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34: R23 Subsequent Event (Notes) HTML 25K
35: R24 BASIS OF FINANCIAL STATEMENT PRESENTATION Use of HTML 31K
Estimates (Policies)
36: R25 BASIS OF FINANCIAL STATEMENT PRESENTATION New HTML 26K
Accounting Pronouncements (Policies)
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Coronavirus (COVID-19) Financial Statement Impact
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38: R27 BASIS OF FINANCIAL STATEMENT PRESENTATION Recently HTML 26K
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(Exact name of registrant as specified in its charter)
iDelaware
i13-3757370
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i358 South Main Street
iBurlington,
iNorth
Carolina
i27215
(Address of principal executive offices)
(Zip Code)
(Registrant's telephone number, including area code) i336-i229-1127
Securities
registered pursuant to Section 12(b) of the Exchange Act.
Title of Each Class Trading Symbol Name of exchange on which registered
iCommon Stock, $0.10 par valueiLHiNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. iYes☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐
No ☒.
The number of shares outstanding of the issuer's common stock is i97.4 million shares as of July 29, 2020.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
1. iiBASIS
OF FINANCIAL STATEMENT PRESENTATION/
Laboratory Corporation of America® Holdings together with its subsidiaries (the Company) is a leading global life sciences company that is deeply integrated in guiding patient care, providing comprehensive clinical laboratory and end-to-end drug development services. The Company’s mission is to improve health and improve lives by delivering world-class diagnostic
solutions, bringing innovative medicines to patients faster and using technology to provide better care. The Company serves a broad range of customers, including managed care organizations (MCOs), biopharmaceutical companies, governmental agencies, physicians and other healthcare providers (e.g., physician assistants and nurse practitioners, generally referred to herein as physicians), hospitals and health systems, employers, patients and consumers, contract research organizations (CROs), and independent clinical laboratories.
The Company reports its business in two segments, LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). For further financial information
about these segments, see Note 16 Business Segment Information to the Condensed Consolidated Financial Statements. During the three months ended June 30, 2020, LCD and CDD contributed approximately i61% and i39%
respectively, of revenues to the Company. During the six months ended June 30, 2020, LCD and CDD contributed approximately i60% and i40%,
respectively, of revenues to the Company.
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries for which it exercises control. Long-term investments in affiliated companies in which the Company exercises significant influence, but which it does not control, are accounted for using the equity method. Investments in which the Company does not exercise significant influence (generally, when the
Company has an investment of less than i20.0% and no representation on the investee's board of directors) are accounted for at fair value or at cost minus impairment adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer for those investments that do not have readily determinable fair values. All significant inter-company transactions and accounts have been eliminated. The Company does not have any significant
variable interest entities or special purpose entities whose financial results are not included in the condensed consolidated financial statements.
The financial statements of the Company's operating foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average monthly exchange rates prevailing during the period. Resulting translation adjustments are included in “Accumulated other comprehensive income.”
The accompanying condensed consolidated financial statements of the
Company are unaudited. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows, and financial position have been made. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.
The condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States (U.S.) Securities and Exchange Commission (SEC) and do not contain certain information included in the Company’s 2019 Annual Report on Form 10-K (Annual Report). Therefore, these interim
statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report.
i
Recently Adopted Guidance
In June 2016, the FASB issued a new accounting standard intended to provide financial statement users with more decision-useful information about expected credit losses and other commitments to extend credit held by
the reporting entity. The standard replaces the incurred loss impairment methodology in current generally accepted accounting principles(GAAP) with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company recorded an opening retained earnings adjustment of $i7.0 with the adoption of this standard on January
1, 2020.
In August 2018, the FASB issued a new accounting standard to reduce, modify, and add to the disclosure requirements on fair value measurements. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred
LABORATORY
CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
to develop or obtain internal-use software. The Company adopted this standard effective January 1, 2020. The adoption of this standard did not have a material impact on the consolidated financial statements.
i
New
Accounting Pronouncements
In August 2018, the FASB issued a new accounting standard to reduce, modify, and add to the disclosure requirements on defined benefit pension and other postretirement plans. The standard is effective on January 1, 2021, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In December 2019, the FASB issued a new accounting standard to simplify accounting for income taxes and remove, modify, and add to the disclosure requirements of income taxes. The standard is effective January 1, 2021, with early adoption permitted. The
Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In January 2020, the FASB issued a new accounting standard to clarify the interaction of the accounting for equity securities and investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options. The standard is effective January 1, 2021. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In March 2020, the FASB issued a new accounting standard to provide optional expedients and exceptions if certain conditions
are met for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The expedients and exceptions in the standard are effective between March 12, 2020 and December 31, 2022. The Company did not elect to apply any of the expedients or exceptions for the period ended June 30, 2020 and is currently evaluating the impact this new standard will have on the consolidated financial statements.
