What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-31 compared with 2020-05-08 · 224 added, 110 removed, 136 unchanged (71% of the section changed)

23 unchanged sentences

Food and Drug Administration, the U.S.

Department of Agriculture, the Medicine and Healthcare products Regulatory Agency in the United Kingdom (U.K.), the National Medical Products Administration in China, the Pharmaceutical and Medical Devices Agency in Japan, the European Medicines Agency and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business;

European Medicines Agency and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business;

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

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global economic conditions and government and regulatory changes, including, but not limited to the U.K.'s exit from the European Union;

effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, and liquidity, and the actions the Company, or governments, have taken or may take in response, 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, including the availability and accuracy and timeliness of delivery of any tests that the Company develops, collaborates on or provides for the detection of COVID-19.

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.

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GENERAL (dollars in millions, except per share data)

Revenues for the quarter were $2,823.8, an increase of 1.2% from $2,791.2 during the three months ended March 31, 2019.

The increase in revenues was primarily due to acquisitions of 3.4% , partially offset by the disposition of a business of 0.5% and lower organic growth of 1.8% .

The lower organic revenue includes the negative impact from COVID-19 of approximately 4.9% (which includes a $17.0 increase in implicit price concessions as a result of the pandemic) and lower Medicare and Medicaid pricing as a result of PAMA of 0.7% .

Revenues for the six months ended June 30, 2020 were $5,592.6, a decrease of (1.4)% from $5,672.9 during the six months ended June 30, 2019.

The decrease in revenues was due to a 3.6% decline of organic revenue, 0.4% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 2.6% from acquisitions.

The 3.6% decline of organic revenue was due to the pandemic, which reduced the Company's organic Base Business by 11.7%, partially offset by 8.1% from COVID-19 related business.

Base Business includes the Company's business operations except for molecular and serology COVID-19 testing (COVID-19 Testing).

The decline in the organic Base Business includes the negative impact from PAMA of 0.6%.

In March 2020, COVID-19 was declared a pandemic.

COVID-19 has and continues to have an extensive impact on the global health and economic environments.

On March 5, 2020, in response to the pandemic, the Company announced the availability of the LabCorp 2019 Novel Coronavirus (COVID-19) NAA test, which detects the presence of the underlying virus that causes COVID-19, for use with patients who meet current guidance for evaluation of infection with COVID-19.

Since that time, the Company has been continuously working to increase the number of tests that can be performed and improve the time for delivering test results.

The Company currently has the capacity to perform 55,000 to 65,000 COVID-19 molecular tests per day on top of the hundreds of thousands of non-COVID-19 tests.

The Company continues to invest in expanding its COVID-19 testing capabilities and capacity, while at the same time supporting the development of COVID-19 vaccines and treatments, as well as other life-saving medicines.

On April 21, 2020, the Company announced through its Pixel by LabCorp TM platform the availability of self-collection kits for its COVID-19 NAA test under an emergency use authorization from the U.S.

Food and Drug Administration (FDA), further increasing access to the test, particularly for healthcare workers and first responders.

On April 22, 2020, the Company also expanded availability of serology tests to detect antibodies to the virus that causes COVID-19.

The Company has the capacity to perform more than 50,000 serology tests per day and expects that capacity to increase to 200,000 per day by mid-May 2020, provided the necessary supplies are available.

By mid-March 2020, government restrictions, social distancing guidelines, and overall customer caution associated with the COVID-19 pandemic negatively affected LCD's revenues and CDD's operations.

For LCD, demand for testing declined 50% to 55% versus the Company's normal daily levels at the end of the first quarter.

This reduction in demand impacted testing volumes broadly but was more heavily weighted towards routine tests.

The Company expects the volume to increase through the remainder of the year.

The performance of CDD has also been negatively affected by the COVID-19 pandemic through numerous study site closures around the world as well as customer initiated delays for new patient recruitment for existing clinical trials and start-up of new clinical trials.

The Company expects drug development study deferrals to continue at least through the first half of 2020, if not longer .

As a result of the impact of COVID-19, during the three months ended March 31, 2020 , the Company recorded goodwill and other asset impairment charges of $437.4 , $426.4 within CDD and $11.0 within LCD.

COVID-19 has had and continues to have an extensive impact on the global health and economic environments.

Given the continued unpredictability of the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial results for 2020.

While the Company's Base Business continues to be negatively impacted by the COVID-19 pandemic, the Company's outlook has improved across the enterprise.

In LCD, demand for its Base Business continues to be below the Company's historical levels;

however, the Company's Base Business has been steadily recovering from its trough in April, while at the same time COVID-19 Testing continues to grow.

To date, the Company has performed more than 9.2 million molecular and 2.2 million antibody COVID-19 tests and has a current capacity of 180,000 molecular and 300,000 antibody tests per day.

