What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-29 compared with 2021-11-02 · 108 added, 249 removed, 129 unchanged (73% of the section changed)

1 unchanged sentence

FORWARD-LOOKING STATEMENTS

Laboratory Corporation of America ® Holdings together with its subsidiaries (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.

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 "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:

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:

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 products 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.

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);

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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 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 and medical device and diagnostic customers;

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;

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;

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

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;

changes in payer mix or payment structure or processes, 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;

failure to retain or attract managed care organization (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;

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 payment from customers;

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;

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;

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;

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

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adverse results in litigation matters;

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

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;

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;

2 unchanged sentences

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;

business interruption, receivable 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;

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, inflationary increases, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes;

geopolitical events, including terrorism and war;

public health crises and disease epidemics and pandemics;

15 unchanged sentences

global economic conditions and government and regulatory changes;

effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, supplies, liquidity, 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, emerging government vaccine and testing mandates, 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, and the availability and timeliness of its drug development services.

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, evolving government vaccine and testing mandates and policies, 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, and the availability and timeliness of its drug development services.

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.

1 unchanged sentence

GENERAL (dollars in millions, except per share data)

Revenues for the nine months ended September 30, 2021, were $12,064.8, an increase of 27.1% from $9,488.7 during the nine months ended September 30, 2020.

The increase in revenues was due to organic growth of 25.2%, acquisitions of 0.8%, and favorable foreign currency translation of 1.2%.

The 25.2% increase in organic revenue includes a 18.2% contribution from the company's organic Base Business and a 7.0% increase from COVID-19 Testing.

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

The Company defines organic growth as the increase in revenue, excluding revenue from acquisitions for the first twelve months after the close of each acquisition.

As previously reported, in March 2021, the Company announced that its board of directors and management had commenced a review of the Company’s structure and capital allocation strategy to ensure that it is best positioned to unlock shareholder value while the Company continues to support patients and customers around the world.

The board of directors has engaged Goldman Sachs & Co.

LLC as its financial advisor to support the process.

There can be no assurances regarding the outcome or timing of the review process.

The Company expects to provide an update in the fourth quarter, though it does not undertake any obligation to provide updates on this process until a conclusion is reached.

Revenues for the three months ended March 31, 2022, were $3,899.6, a decrease of 6.3% from $4,161.5 during the three months ended March 31, 2021.

The decrease was due to lower organic revenue of 6.3% and unfavorable foreign currency translation of 0.4%, partially offset by acquisitions net of divestitures of 0.4%.

The 6.3% decline in organic revenue was driven by a 9.8% decrease in COVID-19 PCR and antibody testing (COVID-19 Testing), partially offset by a 3.5% increase in the Company's organic Base Business.

Base Business includes the Company's business 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.

Strategic Review of Company Structure and Capital Allocation Strategy

In March 2021, the Company announced the undertaking of a comprehensive review by its board of directors and management team of Labcorp's structure and capital allocation strategy.

In December 2021, the Company announced the board of directors' conclusion, as well as actions that the management team and the board of directors are taking to enhance shareholder returns.

Through April 28, 2022, the actions taken include:

announcing that a cash dividend of $0.72 per share of common stock will be paid on June 9, 2022, to stockholders of record as of the close of business on May 19, 2022;

completing the purchase of $1,000.0 of Company shares under an accelerated share repurchase plan;

implementing a new LaunchPad business process improvement initiative, targeting savings of $350.0 over the next three years;

providing longer-term outlook in connection with the announcement of the Company's 2021 year-end results;

providing further business insights through additional detail in connection with the announcement of Labcorp's results for the first quarter of 2022.

These actions demonstrate the Company’s continuing commitment to profitable growth through investments in science, innovation, and new technologies.

Management and the board of directors are committed to continuing to evaluate all avenues for enhancing shareholder value.

RESULTS OF OPERATIONS (dollars in millions)

Three months ended September 30, 2021, compared with three months ended September 30, 2020

Three Months Ended September 30,

Three months ended March 31, 2022, compared with three months ended March 31, 2021

Three Months Ended March 31,

2022 2021 Change

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Total $ 3,899.6 $ 4,161.5 (6.3 %)

Total revenues for the three months ended September 30, 2021, were $4,062.6, an increase of 4.3% over $3,896.1 in the third quarter of 2020.

The increase was due to organic Base Business growth of 3.4%, acquisitions of 0.4%, and favorable foreign currency translation of 0.5%.

