What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-01 · 134 added, 200 removed, 131 unchanged (72% 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, the European Union and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business;

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;

3 unchanged sentences

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 or other services ordered, or a reduction in tests ordered, specimens submitted, or services requested by existing customers, and reductions and delays in payments from Dx and DD customers;

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;

8 unchanged sentences

damage or disruption to the Company's facilities;

damage to the Company's reputation, loss of business, or other harm from increased regulations and restrictions on the import of research animals, limitations of supply of research animals, and acts of animal rights activists, or potential harm and/or liability arising from animal research activities;

damage to the Company's reputation, loss of business, or other harm from acts of animal rights activists or potential harm and/or liability arising from animal research activities;

adverse results in litigation matters;

4 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, 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;

business interruption, receivables impairment, delays in cash collection impacting days sales outstanding, supply chain disruptions or inventory obsolescence, increases in material cost or other operating costs, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes;

political crises, including terrorism and war;

public health crises and disease epidemics and pandemics;

10 unchanged sentences

expenses and risks associated with international operations, including, but not limited to, compliance with the U.S.

Foreign Corrupt Practices Act, the U.K.

Foreign Corrupt Practices Act (FPCA), the U.K.

Bribery Act, other applicable anti-corruption laws and regulations, trade sanction laws and regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions;

2 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, 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;

risks associated with the impact, timing, expected benefits and costs, or terms of the planned spin-off of the Company’s Clinical Development business, which includes the parts of its DD segment focused on providing Phase I-IV clinical trial management, market access, and technology solutions to pharmaceutical and biotechnology organizations, including but not limited to (i) uncertainties as to the completion and timing of the transaction;

failure to obtain appropriate assurances regarding the tax-free nature of the spin-off;

(iii) the receipt of regulatory approvals;

risks associated with the impact, timing, expected benefits and costs, or terms of the planned spin-off of the Company’s Clinical Development and Commercialization Services (CDCS) business, which includes the parts of its DD segment focused on providing Phase I-IV clinical trial management, market access, and technology solutions to pharmaceutical and biotechnology organizations, including but not limited to (i) uncertainties as to the completion and timing of the transaction;

(ii) the failure to obtain appropriate assurances regarding the tax-free nature of the spin-off;

(iii) the failure to obtain receipt of required regulatory approvals;

(iv) the effect of the announcement or pendency of the transaction on the Company’s business relationships, operating results, and business generally;

1 unchanged sentence

(vi) the failure to have the Form 10 registration statement that will be filed with the SEC declared effective on a timely basis, or at all;

(vii) risks that the proposed transaction disrupts current plans and operations of Labcorp or Clinical Development;

(viii) potential difficulties attracting or retaining Company or Clinical Development employees as a result of the spin-off announcement, pendency or completion of the spin-off;

(ix) risks related to diverting management’s attention from the Company and Clinical Development’s ongoing business operations;

(x) the ability of the Company to successfully separate Clinical Development operations from the Company’s ongoing operations;

(xi) market receptiveness to effect transactions in the capital markets;

(vii) risks that the proposed transaction disrupts current plans and operations of Labcorp or CDCS;

(viii) potential difficulties attracting or retaining Company or CDCS employees as a result of the spin-off announcement, pendency or completion of the spin-off;

(ix) risks related to diverting management’s attention from the Company and CDCS’ ongoing business operations;

(x) the ability of the Company to successfully separate CDCS operations from the Company’s ongoing operations;

receptiveness to effect transactions in the capital markets;

and (xii) market reaction to the announcement and planning for the transaction;

the effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, supplies, liquidity, and collections, as well as the impact of past or future actions or omissions by the Company or governments in response to the COVID-19 pandemic including, but not limited to, the end of the federal Public Health Emergency, and damage to the Company's reputation or loss of business resulting from the perception of the Company's response to the COVID-19 pandemic.

Except as may be required by applicable law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

1 unchanged sentence

GENERAL (dollars in millions, except per share data)

Revenues for the nine months ended September 30, 2022, were $11,202.6, a decrease of 7.1% from $12,064.8 during the nine months ended September 30, 2021.

The decrease was due to lower organic revenue of 6.9% and unfavorable foreign currency translation of 0.9%, partially offset by acquisitions net of divestitures of 0.6%.

The 6.9% decline in organic revenue includes a 8.9% decrease in COVID-19 PCR and antibody testing (COVID-19 Testing), partially offset by a 2.0% increase in the Company's organic Base Business.