In March 2020, COVID-19 was declared a pandemic. COVID-19 has had and continues to have an extensive impact on the global health and economic environment. Given the continued unpredictability of the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial results for 2020. While the Company's Base Business continues to be negatively impacted by the COVID-19 pandemic, the Company's outlook has improved across the enterprise. Base Business includes the Company's business operations except for molecular and serology COVID-19 testing (COVID-19 Testing).
In
LCD, demand for its Base Business continues to be below the Company's historical levels; however, the Company's Base Business has been steadily recovering from its trough in April, while at the same time COVID-19 Testing continues to grow and the Company continues to increase capacity for its COVID-19 molecular and antibody tests.
In CDD, while the pandemic is expected to continue to negatively impact its business, this impact is expected to subside throughout the year as CDD continues to work on projects supporting global vaccine and treatment development, with additional support from COVID-19 Testing.
As a result of the impact
of the COVID-19 pandemic, during the six months ended June 30, 2020, the Company recorded goodwill and other asset impairment charges of $i437.4: $i426.4
within CDD and $i11.0 within LCD, all of which were recorded in the three months ended March 31, 2020. See Note 6 Goodwill and Intangible Assets for discussion of goodwill and intangible asset impairment and Note 2 Revenue for the discussion of credit losses and additional price concessions. The Company also wrote-off or wrote down certain of the Company's investments
by $i25.4 due to the impact of COVID-19, $i7.1 included in Equity method earnings (loss), net (recorded in the three months ended March 31, 2020), and $i18.3
included in Other, net ($i13.1 recorded during the three months ended March 31, 2020 and $i5.2 recorded during the three months ended June 30, 2020).
In
April 2020, the Company received cash payments of approximately $i55.9 from the Public Health and Social Services Emergency Fund for provider relief (Relief Fund) that was appropriated by Congress to the Department of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Upon receiving and satisfying the terms and conditions associated with the distributed funds, the
Company accounted for the transaction by applying the guidance in ASC 450-30 Gain Contingencies, andrecorded these funds in Other, net non-operating income in the Consolidated Statement of Operations as of June 30, 2020.
The Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) plan contributions in the
LABORATORY
CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
United States (U.S.). In response to its improved business operations, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in the U.S.
i
Use
of Estimates
The extent to which the COVID-19 pandemic has and will impact the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of the COVID-19 pandemic, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the
unknown future impacts of COVID-19 as of June 30, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s implicit price concessions and credit losses, equity investments, notes receivable and the carrying value of goodwill and other long-lived assets. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in additional material impacts to the Company’s consolidated financial statements in future reporting periods.
2. iREVENUES
i
The
Company's revenues by segment payers/customer groups for the three and six months ended June 30, 2020, and 2019, were as follows:
CDD incurs sales commissions in the process of obtaining contracts with customers, which are recoverable through the service fees in the contract. Sales commissions that are payable upon contract award are recognized as assets and amortized over the expected contract term, along with related payroll tax expense. The amortization of commission expense is based on the weighted average contract duration for all commissionable awards in the respective business in which the commission
expense is paid, which approximates the period over which goods and services are transferred to the customer. The amortization period of sales commissions ranges from approximately i1 to i5 years, depending on the business. For businesses that enter into primarily
short-term contracts, the Company applies the practical expedient, which allows costs to obtain a contract to be expensed when incurred if the amortization period of the assets that would otherwise have been recognized is one year or less. Amortization of assets from sales commissions is included in selling, general, and administrative expense.
CDD incurs costs to fulfill contracts with customers, which are recoverable through the service fees in the contract. Contract
fulfillment costs include software implementation costs and setup costs for certain market access solutions. These costs are recognized as assets and amortized over the expected term of the contract to which the implementation relates, which is the period over which services are expected to be provided to the customer. This period typically ranges from i2 to i5
years. Amortization of deferred contract fulfillment costs is included in cost of goods sold.