The Company continues to increase capacity across multiple platforms for its COVID-19 Testing subject to the availability of equipment and testing supplies and key personnel.

In CDD, while the pandemic is expected to continue to negatively impact its business, this impact is expected to subside throughout the year as CDD continues to work on projects supporting global vaccine and treatment development, with additional support from COVID-19 Testing.

As a result of the impact of COVID-19, during the six months ended June 30, 2020, the Company recorded goodwill and other asset impairment charges of $437.4, $426.4 within CDD and $11.0 within LCD, all of which were recorded in the three months ended March 31, 2020.

See Note 6 Goodwill and Intangible Assets for discussion of goodwill and intangible asset impairments and Note 2 Revenue for the discussion of credit losses and additional price concessions.

The Company also wrote-off or wrote down certain of the Company's investments by $ 20.2 due to the impact of COVID-19, $ 7.1 included in Equity method earnings (loss), net and $13.1 included in Other, net.

Notwithstanding the negative developments in demand and operations, the Company believes that it maintains a solid financial position, including a strong balance sheet, investment grade ratings, and access to credit.

However, in order to mitigate the effects of the pandemic on its financial position, the Company has temporarily suspended share repurchases, increased requirements for acquisition activity, delayed some of its capital expenditures, made certain adjustments to staffing, including delayed hiring, furloughs, a reduction of temporary staff, and limited hours of some of its employees to align with decreased demands, and made certain compensation adjustments, including suspending Company contributions to its 401K Plans in the U.S.

from June 2020 and 2020 merit pay increases.

In April 2020, the Company received cash payments of approximately $56.0 from the Public Health and Social Services Emergency Fund that was appropriated by Congress to the Department of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act.

The HHS distributed the funds to healthcare providers based on their 2019 Medicare fee-for-service reimbursement.

The Company also wrote-off or wrote down certain of the Company's investments by $25.4 due to the impact of COVID-19, $7.1 included in Equity method earnings (loss), net (recorded in the three months ended March 31, 2020), and $18.3 included in Other, net ($13.1 recorded during the three months ended March 31, 2020 and $5.2 recorded during the three months ended June 30, 2020).

The Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) plan contributions in the United States (U.S.).

In response to its improved outlook, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in the U.S.

In April 2020, the Company received cash payments of approximately $55.9 from the Public Health and Social Services Emergency Fund for provider relief (Relief Fund) that was appropriated by Congress to the Department of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Upon receiving and satisfying the terms and conditions associated with the distributed funds, the Company accounted for the transaction by applying the guidance in ASC 450-30 Gain Contingencies, and recorded these funds in Other, net non-operating income in the Consolidated Statement of Operations as of June 30, 2020.

On July 30, the Company announced plans to create a program to offer total antibody testing at no charge through the patient’s doctor in support of increased blood plasma donations for use as a possible COVID-19 treatment.

The Company is working with public health authorities and the provider community on the details of the three-month program and is evaluating the impact this program will have on the consolidated financial statements.

There remains significant uncertainty regarding the duration and severity of the pandemic and its impact on the Company’s business, results of operations and financial position for the balance of 2020 and beyond.

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RESULTS OF OPERATIONS (dollars in millions)

Three months ended March 31, 2020 , compared with three months ended March 31, 2019

Three Months Ended March 31,

Three months ended June 30, 2020, compared with three months ended June 30, 2019

Three Months Ended June 30,

2020 2019 Change

LCD $ 1,692.7 $ 1,760.9 (3.9) %

CDD 1,093.7 1,126.3 (2.9) %

Intercompany eliminations and other (17.6) (5.5) 220.0 %

The increase in revenues for the three months ended March 31, 2020 , as compared with the corresponding period in 2019 was 1.2% .

The increase in revenues was primarily due to acquisitions of 3.4% , partially offset by the disposition of a business of 0.5% and lower organic growth of 1.8% .

The lower organic revenue includes the estimated negative impact from COVID-19 of approximately 4.9%, lower Medicare and Medicaid pricing as a result of PAMA of 0.7% and the negative impact of increased implicit price concessions of 0.6%.

LCD revenues for the quarter were $1,702.0 , a decrease of 1.2% compared to revenues of $1,722.0 in the first quarter of 2019 .

The decrease in revenues was primarily due to lower organic revenues of 2.9% , partially offset by acquisitions of 1.7% .

The organic revenues decline of 2.9% includes the net negative impact from COVID-19 of approximately 5.4% and PAMA of 1.1% .

The negative impact from the nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market was largely offset by favorable weather.

The Company has increased its price concessions reserves as a result of rising unemployment and the financial difficulties faced by our customers in the wake of the COVID-19 pandemic.

Total LCD volume (measured by requisitions) decreased by 4.4% , as organic volume declined by 6.1% , partially offset by acquisition volume of 1.6% .