The 3.4% increase in organic revenue is driven by a 10.2% increase in the company's organic Base Business, partially offset by a 6.8% decrease in COVID-19 Testing.

Dx revenues for the three months ended September 30, 2021, were $2,617.5, a decrease of 3.2% over $2,704.2 in the third quarter of 2020.

The decrease was due to organic Base Business reduction of 3.9%, partially offset by acquisitions of 0.4%, and favorable foreign currency translation of 0.3%.

Total revenues for the three months ended March 31, 2022, were $3,899.6, a decrease of 6.3% over $4,161.5 in the first quarter of 2021.

The decrease was due to lower organic revenue of 6.3% and unfavorable foreign currency translation of 0.4%, partially offset by acquisitions net of divestitures of 0.4%.

The 6.3% decline in organic revenue was driven by a 9.8% decrease in COVID-19 Testing, partially offset by a 3.5% increase in the company's organic Base Business.

Dx revenues for the three months ended March 31, 2022, were $2,454.1, a decrease of 11.0% over $2,757.8 in the first quarter of 2021.

The decrease was due to organic revenue of 11.5%, partially offset by acquisitions of 0.5%.

The 11.5% decrease in organic revenue was due to a 14.7% reduction from COVID-19 Testing, partially offset by a 3.2% increase in the Base Business.

Total volume (measured by requisitions) for the three months ended September 30, 2021, increased by 0.2% as acquisition volume contributed 0.2% and organic volume decreased by 0.1%.

The organic volume was impacted by a 5.9% decrease in COVID-19 Testing, partially offset by a 5.9% increase in Base Business.

Price/mix decreased by 3.4% due to lower COVID-19 Testing of 3.8%, partially offset by acquisitions of 0.2% and favorable currency translation of 0.3%.

Organic Base Business volume was up 7.7% while price/mix was up 1.3%.

DD revenues for the three months ended September 30, 2021, were $1,459.5, an increase of 17.5% over $1,241.9 in the third quarter of 2020.

The increase was due to organic Base Business growth of 19.9%, acquisitions of 0.4%, and favorable foreign currency translation of 1.0%, partially offset by lower COVID-19 Testing performed through its Central Laboratories business of 3.5% and divestitures of 0.3%.

Drug Development's Base Business benefited from broad-based demand, including COVID-19 vaccine and therapeutic work.

Total Base Business growth compared to the Base Business in the prior year was 5.6%.

Dx total volume (measured by requisitions) for the three months ended March 31, 2022, decreased by 5.0% as organic volume decreased by 5.3% and acquisition volume contributed 0.3%.

Organic volume was impacted by an 8.5% decrease in COVID-19 Testing, partially offset by a 3.1% increase in Base Business.

Price/mix decreased by 6.0% due to lower COVID-19 Testing of 6.3%, partially offset by acquisitions of 0.2% and organic Base Business growth of 0.1%.

Base Business volume was up 4.4% compared to Base Business last year while price/mix was up 1.2%.

DD revenues for the three months ended March 31, 2022, were $1,459.3, an increase of 1.5% over $1,438.2 in the first quarter of 2021.

The increase was due to organic Base Business growth of 4.3% and acquisitions net of divestitures of 0.1%, partially offset by lower COVID-19 Testing of 1.7% and foreign currency translation of 1.2%.

Cost of Revenues

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

1 unchanged sentence

Cost of revenues as a % of revenues 68.4 % 61.6 %

Cost of revenues increased 14.6 % during the three months ended September 30, 2021, as compared with the corresponding period in 2020.

Cost of revenues as a percentage of revenues during the three months ended September 30, 2021, increased to 65.9% as compared to 60.0% in the corresponding period in 2020.

This increase was primarily due to the impact of COVID-19 Testing.

Cost of revenues increased 4.1% during the three months ended March 31, 2022, as compared with the corresponding period in 2021.

Cost of revenues as a percentage of revenues during the three months ended March 31, 2022, increased to 68.4% as compared to 61.6% in the corresponding period in 2021.

This increase was primarily due to a reduction in COVID-19 Testing, higher personnel expenses, and other inflationary costs, partially offset by LaunchPad savings.

Selling, General and Administrative Expenses

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

1 unchanged sentence

Selling, general and administrative expenses as a % of revenues 11.9 % 10.3 %

During the three months ended September 30, 2021, the Company incurred $9.6 of retention bonuses, $5.2 of acquisition and divestiture related costs, $2.8 in management transition costs, and $2.0 in COVID-related costs.