LABORATORY
CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Amortization related to sales commission assets and associated payroll taxes for the three months ended June 30, 2020, and 2019, was $i5.5
and $i5.1, respectively and for the six month periods ended June 30, 2020, and 2019, was $i10.8
and $i9.5, respectively. Amortization related to deferred contract fulfillment costs for the three months ended June 30, 2020, and 2019, was $i2.3
and $i1.9, respectively, and was $i5.3 and $i3.8,
respectively, for the six month periods ended June 30, 2020, and 2019.
Receivables, Unbilled Services and Unearned Revenue
Unbilled services are comprised primarily of unbilled receivables, but also include contract assets. A contract asset is recorded when a right to payment has been earned for work performed, but billing and payment for that work is determined by certain contractual milestones, whereas unbilled receivables are billable upon the passage of time. While CDD attempts to negotiate terms that provide for billing and payment of services prior or in close proximity to the provision of services,
this is not always possible and there are fluctuations in the level of unbilled services and unearned revenue from period to period. The following table provides information about receivables, unbilled services, and unearned revenue (contract liabilities) from contracts with customers for CDD.
Receivables, which are included in accounts receivable
$
i730.5
$
i771.1
Unbilled
services
i539.7
i483.7
Unearned
revenue
i471.4
i449.2
/
Revenues
recognized during the period, that were included in the unearned revenue balance at the beginning of the period for the six months ended June 30, 2020, and June 30, 2019, were $i102.2 and $i161.6,
respectively.
Credit Loss Rollforward
With the adoption of current expected credit loss standard in 2020, the Company estimates future expected losses on accounts receivable, unbilled services and notes receivable over the remaining collection period of the instrument. iThe rollforward for the allowance for credit losses
for the six months ended June 30, 2020, is as follows:
Current
expected credit losses opening balance impact on retained earnings
i1.9
i0.2
i5.0
i7.1
Plus,
credit loss expense
i9.1
i1.9
i5.0
i16.0
Less,
write offs
i0.9
i0.1
i—
i1.0
Ending
allowance for credit losses
$
i29.1
$
i4.3
$
i10.0
$
i43.4
The
note receivable is the floating note receivable due 2022 from the Envigo transaction which is recorded in Other assets, net.
During the six months ended June 30, 2020, the Company also recorded $i23.3 of additional implicit price concessions as a result of anticipated collection challenges from the economic decline.
Long-term
contracts at the Company consist primarily of fully managed clinical studies within CDD. The amount of existing performance obligations under such long-term contracts unsatisfied as of June 30, 2020, was $i4,498.8. The
Company expects to recognize approximately i31% of the remaining performance obligations as of June 30, 2020, as revenue over the next 12 months, and the balance thereafter. The Company's long-term contracts generally range from i1
to i8 years.
Within CDD, revenues of $i13.7 and $i48.4
were recognized during the six months ended June 30, 2020, and 2019, respectively, from performance obligations that were satisfied in previous periods. This revenue comes from adjustments related to changes in scope and estimates in full service clinical studies.
3. iBUSINESS
ACQUISITIONS AND DISPOSITIONS
On June 3, 2019, CDD acquired Envigo's nonclinical contract research services business, expanding CDD's global nonclinical drug development capabilities with additional locations and resources. Additionally, the Company divested the Covance Research Products (CRP) business, which was a part of CDD, to Envigo. As part of this sale, CDD entered into a multi-year, renewable supply agreement with Envigo. The Company paid cash consideration of $i601.0,
received a floating rate
Property,
plant and equipment (including ROU operating lease assets)
i99.1
i29.3
i128.4
Deferred
income taxes
i25.5
(i0.3)
i25.2
Goodwill
i432.2
(i55.6)
i376.6
Customer
relationships
i125.8
i15.0
i140.8
Trade
name and trademarks
i0.6
i—
i0.6
Other
assets
i9.9
i—
i9.9
Total
assets acquired
i759.2
(i13.4)
i745.8
Accounts
payable
i15.4
(i0.2)
i15.2
Accrued
expenses and other
i11.6
(i1.2)
i10.4
Unearned
revenue
i49.9
i—
i49.9
Operating
lease liabilities
i15.0
(i15.0)
i—
Other
liabilities
i66.3
i3
i69.3
Total
liabilities acquired
i158.2
(i13.4)
i144.8
Net
Envigo assets acquired
i601.0
$
i—
$
i601.0
Floating
rate secured note receivable due 2022
i110.0
Total
$
i711.0
/
The
final purchase consideration for Envigo has been allocated to the estimated fair market value of the net assets acquired, including approximately $i141.4 in identifiable intangible assets and a residual amount of non-tax-deductible goodwill of approximately $i376.6.
