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| LH > SEC Filings for LH > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
FORWARD-LOOKING STATEMENTS
The Company has made in this report, and from time to time may otherwise make in its public filings, press releases and discussions by Company management, forward-looking statements concerning the Company's operations, performance and financial condition, as well as its strategic objectives. Some of these forward-looking statements 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 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 and in the Company's other public filings, press releases and discussions with Company management, including:
1. changes in federal, state, local and third party payer regulations or policies (or in the interpretation of current regulations) affecting governmental and third-party coverage or reimbursement for clinical laboratory testing;
2. adverse results from investigations of clinical laboratories by the government, which may include significant monetary damages and/or exclusion from the Medicare and Medicaid programs;
3. loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of, the law or regulations of the Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988, or those of Medicare, Medicaid, the False Claims Act or other federal, state or local agencies;
4. failure to comply with the Federal Occupational Safety and Health Administration requirements and the Needlestick Safety and Prevention Act, which may result in penalties and loss of licensure;
5. failure to comply with HIPAA, including the failure to meet new National Provider Identifier ("NPI") requirements, which could result in denial of claims and/or significant fines;
6. failure of third-party payers to complete testing with the Company, or accept or remit transactions in HIPAA-required standard transaction and code set format, (including a NPI), which could result in an interruption in the Company's cash flow;
7. increased competition, including competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry;
8. increased price competition, competitive bidding for laboratory tests and/or changes or reductions to fee schedules;
9. changes in payer mix, including an increase in capitated managed-cost health care or the impact of a shift to consumer-driven health plans;
10. failure to obtain and retain new customers and alliance partners, or a reduction in tests ordered or specimens submitted by existing customers;
11. failure to retain or attract managed care business as a result of changes in business models, including new risk based or network approaches, or other changes in strategy or business models by managed care companies;
12. failure to effectively integrate and/or manage newly acquired businesses and the cost related to such integration;
13. adverse results in litigation matters;
14. inability to attract and retain experienced and qualified personnel;
15. failure to maintain the Company's days sales outstanding and/or bad debt expense levels;
16. decrease in the Company's credit ratings by Standard & Poor's and/or Moody's;
17. failure to develop or acquire licenses for new or improved technologies, or if customers use new technologies to perform their own tests;
18. inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests, which could result in impairment in the value of certain capitalized licensing costs;
19. changes in government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests;
20. inability to obtain and maintain adequate patent and other proprietary rights for protection of the Company's products and services and to successfully enforce the Company's proprietary rights;
21. the scope, validity and enforceability of patents and other proprietary rights held by third parties which might have an impact on the Company's ability to develop, perform, or market the Company's tests or operate its business;
22. failure in the Company's information technology systems resulting in an increase in testing turnaround time or billing processes or the failure to meet future regulatory or customer information technology and connectivity requirements;
23. failure of the Company's financial information systems resulting in failure to meet required financial reporting deadlines;
24. failure of the Company's disaster recovery plans to provide adequate protection against the interruption of business and/or to permit the recovery of business operations;
25. business interruption or other impact on the business due to adverse weather (including hurricanes), fires and/or other natural disasters and terrorism or other criminal acts;
26. liabilities that result from the inability to comply with corporate governance requirements; and
27. significant deterioration in the economy or financial markets could negatively impact the Company's testing volumes, cash collections and the availability of credit for general liquidity or other financing needs.
During the first nine months of 2008, the Company continued to strengthen its financial performance through the implementation of the Company's strategic plan and the expansion of its national platform. This plan continues to provide growth opportunities for the Company by building a leadership position in genomic and other advanced testing technologies primarily through internal development efforts, acquisitions and technology licensing activities.