In addition, the Company recorded $1.8 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $4.0 related to miscellaneous other items.

These items increased selling, general and administrative expenses by $25.4.

During the three months ended September 30, 2020, the Company incurred $2.4 in acquisition and divestiture costs, $1.9 in COVID-related costs and $1.8 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 $0.7 related to miscellaneous other items.

These items increased selling, general and administrative expenses by $7.0.

Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 12.2% and 10.6% during the three months ended September 30, 2021, and 2020, respectively, primarily due to the impact of COVID-19 Testing.

Selling, general and administrative expenses as a percentage of revenues were 11.9% and 10.3% during the three months ended March 31, 2022, and 2021, respectively.

The increase is primarily due to a reduction in COVID-19 Testing, and higher personnel expenses, partially offset by LaunchPad savings.

Goodwill and Other Asset Impairments

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

Goodwill and other asset impairments $ 1.2 $ — 100.0 %

During the three months ended September 30, 2020, the Company recorded goodwill and other asset impairment charges of $10.1 and $17.7 for customer relationships and technology intangible assets, respectively, due to the loss of a contract from a DD prior acquisition.

The Company reversed the $5.0 charge for the estimated loss related to the DD floating rate secured note receivable due 2022 from Envigo.

The Company also recorded an impairment for a note receivable related to a Dx investment of $0.7 during the three months ended September 30, 2020.

There were no goodwill and other asset impairments for the three months ended September 30, 2021.

The Company recorded impairment charges of $1.2 in other assets in Ukraine and Russia during the three months ended March 31, 2022.

There were no goodwill and other asset impairments for the three months ended March 31, 2021.

Amortization of Intangibles and Other Assets

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

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Total amortization of intangibles and other assets $ 67.1 $ 92.1 (27.2) %

The increase in amortization of intangibles and other assets primarily reflects the impact of acquisitions occurring after September 30, 2020, and $30.2 of accelerated amortization related to the Covance trade name as a result of a rebranding initiative, partially offset by lower amortization due to the impairment of intangible assets in 2020.

Restructuring and Other Special Charges

Three Months Ended September 30,

The decrease in amortization of intangibles and other assets primarily reflects the completion of the accelerated amortization related to the Covance trade name as a result of a rebranding initiative that resulted in $29.2 of expense in the three months ended March 31, 2021, offset by amortization for assets acquired subsequent to March 31, 2021.

Restructuring and Other Charges

Three Months Ended March 31,

2022 2021 Change

Restructuring and other charges $ 12.6 $ 19.2 (34.1) %

During the three months ended September 30, 2021, the Company recorded net restructuring and other charges of $6.5:

During the three months ended March 31, 2022, the Company recorded net restructuring and other charges of $12.6:

$2.6 within Dx and $10.0 within DD.

The charges were comprised of $5.4 related to severance and other personnel costs and $7.7 in facility closures, lease terminations, and general integration activities.

The charges were adjusted by the reversal of previously established liability of $0.5 in unused facility-related costs.

During the three months ended September 30, 2020, the Company recorded net restructuring and other special charges of $7.1:

The charges were adjusted by the reversal of a previously established liability of $0.4 in unused severance costs and $0.1 in unused facility-related costs.

During the three months ended March 31, 2021, the Company recorded net restructuring and other charges of $19.2:

$7.5 within Dx and $11.7 within DD.

The charges were comprised of $2.3 related to severance and other personnel costs, $3.0 for a DD lab facility and equipment impairment, and $4.0 in 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 and $2.1 in unused severance and facility-related costs, respectively.

The charges were comprised of $4.2 related to severance and other personnel costs and $15.1 in facility closures, lease terminations, and general integration activities.

The charges were offset by the reversal of a previously established liability of $0.1 in unused facility-related costs.

Interest Expense

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

Interest expense $ (42.2) $ (48.5) (13.0) %

The decrease in interest expense for the three months ended September 30, 2021, as compared with the corresponding period in 2020, is primarily due to lower outstanding debt and a lower average cost of debt.

The decrease in interest expense for the three months ended March 31, 2022, as compared with the corresponding period in 2021, is primarily due to lower outstanding debt and a lower average cost of debt.

