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LH > SEC Filings for LH > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for LABORATORY CORP OF AMERICA HOLDINGS

Form 10-Q for LABORATORY CORP OF AMERICA HOLDINGS


30-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 other future reforms in the health care system (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 HITECH and any subsequent amendments, which could result in increased costs, denial of claims and/or significant penalties;

6. failure to maintain the security of business information or systems could damage the Company's reputation, cause it to incur substantial additional costs and to become subject to litigation;

7. failure of the Company, third party payers or physicians to comply with the ICD-10-CM Code Set by the compliance date of October 1, 2014, could negatively impact the Company's reimbursement, cash collections, DSO and profitability;

8. increased competition, including competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry;

9. increased price competition, competitive bidding for laboratory tests and/or changes or reductions to fee schedules;

10. changes in payer mix, including an increase in capitated reimbursement mechanisms or the impact of a shift to consumer-driven health plans;

11. failure to obtain and retain new customers and alliance partners, or a reduction in tests ordered or specimens submitted by existing customers;

12. 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;

13. failure to effectively integrate and/or manage newly acquired businesses and the cost related to such integrations;

14. adverse results in litigation matters;

15. inability to attract and retain experienced and qualified personnel;

16. failure to maintain the Company's days sales outstanding and/or bad debt expense levels;

17. decrease in the Company's credit ratings by Standard & Poor's and/or Moody's;

18. discontinuation or recalls of existing testing products;


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19. failure to develop or acquire licenses for new or improved technologies, or if customers use new technologies to perform their own tests;

20. 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;

21. changes in government regulations or policies, including regulations and policies of the Food and Drug Administration, affecting the approval, availability of, and the selling and marketing of diagnostic tests;

22. 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;

23. 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;

24. 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;

25. failure of the Company's financial information systems resulting in failure to meet required financial reporting deadlines;

26. 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;

27. business interruption or other impact on the business due to adverse weather (including hurricanes), fires and/or other natural disasters, labor unrest, terrorism or other criminal acts, and/or widespread outbreak of influenza or other pandemic illness;

28. liabilities that result from the inability to comply with corporate governance requirements;

29. 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;

30. changes in reimbursement by foreign governments and foreign currency fluctuations; and

31. expenses and risks associated with international operations, including but not limited to compliance with the Foreign Corrupt Practices Act, the U.K. Bribery Act, as well as laws and regulations that differ from those of the United States, and economic, political, legal and other operational risks associated with foreign markets.

GENERAL (dollars in millions, except per share data)

During the third quarter of 2012 the Company was able to grow its revenue in a challenging economic environment. Net sales for the three months ended September 30, 2012 increased 1.1% in comparison to the same period in 2011 on a 1.4% increase in volume and a 0.3% decrease in revenue per requisition. The Company's acquisition of Orchid in December 2011 increased revenue and volume by 1.1% and 0.3%, respectively, in the third quarter of 2012 compared to 2011. The Company's acquisition of MEDTOX on July 31, 2012 increased revenue and volume by 1.7% and 2.4%, respectively, in the third quarter of 2012 compared to 2011. The third quarter of 2012 had one less revenue day than the third quarter of 2011. On a per day basis, volume increased by 3.1% in the third quarter of 2012 compared to the third quarter of 2011.


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RESULTS OF OPERATIONS (amounts in millions except Revenue Per Requisition info)

Three months ended September 30, 2012 compared with three months ended September
30, 2011

Net Sales

                                    Three Months Ended September 30,
                                           2012                     2011      % Change
Net sales
Routine Testing              $           821.3                   $   806.2       1.9  %
Genomic and Esoteric Testing             516.4                       522.5      (1.2 )%
Ontario, Canada                           81.7                        75.8       7.8  %
Total                        $         1,419.4                   $ 1,404.5       1.1  %



                                             Three Months Ended September 30,
                                                   2012              2011          % Change
Volume (Number of Requisitions)
Routine Testing                                         21.8            21.5           1.4 %
Genomic and Esoteric Testing                             7.5             7.5           0.5 %
Ontario, Canada                                          2.4             2.3           4.6 %
Total                                                   31.7            31.3           1.4 %