The 6.1% decline in organic volume includes the negative net impact from COVID-19 of approximately 7.3% , partially offset by other organic volume growth of 1.2%.

The reduction in demand impacted testing volume broadly but was heavily weighted toward routine procedures.

Also, the benefit from an additional one-half revenue day and favorable weather versus the prior year, was essentially offset by the negative impact from lower consumer genetics demand of 1.6%.

Revenue per requisition increased by 3.4%.

The increase was due to favorable mix which includes the impact from COVID-19 of 1.9%, consumer genetics of 0.9%, other organic growth of 2.8%, partially offset by PAMA of 1.1% and the nonrenewal of the BeaconLBS contract of 1.1%.

CDD revenues for the second quarter were $1,143.8 , an increase of 6.4% over revenues of $1,074.7 in the first quarter of 2019 .

The increase in revenues was primarily due to the benefit of acquisitions of 6.2% and organic growth of 1.6% (which includes the negative impact from COVID-19 of approximately 2.5% ), partially offset by the disposition of a business of 1.2% and negative foreign currency translation of 0.1% .

Total $ 2,768.8 $ 2,881.7 (3.9) %

The decrease in revenues for the three months ended June 30, 2020, as compared with the corresponding period in 2019 was 3.9%.

The decrease in revenue was due to a 5.4% decline of organic revenue, 0.3% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 1.9% from acquisitions.

The 5.4% decline of organic revenue was due to the pandemic, which reduced the Company's organic Base Business by 20.9%, partially offset by COVID-19 Testing of 15.4%.

The decline in organic Base Business includes the lower Medicare and Medicaid pricing as a result of PAMA of 0.5%.

LCD revenues for the quarter were $1,692.7, a decrease of 3.9% compared to revenues of $1,760.9 in the second quarter of 2019.

The decrease in revenues was primarily due to a 4.9% decline in organic revenue and 0.1% from unfavorable foreign currency translation, partially offset by 1.1% from acquisitions.

The 4.9% organic revenue decline includes a 30.1% decline of the organic Base Business (due to the pandemic), partially offset by 25.2% from COVID-19 Testing.

The 30.1% decline of the organic Base Business includes a 0.8% negative impact from PAMA and a 1.2% reduction due to the September 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market.

Total volume (measured by requisitions) decreased by 19.5% as organic volume declined by 20.7%, partially offset by acquisition volume of 1.2%.

The decline in organic volume includes a 35.3% reduction of organic Base Business (due to the pandemic), partially offset by increased demand for COVID-19 Testing of 14.6%.

The organic Base Business volumes continued to improve throughout the quarter with daily volume in June averaging approximately 17.0% below June volume in 2019.

At the same time, demand for COVID-19 Testing continues to increase, contributing approximately 23.0% to total volume in June.

While total volume declined 19.5%, price/mix increased by 15.6% due to COVID-19 Testing of 10.7% and the Base Business of 4.9%.

The Base Business price includes the negative impact from PAMA of 0.8% and the non-renewal of the BeaconLBS contract of 1.2%.

CDD revenues for the second quarter were $1,093.7, a decrease of 2.9% over revenues of $1,126.3 in the second quarter of 2019.

The decrease in revenues was primarily due to a 5.2% decline in organic revenue, 0.7% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 3.1% benefit from an acquisition.

The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 1.1% increase from COVID-19 molecular testing through its Central Laboratories business.

The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit.

Cost of Revenues

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 Change

Cost of revenues $ 2,008.3 $ 2,056.9 (2.4) %

Cost of revenues as a % of revenues 72.5 % 71.4 %

Cost of revenues increased 4.7% during the three months ended March 31, 2020 , as compared with the corresponding period in 2019 .

Cost of revenues as a percentage of revenues during the three months ended March 31, 2020 , increased to 74.2% as compared to 71.7% in the corresponding period in 2019 .

Cost of revenues decreased 2.4% during the three months ended June 30, 2020, as compared with the corresponding period in 2019.

Cost of revenues as a percentage of revenues during the three months ended June 30, 2020, increased to 72.5% as compared to 71.4% in the corresponding period in 2019.

This increase was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases), and PAMA, partially offset by LaunchPad savings.

Selling, General and Administrative Expenses

Three Months Ended June 30,

2020 2019 Change

Selling, general and administrative expenses $ 396.3 $ 415.3 (4.6) %

Selling, general and administrative expenses as a % of revenues 14.3 % 14.4 %

During the three months ended June 30, 2020, the Company incurred $4.6 of acquisition and divestiture related costs and $7.8 in management transition costs.

In addition, the Company recorded $0.2 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $1.8 related to miscellaneous other items.

These charges were offset by insurance proceeds of $10.0 related to the 2018 ransomware attack.

