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LH > SEC Filings for LH > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for LABORATORY CORP OF AMERICA HOLDINGS

Form 10-Q for LABORATORY CORP OF AMERICA HOLDINGS


30-Jul-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, audits, regulatory examinations, information requests, and other inquiries by the government, which may include significant monetary damages, fines, penalties, assessments, refunds, repayments, 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 reimbursement or 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.


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GENERAL (dollars in millions, except per share data)

During the second quarter of 2013, the Company grew its revenue in a challenging economic environment. Net sales for the three months ended June 30, 2013 increased 3.1% in comparison to the same period in 2012, on a 5.0% increase in volume and a 1.8% decrease in revenue per requisition. The Company's acquisition of MedTox Scientific, Inc. ("MedTox") on July 31, 2012, increased revenue and volume by 2.6% and 3.6%, respectively, in the second quarter of 2013 compared to 2012.

Changes in governmental regulations have had, and are expected to continue to have, a significant impact on the Company's operations in 2013. The Affordable Care Act Baseline for the 2013 update to the Clinical Lab Fee Schedule was negative 0.95% and the Middle Class Tax Relief and Job Creation Act rebaselined the fee schedule an additional 2% lower. These fee schedule reductions became effective on January 1, 2013. As a result of mandatory sequestration, there was an additional 2% reduction to the Clinical Lab Fee Schedule and a separate 2% reduction to the Physician Fee Schedule effective April 1, 2013. In addition, the Company has experienced delays in the pricing and implementation of new molecular pathology codes among various payers, including Medicaid, Medicare and commercial carriers. While some delays were expected, several non-commercial payers have still not priced key molecular codes and a number of these payers, mostly government entities, have indicated that they will no longer pay for tests that they have previously covered. Further, several payers are requiring additional information to process claims or have implemented prior authorization policies. Many commercial payers are only now becoming aware of the impact of their claim edits which impede access to services which previously have been covered and reimbursed. These delays had an impact on 2013 revenue, revenue per requisition, margins and cash flows and until resolved could have continuing impact.

The Company manages its operations through two reportable segments: the Clinical diagnostics laboratory segment, which includes routine testing as well as genomic and esoteric testing, and the Other segment which consists of the portion of the Company's non-United States clinical diagnostic laboratory operations which are reviewed separately by corporate management for the purposes of allocation of resources. As mentioned above, the Clinical diagnostics laboratory segment results of operations have been negatively impacted by the reductions in payments for laboratory services, primarily from Federal and State government entities. Operating results for the Other segment have declined slightly from the prior year primarily due to the expansion of that segment through acquisitions not fully integrated, as well as the impact of the stronger United States dollar in 2013 as compared with 2012.

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

Three months ended June 30, 2013 compared with three months ended June 30, 2012

Net Sales

                                       Three Months Ended June 30,
                                            2013                 2012      Change
Net sales
Clinical diagnostics laboratory:
Routine Testing                  $         873.1              $   814.4     7.2  %
Genomic and Esoteric Testing               508.5                  525.2    (3.2 )%
Other                                       86.6                   83.8     3.3  %
Total                            $       1,468.2              $ 1,423.4     3.1  %


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                                       Three Months Ended June 30,
                                              2013                 2012    Change
Volume (Number of Requisitions)
Clinical diagnostics laboratory:
Routine Testing                          22.4                      21.2      5.9 %
Genomic and Esoteric Testing              7.9                       7.6      3.5 %
Other                                     2.6                       2.6      2.4 %
Total                                    32.9                      31.4      5.0 %


                                        Three Months Ended June 30,
                                              2013                  2012     Change
Revenue Per Requisition
Clinical diagnostics laboratory:
Routine Testing                  $         38.88                  $ 38.42     1.2  %
Genomic and Esoteric Testing               64.66                    69.10    (6.4 )%
Other                                      32.99                    32.70     0.9  %
Total                            $         44.57                  $ 45.39    (1.8 )%

The increase in net sales for the three months ended June 30, 2013 as compared with the corresponding 2012 period was driven primarily by the MedTox acquisition along with growth in the Company's drugs of abuse testing and sales in the Other segment. The decline in revenue per requisition in genomic and esoteric testing is a result of a lower mix of genetic and histology testing during the quarter. Histology revenue per requisition 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. Revenue per requisition also decreased due to delays in payments and denials of coverage for existing tests by some payers after implementation of recently-adopted molecular pathology codes and the implementation of sequestration on April 1, 2013. Net sales of the Other segment were $86.6 for the three months ended June 30, 2013 compared to $83.8 in the corresponding 2012 period, an increase of $2.8, or 3.3%. Net sales in this segment were negatively impacted by a stronger U.S. dollar in 2013 as compared with 2012. In local currency, net sales of the Other segment increased by 4.7%.