                                     Three Months Ended September 30,
                                             2012                      2011     % Change
Revenue Per Requisition
Routine Testing              $           37.68                       $ 37.50       0.5  %
Genomic and Esoteric Testing             68.63                         69.78      (1.6 )%
Ontario, Canada                          34.11                         33.12       3.0  %
Total                        $           44.75                       $ 44.90      (0.3 )%

The increase in net sales for the three months ended September 30, 2012 as compared with the corresponding 2011 period was driven primarily by the MEDTOX and Orchid acquisitions along with positive revenue per requisition growth in routine testing and Ontario, Canada. Volume growth for genomic and esoteric testing was primarily due to the incremental revenue and volume from MEDTOX and Orchid as well as growth in the recently launched NuSwabsm series of women's health tests. Genomic and esoteric testing volume as a percentage of total volume decreased from 23.9% in 2011 to 23.7% in 2012. The decline in price in genomic and esoteric testing is a result of a lower mix of reproductive and histology testing during the quarter. Net sales of the Ontario partnership were $81.7 for the three months ended September 30, 2012 compared to $75.8 in the corresponding 2011 period, an increase of $5.9, or 7.8%. Net sales of the Ontario partnership were negatively impacted by a stronger U.S. dollar in 2012 as compared with 2011. In Canadian dollars, net sales of the Ontario partnership increased by CN$7.0, or 9.4%.

Cost of Sales                     Three Months Ended September 30,
                                     2012                   2011          % Change
Cost of sales                 $         863.3         $         836.0        3.3 %
Cost of sales as a % of sales            60.8 %                  59.5 %

Cost of sales (primarily laboratory and distribution costs) increased 3.3% in the 2012 period as compared with the 2011 period primarily due to incremental costs from acquisitions including MEDTOX and Orchid, as well as annual merit increases in labor. As a percentage of net sales, cost of sales increased to 60.8% in 2012 from 59.5% in 2011. The increase in cost of sales as a


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percentage of net sales is primarily due to lower margins on acquired operations that have not yet been fully integrated as well as the impact of slower volume growth.

Selling, General and Administrative Expenses

                                                 Three Months Ended September 30,
                                                    2012                   2011            % Change
Selling, general and administrative expenses $         285.1         $         283.8           0.5 %
Selling, general and administrative expenses
as a % of sales                                         20.1 %                  20.2 %

Selling, general and administrative expenses as a percentage of net sales decreased to 20.1% in the third quarter of 2012 as compared to 20.2% in 2011. The decrease in selling, general and administrative expenses as a percentage of net sales is partially due to expense management and to efficiencies from acquired operations that are being integrated into the Company's operating cost structure. Additionally, bad debt expense decreased to 4.3% of net sales in the third quarter of 2012 as compared with 4.5% in 2011 primarily due to improved collection trends resulting from process improvement programs within the Company's billing department and field operations. These decreases in selling, general and administrative expenses were partially offset by $9.0 in fees from the MEDTOX acquisition recorded during the third quarter of 2012.

Amortization of Intangibles and Other Assets

                                              Three Months Ended September 30,
                                                    2012               2011          % Change
Amortization of intangibles and other assets $           21.1     $       21.2          (4.2 )%

The decrease in amortization of intangibles and other assets primarily reflects certain intangible assets that became fully amortized during 2012, partially offset by an increase from business acquisitions that closed during the first nine months of 2012 and the fourth quarter of 2011.

Restructuring and Other Special Charges

                                              Three Months Ended September 30,
                                                   2012               2011          % Change
Restructuring and other special charges      $           4.8     $       24.1         (80.1 )%

During the third quarter of 2012, the Company recorded net restructuring charges of $4.8. These charges were comprised of $5.2 in severance and other personnel costs and $1.2 in facility-related costs primarily associated with the ongoing consolidation of recent acquisitions and other operations. These charges were partially offset by the reversal of previously established reserves of $0.9 in unused severance and $0.7 in unused facility related costs.

During the third quarter of 2011, the Company recorded net restructuring charges of $14.9. These charges were comprised of $7.8 in severance and other personnel costs, and $7.5 in facility-related costs associated with the integration of certain acquisitions including Genzyme Genetics and Westcliff. These charges were partially offset by a restructuring credit of $0.4 resulting from the reversal of unused facility closure liabilities. In addition, the Company recorded fixed assets impairment charges of $9.2 related to equipment and leasehold improvements in closed facilities.