These items increased selling, general and administrative expenses by $7.7.

During the three months ended June 30, 2019, the Company incurred $33.2 in acquisition and divestiture costs, $1.5 in management transition costs and $0.1 in costs related to the 2018 ransomware attack.

In addition, the Company recorded $2.6 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative.

These items increased selling, general and administrative expenses by $37.4.

Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 14.0% and 13.1% during each of the three months ended June 30, 2020, and 2019, respectively.

Amortization of Intangibles and Other Assets

Three Months Ended June 30,

2020 2019 Change

LCD $ 25.3 $ 25.6 (1.2) %

CDD 34.8 34.6 0.6 %

Total amortization of intangibles and other assets $ 60.1 $ 60.2 (0.2) %

The decrease in amortization of intangibles and other assets within LCD primarily reflects the impact of acquisitions occurring after June 30, 2019, net of Amortization of intangible assets within CDD increased primarily due to the impact of acquisitions occurring after June 30, 2019.

Restructuring and Other Special Charges

Three Months Ended June 30,

2020 2019 Change

Restructuring and other charges $ 6.4 $ 13.6 (52.9) %

During the three months ended June 30, 2020, the Company recorded net restructuring and other charges of $6.4:

$3.7 within LCD and $2.7 within CDD.

The charges were comprised of $5.4 related to severance and other personnel costs, $3.3 for a CDD lab facility and equipment impairment, and $4.2 in facility closures, impairment of operating lease right-of use assets and general integration activities.

The charges were offset by the reversal of previously established liability of $1.0 and $5.5 in unused severance costs and facility-related costs, respectively.

During the three months ended June 30, 2019, the Company recorded net restructuring and other special charges of $13.6:

$3.0 within LCD and $10.6 within CDD.

The charges were comprised of $3.5 related to severance and other personnel costs along with $10.2 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives.

The charges were offset by the reversal of previously established reserves of $0.1 in unused facility reserves.

Interest Expense

Three Months Ended June 30,

2020 2019 Change

Interest expense $ (52.7) $ (59.1) (10.8) %

The decrease in interest expense for the three months ended June 30, 2020, as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of $1,050.0 in debt securities in November 2019.

Equity Method Income

Three Months Ended June 30,

2020 2019 Change

Equity method income, net $ 1.8 $ 2.5 (28.0) %

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.

All of these partnerships and investments reside within LCD.

decrease in income for the three months ended June 30, 2020, as compared with the corresponding period in 2019, was primarily due to decreased profitability of the Company's joint ventures.

Three Months Ended June 30,

2020 2019 Change

Other, net $ 47.7 $ (10.5) (554.3) %

The change in other, net for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, is primarily due to $55.9 of funding from the Relief Fund that was appropriated by Congress to the HHS in the CARES Act.

This funding was partially offset by the $5.2 write-off or write down of certain of the Company's investments primarily due to the negative impact of the COVID-19 global pandemic.

In addition, foreign currency transaction losses of $1.7 were recognized for the three months ended June 30, 2020 and losses of $3.2 were recognized in the corresponding period of 2019.

Income Tax Expense

Three Months Ended June 30,

2020 2019 Change

Income tax expense $ 65.4 $ 79.3 (17.5) %

Income tax expense as a % of earnings before income taxes 22.0 % 29.4 %

The 2020 tax rate was favorable to the 2019 tax rate due to the mix of earnings inclusive of federal, state, and foreign changes.

Operating Income by Segment

Three Months Ended June 30,

2020 2019 Change

LCD operating income $ 281.3 $ 312.5 (10.0) %

LCD operating margin 16.6 % 17.7 % (1.1) %

CDD operating income 65.5 65.8 (0.5) %

CDD operating margin 6.0 % 5.9 % 0.1 %

General corporate expenses (49.1) (42.6) 15.3 %

Total operating income $ 297.7 $ 335.7 (11.3) %

LCD operating income was $281.3 for the three months ended June 30, 2020, a decrease of 10.0% over operating income of $312.5 in the corresponding period of 2019, and LCD operating margin decreased 1.1% basis points year-over-year.The decrease was primarily due to the reduction in the Base Business (primarily due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings.

The Company remains on track to deliver approximately $200.0 of net savings from its three-year LCD's LaunchPad initiative by the end of 2021.

CDD operating income was $65.5 for the three months ended June 30, 2020, a decrease over operating income of $65.8 in the corresponding period of 2019.

The decrease was primarily due to the negative impact from the pandemic and higher personnel costs, partially offset by molecular COVID-19 testing and LaunchPad savings.

The Company remains on track to deliver approximately $150.0 of net savings from its three-year CDD's LaunchPad initiative by the end of 2020.

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 $49.1 for the three months ended June 30, 2020, an increase of 15.3% over corporate expenses of $42.6 in the corresponding period of 2019.