Equity Method Income

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

1 unchanged sentence

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 increase in income for the three months ended September 30, 2021, as compared with the corresponding period in 2020, was primarily due to the write off or write down of certain of the Company's investments in 2020, which was primarily due to the negative impact of the COVID-19 global pandemic, and to increased profitability of the Company's joint ventures in 2021.

Three Months Ended September 30,

The decrease in income for the three months ended March 31, 2022, as compared with the corresponding period in 2021, was primarily due to the decreased profitability of the Company's joint ventures in 2022.

Three Months Ended March 31,

2022 2021 Change

Other, net $ (10.1) $ 5.5 283.6 %

The change in other, net for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, is primarily due to the $55.9 of funding from the Public Health and Social Services Emergency Fund for provider relief that was appropriated by Congress to the U.S.

Department of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act Provider Relief Funds) in the second quarter of 2020.

The Company returned these funds to the government in the fourth quarter of 2020.

This funding in 2020 was partially offset by the $5.2 write off or write down of certain of the Company's investments due to the negative impact of the COVID-19 global pandemic in 2020.

During the three months ended September 30, 2021, the Company recorded investment gains of $36.9.

In addition, foreign currency transaction gains of $0.4 were recognized for the three months ended September 30, 2021, and losses of $1.9 were recognized in the corresponding period of 2020.

The change in Other, net for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, is primarily due to investment gains of $8.0 for the three months ended March 31, 2022.

In addition, foreign currency transaction losses of $2.6 were recognized for the three months ended March 31, 2022, and losses of $1.0 were recognized in the corresponding period of 2021.

Income Tax Expense

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

1 unchanged sentence

Income tax expense as a % of earnings before income taxes 23.1 % 24.6 %

The tax rate was favorably impacted when the Company recorded tax benefits related to electing the Global Intangible Low Tax Income (GILTI) high-tax exclusion retroactively for previous tax years.

On July 20, 2020, the U.S.

Treasury issued and enacted final regulations related to GILTI that allows certain U.S.

taxpayers to elect to exclude foreign income that is subject to a high effective tax rate from the GILTI inclusions.

The GILTI high-tax exclusion is an annual election and is retroactively available.

During the quarter, the Company completed a detailed analysis and took the appropriate steps to amend its previous tax filings and to reassess its position on its 2020 and 2021 tax years.

Further, the rate was favorably impacted by foreign derived intangible income (FDII) as the Company finalized a comprehensive study related to previous tax filings and on its 2020 and 2021 tax years.

On July 15, 2020, the U.S.

Treasury issued and enacted final regulations related to FDII that governs the acceptable documentation reliability requirements and acceptable services that qualify as deduction eligible income.

This was partially offset by a new uncertain tax position that was established during this quarter related to a foreign jurisdiction.

For the three months ended March 31, 2022 and 2021, the effective income tax rate was 23.1% and 24.6%, respectively.

The current year effective tax rate was favorably impacted by the Company's foreign income inclusion.

Additionally, the effective income tax rate recorded benefits related to stock-based compensation arrangements.

Operating Income by Segment

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 Change

5 unchanged sentences

Total operating income $ 687.9 $ 1,057.9 (35.0) %

Dx operating income was $722.7 for the three months ended September 30, 2021, a decrease of $242.0 over operating income of $964.9 in the corresponding period of 2020, and Dx operating margin decreased 810 basis points year-over-year.

The decrease was reduction in COVID-19 Testing and higher personnel costs, partially offset by organic Base Business growth and LaunchPad savings.

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

DD operating income was $141.6 for the three months ended September 30, 2021, a decrease of 0.4% over operating income of $142.0 in the corresponding period of 2020.

The decrease was primarily due to lower COVID-19 Testing and higher personnel costs, partially offset by organic Base Business growth and LaunchPad savings.

Dx operating income was $623.3 for the three months ended March 31, 2022, a decrease of $325.8 over operating income of $949.1 in the corresponding period of 2021, and Dx operating margin decreased 900 basis points year-over-year.

The decrease in adjusted operating income and adjusted operating margin was primarily due to a reduction in COVID-19 Testing, higher personnel expense, and other inflationary costs, partially offset by organic Base Business growth and LaunchPad savings.

DD operating income was $124.2 for the three months ended March 31, 2022, a decrease of 20.6% over operating income of $156.4 in the corresponding period of 2021.

The decrease was primarily due to COVID-19 Testing, a reduction in COVID-19 vaccine and therapeutic work, the interruption of some clinical trial activity due to the conflict in Ukraine, higher personnel expense, and other inflationary costs.

