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LH > SEC Filings for LH > Form 10-Q on 1-May-2013All Recent SEC Filings

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Form 10-Q for LABORATORY CORP OF AMERICA HOLDINGS


1-May-2013

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 (Health Insurance Exchanges), 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 or protect against cyber security attacks 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 and adverse changes in payer coverage policies related to specific testing procedures or categories of testing;

11. failure to obtain and retain new customers 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. business interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, or general labor unrest;

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

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


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19. discontinuation or recalls of existing testing products;

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

21. 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;

22. failure to identify and successfully close and integrate strategic acquisition targets;

23. 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;

24. 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;

25. 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;

26. 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;

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

28. 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;

29. 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/or widespread outbreak of influenza or other pandemic illness;

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

31. 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;

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

33. 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 first quarter of 2013 the Company grew its revenue in a challenging economic environment. Net sales for the three months ended March 31, 2013 increased 1.2% in comparison to the same period in 2012 on a 1.1% increase in volume and a 0.2% increase in revenue per requisition. The Company's acquisition of Medtox Scientific, Inc. ("Medtox") on July 31, 2012 increased revenue and volume by 2.4% and 3.2%, respectively, in the first quarter of 2013 compared to 2012. The first quarter of 2013 had one less revenue day than the first quarter of 2012. On a per day basis, revenue increased 2.9% and testing volume increased by 2.7% in the first quarter of 2013 compared to the first quarter of 2012. Inclement weather reduced volume growth by approximately 0.5%.


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

Three months ended March 31, 2013 compared with three months ended March 31,
2012

Net Sales

                                   Three Months Ended March 31,
                                        2013                  2012      Change
Net sales
Routine Testing              $         826.8               $   796.2     3.8  %
Genomic and Esoteric Testing           527.2                   544.3    (3.1 )%
Ontario, Canada                         86.9                    82.8     5.0  %
Total                        $       1,440.9               $ 1,423.3     1.2  %



                                      Three Months Ended March 31,
                                              2013                  2012    Change
Volume (Number of Requisitions)
Routine Testing                          22.0                       21.6     1.7  %
Genomic and Esoteric Testing              7.6                        7.6     0.2  %
Ontario, Canada                           2.4                        2.4    (2.0 )%
Total                                    32.0                       31.6     1.1  %


                                    Three Months Ended March 31,
                                          2013                   2012     Change
Revenue Per Requisition
Routine Testing              $         37.54                   $ 36.77     2.1  %
Genomic and Esoteric Testing           69.58                     71.99    (3.3 )%
Ontario, Canada                        36.59                     34.14     7.2  %
Total                        $         45.06                   $ 44.98     0.2  %

The increase in net sales for the three months ended March 31, 2013 as compared with the corresponding 2012 period was driven primarily by the Medtox acquisition along with positive revenue per requisition growth in routine testing and Ontario, Canada. The decline in price in genomic and esoteric testing is a result of a lower mix of reproductive and histology testing during the quarter. Histology price was also impacted by payment reductions on the Medicare physician fee schedule, as well as the expiration of the Company's ability to directly bill Medicare for the technical component of pathology services furnished to hospitals for in-patient Medicare beneficiaries. Net sales of the Ontario partnership were $86.9 for the three months ended March 31, 2013 compared to $82.8 in the corresponding 2012 period, an increase of $4.1, or 5.0%. Net sales of the Company's Ontario subsidiary were negatively impacted by a stronger U.S. dollar in 2013 as compared with 2012. In Canadian dollars, net sales of the Ontario subsidiary increased by CN$4.6, or 5.5%.

Cost of Sales                    Three Months Ended March 31,
                                    2013               2012         Change
Cost of sales                 $       868.7       $       847.2       2.5 %
Cost of sales as a % of sales          60.3 %              59.5 %

Cost of sales (primarily laboratory and distribution costs) increased 2.5% in the 2013 period as compared with the 2012 period primarily due to incremental costs from the Medtox acquisition, as well as increases in employee benefits costs. As a percentage of net sales, cost of sales increased to 60.3% in 2013 from 59.5% in 2012. The increase in cost of sales as a percentage of net sales


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is primarily due to the impact of inclement weather, lower margins on acquired operations that have not yet been fully integrated, one less revenue day in the first quarter of 2013, as well as the impact of previously announced Medicare payment reductions.

