained for catastrophic exposure as well as those risks required to be insured by law or contract. The Company is responsible for the uninsured portion of losses related primarily to general, professional and vehicle liability, certain medical costs and workers' compensation. The self-insured retentions are on a per-occurrence basis without any aggregate annual limit. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregated liability of claims incurred.
10. FAIR VALUE MEASUREMENTS
The Company’s population of financial assets and liabilities subject to fair value measurements as of September 30, 2023, and December 31, 2022, is as follows:
Fair Value Measurements as of
September 30, 2023
Balance Sheet
Fair Value as of
Using Fair Value Hierarchy
Classification
September 30, 2023
Level 1
Level 2
Level 3
Noncontrolling interest put
Noncontrolling interest
$
15.2
$
—
$
15.2
$
—
Cross currency swaps
Other liabilities
55.6
—
55.6
—
Interest rate swaps
Other liabilities
94.9
—
94.9
—
Cash surrender value of life insurance policies
Other assets, net
112.2
—
112.2
—
Deferred compensation liability
Other liabilities
105.4
—
105.4
—
Contingent consideration
Accrued expenses and other; Other liabilities
66.1
—
—
66.1
Fair Value Measurements as of
December 31, 2022
Balance Sheet
Fair Value as of
Using Fair Value Hierarchy
Classification
December 31, 2022
Level 1
Level 2
Level 3
Noncontrolling interest put
Noncontrolling interest
$
15.0
$
—
$
15.0
$
—
Cross currency swaps
Other liabilities, net
45.7
—
45.7
—
Interest rate swaps
Other liabilities, net
79.7
—
79.7
—
Cash surrender value of life insurance policies
Other assets, net
100.7
—
100.7
—
Deferred compensation liability
Other liabilities
96.9
—
96.9
—
Contingent consideration
Accrued expenses and other; Other liabilities
77.4
—
—
77.4
Fair Value Measurement of Level 3 Liabilities
Contingent Consideration
Balance at December 31, 2022
$
77.4
Adjustments
(11.3)
Balance as of September 30, 2023
$
66.1
The Company has a noncontrolling interest put related to its Ontario subsidiary that has been classified as mezzanine equity in the Company’s condensed consolidated balance sheets. The noncontrolling interest put is valued at its contractually determined value, which approximates fair value.
The Company offers certain employees the opportunity to participate in an employee-funded deferred compensation plan (DCP). A participant's deferrals are allocated by the participant to one or more of multiple measurement funds, which are indexed to externally managed funds. From time to time, to offset the cost of the growth in the participant's investment accounts, the Company purchases life insurance policies, with the Company named as beneficiary of the policies. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments, which are typically invested in a similar manner to the participant's allocations. Changes in the fair value of the DCP obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash surrender value and the DCP obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the hypothetical investments.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Contingent accrued earn-out business acquisition consideration liabilities are measured at fair value using Level 3 valuations. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3.
The carrying amounts of cash and cash equivalents, accounts receivable, income taxes receivable, and accounts payable are considered to be representative of their respective fair values due to their short-term nature. The fair market value of the senior notes, based on market pricing, was approximately $4,936.6 and $4,973.9 as of September 30, 2023, and December 31, 2022, respectively. The Company's note and debt instruments are classified as Level 2 instruments, as the fair market values of these instruments are determined using other observable inputs.
Cross-Currency Swap
During the fourth quarter of 2018, the Company entered into U.S. Dollar (USD) to Swiss Franc cross-currency swap agreements with an aggregate notional value of $600.0. During the second quarter of 2022, the Company terminated $300.0 of those cross-currency swap agreements and entered into new USD to Swiss Franc cross-currency swap agreements with an aggregate notional value of $300.0 that mature in 2024. These cross currency swaps are included in other long-term liabilities as appropriate with an aggregate fair value of $55.6 and $45.7 as of September 30, 2023 and December 31, 2022, respectively. Changes in the fair value of the cross-currency swaps are charged or credited through accumulated other comprehensive income in the Consolidated Balance Sheet until the hedged item is recognized in earnings. The cumulative amount of the fair value hedging adjustments are recognized as currency translation within the Consolidated Statement of Comprehensive Earnings.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended September 30,
2023
2022
Cash paid during period for:
Interest
$
180.3
$
159.2
Income taxes, net of refunds
181.2
391.7
Disclosure of non-cash financing and investing activities:
Change in accrued property, plant and equipment
23.1
8.2
12. BUSINESS SEGMENT INFORMATION
The following table is a summary of segment information for the three and nine months ended September 30, 2023, and 2022. The “management approach” has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating segment performance and deciding how to allocate resources to segments. The Company’s chief executive officer has been identified as the CODM.