Base Business includes the Company's business operations except for COVID-19 Testing.

Revenues for the three months ended March 31, 2023, were $3,777.9, a decrease of 3.1% from $3,899.6 during the three months ended March 31, 2022.

The decrease was due to organic revenue of 3.6% and unfavorable foreign currency translation of 0.7%, partially offset by acquisitions, net of divestitures, of 1.2%.

The 3.6% decrease in organic revenue was driven by a 11.6% decrease in COVID-19 PCR and antibody testing (COVID-19 Testing), partially offset by a 7.9% increase in the company's organic Base Business.

Base Business includes Labcorp's operations except for COVID-19 Testing.

The Company defines organic growth as the increase in revenue excluding the year-over-year impact of acquisitions, divestitures, and currency.

Acquisition and divestiture impact is considered for a twelve month period following the close of each transaction.

Proposed Spin-Off of Clinical Development Business

On July 28, 2022, the Company announced that its board of directors authorized the Company to pursue a spin-off of its wholly owned Clinical Development business, which includes the parts of its DD segment focused on providing Phase I-IV clinical trials, market access, and technology solutions to pharmaceutical and biotechnology organizations.

The planned spin-off would result in two independent, publicly traded companies.

The spin-off is intended to be a tax-free transaction to the Company and its stockholders for U.S.

federal income tax purposes and is expected to be effected through a dividend of the Clinical Development business' shares to the Company's shareholders.

The Company anticipates that, consistent with any applicable legal and tax requirements, there will be ongoing transitional and commercial arrangements to provide for a seamless delivery of services to the customers and other stakeholders of the independent companies following the spin-off.

The Company is targeting completion of the spin-off with an accelerated timeframe of mid-2023, subject to the satisfaction of certain customary conditions, including receipt of final approval by the Company's board of directors, receipt of appropriate assurances regarding the tax-free nature of the transaction, and the effectiveness of any required filings with the SEC.

Spin-Off of the Company's CDCS Business

On July 28, 2022, the Company announced that the Board of Directors authorized the Company to pursue a spin-off of the Company’s wholly owned CDCS business to its shareholders through a tax-free transaction.

The planned spin-off will result in two independent companies, each poised for strong, sustainable growth.

On January 9, 2023, Thomas (Tom) Pike joined the Company as president and chief executive officer of its DD Clinical Development business unit, and when the planned spin-off is complete, Mr.

Pike will become the chief executive officer and chairman of the board of directors of the independent, publicly listed company.

On February 9, 2023, the Company announced that the name of the CDCS business will become Fortrea in connection with the planned spin-off.

The Company is targeting completion of the planned spin-off in mid-2023.

The planned spin-off will be subject to the satisfaction of certain customary conditions, including, among others, the receipt of final approval by the Company's Board, the receipt of appropriate assurances regarding the tax-free nature of the separation and effectiveness of any required filings with the U.S.

Securities and Exchange Commission (SEC).

There can be no assurances regarding the ultimate timing of the transaction or that the spin-off will be completed.

When the transaction is complete, the resulting companies will be Labcorp, comprising the Company’s routine and esoteric labs, central labs and early development research labs, and Fortrea, a global contract research organization (CRO) providing Phase I-IV clinical trial management, market access and technology solutions to pharmaceutical and biotechnology organizations.

The planned spin-off is expected to provide each company with:

• strengthened strategic flexibility and operational focus to pursue specific market opportunities and better meet customer needs;

• focused capital structures and capital allocation strategies to drive innovation and growth;

• a more targeted investment opportunity for different investor bases;

• the ability to align its particular incentive compensation with its financial performance.

Following the planned spin-off, the Company believes that Labcorp will be positioned to:

• invest in R&D and innovation to develop and launch diagnostic advancements globally in key clinical areas including oncology, Alzheimer's, and autoimmune and liver disease through organic and inorganic opportunities;

• bring together its global health and patient data and provide insights to enable customers to innovate;

• utilize its worldwide laboratory network to serve a broad, growing and global customer base including pharmaceutical and biotechnology companies, physicians, health systems, consumers, and other start-ups and laboratories that require lab services or diagnostic testing;

• launch innovative tests globally, providing patients, physicians, health systems and pharmaceutical companies with access to its advanced science, technology and diagnostic capabilities.