The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs.

Six months ended June 30, 2020, compared with six months ended June 30, 2019

Six Months Ended June 30,

2020 2019 Change

LCD $ 3,394.7 $ 3,482.9 (2.5) %

CDD 2,237.5 2,201.0 1.7 %

Intercompany eliminations and other (39.6) (11.0) 260.0 %

Total $ 5,592.6 $ 5,672.9 (1.4) %

Revenues for the six months ended June 30, 2020 were $5,592.6, a decrease of (1.4)% from $5,672.9 during the six months ended June 30, 2019.

The 3.6% decline of organic revenue was due to a 11.7% decline in the Company's organic Base Business (as a result of the pandemic), partially offset by 8.1% from COVID-19 related business.

The decline in the organic Base Business includes the negative impact from PAMA of 0.6%.

LCD revenues for the six months ended June 30, 2020 were $3,394.7, a decrease of 2.5% compared to revenues of $3,482.9 for the six months ended June 30, 2019.

The decrease in revenue was due to a 3.9% decline in organic revenue, partially offset by 1.4% from acquisitions.

The 3.9% decline in organic revenue,was due to a 17.1% decline of the organic Base Business (due to the pandemic), partially offset by 13.2% from COVID-19 Testing.

The 17.1% decline of organic Base Business includes a 1.0% negative impact from PAMA and a 1.2% reduction due to the September 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market.

Total volume (measured by requisitions) decreased by 12.0% as organic volume declined by 13.4%, partially offset by acquisition volume of 1.4%.

The decline in organic volume includes a 21.0% reduction of organic Base Business (due to the pandemic), partially offset by increased demand for COVID-19 Testing of 7.6%.

The organic Base Business volumes continued to improve throughout the second quarter with daily volume in June averaging approximately 17.0% below June volume in 2019.

At the same time, demand for COVID-19 Testing continues to increase, contributing approximately 23.0% to total volume in June.

While total volume declined 12.0%, price/mix increased by 9.4% due to COVID-19 Testing of 5.5% and Base Business of 3.9%.

The Base Business price includes the negative impact from PAMA of 1.0% and the non-renewal of the BeaconLBS contract of 1.2%.

CDD revenues for six months ended June 30, 2020 were $2,237.5, an increase of 1.7% over revenues of $2,201.0 for the six months ended June 30, 2019.

The increase in revenue was primarily due to the benefit of acquisitions of 4.6%, partially offset by a decline in organic revenue 1.9% and disposition of a business of 1.0%.

The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 0.6% increase from COVID-19 molecular testing through its Central Laboratories business.

Cost of Revenues

Six Months Ended June 30,

2020 2019 Change

Cost of revenues $ 4,104.1 $ 4,058.4 1.1 %

Cost of revenues as a % of revenues 73.4 % 71.5 %

Cost of revenues increased 1.1% during the six months ended June 30, 2020, as compared with the corresponding period in 2019.

Cost of revenues as a percentage of revenues during the six months ended June 30, 2020, increased to 73.4% as compared to 71.5% in the corresponding period in 2019.

This increase was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases and one additional payroll day that predominantly impacted LCD), and PAMA, partially offset by LaunchPad savings.

Selling, General and Administrative Expenses

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

Selling, general and administrative expenses $ 791.8 $ 809.1 (2.1) %

Selling, general and administrative expenses as a % of revenues 14.2 % 14.3 %

During the three months ended March 31, 2020 , the Company incurred $8.4 of acquisition and divestiture related costs and $2.8 in management transition costs.

In addition, the Company recorded $0.9 of non-capitalized costs associated with the

implementation of a major system as part of its LaunchPad business process improvement initiative and reversed $0.6 related to miscellaneous other items.

During the six months ended June 30, 2020, the Company incurred $13.0 of acquisition and divestiture related costs and $10.6 in management transition costs.

In addition, the Company recorded $1.1 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $1.2 related to miscellaneous other items.These charges were offset by insurance proceeds of $10.0 related to the 2018 ransomware attack.

These items increased selling, general and administrative expenses by $19.6.

During the three months ended March 31, 2019 , the Company incurred $11.1 in acquisition and divestiture costs, $1.4 in consulting expenses relating to fees incurred as part of its integration and management transition costs and $0.6 in costs related to the 2018 ransomware attack.

During the six months ended June 30, 2019, the Company incurred $44.3 in acquisition and divestiture costs, $2.9 in consulting expenses relating to fees incurred as part of its integration and management transition costs and $0.7 in costs related to the 2018 ransomware attack.

In addition, the Company recorded $5.0 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative.

These items increased selling, general and administrative expenses by $52.9.

Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.6% and 13.6% during each of the three months ended March 31, 2020 , and 2019 , respectively.

Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.8% and 13.3% during each of the six months ended June 30, 2020, and 2019, respectively.

Amortization of Intangibles and Other Assets

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

LCD $ 51.4 $ 50.3 2.2 %

CDD 71.0 67.0 6.0 %

Total amortization of intangibles and other assets $ 122.4 $ 117.3 4.3 %

The increase in amortization of intangibles and other assets within LCD primarily reflects the impact of acquisitions occurring after March 31, 2019 .

Amortization of intangible assets within CDD increased primarily due to the impact of acquisitions occurring after March 31, 2019 , offset by the reduction of amortizable intangible assets pursuant to the divestiture of one CDD business during the second quarter of 2019.

Goodwill and Other Asset Impairments

Three Months Ended March 31,

The increase in amortization of intangibles and other assets within LCD primarily reflects the impact of acquisitions occurring after June 30, 2019.

Amortization of intangible assets within CDD increased primarily due to the impact of acquisitions occurring after June 30, 2019.

Goodwill and Other Asset Impairments

During the three months ended March 31, 2020 , the Company recorded goodwill and other asset impairment charges of $437.4 , $426.4 within CDD and $11.0 within LCD, representing 3.7% of our total goodwill and intangible assets.

Six Months Ended June 30,

2020 2019 Change

Goodwill and other asset impairments $ 437.4 $ — N/A

During the six months ended June 30, 2020 , the Company recorded goodwill and other asset impairment charges of $437.4, $426.4 within CDD and $11.0 within LCD, representing 3.9% of the Company's total goodwill and intangible assets.

The Company concluded that the fair value was less than carrying value for two of its reporting units and recorded goodwill impairment of $418.7 in the CDD segment and $3.7 in the LCD segment.

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Restructuring and Other Special Charges

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

Restructuring and other charges $ 31.8 $ 34.2 (7.0) %

During the three months ended March 31, 2020 , the Company recorded net restructuring and other charges of $25.4 :

During the six months ended June 30, 2020, the Company recorded net restructuring and other charges of $31.8:

$11.8 within LCD and $20.0 within CDD.

The charges were comprised of $10.5 related to severance and other personnel costs, $8.0 for a CDD lab facility impairment, and $20.0 in facility closures, impairment of operating lease right-of use assets and general integration activities.

The charges were offset by the reversal of previously established liability of $0.2 in unused facility-related costs.

During the three months ended March 31, 2019 , the Company recorded net restructuring and other special charges of $20.6 :

The charges were offset by the reversal of previously established liability of $1.0 and $5.7 in unused severance costs and facility-related costs, respectively.

During the six months ended June 30, 2019, the Company recorded net restructuring and other special charges of $34.2:

$16.1 within LCD and $18.1 within CDD.

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Interest Expense

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

Interest expense $ (107.7) (115.8) (7.0) %

The decrease in interest expense for the three months ended March 31, 2020 , as compared with the corresponding period in 2019 , is primarily due to a lower outstanding balance on term loans, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of $1,050.0 in debt securities in November 2019.

The decrease in interest expense for the six months ended June 30, 2020, as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of $1,050.0 in debt securities in November 2019.

Equity Method Income

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

Equity method income, net $ (4.8) $ 5.5 (187.3) %

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All of these partnerships and investments reside within LCD.

The decrease in income for the three months ended March 31, 2020 , as compared with the corresponding period in 2019 , was primarily due to the impairment of an equity method investment and decreased profitability of the Company's joint ventures.

Three Months Ended March 31,

The change in other, net for the three months ended March 31, 2020 , as compared to the three months ended March 31, 2019, is primarily due to the $13.1 write-off or write down of certain of the Company's investments primarily due to the negative impact of the COVID-19 global pandemic.

In addition, foreign currency transaction losses of $2.8 were recognized for the three months ended March 31, 2020 and losses of $4.7 were recognized in the corresponding period of 2019 .

The decrease in income for the six months ended June 30, 2020, as compared with the corresponding period in 2019, was primarily due to the impairment of an equity method investment and decreased profitability of the Company's joint ventures.

Six Months Ended June 30,

2020 2019 Change

Other, net $ 31.6 $ (20.9) (251.2) %

The change in other, net for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, is primarily due to the $55.9 funding from the Relief Fund that was appropriated by Congress to the HHS in the CARES Act.

This funding was partially offset by the $18.3 write-off or write down of certain of the Company's investments primarily due to the negative impact of the COVID-19 global pandemic.

In addition, foreign currency transaction losses of $4.5 were recognized for the six months ended June 30, 2020 and losses of $7.8 were recognized in the corresponding period of 2019.

Income Tax Expense

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

Income tax expense $ 114.6 $ 148.1 (22.6) %

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The 2020 tax rate was unfavorable to the 2019 tax rate due to impairment charges for which either no tax benefit was recorded (as they were not deductible) or the associated tax assets required a full valuation allowance.