From time to time, the Company implements cost savings initiatives. These initiatives result from the integration of recently acquired businesses and from reducing the number of facilities and employees in an effort to balance the Company's cost of operations with current test volume trends while maintaining the high quality of its services that the marketplace demands. It is difficult to determine the nature, timing and extent of these activities until adequate planning has been completed and reviewed. The continuing economic downturn being experienced in the United States and globally has had an impact on the Company's volume. The Company believes that any restructuring costs which may be incurred in the fourth quarter of 2012 will be more than offset by subsequent savings realized from these potential actions and that any related restructuring charges will not have a material impact on the Company's operations or liquidity.


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Interest Expense         Three Months Ended September 30,
                                  2012                     2011     % Change
Interest expense $           24.1                         $ 20.3       18.7 %

The increase in interest expense for 2012 as compared with 2011 is primarily due to the issuance of $1,000.0 of senior notes in August 2012. The net proceeds from the senior notes were used to repay outstanding amounts on the Company's Credit Facility. The newly issued senior notes have an effective weighted-average interest rate of 3.0%, compared to effective rates of less than 1.0% on the Company's combined term loan and credit facility outstanding during the third quarter of 2011.

Equity Method Income

                             Three Months Ended September 30,
                                       2012                      2011    % Change
Equity method income $            5.1                           $ 2.5      104.0 %

Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the healthcare industry. The increase in income in the third quarter of 2012 compared with the 2011 period is primarily due to the Company's share of losses incurred during the third quarter of 2011 in the Cincinnati, Ohio joint venture (liquidation initiated in the second half of 2011).

Income Tax Expense                                Three Months Ended September 30,
                                                      2012                  2011           % Change
Income tax expense                             $         78.5         $         82.5          (4.8 )%
Income tax expense as a % of income before tax           34.6 %                 37.5 %

The decrease in the effective tax rate for 2012 compared with 2011 is primarily the result of the reduction of uncertain tax position reserves related to the completion of a domestic intercompany transfer pricing study.

Nine months ended September 30, 2012 compared with nine months ended September

30, 2011

Net Sales

                                   Nine Months Ended September 30,
                                          2012                    2011      % Change
Net sales
Routine Testing              $        2,432.0                  $ 2,372.7       2.5 %
Genomic and Esoteric Testing          1,585.9                    1,572.8       0.8 %
Ontario, Canada                         248.2                      230.7       7.6 %
Total                        $        4,266.1                  $ 4,176.2       2.2 %



                                             Nine Months Ended September 30,
                                                   2012             2011          % Change
Volume (Number of Requisitions)
Routine Testing                                        64.6            64.3           0.5 %
Genomic and Esoteric Testing                           22.7            22.2           2.2 %
Ontario, Canada                                         7.4             7.0           6.1 %
Total                                                  94.7            93.5           1.3 %


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                                    Nine Months Ended September 30,
                                            2012                     2011     % Change
Revenue Per Requisition
Routine Testing              $          37.62                      $ 36.90       2.0  %
Genomic and Esoteric Testing            69.91                        70.83      (1.3 )%
Ontario, Canada                         33.63                        33.17       1.4  %
Total                        $          45.04                      $ 44.68       0.8  %

The increase in net sales for the nine months ended September 30, 2012 as compared with the corresponding 2011 period was driven primarily by the MEDTOX and Orchid acquisitions and by contributions from the milder winter weather experienced in the first quarter of 2012, along with positive volume growth in genomic and esoteric testing and Ontario, Canada. Genomic and esoteric testing volume as a percentage of total volume increased from 23.7% in 2011 to 24.0% in 2012. Volume growth for genomic and esoteric testing was primarily due to the incremental volume from Orchid as well as growth in the NuSwabsm series of women's health tests. The decline in price in genomic and esoteric testing is a result of a lower mix of reproductive and histology testing. Net sales of the Ontario partnership were $248.2 for the nine months ended September 30, 2012 compared to $230.7 in the corresponding 2011 period, an increase of $17.5, or 7.6%. Net sales of the Ontario partnership were negatively impacted by a stronger U.S. dollar in 2012 as compared with 2011. In Canadian dollars, net sales of the Ontario partnership increased by CN$23.3, or 10.3%.