Following the planned spin-off, the Company believes that Fortrea will be positioned to:

• capitalize on growth opportunities across Phases I-IV clinical trials and extend its leadership in oncology, cell and gene therapy, rare disease, and other emerging therapeutic areas;

• increase agility with large pharmaceutical and biotechnology clients to better serve customers and advance life-saving therapies;

• access to unique data sets and insights through an arrangement with the Company for a defined period of time which will enable Fortrea to provide enhanced trial execution and a differentiated value proposition;

• invest in capabilities, technologies, diverse talent and innovation to enhance trial execution and better serve all of its customers;

• implement a capital structure that is tailored to support its growth strategy and enhance stakeholder value.

The planned spin-off is intended to qualify as a tax-free transaction for U.S.

federal income tax purposes.

RESULTS OF OPERATIONS (dollars in millions)

Three months ended September 30, 2022, compared with three months ended September 30, 2021

Three Months Ended September 30,

Three months ended March 31, 2023, compared with three months ended March 31, 2022

Three Months Ended March 31,

2023 2022 Change

3 unchanged sentences

Total $ 3,777.9 $ 3,899.6 (3.1 %)

Total revenues for the three months ended September 30, 2022, were $3,606.1, a decrease of 11.2% over $4,062.6 in the third quarter of 2021.

The decrease was due to lower organic revenue of 10.7% and unfavorable foreign currency translation of 1.3%, partially offset by acquisitions of 0.8%.

Total revenues for the three months ended March 31, 2023, were $3,777.9, a decrease of 3.1% over $3,899.6 in the first quarter of 2022.

The decrease was due to lower organic revenue of 3.6% and unfavorable foreign currency translation of 0.7%, partially offset by acquisitions net of divestitures of 1.2%.

The 3.6% decrease in organic revenue was driven by a 11.6% decrease in COVID-19 Testing, partially offset by a 7.9% increase in the Company's organic Base Business.

Dx revenues for the three months ended September 30, 2022, were $2,207.6, a decrease of 15.7% over $2,617.5 in the third quarter of 2021.

The decrease was primarily due to organic revenue of 16.4% and unfavorable foreign currency translation of

0.1%, partially offset by acquisitions of 0.9%.

Dx revenues for the three months ended March 31, 2023, were $2,382.8, a decrease of 2.9% over $2,454.1 in the first quarter of 2022.

The decrease was due to organic revenue of 4.7% and unfavorable foreign currency translation of 0.3%, partially offset by acquisitions of 2.0%.

The 4.7% decrease in organic revenue was due to a 18.4% decrease in COVID-19 Testing, partially offset by a 13.7% increase in the Base Business.

Total Base Business growth compared to the Base Business in the prior year was 3.7%.

Dx total volume (measured by requisitions) for the three months ended September 30, 2022, decreased by 10.3% as organic volume decreased by 10.9% and acquisition volume contributed 0.6%.

Organic volume was impacted by an 12.8% decrease in COVID-19 Testing, partially offset by a 1.9% increase in Base Business.

Price/mix decreased by 5.4% due to a decrease in COVID-19 Testing of 5.5%.

Base Business volume was up 3.1% compared to the Base Business last year, while price/mix was up 0.6%.

DD revenues for the three months ended September 30, 2022, were $1,405.8, a decrease of 3.7% over $1,459.5 in the third quarter of 2021.

The decrease was primarily due to unfavorable foreign currency translation of 3.4%.

The benefit of acquisitions of 0.5% was offset by a 0.7% decline in Base Business organic growth, which was negatively impacted by approximately 5.0% due to reduced COVID-19 related work and the Ukraine/Russia crisis.

COVID-19 related work includes lower COVID-19 vaccine and therapeutic studies as well as reduced clinical development kits shipped and returned due to supply chain issues and labor constraints.

Total Base Business growth compared to the Base Business in the prior year was 19.8%, which includes the benefit from the Ascension lab management agreement of approximately 7% as well as the positive impact from weather and revenue days of approximately 2%.

Dx total volume (measured by requisitions) for the three months ended March 31, 2023, decreased by 3.3% as organic volume decreased by 5.6% and acquisition volume contributed 2.3%.

Organic volume was impacted by a 12.7% decrease in COVID-19 Testing, partially offset by a 7.1% increase in Base Business.

Price/mix increased by 0.4% due to Base Business growth of 6.6%, partially offset by a decrease in COVID-19 Testing of 5.7%, unfavorable foreign currency translation of 0.3%, and lower acquisitions of 0.2%.

Base Business volume was up 11.0% compared to the Base Business last year, which includes the combined favorable impact from weather and revenue days of approximately 2%.

