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| LH > SEC Filings for LH > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
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), new insurance or payment systems, including state or regional insurance cooperatives, new public insurance programs or a single-payer system, affecting governmental and third-party coverage or reimbursement for clinical laboratory testing;
2. adverse results from investigations or audits of clinical laboratories by the government, which may include significant monetary damages, refunds 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 changes to federal and state privacy and security obligations and changes to HIPAA, including those changes included within the Health Information Technology for Economic and Clinical Health Act ("HITECH"), which could result in increased costs, denial of claims and/or significant penalties;
6. failure of the Company, third party payors or physicians to comply with Version 5010 Transactions or the ICD-10-CM and ICD-10-PCS Code Sets issued by the Department of Health and Human Services and effective for claims submitted as of October 1, 2013;
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. discontinuation or recalls of existing testing products;
18. failure to develop or acquire licenses for new or improved technologies, or if customers use new technologies to perform their own tests;
19. 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;
20. changes in government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests;
21. inability to obtain and maintain adequate patent and other proprietary rights for protection of the Company's products and services and successfully enforce the Company's proprietary rights;
22. 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;
23. 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, data security and connectivity requirements;
24. failure of the Company's financial information systems resulting in failure to meet required financial reporting deadlines;
25. 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;
26. business interruption or other impact on the business due to adverse weather (including hurricanes), fires and/or other natural disasters, terrorism or other criminal acts, and widespread outbreak of influenza or other pandemic;
27. liabilities that result from the inability to comply with corporate governance requirements;
28. significant deterioration in the economy or financial markets which could negatively impact the Company's testing volumes, cash collections and the availability of credit for general liquidity or other financing needs; and
29. changes in reimbursement by foreign governments and foreign currency fluctuations.
GENERAL
During the first nine months of 2009, the Company continued to strengthen its financial performance through pricing discipline, continued growth of its esoteric testing, outcome improvement and companion diagnostics offerings, and expense control.
RESULTS OF OPERATIONS (amounts in millions except Revenue Per Accession info)
Three months ended September 30, 2009 compared with three months ended September
30, 2008
Net Sales
Quarter ended September 30,
2009 2008 % Change
Net sales
Routine Testing $ 718.4 $ 697.4 3.0 %
Genomic and Esoteric Testing 403.3 378.3 6.6 %
Ontario, Canada 63.4 59.4 6.7 %
Total $ 1,185.1 $ 1,135.1 4.4 %
Number of Accessions
Quarter ended September 30,
2009 2008 % Change
Volume
Routine Testing 21.3 21.8 (2.5 )%
Genomic and Esoteric Testing 6.5 6.0 9.2 %
Ontario, Canada 2.2 2.0 9.9 %
Total 30.0 29.8 0.7 %
Quarter ended September 30,
2009 2008 % Change
Revenue Per Accession
Routine Testing $ 33.77 $ 31.97 5.6 %
Genomic and Esoteric Testing 61.55 63.06 (2.4 )%
Ontario, Canada 28.51 29.36 (2.9 )%
Total $ 39.44 $ 38.04 3.7 %
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The increase in net sales for the three months ended September 30, 2009 as compared with the corresponding 2008 period was driven primarily by growth in the Company's Managed Care business, increased revenue from third parties (Medicare and Medicaid) and the Company's continued shift in test mix to higher priced genomic and esoteric tests. Managed Care and third party revenue as a percentage of net sales for routine, genomic and esoteric testing increased from 62.9% in 2008 to 65.1% in 2009. Genomic and esoteric testing volume as a percentage of volume for routine, genomic and esoteric testing increased from 21.6% in 2008 to 23.6% in 2009. Net sales of the Ontario joint venture were $63.4 for the three months ended September 30, 2009 compared to $59.4 in the corresponding 2008 period, an increase of $4.0, or 6.7%. Net sales of the Ontario joint venture were impacted by a stronger U.S. dollar in 2009 as compared with 2008. In Canadian dollars, net sales of the Ontario joint venture increased by CN$7.7, or 12.5%.
Cost of Sales
Quarter ended September 30,
2009 2008 % Change
Cost of sales $ 687.0 $ 673.5 2.0 %
Cost of sales as a % of sales 58.0 % 59.3 %
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Cost of sales, which includes primarily laboratory and distribution costs, increased 2.0% in 2009 as compared with 2008 primarily due to the continued shift in test mix to higher cost genomic and esoteric testing. As a percentage of net sales, cost of sales decreased to 58.0% in 2009 from 59.3% in 2008. The decrease in cost of sales as a percentage of net sales is primarily due to effective expense control coupled with the growth of revenue per accession. Cost of sales as a percentage of net sales in 2008 was also higher due to the loss of revenue as a result of the severe weather experienced during the quarter.