Effective January 1, 2007, the Company commenced its successful implementation of its ten-year agreement with United Healthcare Insurance Company ("UnitedHealthcare") and became its exclusive national laboratory provider. Over a period of several years, the Company will continue to perform more of UnitedHealthcare's testing. During the first three years of the ten-year agreement, the Company has committed to reimburse UnitedHealthcare up to $200.0 for transition costs related to developing expanded networks in defined markets. Since the inception of this agreement, approximately $69.3 of such transition payments were billed to the Company by UnitedHealthcare and approximately $61.9 had been remitted by the Company. Based on the trend rates of the transition payment amounts billed by UnitedHealthcare during the nine months of 2008 and for 2007, the Company believes that its total reimbursement commitment under this agreement will be approximately $115.0. The Company is amortizing the total estimated transition costs over the life of the contract.
Effective January 1, 2008 the Company acquired additional partnership units in its Ontario, Canada ("Ontario") joint venture for approximately $140.9 in cash (net of cash acquired), bringing the Company's percentage interest owned up to 85.6%. Concurrent with this acquisition, the terms of the joint venture's partnership agreement were amended. Based upon the amended terms of this agreement, the Company began including the consolidated operating results, financial position and cash flows of the Ontario joint venture in the Company's consolidated financial statements on January 1, 2008. The amended joint venture's partnership agreement also enables the holders of the minority interest to put the remaining partnership units to the Company in defined future periods, at an initial amount equal to the consideration paid by the Company in 2008, and subject to adjustment based on market value formulas contained in the agreement. The initial difference of $123.0 between the value of the put and the underlying minority interest was recorded as additional minority interest liability and as a reduction to additional paid-in capital in the condensed consolidated financial statements. The contractual value of the put, in excess of the current minority interest of $22.4, totals $118.4 at September 30, 2008.
RESULTS OF OPERATIONS (dollars in millions)
Effective January 1, 2008, the Company began consolidating the results of its Ontario joint venture (see note 6. "Business Acquisitions"). Certain analysis of the Company's operating results is provided below, excluding the impact of this consolidation, in order to facilitate comparison with the prior period's results.
Operating results for the three months ended September 30, 2008 were negatively impacted by severe weather as a result of Gulf Coast hurricanes. While the Company's more significant testing facilities were not damaged by these storms, a number of smaller facilities, including patient service centers, were inoperable for a number of days. The Company made every effort to re-route specimens to other operating facilities; however, specimen volume was negatively impacted due to patients' inability to visit doctors' offices - the source of the majority of testing volume. Management estimates that revenue was negatively impacted by approximately $6.7, or 0.7% during the three months ended September 30, 2008 due to severe weather.
Three months ended September 30, 2008 compared with three months ended September 30, 2007
Net sales for the three months ended September 30, 2008 were $1,135.1, an increase of $114.5, or approximately 11.2%, from $1,020.6 for the comparable 2007 period. The sales increase is primarily due to including $59.4 of revenue from the Ontario operation and increases, excluding the Ontario operation, of 3.1% in accession volume and 2.3% in price.
Cost of sales, which includes primarily laboratory and distribution costs, was $673.5 for the three months ended September 30, 2008, compared to $598.5 in the corresponding 2007 period, an increase of $75.0, or 12.5%. Excluding the Ontario operation, cost of sales as a percentage of net sales was 59.9% for the three months ended September 30, 2008, and 58.6% in the corresponding 2007 period. The increase in cost of sales as a percentage of net sales is primarily due to increases in the costs of materials, which is caused by shifts in the Company's test mix, and increases in labor, which is due to additions in front-line
Selling, general and administrative expenses increased to $227.1 for the three months ended September 30, 2008 from $198.0 in the same period in 2007. Excluding the Ontario operation, selling, general and administrative expenses as a percentage of net sales were 20.2% and 19.4% for the three months ended September 30, 2008 and 2007, respectively. Bad debt expense increased to 5.3% of net sales as compared with 4.8% in the comparable 2007 period due to the impact of the economy, higher patient deductibles and co-payments, and recent acquisitions on the collectibility of accounts receivable balances.
Amortization of intangibles and other assets was $14.6 and $13.9 for the three months ended September 30, 2008 and 2007, respectively. The increase in the amortization of intangibles reflects certain acquisitions closed during 2008 and 2007.