Price/mix was up 8.8% in the Base Business compared to the Base Business last year, which includes the benefit of the Ascension lab management agreement.

DD revenues for the three months ended March 31, 2023, were $1,401.3, a decrease of 4.0% over $1,459.3 in the first quarter of 2022.

The decrease was primarily due to an organic decline of 2.4%, unfavorable foreign currency translation of 1.5%, and unfavorable acquisitions net of divestitures of 0.1%.

The decrease in organic revenue was negatively impacted by approximately 8.0% due to non-human primate (NHP) related constraints, reduced COVID-19 vaccine and therapeutic work, and the loss of a functional services provider (FSP) contract.

Our backlog expected to be recognized in the next 12 months decreased from approximately 30% at December 31, 2022, to approximately 29.5% at March 31, 2023, as a result of an increase in the average contract length.

Cost of Revenues

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

1 unchanged sentence

Cost of revenues as a % of revenues 74.2 % 68.4 %

Cost of revenues decreased 4.9% during the three months ended September 30, 2022, as compared with the corresponding period in 2021.

Cost of revenues as a percentage of revenues during the three months ended September 30, 2022, increased to 70.6% as compared to 65.9% in the corresponding period in 2021.

This increase in cost of revenues as a percent of revenues was primarily due to a reduction in COVID-19 Testing revenues, higher personnel expenses, and other inflationary costs, partially offset by organic Base Business growth and LaunchPad savings.

Cost of revenues increased 5.1% during the three months ended March 31, 2023, as compared with the corresponding period in 2022.

Cost of revenues as a percentage of revenues during the three months ended March 31, 2023, increased to 74.2% as compared to 68.4% in the corresponding period in 2022.

This increase in cost of revenues as a percent of revenues

was primarily due to a reduction in COVID-19 Testing revenues, the impact of the Ascension Management Service Agreement, and higher personnel expenses, partially offset by organic Base Business growth and LaunchPad savings.

Selling, General and Administrative Expenses

Three Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

1 unchanged sentence

Selling, general and administrative expenses as a % of revenues 14.7 % 11.9 %

Selling, general and administrative expenses as a percentage of revenues were 14.1% and 12.8% during the three months ended September 30, 2022, and 2021, respectively.

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

Selling, general and administrative expenses as a percentage of revenues were 14.7% and 11.9% during the three months ended March 31, 2023, and 2022, respectively.

The increase is primarily due to a reduction in COVID-19 Testing revenues and spin off transaction costs.

Amortization of Intangibles and Other Assets

Three Months Ended September 30,

2022 2021 Change

Dx $ 32.5 $ 29.3 11.1 %

DD 32.7 62.9 (48.1) %

Total amortization of intangibles and other assets $ 65.2 $ 92.2 (29.3) %

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 $30.2 of expense in the three months ended September 30, 2021, offset by additional amortization for assets acquired subsequent to September 30, 2021.

Restructuring and Other Charges

Three Months Ended September 30,

2022 2021 Change

Restructuring and other charges $ 15.1 $ 6.5 133.8 %

During the three months ended September 30, 2022, the Company recorded net restructuring and other charges of $15.1:

$3.6 within Dx, $11.3 within DD, and $0.2 allocated to general corporate.

The charges were comprised of $2.5 related to severance and other personnel costs and $11.4 in facility closures, lease terminations, and general integration activities.

The charges were adjusted by the increase of $1.5 of previously established severance liabilities and the reversal of previously established liability of $0.3 in unused facility-related costs.

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

$3.3 within Dx and $3.2 within DD.

The charges were comprised of $3.3 related to severance and other personnel costs and

$3.7 in facility closures, lease terminations, and general integration activities.

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

Interest Expense

Three Months Ended September 30,

2022 2021 Change

Interest expense $ (46.3) $ (42.2) 9.9 %

The increase in interest expense for the three months ended September 30, 2022, as compared with the corresponding period in 2021, is primarily due to the increased interest rates on variable rate debt, and lower benefit from cross currency swaps, partly offset by the impact of higher interest rates on cash.

Equity Method Income

Three Months Ended September 30,

2022 2021 Change

Equity method income, net $ 1.7 $ 8.4 (79.3) %

Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry.

The decrease in income for the three months ended September 30, 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 September 30,

2022 2021 Change

Other, net $ (7.3) $ 31.9 (123.0) %

The change in Other, net for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, is primarily due to investment losses of $5.2 for the three months ended September 30, 2022 compared to investment gains of $36.9 for the corresponding period of 2021.