As a result of the spin-off, the Company recast the segment results to exclude the historical results of Fortrea. Additionally, the remaining operations of the Drug Development segment has been renamed as the BLS segment. Prior periods have been conformed for comparability.
Segment asset information is not presented because it is not used by the CODM at the segment level. The Corporate costs not allocated to segments include the costs of centralized functions, other charges such as acquisition expenses, spin-off costs, remaining unallocated costs of the CDCS business, and COVID-19 related costs not deemed to relate to segment. Centralized functions include corporate governance, executive management and related human resources, finance, legal, risk management, and information technology functions.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2023
2022
2023
2022
Revenues:
Dx
$
2,344.7
$
2,207.6
$
7,068.3
$
6,917.1
BLS
719.1
666.4
2,079.4
2,048.5
Intercompany eliminations and other
(7.0)
(7.2)
(19.4)
(31.4)
Total revenues
$
3,056.8
$
2,866.8
$
9,128.3
$
8,934.2
Operating Earnings:
Dx segment operating income
$
386.3
$
439.8
$
1,237.5
$
1,638.5
BLS segment operating income
109.0
105.0
287.2
293.9
Segment operating income
495.3
544.8
1,524.7
1,932.4
General corporate and unallocated expenses
(169.6)
(111.8)
(469.7)
(329.2)
Amortization of intangibles and other assets
(55.7)
(49.0)
(160.6)
(149.0)
Restructuring and other charges
(7.5)
(10.0)
(30.8)
(45.0)
Goodwill and other asset impairments
(10.2)
—
(15.2)
(1.2)
Total operating income
$
252.3
$
374.0
$
848.4
$
1,408.0
13. SUBSEQUENT EVENTS
On October 4, 2023, the Company announced it had entered into an agreement with Baystate Health, Inc. (Baystate Health) to acquire its outreach laboratory business and select operating assets, including laboratory service centers operated by Baystate Health throughout Massachusetts for $151.1 in cash. This strategic relationship will build upon Labcorp's and Baystate Health's existing reference laboratory relationship to improve the efficiency of routine and specialty lab testing.
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 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;
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;
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.
GENERAL (dollars in millions, except per share data)
Revenues for the nine months ended September 30, 2023, were $9,128.3, an increase of 2.2% from $8,934.2 during the nine months ended September 30, 2022. 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 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.
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). 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 partial 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 September 30, 2023, compared with three months ended September 30, 2022
Revenues
Three Months Ended September 30,
2023
2022
Change
Dx
$
2,344.7
$
2,207.6
6.2
%
BLS
719.1
666.4
7.9
%
Intercompany eliminations and other
(7.0)
(7.2)
2.8
%
Total
$
3,056.8
$
2,866.8
6.6
%
Total revenues for the three months ended September 30, 2023, were $3,056.8, an increase of 6.6% over $2,866.8 in the third quarter of 2022. The increase was due to an increase in organic revenue of 3.7%, acquisitions, net of divestitures, of 2.2%, and favorable 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). Base Business includes Labcorp's operations except for COVID-19 Testing.
Dx revenues for the three months ended September 30, 2023, were $2,344.7, an increase of 6.2% over $2,207.6 in the third quarter of 2022. The increase was due to organic revenue of 3.4% and acquisitions of 3.0%, partially offset by unfavorable foreign currency translation of 0.1%. The 3.4% increase in organic growth 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 6.0% of the Base Business growth.