Selling, General and Administrative Expenses
Quarter ended September 30,
2009 2008 % Change
Selling, general and administrative expenses $ 247.3 $ 227.1 8.9 %
SG&A as a % of sales 20.9 % 20.0 %
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Selling, general and administrative (SG&A) expenses increased 8.9% in 2009 as compared with 2008 primarily due to Monogram's incremental SG&A expenses (primarily personnel costs and research and development expenses) of $7.9 and acquisition related costs (primarily legal and other professional services) of $3.5, of which $2.7 related directly to the Monogram acquisition.
Amortization of Intangibles and Other Assets
Quarter ended September 30,
2009 2008 % Change
Amortization of intangibles and other assets $ 15.9 $ 14.6 8.9 %
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The increase in amortization of intangibles and other assets primarily reflects certain acquisitions closed during 2009 and 2008.
Restructuring and Other Special Charges
Quarter ended September 30,
2009 2008 % Change
Restructuring and other special charges $ -- $ 17.7 (100.0 )%
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During 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.
During 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.
Interest Expense
The decrease in interest expense was primarily driven by lower average borrowings outstanding in 2009 as compared with 2008 primarily due to principal payments on the Term Loan Facility and the redemption of approximately fifty percent of the zero-coupon subordinated notes in the second quarter of 2009. Also, the Company's zero-coupon subordinated notes did not accrue contingent cash interest in the third quarter of 2009.
Income from Joint Venture Partnerships
Quarter ended September 30,
2009 2008 % Change
Income from joint venture partnerships $ 4.2 $ 3.7 13.5 %
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Income from investments in joint venture partnerships represents the Company's ownership share in joint venture partnerships. A significant portion of this income is derived from the investment in Alberta, Canada, and is earned in Canadian dollars.
Income Tax Expense
Quarter ended September 30,
2009 2008 % Change
Income tax expense $ 88.5 $ 75.0 18.0 %
Income tax expense as a % of income before tax 39.7 % 39.5 %
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The increase in the effective tax rate for 2009 as compared to 2008 was primarily the result of the non deductibility of certain fees and expenses, primarily associated with the acquisition of Monogram.
Nine months ended September 30, 2009 compared with nine months ended September
30, 2008
Net Sales
Nine Months Ended September 30,
2009 2008 % Change
Net sales
Routine Testing $ 2,158.0 $ 2,088.5 3.3 %
Genomic and Esoteric Testing 1,191.1 1,107.1 7.6 %
Ontario, Canada 180.5 190.5 (5.2 )%
Total $ 3,529.6 $ 3,386.1 4.2 %
Number of Accessions
Nine Months Ended September 30,
2009 2008 % Change
Volume
Routine Testing 64.5 65.0 (0.8 )%
Genomic and Esoteric Testing 19.2 17.6 9.7 %
Ontario, Canada 6.8 5.9 15.1 %
Total 90.5 88.5 2.3 %
Nine Months Ended September 30,
2009 2008 % Change
Revenue Per Accession
Routine Testing $ 33.48 $ 32.14 4.2 %
Genomic and Esoteric Testing 61.90 63.10 (1.9 )%
Ontario, Canada 26.33 31.97 (17.6 )%
Total $ 38.98 $ 38.26 1.9 %
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The increase in net sales for the nine months ended September 30, 2009 as compared with the corresponding 2008 period was driven primarily by growth in the Company's Managed Care business, increased revenue from third parties (Medicare and Medicaid) and the Company's continued shift in test mix to higher priced genomic and esoteric tests. Managed Care and third party revenue as a percentage of net sales for routine, genomic and esoteric testing increased from 63.2% in 2008 to 65.1% in 2009. Genomic and esoteric testing volume as a percentage of volume for routine, genomic and esoteric testing increased from 21.3% in 2008 to 23.0% in 2009. Net sales of the Ontario joint venture were $180.5 for the nine months ended September 30, 2009 compared to $190.5 in the corresponding 2008 period, a decrease of $10.0, or 5.2%. The decrease in net sales for the Ontario joint venture was due to the exchange rate impact of a stronger U.S. dollar in 2009 as compared with 2008. In Canadian dollars, net sales of the Ontario joint venture increased by CN$16.9, or 8.7%.
Cost of Sales
Nine Months Ended September 30,
2009 2008 % Change
Cost of sales $ 2,034.7 $ 1,962.2 3.7 %
Cost of sales as a % of sales 57.6 % 57.9 %
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Cost of sales, which includes primarily laboratory and distribution costs, increased 3.7% in 2009 as compared with 2008 primarily due to the continued shift in test mix to higher cost genomic and esoteric testing. As a percentage of net sales, cost of sales decreased to 57.6% in 2009 from 57.9% in 2008. The
decrease in cost of sales as a percentage of net sales is primarily due to effective expense control coupled with the growth of revenue per accession.