Cost of Sales                    Three Months Ended June 30,
                                   2013               2012        Change
Cost of sales                 $      890.9       $      843.9       5.6 %
Cost of sales as a % of sales         60.7 %             59.3 %

Cost of sales (primarily laboratory and distribution costs) increased 5.6% in the 2013 period as compared with the 2012 period primarily due to lower margins resulting from the Medicare fee cuts, the impact of delays and denials of coverage of molecular pathology codes and sequestration in 2013, as mentioned above. As a percentage of net sales, cost of sales increased to 60.7% in 2013 from 59.3% in 2012. Cost of sales of the Other segment contributed $1.5 or 0.2% of the increase in cost of sales for the three months ended June 30, 2013. These increases were due to continued growth in the business.

Selling, General and Administrative Expenses

                                                 Three Months Ended June 30,
                                                   2013               2012           Change
Selling, general and administrative expenses $       280.9       $       279.5           0.5 %
Selling, general and administrative expenses
as a % of sales                                       19.1 %              19.6 %

Selling, general and administrative expenses as a percentage of net sales decreased to 19.1% in the second quarter of 2013 as compared to 19.6% in 2012. Expense management and efficiencies from acquired operations that are being integrated into the Company's cost structure contributed to the decrease in selling, general and administrative expenses as a percentage of net sales.


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Additionally, bad debt expense decreased to 4.3% of net sales in the second quarter of 2013 as compared with 4.4% in 2012 primarily due to increased collections resulting from process improvement programs within the Company's billing department and field operations. Selling, general and administrative expenses of the Other segment increased $3.4 or 1.2% over the prior year total for the three months ended June 30, 2013. These increases were due to continued growth in the business.

Amortization of Intangibles and Other Assets

                                                Three Months Ended June 30,
                                                   2013              2012           Change
Amortization of intangibles and other assets $         20.5     $       20.6          (0.5 )%

During the three months ended June 30, 2013, amortization expense remained consistent as compared to the three months ended June 30, 2012.

Restructuring and Other Special Charges

                                                Three Months Ended June 30,
                                                   2013              2012          Change
Restructuring and other special charges      $          6.6     $        3.4          94.1 %

During the second quarter of 2013, the Company recorded net restructuring charges of $6.6, primarily within the Clinical diagnostics laboratory segment. These charges were comprised of $2.5 in severance and other personnel costs along with $4.5 in costs associated with facility closures and general integration initiatives. These charges were partially offset by the reversal of previously established reserves of $0.4 in unused facility related costs.

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.

Interest Expense        Three Months Ended June 30,
                              2013                  2012     Change
Interest expense $         23.1                    $ 21.3      8.5 %

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 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 second quarter of 2012.

Equity Method Income

                            Three Months Ended June 30,
                                   2013                  2012     Change
Equity method income $         4.4                      $ 8.0    (45.0 )%


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Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the healthcare industry. In conjunction with the liquidation of one of its joint ventures, the Company recorded a $2.9 increase in equity method income during the second quarter of 2012.

Income Tax Expense                                 Three Months Ended June 30,
                                                     2013               2012            Change
Income tax expense                             $        97.7       $       102.4          (4.6 )%
Income tax expense as a % of income before tax          39.1 %              40.0 %

The decrease in the effective tax rate for 2013 compared with 2012 is the result of a lower effective state income tax rate.