These impacts were partially offset by organic Base Business growth and LaunchPad savings.

The Company continues to invest in technology and processes to drive profitable growth in DD.

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 $97.4 for the three months ended September 30, 2021, an increase of $37.6 over corporate expenses of $59.8 in the corresponding period of 2020, primarily due to higher personnel costs.

Nine months ended September 30, 2021, compared with nine months ended September 30, 2020

Nine Months Ended September 30,

2021 2020 Change

Dx $ 7,740.8 $ 6,098.8 26.9 %

DD 4,392.9 3,479.4 26.3 %

Intercompany eliminations and other (68.9) (89.5) (23.0) %

Total $ 12,064.8 $ 9,488.7 27.1 %

The increase in revenues for the nine months ended September 30, 2021, as compared with the corresponding period in 2020, was 27.1%.

The increase in revenues was due to organic growth of 25.2%, acquisitions of 0.8%, and favorable foreign currency translation of 1.2%.

The 25.2% increase in organic revenue includes a 18.2% increase in the Company's organic Base Business and a 7.0% contribution from COVID-19 Testing.

Dx revenues for the nine months ended September 30, 2021, were $7,740.8, an increase of 26.9% compared to revenues of $6,098.8 during the nine months ended September 30, 2020.

The increase in revenues was primarily due to organic growth of 25.7%, acquisitions of 0.7%, and favorable foreign currency translation of 0.5%.

The 25.7% in organic revenue was due to a 10.9% contribution from COVID-19 Testing and a 14.8% increase in the Base Business.

Total volume, measured by requisitions, increased by 19.6% as organic volume increased by 19.0% and acquisition volume contributed 0.6%.

COVID-19 Testing contributed 6.4% to organic volume growth.

Price/mix increased by 7.3% due to COVID-19 Testing of 4.5%, organic Base Business of 2.2%, favorable foreign currency translation of 0.5%, and acquisitions of 0.2%.

DD revenues for the nine months ended September 30, 2021 were $4,392.9, an increase of 26.3% over revenues of $3,479.4 during the nine months ended September 30, 2020.

The increase in revenues was primarily due to organic Base Business growth of 23.7%, acquisitions of 0.9%, favorable foreign currency translation of 2.5%, partially offset by lower COVID-19 Testing performed through its Central Laboratories business of 0.6% and divestitures of 0.1%.

Drug Development's Base Business benefited from broad-based demand, including COVID-19 vaccine and therapeutic work.

Cost of Revenues

Nine Months Ended September 30,

2021 2020 Change

Cost of revenues $ 7,815.5 $ 6,440.8 21.3 %

Cost of revenues as a % of revenues 64.8 % 67.9 %

Cost of revenues increased 21.3% during the nine months ended September 30, 2021, as compared with the corresponding period in 2020.

Cost of revenues as a percentage of revenues during the nine months ended September 30, 2021, decreased to 64.8% as compared to 67.9% in the corresponding period in 2020.

This decrease was primarily due to organic Base Business growth, impact of COVID-19 Testing, and acquisitions, partially offset by higher personnel costs.

Selling, General and Administrative Expenses

Nine Months Ended September 30,

2021 2020 Change

Selling, general and administrative expenses $ 1,408.4 $ 1,211.3 16.3 %

Selling, general and administrative expenses as a % of revenues 11.7 % 12.8 %

During the nine months ended September 30, 2021, the Company incurred $17.4 of acquisition and divestiture related costs, $9.6 in retention bonuses, $7.8 in COVID-related costs and $5.6 in management transition costs.

In addition, the Company recorded $4.6 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $17.2 related to miscellaneous other items.

These items increased selling, general and administrative expenses by $62.2.

During the nine months ended September 30, 2020, the Company incurred $15.3 in acquisition and divestiture costs, $5.8 in COVID-related costs, and $12.4 in management transition costs.

In addition, the Company recorded $1.3 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $1.7 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 $26.5.

Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 11.2% and 12.5% during the nine months ended September 30, 2021, and 2020, respectively, primarily due to leveraging the Company's infrastructure on higher revenue.

Goodwill and Other Asset Impairments

Nine Months Ended September 30,

2021 2020 Change

Goodwill and other asset impairments $ — $ 460.9 (100.0) %

During the nine months ended September 30, 2020, the Company recorded goodwill and other asset impairment charges of $460.9.