Selling, General and Administrative Expenses

                                                Three Months Ended March 31,
                                                   2013               2012           Change
Selling, general and administrative expenses $       283.2       $       271.2           4.4 %
Selling, general and administrative expenses
as a % of sales                                       19.7 %              19.1 %

Selling, general and administrative expenses as a percentage of net sales increased to 19.7% in the first quarter of 2013 as compared to 19.1% in 2012. The increase in selling, general and administrative expenses as a percentage of net sales is primarily due to increases in personnel costs relating to recent acquisitions that have not been fully integrated, along with the impact of inclement weather and one less revenue day in 2013. Additionally, bad debt expense decreased to 4.3% of net sales in the first quarter of 2013 as compared with 4.4% in 2012 primarily due to improved collection trends resulting from process improvement programs within the Company's billing department and field operations.

Amortization of Intangibles and Other Assets

                                                Three Months Ended March 31,
                                                   2013               2012           Change
Amortization of intangibles and other assets $          19.5     $       21.4          (8.9 )%

During the three months ended March 31, 2013, the Company recorded a $2.0 reduction in amortization expense resulting from the reversal of certain contingent acquisition payments.

Restructuring and Other Special Charges

                                               Three Months Ended March 31,
                                                   2013              2012           Change
Restructuring and other special charges      $          7.5     $       (3.6 )      (308.3 )%

During the first quarter of 2013, the Company recorded net restructuring charges of $7.5. These charges were comprised of $7.6 in severance and other personnel costs along with $1.8 in costs associated with facility closures and general integration initiatives. These charges were partially offset by the reversal of previously established reserves of $0.6 in unused severance and $1.3 in unused facility related costs.

During the first quarter of 2012, the Company recorded a net credit of $3.6 in restructuring and other special charges. The Company reversed previously established reserves of $3.8 in unused severance and $2.4 in unused facility related costs. This credit also includes charges of $1.7 related to severance and other personnel costs and $0.9 primarily related to facility-related costs primarily related to ongoing integration activities for Orchid and Genzyme Genetics.

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 2013 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 March 31,
                               2013                   2012     Change
Interest expense $          24.5                     $ 21.5     14.0 %

The increase in interest expense for 2013 as compared with 2012 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 Revolving Credit Facility. The newly issued senior notes have an effective weighted-average interest rate of 3.0%, compared to the effective rate of 1.22% on the Company's Revolving Credit Facility outstanding during the first quarter of 2012.

Equity Method Income

                             Three Months Ended March 31,
                                    2013                    2012    Change
Equity method income $           4.3                       $ 4.3      - %

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

Income Tax Expense                                 Three Months Ended March 31,
                                                     2013                2012            Change
Income tax expense                             $        93.8       $       107.6          (12.8 )%
Income tax expense as a % of income before tax          38.9 %              39.9 %

The decrease in the effective tax rate for 2013 compared with 2012 is the result of a lower effective state income tax rate and the research and development tax credit which was reinstated by The American Taxpayer Relief Act of 2012, enacted in early 2013.

LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

The Company's strong cash-generating capability and financial condition typically have provided ready access to capital markets. The Company's principal source of liquidity is operating cash flow, supplemented by proceeds from debt offerings. This cash-generating capability is one of the Company's fundamental strengths and provides substantial financial flexibility in meeting operating, investing and financing needs. The Company's senior unsecured Revolving Credit Facility is further discussed in "Note 7 to Unaudited Condensed Consolidated Financial Statements."
On July 31, 2012, the Company completed its acquisition of MEDTOX for $236.4 in cash, excluding transaction fees. The acquisition was financed through borrowings from the Company's Revolving Credit Facility and cash on hand. On August 23, 2012, the Company issued $1,000.0 in new senior notes pursuant to the Company's effective shelf registration statement on Form S-3. The new senior notes consisted of $500.0 aggregate principal amount of 2.20% Senior Notes due 2017 and $500.0 aggregate principal amount of 3.75% Senior Notes due 2022. The net proceeds were used to repay $625.0 of the outstanding borrowings under the Company's Revolving Credit Facility. The remaining proceeds are available for other general corporate purposes.
In February, 2013, the Company repaid its 5 1/2% $350.0 Senior Notes due 2013 with cash on hand and $30.0 of borrowings on its Revolving Credit Facility. The Company believes that its cash from operations, in combination with cash on hand and borrowing capacity, will be sufficient to satisfy its obligations in 2013. The Company has discussed its intention to increase its ratio of total debt to consolidated EBITDA overtime from 2.0 to 1.0 as of December 2012 to 2.5 to 1.0. As of March 31, 2013, the total debt to consolidated EBITDA was 1.8. The Company believes that it can achieve this through the use of its Revolving Credit Facility and its ready access to debt capital markets. In the event that the Company needs additional liquidity, it believes it can readily access the debt capital markets.