Income tax expense was favorably impacted in 2020 due to incremental benefits from foreign losses taxed at rates lower than the U.S.

statutory rate and stock compensation benefits.

Operating Income by Segment

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 Change

LCD operating income $ 486.7 $ 580.8 (16.2) %

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Total operating income $ 105.1 $ 653.9 (83.9) %

LCD operating income was $188.4 for the three months ended March 31, 2020 , a decrease of 29.8% over operating income of $268.3 in the corresponding period of 2019 , and LCD operating margin decreased 450 basis points year-over-year.

The decrease in operating income and margin were primarily due to the negative impact from COVID-19 (of approximately $62.0) and PAMA of $20.1, partially offset by price mix.

In addition, the negative impact from higher personnel costs (including one additional payroll day) was offset by LaunchPad savings.

The Company remains on track to deliver approximately $200.0 of net savings from its three-year, phase II of LabCorp Diagnostics’ LaunchPad initiative by the end of 2021.

CDD operating loss was $(338.7) for the three months ended March 31, 2020 , a decrease over operating income of $88.0 in the corresponding period of 2019 .

LCD operating income was $486.7 for the six months ended June 30, 2020, a decrease of 16.2% over operating income of $580.8 in the corresponding period of 2019, and LCD operating margin decreased (2.4)% basis points year-over-year.

The decrease in operating income and margin were primarily due to the reduction in Base Business (primarily due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings.

The Company remains on track to deliver approximately $200.0 of net savings from its three-year, phase II of LCD's LaunchPad initiative by the end of 2021.

CDD operating loss was $(273.2) for the six months ended June 30, 2020, a decrease over operating income of $153.8 in the corresponding period of 2019.

The decrease in operating income and margin was primarily due to the negative impact of COVID-19, specifically goodwill and other asset impairments of $426.4, and higher personnel costs, partially offset by organic demand, acquisitions, and LaunchPad savings.

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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 $42.3 for the three months ended March 31, 2020 , an increase of 11.0% over corporate expenses of $38.1 in the corresponding period of 2019 .

The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs.

Corporate expenses were $108.4 for the six months ended June 30, 2020, an increase of 34.3% over corporate expenses of $80.7 in the corresponding period of 2019.

The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs, and COVID-19 related expenses.

LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

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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 were as follows for the three months ended March 31, 2020 , and 2019 , respectively:

Three Months Ended March 31,

In summary, the Company's cash flows were as follows for the six months ended June 30, 2020 and 2019, respectively:

Six Months Ended June 30,

Net cash provided by operating activities $ 574.5 $ 419.3

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Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2020 and 2019 , totaled $323.6 and $348.8 , respectively.

Cash and cash equivalents at June 30, 2020 and 2019, totaled $557.0 and $265.4, respectively.

Cash and cash equivalents consist of highly liquid instruments, such as time deposits, commercial paper, and other money market investments, substantially all of which have original maturities of three months or less.

Operating Activities

During the three months ended March 31, 2020 , the Company's operations provided $ 203.8 of cash as compared to $ 165.8 during the same period in 2019 .

The $38.0 increase in cash provided from operations in 2020 as compared with the corresponding 2019 period is primarily due to lower cash earnings more than offset by favorable working capital.

During the six months ended June 30, 2020, the Company's operations provided $574.5 of cash as compared to $419.3 during the same period in 2019.

The $155.2 increase in cash provided from operations in 2020 as compared with the corresponding 2019 period is primarily due to higher cash earnings partially offset by higher working capital.

For the first six months of 2020, cash earnings included the $55.9 CARES Act funding and benefited from income and payroll tax deferrals, while working capital was negatively impacted by an increase in COVID-19 related testing supplies inventory and accounts receivable.

The COVID-19 pandemic has created uncertainty about the Company's near-term operating cash flows.

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Investing Activities

Net cash used for investing activities for the three months ended March 31, 2020 , was $106.6 as compared to net cash used for investing activities of $140.5 for the three months ended March 31, 2019 .

The change in cash used for investing activities was primarily due to a decrease in business acquisitions during the three months ended March 31, 2020 .

Capital expenditures were $106.6 and $94.2 for the three months ended March 31, 2020 , and 2019 , respectively.

Net cash used for investing activities for the six months ended June 30, 2020, was $230.0 as compared to net cash used for investing activities of $891.3 for the six months ended June 30, 2019.

The change in cash used for investing activities was primarily due to a decrease in business acquisitions during the six months ended June 30, 2020.

Capital expenditures were $205.1 and $179.4 for the six months ended June 30, 2020, and 2019, respectively.

Financing Activities

Net cash used for financing activities for the three months ended March 31, 2020 , was $ 102.8 compared to net cash used for financing activities of $ 103.2 for the three months ended March 31, 2019 .