The Company recorded goodwill impairment of $418.7 within DD and $3.7 within Dx.

The Company also recorded impairment charges of $2.7 for a DD tradename, $10.1 and $17.7, respectively, for DD customer relationships and DD technology due to the loss of a contract from a prior acquisition, $7.3 for Dx software and $0.7 for the impairment of the a Dx investment.

There were no goodwill and other asset impairments for the nine months ended September 30, 2021.

Amortization of Intangibles and Other Assets

Nine Months Ended September 30,

2021 2020 Change

Dx $ 85.8 $ 77.3 10.9 %

DD 190.9 107.3 78.0 %

Total amortization of intangibles and other assets $ 276.7 $ 184.6 49.9 %

The increase in amortization of intangibles and other assets primarily reflects the impact of acquisitions occurring after September 30, 2020, and $87.4 of accelerated amortization related to the Covance trade name as a result of a rebranding initiative, partially offset by lower amortization due to the impairment of intangible assets in 2020.

Restructuring and Other Special Charges

Nine Months Ended September 30,

2021 2020 Change

Restructuring and other charges $ 35.3 $ 38.9 (9.4) %

During the nine months ended September 30, 2021, the Company recorded net restructuring and other charges of $35.3:

$16.8 within Dx and $18.5 within DD.

The charges were comprised of $13.6 related to severance and other personnel costs and $22.4 in facility closures, lease terminations, and general integration activities.

The charges were adjusted by an decrease of $0.1 of previously established severance liabilities and the reversal of previously established liability of $0.7 in unused facility-related costs.

During the nine months ended September 30, 2020, the Company recorded net restructuring and other special charges of $38.9:

$13.4 within Dx and $25.5 within DD.

The charges were comprised of $12.8 related to severance and other personnel costs, $11.0 for a DD lab facility impairment, and $24.0 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 liability of $1.1 and $7.8 in unused severance costs and facility-related costs, respectively.

Interest Expense

Nine Months Ended September 30,

2021 2020 Change

Interest expense $ (169.0) $ (159.1) 6.2 %

The increase in interest expense for the nine months ended September 30, 2021, as compared with the corresponding period in 2020, is primarily due to the costs of redeeming the 3.20% and 3.75% notes and issuing the new senior notes, partially offset by lower debt.

Equity Method Income

Nine Months Ended September 30,

2021 2020 Change

Equity method income, net $ 20.9 $ (1.8) 1,255.2 %

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 increase in income for the nine months ended September 30, 2021, as compared with the corresponding period in 2020, was primarily due to the write off or write down of certain of the Company's investments in 2020, which was primarily due to the negative impact of the COVID-19 global pandemic, and increased profitability of the Company's joint ventures in 2021.

Nine Months Ended September 30,

2021 2020 Change

Other, net $ 51.5 $ (22.6) 327.8 %

The change in other, net for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, is primarily due to investment activity.

During the nine months ended September 30, 2020, the Company adjusted certain of the Company's investments due to the negative impact of the COVID-19 global pandemic in 2020.

During the nine months ended September 30, 2021, the Company recorded investment gains of $67.4 which were partially offset by a loss on sale of a business of $6.1.

In addition, foreign currency transaction losses of $2.4 were recognized for the nine months ended September 30, 2021, and losses of $6.4 were recognized in the corresponding period of 2020.

Income Tax Expense

Nine Months Ended September 30,

2021 2020 Change

Income tax expense $ 614.7 $ 358.0 71.7 %

Income tax expense as a % of earnings before income taxes 25.2 % 36.7 %

The 2021 tax rate was favorable to the 2020 tax rate due primarily to the 2020 impairment charges which were either not deductible or the associated tax assets required a full valuation allowance.

In addition, the tax rate was favorably impacted when the Company recorded tax benefits related to electing the GILTI high-tax exclusion retroactively for previous tax years.

On July 20, 2020, the U.S.

Treasury issued and enacted final regulations related to GILTI that allows certain U.S.

taxpayers to elect to exclude foreign income that is subject to a high effective tax rate from the GILTI inclusions.

The GILTI high-tax exclusion is an annual election and is retroactively available.

During the quarter, the Company completed a detailed analysis and took the appropriate steps to amend its previous tax filings and to reassess its position on its 2020 and 2021 tax years.

Further, the rate was favorably impacted by FDII as the Company finalized a comprehensive study related to previous tax filings and on its 2020 and 2021 tax years.