During the three months ended September 30, 2008, the Company recorded net restructuring charges of $12.2 primarily related to work force reductions and the closing of redundant and underutilized facilities. The majority of these costs related to severance and other employee costs and contractual obligations associated with leased facilities and equipment. Of this amount, $12.2 related to severance and other employee costs in connection with the general work force reductions and $1.9 related to contractual obligations associated with leased facilities and equipment. The Company also recorded a credit of $1.9, comprised of $1.2 of previously recorded facility costs and $0.7 of employee severance benefits. These restructuring initiatives are expected to provide annualized cost savings of approximately $48.0.
During the three months ended September 30, 2008, the Company also recorded a special charge of $5.5 related to estimated uncollectible amounts primarily owed by patients in the areas of the Gulf Coast severely impacted by hurricanes similar to losses incurred during the 2005 hurricane season.
During the three months ended September 30, 2007, the Company recorded net restructuring charges of $31.3 primarily related to actions directed at reductions in work force and redundant and underutilized facilities. The majority of these costs related to employee severance and contractual obligations associated with leased facilities and equipment. Of this amount, $18.0 related to employee severance benefits for employees primarily in management, administrative and support functions and $7.8 related to contractual obligations and other costs associated with the closure of facilities. The charge also included approximately $6.5 of accounts receivable balances remaining on a subsidiary's billing system that was abandoned during the quarter. The Company also recorded a credit of $1.0, comprised of $0.7 of previously recorded facility costs and $0.3 of employee severance benefits.
Interest expense was $16.8 for the three months ended September 30, 2008, compared with $12.6 for the same period in 2007. The increase in interest expense was primarily driven by borrowings under the five-year, $500.0 Term Loan Facility in October 2007.
Income from investments in joint venture partnerships was $3.7 for the three months ended September 30, 2008, compared with $20.9 for the same period in 2007. This income represents the Company's ownership share in joint venture partnerships. During 2007, a significant portion of this income was derived from investments in Ontario and Alberta, Canada, and was earned in Canadian dollars. Effective January 1, 2008, the income from the Ontario operation is included in the consolidated operating results of the Company, which is the primary reason for the lower income from investments in joint venture partnerships in 2008.
The provision for income taxes as a percentage of earnings before taxes was 40.1% for the three months ended September 30, 2008, compared to 40.6% for the three months ended September 30, 2007. This decrease was primarily due to certain adjustments arising out of the finalization and filing of the Company's federal and state income tax returns for 2007.
Nine months ended September 30, 2008 compared with nine months ended September 30, 2007
Net sales for the nine months ended September 30, 2008 were $3,386.1, an increase of $323.7, or approximately 10.6%, from $3,062.4 for the comparable 2007 period. The sales increase is primarily due to including $190.5 of revenue from the Ontario operation and increases, excluding the Ontario operation, of 2.0% in accession volume and 2.3% in price.
Selling, general and administrative expenses increased to $708.7 for the nine months ended September 30, 2008 from $612.1 in the same period in 2007. Excluding the Ontario operation, selling, general and administrative expenses as a percentage of net sales were 21.2% and 20.0% for the nine months ended September 30, 2008 and 2007, respectively. Bad debt expense increased to 6.4% of net sales as compared with 4.8% in the comparable 2007 period due to an increase of $45.0 in the Company's provision for doubtful accounts. The Company's estimate of the allowance for doubtful accounts was increased in the second quarter due to the impact of the economy, higher patient deductibles and co-payments, and recent acquisitions on the collectibility of accounts receivable balances. Excluding this increase in the provision for doubtful accounts and the Ontario operation, selling, general and administrative expenses as a percentage of sales were 19.8% and 20.0% for the nine months ended September 30, 2008 and 2007, respectively.
Amortization of intangibles and other assets was $43.0 and $40.6 for the nine months ended September 30, 2008 and 2007, respectively. The increase in the amortization of intangibles reflects certain acquisitions closed during 2008 and 2007.