Cost of Sales                     Nine Months Ended September 30,
                                     2012                 2011          % Change
Cost of sales                 $       2,554.4       $       2,451.1        4.2 %
Cost of sales as a % of sales            59.9 %                58.7 %

Cost of sales (primarily laboratory and distribution costs) increased 4.2% in the 2012 period as compared with the 2011 period primarily due to incremental costs from acquisitions including MEDTOX and Orchid, increases in labor, and the continued shift in test mix to genomic and esoteric testing. The increase in cost of sales as a percentage of net sales is primarily due to lower margins on acquired operations that have not yet been fully integrated as well as slower volume growth.

Selling, General and Administrative Expenses

                                                  Nine Months Ended September 30,
                                                    2012                   2011            % Change
Selling, general and administrative expenses $         835.8         $         889.3          (6.0 )%
Selling, general and administrative expenses
as a % of sales                                         19.6 %                  21.3 %

Selling, general and administrative expenses as a percentage of net sales decreased to 19.6% in the nine month period of 2012 compared to 21.3% in 2011. The decrease in selling, general and administrative expenses as a percentage of net sales is partially due to expense management and to efficiencies from acquired operations that are being integrated into the Company's operating cost structure. Additionally, bad debt expense decreased to 4.4% of net sales in the first nine months of 2012 as compared with 4.6% in 2011 primarily due to improved collection trends resulting from process improvement programs within the Company's billing department and field operations. During the first nine months of 2011, the Company recorded the settlement of the Hunter Labs litigation in California for $34.5 ($49.5 settlement less previously recorded reserves of $15.0) in selling, general and administrative expenses. These decreases in selling, general and administrative expenses were partially offset by $9.9 in fees from the MEDTOX acquisition recorded during the first nine months of 2012.

Amortization of Intangibles and Other Assets

                                               Nine Months Ended September 30,
                                                    2012               2011          % Change
Amortization of intangibles and other assets $           63.1     $       64.6          (2.3 )%


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The decrease in amortization of intangibles and other assets primarily reflects certain intangible assets that became fully amortized during 2012, partially offset by an increase from business acquisitions that closed during the first nine months of 2012 and during the fourth quarter of 2011.

Restructuring and Other Special Charges

                                              Nine Months Ended September 30,
                                                   2012               2011          % Change
Restructuring and other special charges      $           4.6     $       70.3         (93.5 )%

During the first nine months of 2012, the Company recorded net restructuring charges of $4.6. The charges were comprised of $11.4 in severance and other personnel costs and $2.5 in facility-related costs primarily associated with the consolidation of recent acquisitions and other operations along with costs associated with the previously announced termination of an executive vice president. These charges were offset by the reversal of previously established reserves of $5.7 in unused severance and $3.6 in unused facility-related costs.

During the first nine months of 2011, the Company recorded net restructuring and other special charges of $39.1. These charges were comprised of $21.1 in severance and other personnel costs, and $21.3 in facility-related costs associated with the integration of certain acquisitions including Genzyme Genetics and Westcliff. These charges were partially offset by restructuring credits of $3.3 resulting from the reversal of unused severance and facility closure liabilities. In addition, the Company recorded fixed assets impairment charges of $16.4 primarily related to equipment and leasehold improvements in closed facilities. The Company also recorded a special charge of $14.8 related to a write-off of certain assets and liabilities related to an investment made in a prior year.

Interest Expense         Nine Months Ended September 30,
                                 2012                     2011     % Change
Interest expense $           66.9                        $ 65.3       2.5 %

The increase in interest expense for 2012 as compared with 2011 is primarily due to the issuance of $1,000.0 of senior notes in August 2012. This increase was offset by the settlement of approximately $155.1 of the zero-coupon subordinated notes during 2011. In addition, during December 2011, the Company replaced its Term Loan Facility with a new Revolving Credit Facility. The new Revolving Credit Facility had a lower effective interest rate during the nine month period of 2012 compared with the effective interest rate on the Term Loan Facility during the same period of 2011.

Equity Method Income

                              Nine Months Ended September 30,
                                       2012                      2011    % Change
Equity method income $             17.4                         $ 6.6      163.6 %

Equity method income represents the Company's ownership share in joint venture . . .

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