The cash flows from financing activities for the three months ended March 31, 2020 , were comparable to the three months ended March 31, 2019, and resulted from share repurchases, debt proceeds and payments, and equity compensation transactions.

Net cash used for financing activities for the six months ended June 30, 2020, was $119.7 compared to net cash provided by financing activities of $311.7 for the six months ended June 30, 2019.

The change in cash flows from financing activities for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, were primarily due to net financing proceeds from the term loan and revolving credit facilities in 2019 of $635.0 offset by $200.0 more in share repurchases in 2019.

The Company's revolving credit facility consists of a five-year revolving facility in the principal amount of up to $1,000.0, with the option of increasing the facility by up to an additional $350.0, subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions.

Under the Company's term loan credit facility and 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 under the term loan credit facility and the revolving credit facility at March 31, 2020 and expects that it will remain in compliance with its existing debt covenants for the next twelve months

During the fourth quarter of 2020, $412.2 of the Company's senior notes will become payable.

The Company maintains an investment grade debt rating, has strong relationship with key banks, and believes that it will be able to repay these notes with available cash on hand, cash generated from operations, borrowings under its revolving credit facility, or by refinancing the notes in the public debt market.

At March 31, 2020, the Company had $323.6 of cash and $923.7 of available borrowings under its revolving credit facility, which does not mature until 2022.

In May 2020, in order to obtain increased financial covenant flexibility, the Company and its

lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to 5.0 x debt to last twelve months EBITDA for the three month periods ending June 30, September 30 and December 31, 2020 and 4.5 x for the three month period ended March 31, 2021.

The amendments also provide that during any period in which the Company's leverage ratio exceeds 4.5 x debt to last twelve months EBITDA (i) the company will be prohibited from consummating share repurchases, subject to limited exceptions, (ii) borrowings under the revolving credit facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.25% or a base rate plus a margin of 0.25%, (iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be 0.25% per annum, and (iv) borrowings under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.175% or a base rate plus a margin of 0.175%.

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business.

In the second half of March, daily volume for routine tests started to decline and may continue to decline as a result of decreased consumer demand driven by a significant reduction in physician office visits, the cancellation of elective medical procedures, and the negative impacts on discretionary spending resulting from the economic downturn, among other factors.

In addition, the Company has experienced numerous study site closures around the world as well as delays for new patient recruitment for existing clinical trials and start-up of new clinical trials.

The significance of the impact on the Company’s business is not yet certain and depends on numerous evolving factors that the Company may not be able to accurately predict.

As a result of the economic uncertainties caused by the COVID-19 pandemic, the Company is implementing several measures to improve liquidity and operating results, including reduction of hours or furloughs of its employees, hiring freezes, temporarily suspending its share repurchases, increased requirements for acquisition activity, delaying some of its planned capital expenditures, and suspending merit pay increases and U.S.

employee 401K plan contributions for 2020.

Based on these actions and assumptions regarding the impact of COVID-19, the Company expects that it will be able to generate sufficient liquidity to satisfy its obligations.

The Company was in compliance with all covenants under the term loan credit facility and the revolving credit facility at June 30, 2020 and expects that it will remain in compliance with its existing debt covenants for the next twelve months.

During the fourth quarter of 2020, $412.2 of the Company's senior notes mature.

The Company has elected to redeem these notes in August 2020 at par using available cash on hand and borrowings under its revolving credit facility.

At June 30, 2020 the Company had $557.0 of cash and $997.0 of available borrowings under its revolving credit facility, which does not mature until 2022.

In May 2020, in order to obtain increased financial covenant flexibility, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to 5.0x debt to last twelve months EBITDA for the three month periods ending June 30, September 30 and December 31, 2020, 4.5x for period ended March 31, 2021 and then reverts back to 4.0x.

rate plus a margin of 0.25%, (iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be 0.25% per annum, and (iv) borrowings under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.175% or a base rate plus a margin of 0.175%.

At the end of 2019, the Company had outstanding authorization from the board of directors to purchase up to $900.0 of Company common stock.

During the three months ended March 31, 2020 , the Company purchased 0.6 shares of its common stock at an average price of $178.85 for a total cost of $100.0 under this plan.

As of March 31, 2020 , the Company had outstanding authorization from the board of directors to purchase up to $800.0 of the Company's common stock.

The repurchase authorization has no expiration date, however, the Company has temporarily suspended stock repurchases due to impact of the COVID-19 pandemic.

As of June 30, 2020, the Company had outstanding authorization from the board of directors to purchase up to $800.0 of the Company's common stock.

The repurchase authorization has no expiration date;

however, the Company temporarily suspended stock repurchases beginning in March 2020 due to impact of the COVID-19 pandemic.

Credit Ratings

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis