Laboratory Corporation of America Holdings (LH)

LH » Topics » Nine months ended September 30, 2008 compared with nine months ended September 30, 2007

This excerpt taken from the LH 10-Q filed Nov 4, 2008.

Nine months ended September 30, 2008 compared with nine months ended September 30, 2007

 

Net sales for the nine months ended September 30, 2008 were $3,386.1, an increase of $323.7, or approximately 10.6%, from $3,062.4 for the comparable 2007 period. The sales increase is primarily due to including $190.5 of revenue from the Ontario operation and increases, excluding the Ontario operation, of 2.0% in accession volume and 2.3% in price.

 

 

 

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Cost of sales, which includes primarily laboratory and distribution costs, was $1,962.2 for the nine months ended September 30, 2008 compared to $1,776.6 in the corresponding 2007 period, an increase of $185.6, or 10.4%. Excluding the Ontario operation, cost of sales as a percentage of net sales was 58.6% for the nine months ended September 30, 2008 and 58.0% in the corresponding 2007 period. The increase in cost of sales as a percentage of net sales is primarily due to increases in the costs of materials, which is caused by shifts in the Company’s test mix.

 

Selling, general and administrative expenses increased to $708.7 for the nine months ended September 30, 2008 from $612.1 in the same period in 2007. Excluding the Ontario operation, selling, general and administrative expenses as a percentage of net sales were 21.2% and 20.0% for the nine months ended September 30, 2008 and 2007, respectively. Bad debt expense increased to 6.4% of net sales as compared with 4.8% in the comparable 2007 period due to an increase of $45.0 in the Company’s provision for doubtful accounts. The Company’s estimate of the allowance for doubtful accounts was increased in the second quarter due to the impact of the economy, higher patient deductibles and co-payments, and recent acquisitions on the collectibility of accounts receivable balances. Excluding this increase in the provision for doubtful accounts and the Ontario operation, selling, general and administrative expenses as a percentage of sales were 19.8% and 20.0% for the nine months ended September 30, 2008 and 2007, respectively.

 

Amortization of intangibles and other assets was $43.0 and $40.6 for the nine months ended September 30, 2008 and 2007, respectively. The increase in the amortization of intangibles reflects certain acquisitions closed during 2008 and 2007.

 

During the second and third quarters of 2008, the Company recorded net restructuring charges of $28.2 primarily related to work force reductions and the closing of redundant and underutilized facilities. The majority of these costs related to severance and other employee costs and contractual obligations associated with leased facilities and equipment. Of this amount, $18.7 related to severance and other employee costs in connection with the general work force reductions and $11.4 related to contractual obligations associated with leased facilities and equipment. The Company also recorded a credit of $1.9, comprised of $1.2 of previously recorded facility costs and $0.7 of employee severance benefits. These restructuring initiatives are expected to provide annualized cost savings of approximately $59.0.

 

During the third quarter of 2008, the Company also recorded a special charge of $5.5 related to estimated uncollectible amounts primarily owed by patients in the areas of the Gulf Coast severely impacted by hurricanes similar to losses incurred during the 2005 hurricane season.

 

During the second and third quarters of 2007, the Company recorded net restructuring charges of $38.3 primarily related to actions directed at reductions in work force and redundant and underutilized facilities. The majority of these costs related to employee severance and contractual obligations associated with leased facilities and equipment. Of this amount, $20.4 related to employee severance benefits for employees primarily in management, administrative and support functions, $11.5 related to contractual obligations and other costs associated with the closure of facilities and $0.9 related to settlement of a preacquisition employment liability. The charge also included approximately $6.5 of accounts receivable balances remaining on a subsidiary’s billing system that was abandoned during the quarter. The Company also recorded a credit of $1.0, comprised of $0.7 of previously recorded facility costs and $0.3 of employee severance benefits.

 

Interest expense was $54.0 for the nine months ended September 30, 2008, compared with $37.8 for the same period in 2007. The increase in interest expense was primarily driven by borrowings under the five-year, $500.0 Term Loan Facility in October 2007.

 

Income from investments in joint venture partnerships was $11.7 for the nine months ended September 30, 2008, compared with $56.6 for the same period in 2007. This income represents the Company’s ownership share in joint venture partnerships. During 2007, a significant portion of this income was derived from investments in Ontario and Alberta, Canada, and was earned in Canadian dollars. Effective January 1, 2008, the income from the Ontario operation is included in the consolidated operating results of the Company, which is the primary reason for the lower income from investments in joint venture partnerships in 2008.

 

The provision for income taxes as a percentage of earnings before taxes was 40.9% for the nine months ended September 30, 2008, compared to 41.1% for the nine months ended September 30, 2007.

 

 

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LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

 

The Company’s operations provided $565.6 and $469.3 of cash, net of $29.9 and $23.3 in transition payments to UnitedHealthcare, for the nine months ended September 30, 2008 and 2007, respectively. The increase in cash flows primarily resulted from improved cash collections and lower payments for income taxes of $63.8 ($153.6 in 2008 as compared with $217.4 in 2007).

 

Capital expenditures were $120.4 and $108.5 for the nine months ended September 30, 2008 and 2007, respectively. The Company expects capital expenditures of approximately $140.0 to $160.0 in 2008. The Company will continue to make important investments in its business, including information technology. Such expenditures are expected to be funded by cash flow from operations, as well as borrowings under the Company’s revolving credit facilities as needed.

 

On March 31, 2008, the Company entered into a three-year interest rate swap agreement to hedge variable interest rate risk on the Company’s variable interest rate term loan. Under the swap the Company will, on a quarterly basis, pay a fixed rate of interest (2.92%) and receive a variable rate of interest based on the three-month LIBOR rate on an amortizing notional amount of indebtedness equivalent to the term loan balance outstanding. The swap has been designated as a cash flow hedge. Accordingly, the Company recognizes the fair value of the swap in the consolidated balance sheet and any changes in the fair value are recorded as adjustments to accumulated other comprehensive income, net of tax. The fair value of the interest rate swap agreement is the estimated amount that the Company would pay or receive to terminate the swap agreement at the reporting date. The fair value of the swap was an asset of $6.4 at September 30, 2008 and is included in other assets, net in the consolidated balance sheet. The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to the swap agreement. Management does not expect the counterparty to fail to meet its obligation given the strong creditworthiness of the counterparty to the agreement.

 

At September 30, 2008, the Company has provided letters of credit aggregating approximately $104.8, primarily in connection with certain insurance programs and contractual guarantees on obligations under the Company’s contract with UnitedHealthcare. The UnitedHealthcare contract requires that the Company provide a $50.0 letter of credit, as security for the Company’s contingent obligation to reimburse up to $200.0 in transition costs incurred during the first three years of the contract. Letters of credit provided by the Company are secured by the Company’s senior credit facilities and are renewed annually, around mid-year.

 

During the nine months ended September 30, 2008, the Company repurchased $330.6 of stock representing 4.6 shares. As of September 30, 2008, the Company had outstanding authorization from the Board of Directors to purchase approximately $95.2 of Company common stock.

 

The Company had a $75.2 and $66.5 reserve for unrecognized tax benefits, including interest and penalties, at September 30, 2008 and December 31, 2007, respectively. Substantially all of these tax reserves are classified in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007, respectively.

 

Due to the stock market’s performance year-to-date in 2008, the fair value of assets in the defined benefit retirement plan decreased significantly from January 1, 2008 to September 30, 2008. Unless the market makes a significant recovery in the fourth quarter of 2008, the Company expects an increase in fiscal 2009 pension expense. The amount of this increase will depend on the fair value of assets measured on December 31, 2008 as well as the selection of key actuarial assumptions at fiscal year-end. In addition, based upon the underlying value of plan assets at September 30, 2008, the Company estimates that it will contribute approximately $22.0 to the defined benefit retirement plan during 2009. The actual amount to be contributed will be determined, based upon the underlying value of plan assets and the amount of the plan’s benefit obligation as of December 31, 2008.

 

Based on current and projected levels of operations, coupled with availability under its senior credit facilities, the Company believes it has sufficient liquidity to meet both its anticipated short-term and long-term cash needs; however, the Company continually reassesses its liquidity position in light of market conditions and other relevant factors.

 

 

 

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This excerpt taken from the LH 10-Q filed Aug 4, 2008.

Six months ended June 30, 2008 compared with six months ended June 30, 2007

 

Net sales for the six months ended June 30, 2008 were $2,251.0, an increase of $209.2, or approximately 10.2%, from $2,041.8 for the comparable 2007 period. The sales increase is primarily due to including $131.1 of revenue from the Ontario operation and increases, excluding the Ontario operation, of 1.4% in accession volume and 2.4% in price.

 

Cost of sales, which includes primarily laboratory and distribution costs, was $1,288.7 for the six months ended June 30, 2008 compared to $1,178.1 in the corresponding 2007 period, an increase of $110.6, or 9.4%. Excluding the Ontario operation, cost of sales as a percentage of net sales was 57.9% for the six months ended June 30, 2008 and 57.7% in the corresponding 2007 period. The increase in cost of sales as a percentage of net sales is primarily due to increases in the costs of materials, which is caused by shifts in the Company’s test mix.

 

Selling, general and administrative expenses increased to $481.6 for the six months ended June 30, 2008 from $414.1 in the same period in 2007. Excluding the Ontario operation, selling, general and administrative expenses as a percentage of net sales were 21.7% and 20.3% for the six months ended June 30, 2008 and 2007, respectively. Bad debt expense increased to 7.0% of net sales as compared with 4.8% in the comparable 2007 period due to an increase of $45.0 in the Company’s provision for doubtful accounts. The Company’s estimate of the allowance for doubtful accounts was increased in the second quarter due to the impact of the economy, higher patient deductibles and co-payments, and recent acquisitions on the collectibility of accounts receivable balances. Excluding this increase in the provision for doubtful accounts and the Ontario operation, selling, general and administrative expenses as a percentage of sales were 19.6% and 20.3% for the six months ended June 30, 2008 and 2007, respectively.

 

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Amortization of intangibles and other assets was $28.4 and $26.7 for the six months ended June 30, 2008 and 2007, respectively. The increase in the amortization of intangibles reflects certain acquisitions closed during 2008 and 2007.

 

Interest expense was $37.2 for the six months ended June 30, 2008, compared with $25.2 for the same period in 2007. The increase in interest expense was primarily driven by borrowings under the five-year, $500.0 Term Loan Facility in October 2007.

 

Income from investments in joint venture partnerships was $8.0 for the six months ended June 30, 2008, compared with $35.7 for the same period in 2007. This income represents the Company’s ownership share in joint venture partnerships. During 2007, a significant portion of this income was derived from investments in Ontario and Alberta, Canada, and was earned in Canadian dollars. Effective January 1, 2008, the income from the Ontario operation is included in the consolidated operating results of the Company, which is the primary reason for the lower income from investments in joint venture partnerships in 2008.

 

The provision for income taxes as a percentage of earnings before taxes was 41.3% for the six months ended June 30, 2008, compared to 41.3% for the six months ended June 30, 2007.

 

LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

 

The Company’s operations provided $371.2 and $338.9 of cash, net of $21.5 and $5.4 in transition payments to UnitedHealthcare, for the six months ended June 30, 2008 and 2007, respectively. The increase in cash flows primarily resulted from lower payments for income taxes of $59.8 ($80.6 in 2008 as compared with $140.4 in 2007).

 

Capital expenditures were $78.9 and $73.0 for the six months ended June 30, 2008 and 2007, respectively. The Company expects capital expenditures of approximately $140.0 to $160.0 in 2008. The Company will continue to make important investments in its business, including information technology. Such expenditures are expected to be funded by cash flow from operations, as well as borrowings under the Company’s revolving credit facilities as needed.