In addition, foreign currency transaction gains of $1.9 were recognized for the three months ended September 30, 2022 as compared to gains of $0.4 for the corresponding period of 2021.

Income Tax Expense

Three Months Ended September 30,

2022 2021 Change

Income tax expense $ 68.4 $ 180.4 (62.1) %

Income tax expense as a % of earnings before income taxes 16.2 % 23.5 %

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

During the quarter, the Company completed a detailed research and development tax credit analysis for the 2019, 2020, and 2021 tax years that resulted in an incremental income tax benefit.

The prior year effective tax rate was favorably impacted by stock-based compensation arrangements that was offset by the deferred revaluation related to the United Kingdom rate change.

Operating Income by Segment

Three Months Ended September 30,

2022 2021 Change

Dx operating income $ 378.7 $ 722.7 (47.6) %

Dx operating margin 17.2 % 27.6 % (10.4) %

DD operating income 156.7 141.6 10.7 %

DD operating margin 11.1 % 9.7 % 1.4 %

General corporate expenses (66.0) (97.4) (32.2) %

Total operating income $ 469.4 $ 766.9 (38.8) %

Dx operating income was $378.7 for the three months ended September 30, 2022, a decrease of $344.0 over operating income of $722.7 in the corresponding period of 2021, and Dx operating margin decreased 1,040 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 $156.7 for the three months ended September 30, 2022, an increase of $15.2 over operating income of $141.6 in the corresponding period of 2021.

The increase was primarily due to less amortization expense in 2022 as a

result of the completion of the accelerated amortization related to the Covance trade name, organic Base Business growth, and LaunchPad savings, partially offset by a reduction in COVID-19 related work, the Ukraine/Russia crisis, inflationary costs, and the mix impact of acquisitions.

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 $66.0 for the three months ended September 30, 2022, a decrease of $31.4 over corporate expenses of $97.4 in the corresponding period of 2021, primarily due to lower personnel costs, bonus allocation, and research and development costs.

The Company remains on track to deliver approximately $350.0 of net savings from its three-year LaunchPad initiative by the end of 2024.

Nine months ended September 30, 2022, compared with nine months ended September 30, 2021

Nine Months Ended September 30,

2022 2021 Change

Dx $ 6,917.1 $ 7,740.8 (10.6) %

DD 4,317.0 4,392.9 (1.7) %

Intercompany eliminations and other (31.5) (68.9) 54.3 %

Total $ 11,202.6 $ 12,064.8 (7.1) %

The decrease in revenues for the nine months ended September 30, 2022, as compared with the corresponding period in 2021 was 7.1%.

The decrease was due to lower organic revenue of 6.9% and unfavorable foreign currency translation of 0.9%, partially offset by acquisitions net of divestitures of 0.6%.

The 6.9% decrease in organic revenue includes an 8.9% decrease from COVID-19 Testing and a 2.0% increase in the Company's organic Base Business.

Dx revenues for the nine months ended September 30, 2022 were $6,917.1, a decrease of 10.6% compared to revenues of $7,740.8 during the nine months ended September 30, 2021.

The decrease was primarily due to lower organic revenue of 11.4%, partially offset by acquisitions of 0.8%.

The 11.4% decrease in organic revenue was due to a 13.8% decrease in COVID-19 Testing, partially offset by a 2.4% increase in the Base Business.

Total volume, measured by requisitions, decreased by 6.1% as organic volume decreased by 6.5% and acquisition volume contributed 0.4%.

COVID-19 Testing decreased organic volume growth by 9.1%.

Price/mix decreased by 4.6% due to lower COVID-19 Testing of 4.8%, lower organic Base Business of 0.1%, and unfavorable foreign currency translation of 0.1%, partially offset by acquisitions of 0.4%.

DD revenues for the nine months ended September 30, 2022 were $4,317.0, a decrease of 1.7% over revenues of $4,392.9 during the nine months ended September 30, 2021.

The decrease in revenues was primarily due to unfavorable foreign currency translation of 2.4%, lower COVID-19 Testing performed through its Central Laboratories business of 0.8%, partially offset by an increase in organic Base Business revenue of 1.2% and acquisitions net of divestitures of 0.3%.

Cost of Revenues

Nine Months Ended September 30,

2022 2021 Change

Cost of revenues $ 7,787.3 $ 7,815.5 (0.4) %

Cost of revenues as a % of revenues 69.5 % 64.8 %

Cost of revenues decreased 0.4% during the nine months ended September 30, 2022, as compared with the corresponding period in 2021.

Cost of revenues as a percentage of revenues during the nine months ended September 30, 2022, increased to 69.5% as compared to 64.8% in the corresponding period in 2021.

This increase in cost of revenues as a percentage of revenues was primarily due to a reduction in COVID-19 Testing revenues, higher personnel expenses, and other inflationary costs, partially offset by organic Base Business growth and LaunchPad savings.

Selling, General and Administrative Expenses

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

Selling, general and administrative expenses $ 1,460.1 $ 1,408.4 3.7 %

Selling, general and administrative expenses as a % of revenues 13.0 % 11.7 %

Selling, general and administrative expenses as a percentage of revenues were 13.0% and 11.7% during the nine months ended September 30, 2022, and 2021, respectively.

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

Amortization of intangibles and other assets $ 69.3 $ 67.1 3.3 %

Nine Months Ended September 30,

2022 2021 Change

Dx $ 99.2 $ 85.8 15.7 %

DD 99.5 190.9 (47.9) %

Total amortization of intangibles and other assets $ 198.7 $ 276.7 (28.2) %

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 $87.4 of expense in the nine months ended September 30, 2021, offset by additional amortization for assets acquired subsequent to September 30, 2021.

The increase in amortization of intangibles and other assets primarily reflects additional amortization for assets acquired subsequent to March 31, 2022.

Goodwill and Other Asset Impairments

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

Goodwill and other asset impairments $ 2.2 $ 1.2 83.3 %

The Company recorded impairment charges of $1.2 in other assets in Ukraine and Russia during the nine months ended September 30, 2022.

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

Restructuring and Other Special Charges

Nine Months Ended September 30,

The Company recorded impairment charges of $2.2 in capitalized software costs during the three months ended March 31, 2023.

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

Restructuring and Other Charges

Three Months Ended March 31,

2023 2022 Change

Restructuring and other charges $ 8.6 $ 12.6 (31.7) %

During the nine months ended September 30, 2022, the Company recorded net restructuring and other charges of $72.1:

$23.9 within Dx, $42.7 within DD, and $5.5 allocated to general corporate.

During the three months ended March 31, 2023, the Company recorded net restructuring and other charges of $8.6.

The charges were comprised of $4.9 related to severance and other personnel costs and $4.7 in facility closures, lease terminations, and general integration activities.

The charges were adjusted by an increase of $2.0 of previously established severance liabilities and the reversal of previously established liability of $0.4 in unused facility-related costs.

During the nine months ended September 30, 2021, the Company recorded net restructuring and other special 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 initiatives.

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

The charges were adjusted by the increase of $0.7 of previously established severance liabilities and the reversal of previously established liability of $0.3 in unused facility-related costs.

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

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 a previously established liability of $0.4 in unused severance costs and $0.1 in unused facility-related costs.

Interest Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

Interest expense $ (50.7) $ (42.2) 20.1 %

The decrease in interest expense for the nine months ended September 30, 2022, as compared with the corresponding period in 2021, is primarily due to the costs of redeeming the 3.20% and 3.75% notes and issuing the new senior notes in 2021, lower outstanding debt and a lower average cost of debt in 2022.

The increase in interest expense for the three months ended March 31, 2023, as compared with the corresponding period in 2022, is primarily due to the increased interest rates on variable rate debt and higher borrowings under the Credit Facility.

Equity Method Income

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 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 decrease in income for the nine months ended September 30, 2022, as compared with the corresponding period in 2021, was primarily due to the decreased profitability of the Company's joint ventures in 2022.

Nine Months Ended September 30,

The decrease in income for the three months ended March 31, 2023,

as compared with the corresponding period in 2022, was primarily due to the decreased profitability of the Company's joint ventures in 2023.

Three Months Ended March 31,

2023 2022 Change

Other, net $ (12.6) $ (10.1) 24.5 %

The change in Other, net for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, is primarily due to investment losses of $19.4 compared to $67.4 of investment gains in the corresponding period of 2021.

In addition, foreign currency transaction losses of $5.1 were recognized for the nine months ended September 30, 2022, and losses of $2.4 were recognized in the corresponding period of 2021.

The change in Other, net for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, is primarily due to investment losses of $1.5 for the three months ended March 31, 2023 compared to investment gains of $8.0 for the corresponding period of 2022.

In addition, foreign currency transaction losses of $2.9 were recognized for the three months ended March 31, 2023 as compared to losses of $2.6 for the corresponding period of 2022.