Selling, General and Administrative Expenses
Nine Months Ended September 30,
2009 2008 % Change
Selling, general and administrative expenses $ 718.4 $ 708.7 1.4 %
SG&A as a % of sales 20.4 % 20.9 %
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Selling, general and administrative (SG&A) expenses increased 1.4% in 2009 as compared with 2008. As a percentage of net sales, SG&A expenses decreased to 20.4% in 2009 from 20.9% in 2008. The decrease in SG&A expenses as a percentage of net sales is primarily due to a decrease in bad debt expense. Bad debt expense decreased to 5.3% of net sales as compared with 6.4% in the comparable 2008 period due to the increase in the second quarter of 2008 of $45.0 in the Company's provision for doubtful accounts. The Company's estimate of the allowance for doubtful accounts was increased in 2008 due to the impact of the economy, higher patient deductibles and co-payments, and acquisitions on the collectibility of accounts receivable balances.
Amortization of Intangibles and Other Assets
Nine Months Ended September 30,
2009 2008 % Change
Amortization of intangibles and other assets $ 46.2 $ 43.0 7.4 %
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The increase in amortization of intangibles and other assets primarily reflects certain acquisitions closed during 2009 and 2008.
Restructuring and Other Special Charges
Nine Months ended September 30,
2009 2008 % Change
Restructuring and other special charges $ 10.2 $ 33.7 (69.7 )%
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During 2009, the Company recorded net restructuring charges of $10.2 primarily related to 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 other facility related costs. Of this amount, $6.6 related to severance and other employee costs for employees primarily in the affected facilities, and $12.3 related to contractual obligations associated with leased facilities and other facility related costs. The Company also reduced its prior restructuring accruals by $8.7, comprised of $6.5 of previously recorded facility costs and $2.2 of employee severance benefits as a result of incurring less cost than planned on those restructuring initiatives primarily resulting from favorable settlements on lease buyouts and severance payments that were not required to achieve the planned reduction in work force. These restructuring initiatives are expected to provide annualized cost savings of approximately $18.3.
During 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.
During 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.
Interest Expense
The decrease in interest expense was primarily driven by lower average borrowings outstanding in 2009 as compared with 2008 primarily due to principal payments on the Term Loan Facility and the redemption of approximately fifty percent of the zero-coupon subordinated notes in the second quarter of 2009. Also, the Company's zero-coupon subordinated notes did not accrue contingent cash interest for the period March 12, 2009 through September 30, 2009. Lower interest rates in connection with the Term Loan Facility also contributed to the decrease in interest expense as a result of the three-year interest rate swap agreement the Company entered into on March 31, 2008 to hedge variable interest rate risk on the Term Loan Facility.
Income from Joint Venture Partnerships
Nine Months Ended September 30,
2009 2008 % Change
Income from joint venture partnerships $ 10.9 $ 11.7 (6.8 )%
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Income from investments in joint venture partnerships represents the Company's ownership share in joint venture partnerships. A significant portion of this income is derived from the investment in Alberta, Canada, and is earned in Canadian dollars. As a result, the decrease in income from joint venture partnerships was primarily due to the exchange rate impact of a stronger U.S. dollar in 2009 as compared with 2008.
Income Tax Expense
Nine Months Ended September 30,
2009 2008 % Change
Income tax expense $ 271.6 $ 240.2 13.1 %
Income tax expense as a % of income before tax 39.9 % 40.2 %
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The decrease in the effective tax rate for 2009 as compared to 2008 was primarily the result of a lower rate of taxes on foreign related earnings due to a change in an existing tax treaty with Canada.
LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)
The Company's operations provided $637.7 and $565.6 of cash, net of $24.5 and $29.9 in transition payments to UnitedHealthcare, for the nine months ended September 30, 2009 and 2008, respectively, and net of the $50.2 contribution to the Company's defined benefit retirement plan ("Company Plan") during the nine months ended September 30, 2009. The increase in cash flows primarily resulted from improved cash collections and general working capital management.
For the nine months ended September 30, 2008, the Company did not make any contributions to the Company Plan. However, based upon the underlying value of the Company Plan's assets and the amount of the Company Plan's benefit obligation as of December 31, 2008, the Company made contributions of $50.2 during the nine months ended September 30, 2009. The Company plans to contribute an additional $4.6 to the Company Plan during 2009.
Due to the stock market's performance in 2008, the fair value of assets in the Company Plan decreased significantly from January 1, 2008 to December 31, 2008. As a result, the Company's projected pension expense for the Company Plan and the nonqualified supplemental retirement plan will increase from $19.5 in 2008 to $33.8 in 2009.
Capital expenditures were $77.1 and $120.4 for the nine months ended September 30, 2009 and 2008, respectively. The Company expects capital expenditures of approximately $115.0 in 2009. 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 . . .
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