Dx total volume (measured by requisitions) for the three months ended September 30, 2023, 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 a decrease in COVID-19 Testing of 3.7%, lower acquisitions of 0.4%, and an unfavorable currency translation 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.
BLS revenues for the three months ended September 30, 2023, were $719.1, an increase of 7.9% over $666.4 in the third quarter of 2022. The increase was primarily due to organic growth of 4.9% and favorable foreign currency translation of 3.3%, partially offset by an unfavorable impact of divestitures of 0.2%.
Cost of Revenues
Three Months Ended September 30,
2023
2022
Change
Cost of revenues
$
2,205.6
$
1,980.6
11.4
%
Cost of revenues as a % of revenues
72.2
%
69.1
%
Cost of revenues increased 11.4% during the three months ended September 30, 2023, as compared with the corresponding period in 2022. Cost of revenues as a percentage of revenues during the three months ended September 30, 2023, increased to 72.2% as compared to 69.1% 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, partially offset by the impact of the Ascension lab management agreement.
Selling, General and Administrative Expenses
Three Months Ended September 30,
2023
2022
Change
Selling, general and administrative expenses
$
525.5
$
453.2
16.0
%
Selling, general and administrative expenses as a % of revenues
17.2
%
15.8
%
Selling, general and administrative expenses as a percentage of revenues was 17.2% and 15.8% during the three months ended September 30, 2023, and 2022, respectively. The increase is primarily due to a reduction in COVID-19 Testing revenues and spin-related costs, partially offset by the impact of the Ascension lab management agreement.
Amortization of Intangibles and Other Assets
Three Months Ended September 30,
2023
2022
Change
Amortization of intangibles and other assets
$
55.7
$
49.0
13.6
%
The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to September 30, 2022.
Goodwill and Other Asset Impairments
Three Months Ended September 30,
2023
2022
Change
Goodwill and other asset impairments
$
10.2
$
—
100.0
%
The Company recorded impairment charges of $10.2 in intangible assets during the three months ended September 30, 2023 primarily due to a license impairment related to the divestiture of a joint venture. The Company recorded no impairment charges during the three months ended September 30, 2022.
Restructuring and Other Charges
Three Months Ended September 30,
2023
2022
Change
Restructuring and other charges
$
7.5
$
10.0
(24.7)
%
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 reversal of a previously established liability of $4.5 in unused facility-related costs.
During the three months ended September 30, 2022, the Company recorded net restructuring and other charges of $10.0. The charges were comprised of $2.8 related to severance and other personnel costs and $7.5 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of a previously established liability of $0.3 in unused facility-related costs.
Interest Expense
Three Months Ended September 30,
2023
2022
Change
Interest expense
$
(50.3)
$
(46.3)
8.7
%
The increase in interest expense for the three months ended September 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
Three Months Ended September 30,
2023
2022
Change
Equity method income, net
$
(0.3)
$
1.7
(110.3)
%
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 September 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
Three Months Ended September 30,
2023
2022
Change
Other, net
$
21.1
$
(17.6)
(219.3)
%
The change in Other, net for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, is primarily due to $22.7 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 gains of $4.0 for the three months ended September 30, 2023 compared to investment losses of $5.2 for the corresponding period of 2022. Foreign currency transaction losses of $2.8 were recognized for the three months ended September 30, 2023, as compared to losses of $8.2 for the corresponding period of 2022.
Income Tax Expense
Three Months Ended September 30,
2023
2022
Change
Income tax expense
$
55.1
$
38.2
44.5
%
Income tax expense as a % of earnings before income taxes
23.1
%
12.1
%
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 have been renamed the Biopharma Laboratory Services segment.
Dx operating income was $386.3 for the three months ended September 30, 2023, a decrease of $53.5 over operating income of $439.8 in the corresponding period of 2022, and Dx operating margin decreased 340 basis points year-over-year. 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.
BLS operating income was $109.0 for the three months ended September 30, 2023, an increase of $4.0 over operating income of $105.0 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 the 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 $169.6 for the three months ended September 30, 2023, an increase of $57.8 over corporate expenses of $111.8 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.