Income Tax Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2023 2022 Change

1 unchanged sentence

Income tax expense as a % of earnings before income taxes 23.2 % 23.1 %

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

During the quarter, the Company completed a detailed research and development tax credit analysis for the 2019, 2020, and 2021 tax years that resulted in an incremental income tax benefit.

The prior year effective tax rate was favorably impacted by stock-based compensation arrangements that was offset by the deferred revaluation related to the United Kingdom rate change.

The current year effective tax rate differs from the U.S.

federal statutory rate of 21.0% primarily due to state income taxes and the disallowance of certain executive compensation which are partially offset by research and development tax credits and favorable foreign rate differentials.

The prior year effective tax rate differed from the U.S.

federal statutory rate of 21.0% primarily due to state income taxes which were partially offset by windfall stock compensation deductions and favorable foreign rate differentials.

Operating Income by Segment

Nine Months Ended September 30,

During the fourth quarter of 2022, the Company modified the segment performance measure to exclude the amortization of intangibles and other assets, restructuring and other charges, goodwill and other asset impairments, and certain corporate charges for items such as transaction costs, COVID-19-related costs, and other special items.

These changes align with how the CODM now evaluates segment performance and allocates resources.

Prior periods have been conformed for comparability.

Three Months Ended March 31,

2023 2022 Change

Dx operating income $ 1,457.5 $ 2,275.4 $ (817.9)

Dx operating margin 21.1 % 29.4 % (8.3) %

DD operating income 431.8 445.3 (13.4)

DD operating margin 10.0 % 10.1 % (0.1) %

General corporate expenses (206.1) (191.8) (14.3)

Dx segment operating income $ 441.5 $ 683.1 (35.4) %

Dx segment operating margin 18.5 % 27.8 % (9.3) %

DD segment operating income 123.9 168.6 (26.5) %

DD segment operating margin 8.8 % 11.6 % (2.7) %

Segment operating income 565.4 851.7 (33.6) %

General corporate and unallocated expenses (144.3) (82.9) 74.1 %

Amortization of intangibles and other assets (69.3) (67.1) 3.3 %

Restructuring and other charges (8.6) (12.6) (31.7) %

Goodwill and other asset impairments (2.2) (1.2) 83.3 %

Total operating income $ 341.0 $ 687.9 (50.4) %

Dx operating income was $1,457.5 for the nine months ended September 30, 2022, a decrease of $817.9 from operating income of $2,275.4 in the corresponding period of 2021, and Dx operating margin decreased 830 basis points year-over-year.

DD operating income was $431.8 for the nine months ended September 30, 2022, a decrease of $13.4 from operating income of $445.3 in the corresponding period of 2021.

The decrease was primarily due to a reduction in COVID-19 Testing, a reduction in COVID-19 related 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 less amortization expense as a result of the completion of the accelerated amortization related to the Covance trade name, organic Base Business growth and LaunchPad savings.

Dx operating income was $441.5 for the three months ended March 31, 2023, a decrease of $241.6 over operating income of $683.1 in the corresponding period of 2022, and Dx operating margin decreased 930 basis points year-over-year.

The decrease in adjusted operating income and adjusted operating margin was due to a reduction in COVID-19 Testing.

Excluding COVID-19 Testing, operating income and margin were up due to the benefit of Base Business organic growth and LaunchPad savings, which were partially offset by higher personnel expense.

DD operating income was $123.9 for the three months ended March 31, 2023, a decrease of $44.7 over operating income of $168.6 in the corresponding period of 2022.

The decrease was due to NHP-related constraints, reduced COVID-19 vaccine and therapeutic work, the FSP contract loss, and a provision for credit losses on certain biotech receivables, partially offset by demand growth and LaunchPad savings.

General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology.

Corporate expenses were $206.1 for the nine months ended September 30, 2022, an increase of $14.3 over corporate expenses of $191.8 in the corresponding period of 2021, primarily due to higher personnel costs, bonus allocation, research and development costs, and other costs.

Corporate expenses were $144.3 for the three months ended March 31, 2023, an increase of $61.4 over corporate expenses of $82.9 in the corresponding period of 2022, primarily due to spin transaction costs, personnel costs, bonus allocation, and research and development costs.

The Company remains on track to deliver approximately $350.0 of net savings from its three-year LaunchPad initiative by the end of 2024.

2 unchanged sentences

The Company's principal source of liquidity is operating cash flow, supplemented by proceeds from debt offerings.