Operating Activities


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During the three months ended March 31, 2013 and 2012, the Company's operations provided $198.2 and $197.1 of cash, respectively, reflecting the Company's solid business results. The Company continues to focus on efforts to increase cash collections from all payers and to generate on-going improvements to the claim submission processes.

Investing Activities

Capital expenditures were $41.7 and $34.2 for the three months ended March 31, 2013 and 2012, respectively. The Company expects capital expenditures of approximately $220.0 in 2013. The Company's projected capital expenditures are higher than historical levels due to near-term investments in facility consolidation and replacement of a major testing platform. 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 facility as needed.

Financing Activities

On December 21, 2011, the Company entered into a Credit Agreement (the "Credit Agreement") providing for a five-year $1,000.0 senior unsecured revolving credit facility (the "Revolving Credit Facility") with Bank of America, N.A., acting as Administrative Agent, Barclays Capital as Syndication Agent, and a group of financial institutions as lending parties. The balances outstanding on the Company's Revolving Credit Facility at March 31, 2013 and December 31, 2012 were $30.0 and $0.0, respectively. The Revolving Credit Facility bears interest at varying rates based upon a base rate or LIBOR plus (in each case) a percentage based on the Company's debt rating with Standard & Poor's and Moody's Ratings Services.

The Revolving Credit Facility is available for general corporate purposes, including working capital, capital expenditures, acquisitions, funding of share repurchases and other restricted payments permitted under the Credit Agreement. The Credit Agreement also contains limitations on aggregate subsidiary indebtedness and a debt covenant that requires that the Company maintain on the last day of any period for four consecutive fiscal quarters, in each case taken as one accounting period, a ratio of total debt to consolidated EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of not more than 3.0 to
1.0. The Company was in compliance with all covenants in the Credit Agreement at March 31, 2013. As of March 31, 2013, the total debt to consolidated EBITDA was 1.8.

In February, 2013, the Company repaid its 5 1/2% $350.0 Senior Notes due 2013 with cash on hand and $30.0 of borrowings on its Revolving Credit Facility. During the three months ended March 31, 2013, the Company settled notices to convert $15.3 aggregate principal amount at maturity of its zero-coupon subordinated notes with a conversion value of $18.3. The total cash used for these settlements was $12.9.
As of March 31, 2013, the effective interest rate on the Revolving Credit Facility was 1.25%.

As of December 31, 2012, the Company had outstanding authorization from the Board of Directors to purchase $68.0 of Company common stock. On February 8, 2013, the Company announced the Board of Directors authorized the purchase of $1,000.0 of additional shares of the Company's common stock. During the three months ended March 31, 2013, the Company repurchased $113.9 of stock representing 1.3 shares. As of March 31, 2013, the Company had outstanding authorization from the Board of Directors to purchase $954.1 of Company common stock.

As of March 31, 2013, the Company provided letters of credit aggregating $37.4, primarily in connection with certain insurance programs. Letters of credit provided by the Company are secured by the Company's senior credit facilities and are renewed annually, around mid-year.

The Company had a $48.6 and $46.2 reserve for unrecognized income tax benefits, including interest and penalties as of March 31, 2013 and December 31, 2012, respectively. Substantially all of these tax reserves are classified in other long-term liabilities in the Company's Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012.

Zero-coupon Subordinated Notes

On March 11, 2013, the Company announced that for the period of March 12, 2013 to September 11, 2013, the zero-coupon subordinated notes will accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a zero-coupon subordinated note for the five trading days ended March 6, 2013, in addition to the continued accrual of the original issue discount.

On April 8, 2013, the Company announced that its zero-coupon subordinated notes may be converted into cash and common stock at the conversion rate of 13.4108 per $1,000 principal amount at maturity of the notes, subject to the terms of the zero-


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coupon subordinated notes and the Indenture, dated as of October 24, 2006 between the Company and The Bank of New York Mellon, as trustee and conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter beginning April 1, 2013, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New York City time, on Friday, June 28, 2013. If notices of conversion are received, the Company plans to settle the cash portion of the conversion obligation with cash on hand and/or borrowings under the Revolving Credit Facility.

Credit Ratings

The Company's debt ratings of Baa2 from Moody's and BBB from Standard and Poor's contribute to its ability to access capital markets.

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