Nine Months Ended September 30, 2023, compared with nine months ended September 30, 2022
Revenues
Nine Months Ended September 30,
2023
2022
Change
Dx
$
7,068.3
$
6,917.1
2.2
%
BLS
2,079.4
2,048.5
1.5
%
Intercompany eliminations and other
(19.4)
(31.4)
38.2
%
Total
$
9,128.3
$
8,934.2
2.2
%
The increase in revenues for the nine months ended September 30, 2023, as compared with the corresponding period in 2022 was 2.2%. 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.
Dx revenues for the nine months ended September 30, 2023, were $7,068.3, an increase of 2.2% over $6,917.1 during the nine months ended September 30, 2022. The increase was due to acquisitions of 2.4%, partially offset by unfavorable foreign currency translation of 0.2%. Organic revenue was flat due to a 12.4% decrease in COVID-19 Testing, offset by a 12.4% increase in the Base Business. Total Base Business growth compared to the Base Business in the prior year was 17.1%, which includes the benefit from the Ascension lab management agreement of approximately 7%.
Dx total volume (measured by requisitions) for the nine months ended September 30, 2023 was flat as organic volume decreased by 2.6% and acquisition volume contributed 2.7%. Organic volume was impacted by a 7.9% decrease in COVID-19 Testing, partially offset by a 5.2% increase in Base Business. Price/mix increased by 2.1% due to organic Base Business growth of 7.2%, partially offset by a decrease in COVID-19 Testing of 4.6%, unfavorable foreign currency translation of 0.2%, and lower acquisitions of 0.3%. Base Business volume increased 8.7% compared to the Base Business last year. Price/mix was up 8.4% 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 nine months ended September 30, 2023, were $2,079.4, an increase of 1.5% over $2,048.5 during the nine months ended September 30, 2022. The increase was primarily due to an organic growth of 0.8%, favorable foreign currency translation of 1.0%, and divestitures, net of acquisitions, of 0.3%. The decrease in organic revenue was negatively impacted by approximately 4.0% due to NHP related constraints. BLS backlog expected to convert to revenue in the next 12 months is $2,410.0 or 30.9%.
Cost of Revenues
Nine Months Ended September 30,
2023
2022
Change
Cost of revenues
$
6,584.8
$
6,023.4
9.3
%
Cost of revenues as a % of revenues
72.1
%
67.4
%
Cost of revenues increased 9.3% during the nine months ended September 30, 2023, as compared with the corresponding period in 2022. Cost of revenues as a percentage of revenues during the nine months ended September 30, 2023, increased to 72.1% as compared to 67.4% 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
Nine Months Ended September 30,
2023
2022
Change
Selling, general and administrative expenses
$
1,488.5
$
1,307.6
13.8
%
Selling, general and administrative expenses as a % of revenues
16.3
%
14.6
%
Selling, general and administrative expenses as a percentage of revenues were 16.3% and 14.6% during the nine months ended September 30, 2023, and 2022, respectively. The increase is primarily due to a reduction in COVID-19 Testing revenues and spin-related costs, partially offset by the impact of the Ascension lab management agreement.
Amortization of Intangibles and Other Assets
Nine Months Ended September 30,
2023
2022
Change
Amortization of intangibles and other assets
$
160.6
$
149.0
7.8
%
The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to September 30, 2022.
Goodwill and Other Asset Impairments
Nine Months Ended September 30,
2023
2022
Change
Goodwill and other asset impairments
$
15.2
$
1.2
1,158.5
%
The Company recorded impairment charges of $15.2 in licenses, capitalized software costs and other intangible assets during the nine months ended September 30, 2023. The Company recorded impairment charges of $1.2 in other assets in Ukraine and Russia during the nine months ended September 30, 2022.
Restructuring and Other Charges
Nine Months Ended September 30,
2023
2022
Change
Restructuring and other charges
$
30.8
$
45.0
(31.7)
%
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 $1.1 of previously established severance liabilities and the increase of a previously established liability of $2.5 in unused facility-related costs.