During the second and third quarters of 2008, the Company recorded net restructuring charges of $28.2 primarily related to work force reductions and the closing of redundant and underutilized facilities. The majority of these costs related to severance and other employee costs and contractual obligations associated with leased facilities and equipment. Of this amount, $18.7 related to severance and other employee costs in connection with the general work force reductions and $11.4 related to contractual obligations associated with leased facilities and equipment. The Company also recorded a credit of $1.9, comprised of $1.2 of previously recorded facility costs and $0.7 of employee severance benefits. These restructuring initiatives are expected to provide annualized cost savings of approximately $59.0.
During the third quarter of 2008, the Company also recorded a special charge of $5.5 related to estimated uncollectible amounts primarily owed by patients in the areas of the Gulf Coast severely impacted by hurricanes similar to losses incurred during the 2005 hurricane season.
During the second and third quarters of 2007, the Company recorded net restructuring charges of $38.3 primarily related to actions directed at reductions in work force and redundant and underutilized facilities. The majority of these costs related to employee severance and contractual obligations associated with leased facilities and equipment. Of this amount, $20.4 related to employee severance benefits for employees primarily in management, administrative and support functions, $11.5 related to contractual obligations and other costs associated with the closure of facilities and $0.9 related to settlement of a preacquisition employment liability. The charge also included approximately $6.5 of accounts receivable balances remaining on a subsidiary's billing system that was abandoned during the quarter. The Company also recorded a credit of $1.0, comprised of $0.7 of previously recorded facility costs and $0.3 of employee severance benefits.
Interest expense was $54.0 for the nine months ended September 30, 2008, compared with $37.8 for the same period in 2007. The increase in interest expense was primarily driven by borrowings under the five-year, $500.0 Term Loan Facility in October 2007.
Income from investments in joint venture partnerships was $11.7 for the nine months ended September 30, 2008, compared with $56.6 for the same period in 2007. This income represents the Company's ownership share in joint venture partnerships. During 2007, a significant portion of this income was derived from investments in Ontario and Alberta, Canada, and was earned in Canadian dollars. Effective January 1, 2008, the income from the Ontario operation is included in the consolidated operating results of the Company, which is the primary reason for the lower income from investments in joint venture partnerships in 2008.
The provision for income taxes as a percentage of earnings before taxes was 40.9% for the nine months ended September 30, 2008, compared to 41.1% for the nine months ended September 30, 2007.
The Company's operations provided $565.6 and $469.3 of cash, net of $29.9 and $23.3 in transition payments to UnitedHealthcare, for the nine months ended September 30, 2008 and 2007, respectively. The increase in cash flows primarily resulted from improved cash collections and lower payments for income taxes of $63.8 ($153.6 in 2008 as compared with $217.4 in 2007).
Capital expenditures were $120.4 and $108.5 for the nine months ended September 30, 2008 and 2007, respectively. The Company expects capital expenditures of approximately $140.0 to $160.0 in 2008. The Company will continue to make important investments in its business, including information technology. Such expenditures are expected to be funded by cash flow from operations, as well as borrowings under the Company's revolving credit facilities as needed.
On March 31, 2008, the Company entered into a three-year interest rate swap agreement to hedge variable interest rate risk on the Company's variable interest rate term loan. Under the swap the Company will, on a quarterly basis, pay a fixed rate of interest (2.92%) and receive a variable rate of interest based on the three-month LIBOR rate on an amortizing notional amount of indebtedness equivalent to the term loan balance outstanding. The swap has been designated as a cash flow hedge. Accordingly, the Company recognizes the fair value of the swap in the consolidated balance sheet and any changes in the fair value are recorded as adjustments to accumulated other comprehensive income, net of tax. The fair value of the interest rate swap agreement is the estimated amount that the Company would pay or receive to terminate the swap agreement at the reporting date. The fair value of the swap was an asset of $6.4 at September 30, 2008 and is included in other assets, net in the consolidated balance sheet. The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to the swap agreement. Management does not expect the counterparty to fail to meet its obligation given the strong creditworthiness of the counterparty to the agreement.