On July 15, 2020, the U.S.

Treasury issued and enacted final regulations related to FDII that governs the acceptable documentation reliability requirements and acceptable services that qualify as deduction eligible income.

This was partially offset by a new uncertain tax position that was established during this quarter related to a foreign jurisdiction.

Operating Income by Segment

Nine Months Ended September 30,

2021 2020 Change

Dx operating income $ 2,275.4 $ 1,451.5 56.8 %

Dx operating margin 29.4 % 23.8 % 5.6 %

DD operating income (loss) 445.3 (131.2) 439.4 %

DD operating margin 10.1 % (3.8) % 13.9 %

General corporate expenses (191.8) (168.1) (14.1) %

Total operating income (loss) $ 2,528.9 $ 1,152.2 119.5 %

Dx operating income was $2,275.4 for the nine months ended September 30, 2021, an increase of $823.9 over operating income of $1,451.5 in the corresponding period of 2020, and Dx operating margin increased 560 basis points year-over-year.

The increase was primarily due to the increase in COVID-19 Testing, organic Base Business growth and LaunchPad savings, partially offset by higher personnel costs.

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

DD operating income was $445.3 for the nine months ended September 30, 2021, an increase of $576.4 over operating loss of $131.2 in the corresponding period of 2020.

The increase was primarily due to goodwill and other asset impairments in 2020 and in 2021 organic Base Business growth, and LaunchPad savings, partially offset by lower COVID-19 Testing and higher personnel costs.

The Company continues to develop and execute new LaunchPad programs to support profitable growth in DD.

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 $191.8 for the nine months ended September 30, 2021, an increase of $23.7 over corporate expenses of $168.1 in the corresponding period of 2020, primarily due to higher personnel costs.

Corporate expenses were $59.6 for the three months ended March 31, 2022, an increase of $12.0 over corporate expenses of $47.6 in the corresponding period of 2021, primarily due to higher personnel 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 strong cash-generating ability and financial condition typically have provided ready access to capital markets.

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's senior unsecured revolving credit facility is further discussed in Note 6 (Debt) to the Company's Condensed Consolidated Financial Statements.

In summary, the Company's cash flows were as follows for the nine months ended September 30, 2021, and 2020, respectively:

Nine Months Ended September 30,

In summary, the Company's cash flows were as follows for the three months ended March 31, 2022, and 2021, respectively:

Three Months Ended March 31,

Net cash provided by operating activities $ 356.0 $ 1,157.6

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Effect of exchange rate changes on cash and cash equivalents (4.4) (5.1)

Net increase in cash and cash equivalents $ 715.7 $ 329.7

Net increase (decrease) in cash and cash equivalents $ (239.2) $ 570.0

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2021, and 2020, totaled $2,036.5 and $667.2, 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 nine months ended September 30, 2021, the Company's operations provided $2,412.1 of cash as compared to $1,360.7 during the same period in 2020.

The $1,051.4 increase in cash provided from operations in 2021 as compared with the corresponding 2020 period is primarily due to higher cash earnings and favorable working capital.

Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2021, was $630.1 as compared to $515.2 for the nine months ended September 30, 2020.

The change in cash used for investing activities was primarily due to an increase in business acquisitions and higher capital expenditures during the nine months ended September 30, 2021, partially offset by higher proceeds from the sale of investments and a business.

Capital expenditures were $310.4 and $282.3 for the nine months ended September 30, 2021, and 2020, respectively.

The Company continues to evaluate a robust pipeline of acquisitions and anticipates an acceleration of acquisitions.

Financing Activities

Net cash used by financing activities for the nine months ended September 30, 2021, was $1,057.2 as compared to $516.4 for the nine months ended September 30, 2020.

The change in cash flows from financing activities for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to the repayment of the 2019 Term Loan in February 2021 and an increase of $568.5 in share repurchases.

Cash and cash equivalents at March 31, 2022, and 2021, totaled $1,233.5 and $1,890.8, 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 three months ended March 31, 2022, the Company's operations provided $356.0 of cash as compared to $1,157.6 during the same period in 2021.

The $801.6 decrease in cash provided from operations in 2022 as compared with the corresponding 2021 period is primarily due to lower cash earnings and higher working capital requirements.

Cash Flows from Investing Activities

Net cash used for investing activities for the three months ended March 31, 2022, was $573.1 as compared to $132.4 for the three months ended March 31, 2021.