During the nine months ended September 30, 2022, the Company recorded net restructuring and other charges of $45.0. The charges were comprised of $21.2 related to severance and other personnel costs and $25.1 in facility closures, lease terminations, and general integration activities. The charges were adjusted by the reversal of a previously established liability of $0.9 in unused severance costs and $0.4 in unused facility-related costs.
The increase in interest expense for the nine months ended September 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
Nine Months Ended September 30,
2023
2022
Change
Equity method income, net
$
(1.5)
$
6.5
(123.6)
%
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 nine months ended September 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
Nine Months Ended September 30,
2023
2022
Change
Other, net
$
(2.7)
$
(62.8)
(95.6)
%
The change in Other, net for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, is primarily due to $22.7 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, investment losses of $1.6 for the three months ended September 30, 2023 compared to investment losses of $19.4 for the corresponding period of 2022. Foreign currency transaction losses of $15.0 were recognized for the nine months ended September 30, 2023, as compared to losses of $39.3 for the corresponding period of 2022.
Income Tax Expense
Nine Months Ended September 30,
2023
2022
Change
Income tax expense
$
168.8
$
260.8
(35.3)
%
Income tax expense as a % of earnings before income taxes
23.6
%
21.3
%
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.
Dx operating income was $1,237.5 for the nine months ended September 30, 2023, a decrease of $401.0 over operating income of $1,638.5 in the corresponding period of 2022, and Dx operating margin decreased 620 basis points year-over-year. The decrease was due to a reduction in COVID-19 Testing, the impact of the Ascension lab management agreement and higher personnel costs, partially offset by a recovery in the Base Business.
BLS operating income was $287.2 for the nine months ended September 30, 2023, a decrease of $6.7 over operating income of $293.9 in the corresponding period of 2022. The decrease was due to NHP-related constraints and higher personnel costs, and stranded costs as a result of the Fortrea spin, 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 $469.7 for the nine months ended September 30, 2023, an increase of $140.5 over corporate expenses of $329.2 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 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, 2023, and 2022, respectively:
Nine Months Ended September 30,
2023
2022
Net cash provided by operating activities from continuing operations
$
622.7
$
1,157.6
Net cash used for investing activities from continuing operations
(816.2)
(1,345.1)
Net cash used for financing activities from continuing operations
(1,112.5)
(949.6)
Effect of exchange rate changes on cash and cash equivalents
3.5
(36.6)
Net decrease in cash and cash equivalents from continuing operations
$
(1,302.5)
$
(1,173.7)
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2023, and 2022, totaled $727.9 and $304.9, 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, 2023, the Company's continuing operations provided $622.7 of cash as compared to $1,157.6 during the same period in 2022. The $534.9 decrease in cash provided from operations in 2023 as compared with the corresponding 2022 period is primarily due to lower COVID-19 Testing earnings, spin-related items, and higher working capital, partially offset by increased Base Business earnings.
Net cash used for investing activities from continuing operations for the nine months ended September 30, 2023, was $816.2 as compared to $1,345.1 for the nine months ended September 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 nine months ended September 30, 2023. Capital expenditures were $286.4 and $330.2 for the nine months ended September 30, 2023, and 2022, respectively.
Cash Flows from Financing Activities
Net cash used by financing activities from continuing operations for the nine months ended September 30, 2023, was $1,112.5 as compared to $949.6 for the nine months ended September 30, 2022. The change in cash flows from financing activities from continuing operations for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was primarily due to an increase in share repurchase activity during the nine months ended September 30, 2023, due to the ASR, as compared to $800.0 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 used $1000.0 of the proceeds to make an aggregate payment under two accelerated share repurchase agreements (as described in more detail below) and intends to use additional proceeds to pay down debt of approximately $300.0 maturing this year.
At September 30, 2023, the Company had $727.9 of cash and $910.0 of available borrowings under its revolving credit 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 September 30, 2023, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.