 

On March 31, 2008, the Company entered into a three-year interest rate swap agreement to hedge variable interest rate risk on the Company’s variable interest rate term loan. Under the swap the Company will, on a quarterly basis, pay a fixed rate of interest (2.92%) and receive a variable rate of interest based on the three-month LIBOR rate on an amortizing notional amount of indebtedness equivalent to the term loan balance outstanding. The swap has been designated as a cash flow hedge. Accordingly, the Company recognizes the fair value of the swap in the consolidated balance sheet and any changes in the fair value are recorded as adjustments to accumulated other comprehensive income, net of tax. The fair value of the interest rate swap agreement is the estimated amount that the Company would pay or receive to terminate the swap agreement at the reporting date. The fair value of the swap was an asset of $9.1 at June 30, 2008 and is included in other assets, net in the consolidated balance sheet. The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to the swap agreement. Management does not expect the counterparty to fail to meet its obligation given the strong creditworthiness of the counterparty to the agreement.

 

At June 30, 2008, the Company has provided letters of credit aggregating approximately $104.8, primarily in connection with certain insurance programs and contractual guarantees on obligations under the Company’s contract with UnitedHealthcare. The UnitedHealthcare contract requires that the Company provide a $50.0 letter of credit, as security for the Company’s contingent obligation to reimburse up to $200.0 in transition costs incurred during the first three years of the contract. Letters of credit provided by the Company are secured by the Company’s senior credit facilities and are expected to be renewed annually, around mid-year.

 

During the six months ended June 30, 2008, the Company repurchased $66.5 of stock representing 0.9 shares. As of June 30, 2008, the Company had outstanding authorization from the Board of Directors to purchase approximately $359.3 of Company common stock.

 

The Company had a $71.7 and $66.5 reserve for unrecognized tax benefits, including interest and penalties, at June 30, 2008 and December 31, 2007, respectively. Substantially all of these tax reserves are classified in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007, respectively.

 

 

 

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Based on current and projected levels of operations, coupled with availability under its senior credit facilities, the Company believes it has sufficient liquidity to meet both its short-term and long-term cash needs; however, the Company continually reassesses its liquidity position in light of market conditions and other relevant factors.

 

This excerpt taken from the LH 10-Q filed Apr 30, 2008.

Three months ended March 31, 2008 compared with three months ended March 31, 2007

        Effective January 1, 2008, the Company began consolidating the results of its Ontario, Canada joint venture (see note 4. “Business Acquisitions”). Certain analysis of the Company’s operating results below, is provided, excluding the impact of this consolidation, in order to facilitate comparison with the prior period’s results.

        Net sales for the three months ended March 31, 2008 were $1,103.2, an increase of $104.5, or approximately 10.5%, from $998.7 for the comparable 2007 period. The sales increase is primarily due to including $64.1 of revenue from the Ontario, Canada operation and an increase, excluding the Ontario, Canada operation, of 1.6% in accession volume and 2.5% in price.

        Cost of sales, which includes primarily laboratory and distribution costs, was $632.7 for the three months ended March 31, 2008 compared to $577.0 in the corresponding 2007 period, an increase of $55.7, or 9.7%. Excluding the Ontario, Canada operation, cost of sales as a percentage of net sales was 58.1% for the three months ended March 31, 2008 and 57.8% in the corresponding 2007 period. As a percentage of sales, the increase in cost of sales was primarily due to the Company’s increase in patient service centers and other customer service infrastructure through the second quarter of 2007, along with increases in cost of materials due to shifts in the Company’s test mix.

        Selling, general and administrative expenses increased to $215.6 for the three months ended March 31, 2008 from $205.0 in the same period in 2007. Excluding the Ontario, Canada operation, selling, general and administrative expenses as a percentage of net sales were 19.8% and 20.5% for the three months ended March 31, 2008 and 2007, respectively. This decrease in selling, general and administrative expenses as a percentage of net sales is the result of a continued focus on controlling costs. Bad debt expense increased to 5.0% of net sales as compared with 4.8% in the comparable 2007 period due to higher patient deductibles and co-insurance, combined with the impact the Company believes the economy is having on the collectibility of those balances.

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        The amortization of intangibles and other assets was $13.8 and $13.3 for the three months ended March 31, 2008 and 2007, respectively. The increase in the amortization of intangibles reflects certain acquisitions closed during 2008 and 2007.

        Interest expense was $19.9 for the three months ended March 31, 2008, compared with $12.6 for the same period in 2007. The increase in interest expense was primarily driven by borrowings under the five-year, $500 Term Loan Facility in October 2007.

        Income from investments in joint venture partnerships was $4.4 for the three months ended March 31, 2008, compared with $16.4 for the same period in 2007. This income represents the Company’s ownership share in joint venture partnerships. During 2007, a significant portion of this income was derived from investments in Ontario and Alberta, Canada, and was earned in Canadian dollars. Effective January 1, 2008, the income from the Ontario, Canada operation is included in the consolidated operating results of the Company, which is the primary reason for the lower income from investments in joint venture partnerships in 2008.

        The provision for income taxes as a percentage of earnings before taxes was 41.3% for the three months ended March 31, 2008, compared to 41.4% for the three months ended March 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

        The Company’s operations provided $176.5 and $185.8 of cash, net of $13.0 and $0.0 in transition payments to UnitedHealthcare, for the three months ended March 31, 2008 and 2007, respectively. The decrease in cash flows primarily resulted from the transition payments made to UnitedHealthcare.

        Capital expenditures were $37.9 and $40.8 for the three months ended March 31, 2008 and 2007, respectively. The Company expects capital expenditures of approximately $120 to $140 in 2008. The Company will continue to make important investments in our business, including information technology. Such expenditures are expected to be funded by cash flow from operations, as well as borrowings under the Company’s revolving credit facilities as needed.

        On March 31, 2008, the Company entered into a three-year interest rate swap agreement to hedge variable interest rate risk on the Company’s variable interest rate term loan. Under the swap the Company will, on a quarterly basis, pay a fixed rate of interest (2.92%) and receive a variable rate of interest based on the three-month LIBOR rate on an amortizing notional amount of indebtedness equivalent to the term loan balance outstanding. The swap has been designated as a cash flow hedge. The fair value of the interest rate swap agreement is the estimated amount that the Company would pay or receive to terminate the swap agreement. At March 31, 2008, the swap had no fair value to the Company. The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to the swap agreement. Management does not expect the counterparty to fail to meet its obligation given the strong creditworthiness of the counterparty to the agreement.

        At March 31, 2008, the Company has provided letters of credit aggregating approximately $104.8, primarily in connection with certain insurance programs and contractual guarantees on obligations under the Company’s contract with UnitedHealthcare. The UnitedHealthcare contract requires that the Company provide a $50.0 letter of credit, as security for the Company’s contingent obligation to reimburse up to $200.0 in transition costs during the first three years of the contract. Letters of credit provided by the Company are secured by the Company’s senior credit facilities and are renewed annually, around mid-year.

        During the three months ended March 31, 2008, the Company repurchased $55.7 of stock representing 0.7 shares. As of March 31, 2008, the Company had outstanding authorization from the Board of Directors to purchase approximately $370.1 of Company common stock.

        The Company had a $68.2 and $66.5 reserve for unrecognized tax benefits, including interest and penalties, at March 31, 2008 and December 31, 2007, respectively. Substantially all of these tax reserves are classified in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007, respectively.

        Based on current and projected levels of operations, coupled with availability under its senior credit facilities, the Company believes it has sufficient liquidity to meet both its short-term and long-term cash needs; however, the Company continually reassesses its liquidity position in light of market conditions and other relevant factors.

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