The change in cash used for investing activities was primarily due to an increase in business acquisitions and higher capital expenditures during the three months ended March 31, 2022.

Capital expenditures were $117.2 and $95.4 for the three months ended March 31, 2022, and 2021, respectively.

Cash Flows from Financing Activities

Net cash used by financing activities for the three months ended March 31, 2022, was $17.7 as compared to $450.1 for the three months ended March 31, 2021.

The change in cash flows from financing activities for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, was primarily due to the repayment of the 2019 Term Loan in 2021 and a decrease of $68.5 in share repurchases.

On May 26, 2021, the Company issued new senior notes representing $1,000.0 in debt securities and consisting of $500.0 aggregate principal amount of 1.55% senior notes due 2026 and $500.0 aggregate principal amount of 2.70% senior notes due 2031.

Interest on these notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on

December 1, 2021.

Interest on these notes is payable semi-annually in arrears on June 1 and December 1 of each year.

Net proceeds from the offering of these notes were $989.4 after deducting underwriting discounts and other expenses of the offering.

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These instruments are designated as hedges against changes in the fair value of a portion of the Company's long-term debt.

The aggregate fair value of $4.0 at September 30, 2021, was included as a component of other long-term assets and added to the reported value of the senior notes.

The aggregate fair value of $31.3 at March 31, 2022, was included as a component of other long-term liabilities and reduced the reported value of the senior notes.

On April 30, 2021, the Company amended and restated its revolving credit facility.

1 unchanged sentence

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 0.23%, depending on the Company’s debt ratings.

Borrowings under the revolving credit facility will accrue interest at a per annum rate equal to, at the Company’s election, either (x) a LIBOR rate plus a margin ranging from 0.775% to 1.275% or (y) a base rate plus a margin ranging from 0% to 0.275%, in each case, depending on the Company’s debt ratings.

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, 2021, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.

At September 30, 2021, the Company had $2,036.5 of cash and $1,000.0 of available borrowings under its revolving credit facility, which does not mature until 2026.

For the nine months ended September 30, 2021, the Company repurchased $668.5 of the Company's common stock and had outstanding authorization from the board of directors to purchase up to $131.5 more of the Company's common stock with no expiration date.

The Company was in compliance with all covenants under the revolving credit facility at March 31, 2022, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.

At March 31, 2022, the Company had $1,233.5 of cash and $1,000.0 of available borrowings under its revolving credit facility, which does not mature until 2026.

For the three months ended March 31, 2022, the Company did not repurchase any of the Company's common stock but received 0.6 shares of its common stock, arising from a partial acceleration from Barclays Bank PLC and a final settlement from Goldman Sachs & Co.

LLC in connection with agreements under its ASR program initiated in December 2021.

As of March 31, 2022, t he Company had an outstanding authorization from the board of directors to purchase up to $1,631.5 more of the Company's common stock with no expiration date.

On December 9, 2021, the Company announced that it was initiating a quarterly dividend in the second quarter of 2022.

On April 7, 2022, the Company announced a cash dividend of $0.72 per share of common stock for the second quarter, or approximately $67.6 in the aggregate.

The dividend will be payable on June 9, 2022, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on May 19, 2022.

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.

The Company’s expectation is that it will seek to maintain an investment grade debt rating regardless of what, if anything, results from the Company’s current review of its structure and capital allocation strategy.

Contractual Cash Obligations

Payments Due by Period

Total Short-term Long-term

Operating lease obligations $ 820.1 $ 189.1 $ 631.0

Contingent future licensing payments (a) 19.0 4.0 15.0

Purchase obligations 35.6 15.6 20.0

Finance lease obligations 96.6 10.6 86.0

Scheduled interest payments on Senior Notes (b) 1,693.6 181.0 1,512.6

Long-term debt (c) 5,418.8 1.6 5,417.2

Total contractual cash obligations (d) (e) $ 8,083.7 $ 401.9 $ 7,681.8

(a) Contingent future licensing payments will be made if certain events take place, such as the launch of a specific test, the transfer of certain technology, and the achievement of specified revenue milestones.

(b) Interest payments due by period for the Company's debt subject to variable interest rates are calculated based on rates in place as of September 30, 2021.

(d) The table does not include obligations under the Company’s pension and postretirement benefit plans.

(e) The table does not include the Company’s reserve for unrecognized tax benefits.

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