On August 8, 2023, the Company entered into accelerated share repurchase agreements (collectively, the ASR Agreements) with two different banks, Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC (collectively, the Financial Institutions), to repurchase approximately $1,000.0 in the aggregate of the Company’s common stock (Common Stock), as part of the Company’s Common Stock repurchase program. The remaining repurchase authorization has no expiration date.
Under the ASR Agreements, the Company made an aggregate payment of $1,000.0 to the Financial Institutions and received an aggregate initial number of approximately 3.7 shares of Common Stock from the Financial Institutions, which were removed from the outstanding share count in connection with entering into the ASR Agreements. The 3.7 shares reflects the 80% of the shares that would ultimately be repurchased under the ASR Agreements if the price of the Common Stock established in the ASR Agreement as the inception of the ASR Agreements remains constant. The specific number of shares that the Company ultimately will repurchase under the ASR Agreements will be based generally on the average of the daily volume-weighted average price per share of the Common Stock during a repurchase period, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR Agreements. At settlement, under certain circumstances, the Financial Institutions may be required to deliver additional shares of Common Stock to the Company, or the Company may be required, at its election, either to make cash payments or deliver shares of Common Stock to the Financial Institutions. The ASR Agreements contain provisions customary for agreements of this type, including provisions for adjustments to the transaction terms, the circumstances generally under which the ASR Agreements may be accelerated, extended or terminated early by the Financial Institutions and various acknowledgments, representations and warranties made by the parties to one another. Repurchases and settlements under the ASR Agreements are expected to be completed by the end of December 2023.
As of September 30, 2023, the Company had outstanding authorization from the board of directors to purchase up to $531.5 of the Company's common stock.
For the nine months ended September 30, 2023, the Company paid $192.9 in common stock dividends. On October 12, 2023, the Company announced a cash dividend of $0.72 per share of common stock for the third quarter, or approximately $62.1 in the aggregate. The dividend will be payable on December 12, 2023, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on November 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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk (dollars in millions)
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 13.7% of the Company’s revenues for the nine months ended September 30, 2023, and approximately 14.2% of the Company’s revenue for the nine months ended September 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 third 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 nine months ended September 30, 2023, by approximately $18.9. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $(56.0) and $(256.5) at September 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 September 30, 2023, the Company had 8 open foreign exchange forward contracts with various amounts maturing monthly through October 2023 with a notional value totaling approximately $473.7. 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.
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 SOFR plus 1.0706%.
ITEM 4. Controls and Procedures
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 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 September 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 September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART I - 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.
Item 1A. Risk Factors
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)
During the three months ended September 30, 2023, the Company did not repurchase any of its common stock, other than as contemplated by the ASR Agreements. The following table sets forth information with respect to purchases of shares of the Company’s common stock based on activity under the ASR Agreements during the three months ended September 30, 2023, by or on behalf of the Company:
Total Number of Shares Repurchased as Part of Publicly Announced Program
Maximum Dollar Value of Shares that May Yet Be Repurchased Under the Program
July 1 - July 31
—
$
—
—
$
1,531.5
August 1 - August 31
3.7
(1)
267.34
3.7
531.5
September 1 - September 30
—
—
—
531.5
3.7
$
267.34
3.7
$
531.5
(1) At inception of the ASR Agreements, the Company paid $1,000.0 and received 3.7 shares, which reflects 80% of the shares that would ultimately be repurchased under the ASR Agreements if the price of the Common Stock established in the ASR Agreement at the inception of the ASR agreements remains constant.
The board of directors has authorized the repurchase of specified amounts of the Company's stock since 2007. On August 8, 2023, the Company entered into ASR Agreements with the Financial Institutions to repurchase approximately $1,000.0 in the aggregate of the Company’s common stock, as part of the Company’s previously announced common stock repurchase program. The ASR Agreements are more fully discussed in the Notes to the Unaudited Condensed Consolidated Financial Statements. As of September 30, 2023, the Company had outstanding authorization from the board of directors to purchase up to $531.5 of the Company's common stock. The repurchase authorization has no expiration date.
Item 5. Other Information
During the three months ended September 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.
Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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.