Six months ended June 30, 2013 compared with six months ended June 30, 2012

Net Sales

                                      Six Months Ended June 30,
                                          2013                2012      Change
Net sales
Clinical diagnostics laboratory:
Routine Testing                  $      1,699.9            $ 1,610.6     5.5  %
Genomic and Esoteric Testing            1,035.7              1,069.5    (3.2 )%
Other                                     173.5                166.6     4.2  %
Total                            $      2,909.1            $ 2,846.7     2.2  %



                                        Number of Requisitions
                                       Six Months Ended June 30,
                                             2013                2012    Change
Volume
Clinical diagnostics laboratory:
Routine Testing                          44.5                    42.8      3.8 %
Genomic and Esoteric Testing             15.4                    15.2      1.8 %
Other                                     5.0                     5.0      0.3 %
Total                                    64.9                    63.0      3.0 %


                                       Six Months Ended June 30,
                                            2013                2012     Change
Revenue Per Requisition
Clinical diagnostics laboratory:
Routine Testing                  $       38.22                $ 37.58     1.7  %
Genomic and Esoteric Testing             67.07                  70.54    (4.9 )%
Other                                    34.70                  33.40     3.9  %
Total                            $       44.81                $ 45.18    (0.8 )%

The increase in net sales for the six months ended June 30, 2013 as compared with the corresponding 2012 period was driven primarily by the MedTox acquisition along with growth in the Company's drugs of abuse testing and sales in the Other segment. The decline in revenue per requisition in genomic and esoteric testing is a result of a lower mix of genetic and histology testing during the quarter. Histology revenue per requisition 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. Revenue per requisition decreased due to delays in payments


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and denials of coverage for existing tests by some payers after implementation of recently-adopted molecular pathology codes and the implementation of sequestration on April 1, 2013. Net sales of the Other segment were $173.5 for the six months ended June 30, 2013 compared to $166.6 in the corresponding 2012 period, an increase of $6.9, or 4.1%. Net sales in this segment were negatively impacted by a stronger U.S. dollar in 2013 as compared with 2012. In local currency, net sales of the Other segment increased by 5.2%.

Cost of Sales                    Six Months Ended June 30,
                                    2013             2012       Change
Cost of sales                 $     1,759.6       $ 1,691.1       4.1 %
Cost of sales as a % of sales          60.5 %          59.4 %

Cost of sales (primarily laboratory and distribution costs) increased 4.1% in the 2013 period as compared with the 2012 period primarily due to lower margins resulting from the Medicare fee reductions, the impact of delays and denials of coverage of molecular pathology codes and sequestration in 2013, as mentioned above. As a percentage of net sales, cost of sales increased to 60.5% in 2013 from 59.4% in 2012. Cost of sales of the Other segment contributed $3.1 or 0.2% of the increase in cost of sales for the six months ended June 30, 2013. These increases were due to continued growth in the business.

Selling, General and Administrative Expenses

                                                    Six Months Ended June 30,
                                                     2013               2012          Change
Selling, general and administrative expenses    $      564.1       $      550.7           2.4 %
Selling, general and administrative expenses as
a % of sales                                            19.4 %             19.3 %

Selling, general and administrative expenses as a percentage of net sales increased to 19.4% in the six month period of 2013 compared to 19.3% 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 yet been fully integrated. Additionally, bad debt expense decreased to 4.3% of net sales in 2013 as compared with 4.4% in 2012 primarily due to increased collections resulting from process improvement programs within the Company's billing department and field operations. Selling, general and administrative expenses of the Other segment increased $5.3 or 0.9% over the prior year total for the six months ended June 30, 2013. These increases were due to continued growth in the business.

Amortization of Intangibles and Other Assets

                                                   Six Months Ended June 30,
                                                      2013             2012          Change
Amortization of intangibles and other assets    $         40.0     $     42.0          (4.8 )%

The decrease in amortization of intangibles and other assets primarily reflects certain intangible assets that became fully amortized during 2013, partially offset by an increase from certain acquisitions that closed during the first six months of 2013 and during the year 2012.

Restructuring and Other Special Charges

                                              Six Months Ended June 30,
                                                   2013                 2012     Change
Restructuring and other special charges $        14.1                 $ (0.2 )      N/A

During the first six months of 2013, the Company recorded net restructuring charges of $12.0 within the Clinical diagnostics laboratory segment and $2.1 within the Other segment. The charges were comprised of $10.1 in severance and other personnel costs along with $6.3 in costs associated with facility closures and general integration initiatives. These charges were offset by the reversal of previously established reserves of $0.6 in unused severance and $1.7 in unused facility-related costs.


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During the first six months of 2012, the Company recorded net credit of $0.2 in restructuring and other special charges within the Clinical diagnostics laboratory segment. The Company reversed previously established reserves of $4.8 . . .

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