At September 30, 2008, the Company has provided letters of credit aggregating approximately $104.8, primarily in connection with certain insurance programs and contractual guarantees on obligations under the Company's contract with UnitedHealthcare. The UnitedHealthcare contract requires that the Company provide a $50.0 letter of credit, as security for the Company's contingent obligation to reimburse up to $200.0 in transition costs incurred during the first three years of the contract. Letters of credit provided by the Company are secured by the Company's senior credit facilities and are renewed annually, around mid-year.
During the nine months ended September 30, 2008, the Company repurchased $330.6 of stock representing 4.6 shares. As of September 30, 2008, the Company had outstanding authorization from the Board of Directors to purchase approximately $95.2 of Company common stock.
The Company had a $75.2 and $66.5 reserve for unrecognized tax benefits, including interest and penalties, at September 30, 2008 and December 31, 2007, respectively. Substantially all of these tax reserves are classified in other long-term liabilities in the Company's Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007, respectively.
Due to the stock market's performance year-to-date in 2008, the fair value of assets in the defined benefit retirement plan decreased significantly from January 1, 2008 to September 30, 2008. Unless the market makes a significant recovery in the fourth quarter of 2008, the Company expects an increase in fiscal 2009 pension expense. The amount of this increase will depend on the fair value of assets measured on December 31, 2008 as well as the selection of key actuarial assumptions at fiscal year-end. In addition, based upon the underlying value of plan assets at September 30, 2008, the Company estimates that it will contribute approximately $22.0 to the defined benefit retirement plan during 2009. The actual amount to be contributed will be determined, based upon the underlying value of plan assets and the amount of the plan's benefit obligation as of December 31, 2008.
Based on current and projected levels of operations, coupled with availability under its senior credit facilities, the Company believes it has sufficient liquidity to meet both its anticipated short-term and long-term cash needs; however, the Company continually reassesses its liquidity position in light of market conditions and other relevant factors.
On October 1, 2008, the Company announced that its zero-coupon subordinated Liquid Yield Option™ Notes due 2021 ("LYONs") and Zero-Coupon Convertible Subordinated Notes due 2021 ("Zero-Coupon Notes") are currently convertible. LYONs are convertible into Common Stock of the Company at the conversion rate of 13.4108 per $1,000 principal amount at maturity of the LYONs, subject to the terms of the LYONs and the Indenture, dated as of September 11, 2001 between LabCorp and The Bank of New York, as trustee ("Trustee") and conversion agent. The Zero-Coupon Notes are convertible into cash (for the accreted amount of the securities to be converted - $572.4 at September 30, 2008) and Common Stock of the Company, if any, (for any remaining amount greater than the accreted amount) subject to the terms of the Zero-Coupon Notes and the Indenture, dated as of October 24, 2006 between the Company, the Trustee and the conversion agent. The LYONs and the Zero-Coupon Notes are convertible at any time during the calendar quarter through the close of business at 5:00 p.m., New York City time, on Wednesday, December 31, 2008.
On September 12, 2008, the Company announced that for the period of September 12, 2008 to March 11, 2009, the LYONs will, subject to the terms of the LYONs, accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a LYON for the five trading days ended September 9, 2008, in addition to the continued accrual of the original issue discount. Similarly, the Zero-Coupon Notes will also accrue contingent cash interest over that period using the same calculation method as described for the LYONs. Contingent cash interest, which the Company has determined to be approximately $1.23 per Note, will be payable to holders of the LYONs or Zero-Coupon Notes as of the record date, which is February 24, 2009. The payment of contingent cash interest is expected to be made on March 11, 2009.
Minority Interest Put
Effective January 1, 2008 the Company acquired additional partnership units in its Ontario joint venture for approximately $140.9 in cash (net of cash acquired), bringing the Company's percentage interest owned up to 85.6%. Concurrent with this acquisition, the terms of the joint venture's partnership agreement were amended. Based upon the amended terms of this agreement, the Company began including the consolidated operating results, financial position and cash flows of the Ontario joint venture in the Company's consolidated financial statements on January 1, 2008. The amended joint venture's partnership . . .
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