The Company believes that its balances of cash and cash equivalents and borrowing capacity, along with cash generated from operations, will be sufficient to satisfy its cash requirements, cash dividends, and share repurchases over the next twelve months.

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, 2022, and 2021, respectively:

Nine Months Ended September 30,

In summary, the Company's cash flows were as follows for the three months ended March 31, 2023, and 2022, respectively:

Three Months Ended March 31,

Net cash provided by operating activities $ 121.2 $ 356.0

2 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents 3.0 (4.4)

Net increase (decrease) in cash and cash equivalents $ (1,062.8) $ 715.7

Net decrease in cash and cash equivalents $ (36.1) $ (239.2)

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2022, and 2021, totaled $409.9 and $2,036.5, respectively.

Cash and cash equivalents at March 31, 2023, and 2022, totaled $393.9 and $1,233.5, respectively.

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

Cash Flows from Operating Activities

During the nine months ended September 30, 2022, the Company's operations provided $1,302.3 of cash as compared to $2,412.1 during the same period in 2021.

The $1,109.8 decrease in cash provided from operations in 2022 as compared with the corresponding 2021 period is primarily due to lower cash earnings and unfavorable working capital requirements.

During the three months ended March 31, 2023, the Company's operations provided $121.2 of cash as compared to $356.0 during the same period in 2022.

The $234.8 decrease in cash provided from operations in 2023 as compared with the corresponding 2022 period is primarily due to lower cash earnings.

Cash Flows from Investing Activities

Net cash used for investing activities for the nine months ended September 30, 2022, was $1,378.9 as compared to $630.1 for the nine months ended September 30, 2021.

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, 2022.

Capital expenditures were $364.0 and $310.4 for the nine months ended September 30, 2022, and 2021, respectively.

Net cash used for investing activities for the three months ended March 31, 2023, was $99.7 as compared to $573.1 for the three months ended March 31, 2022.

The change in cash used for investing activities was primarily due to a decrease in business acquisitions and lower capital expenditures during the three months ended March 31, 2023.

Capital expenditures were $93.9 and $117.2 for the three months ended March 31, 2023, and 2022, respectively.

Cash Flows from Financing Activities

Net cash used by financing activities for the nine months ended September 30, 2022, was $949.6 as compared to $1,057.2 for the nine months ended September 30, 2021.

The change in cash flows from financing activities for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, was primarily due to the repayment of the 2019 Term Loan in 2021, the payment of dividends of $131.6 in 2022, and an increase of $131.5 in share repurchases.

At September 30, 2022, the Company had $409.9 of cash and $1,000.0 of available borrowings under its revolving credit facility, which does not mature until 2026.

Net cash used by financing activities for the three months ended March 31, 2023, was $60.6 as compared to $17.7 for the three months ended March 31, 2022.

The change in cash flows from financing activities for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to the payment of dividends of $64.4 in 2023.

At March 31, 2023, the Company had $393.9 of cash and $1,000.0 of available borrowings under its revolving credit facility, which does not mature until 2026.

Under the Company's revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios.

The Company was in compliance with all covenants under the revolving credit facility at September 30, 2022, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.

For the nine months ended September 30, 2022, the Company purchased 3.3 shares of its common stock at a total cost of $800.0.

As of September 30, 2022, t he Company had an outstanding authorization from the board of directors to purchase up to $831.5 more of the Company's common stock with no expiration date.

For the nine months ended September 30, 2022, the Company paid $131.6 in common stock dividends.

On October 12, 2022, the Company announced a cash dividend of $0.72 per share of common stock for the fourth quarter, or approximately $64.9 in the aggregate.

The dividend will be payable on December 9, 2022, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on November 17, 2022.

The Company was in compliance with all covenants under the revolving credit facility at March 31, 2023, and expects that it will remain in compliance with its existing debt covenants for the next twelve months.

For the three months ended March 31, 2023, the Company did not repurchase any of the Company's common stock.

As of March 31, 2023, t he Company had an outstanding authorization from the board of directors to purchase up to $1,531.5 more of the Company's common stock with no expiration date.

For the three months ended March 31, 2023, the Company paid $64.4 in common stock dividends.

On April 6, 2023, the Company announced a cash dividend of $0.72 per share of common stock for the second quarter, or approximately $64.7 in the aggregate.

The dividend will be payable on June 8, 2023, to stockholders of record of all issued and outstanding shares of common stock as of the close of business on May 18, 2023.

The declaration and payment of any future dividends will be at the discretion of the Company's board of directors.

2 unchanged sentences

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