The amortization period for intangible assets acquired is i11 years for customer relationships.
During the six months ended June 30, 2020, the Company recorded a $i5.0
charge for the estimated credit loss related to the CDD floating rate secured note receivable due 2022 from Envigo.
During the six months ended June 30, 2020, the Company acquired a business and related assets for approximately $i17.3 in cash (including contingent consideration of $i6.0
and net of cash acquired). The purchase consideration for this acquisition has been allocated to the estimated fair market value of the net assets acquired, including approximately $i9.2 in identifiable intangible assets and a residual amount of non-tax deductible goodwill of approximately $i8.1.
This acquisition was made primarily to expand its specialty testing.
During the six months ended June 30, 2019, the Company acquired various businesses and related assets for approximately $i117.7 in cash (net of cash acquired). The purchase consideration for all acquisitions in the six months ended June 30, 2019, has been allocated
to the estimated fair market value of the net assets acquired, including approximately $i90.7 in identifiable intangible assets and a residual amount of non-tax deductible goodwill for approximately $i53.8.
The amortization periods for intangible assets acquired from these businesses range from i11 to i15 years for customer relationships. These acquisitions
were made primarily to extend the Company's geographic reach in important market areas, enhance the Company's scientific differentiation and to expand the breadth and scope of the Company's CRO services. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. The goodwill reflects the Company's expectations to utilize the acquired businesses' workforce and established relationships and the benefits of being able to leverage operational efficiencies with favorable growth opportunities in these markets.
Net
earnings attributable to Laboratory Corporation of America Holdings
$
i231.8
$
i194.3
$
(i84.9)
$
i382.6
/
4. iEARNINGS
(LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings attributable to Laboratory Corporation of America Holdings by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net earnings including the impact of dilutive adjustments by the weighted average number of common shares outstanding plus potentially dilutive shares, as if they had been issued at the earlier of the date of issuance or the beginning of the period presented. Potentially dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, restricted stock units, and performance share awards.
i
The
following represents a reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share:
Dilutive
effect of employee stock options and awards
—
i0.4
—
i0.7
—
i—
—
i0.7
Net
earnings (loss) including impact of dilutive adjustments (a)
$
i231.6
i97.7
$
i2.37
$
i190.4
i98.8
$
i1.93
$
(i85.6)
i97.2
$
(i0.88)
$
i376.0
i99.1
$
i3.79
/
(a)Due to the Company's net loss for the six months ended June 30, 2020, diluted earnings (loss) per share is the same as basic earnings (loss) per share.
Diluted earnings per share represent the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. These potential shares include dilutive stock options and unissued restricted stock awards. iThe
following table summarizes the potential common shares not included in the computation of diluted earnings per share because their impact would have been antidilutive:
During the six months ended June 30, 2020, the Company recorded net restructuring and other charges of $i31.8: $i11.8
within LCD and $i20.0 within CDD. The charges were comprised of $i10.5 related to severance and other personnel costs, $i8.0
for a CDD lab facility and equipment impairments, and $i20.0 in facility closures, impairment of operating lease right-of use assets and general integration activities. The charges were offset by the reversal of previously established liability of $i1.0
and $i5.7 in unused severance costs and facility-related costs, respectively.
During the six months ended June 30, 2019, the Company recorded net restructuring and other charges of $i34.2:
$i16.1 within LCD and $i18.1 within CDD. The charges were comprised of $i20.3
related to severance and other personnel costs and $i13.5 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were increased by the adjustment of previously established reserves of $i0.4
in severance reserves.
The
Company assesses goodwill and indefinite-lived intangibles for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Based upon the revised forecasted revenues and operating income following the declaration of the COVID-19 global pandemic, management concluded there was a triggering event and updated its annual 2019 goodwill impairment testing as of March 31, 2020, for its CDD reporting units, including one where the 2019 fair value exceeded carrying value by approximately i10%,
and its LCD reporting units. Based on the quantitative impairment assessment, the Company concluded that the fair value was less than carrying value for two of its reporting units and recorded a goodwill impairment of $i418.7 for the CDD segment and $i3.7
for LCD segment.
The Company utilized a combination of income and market approaches to determine the fair value of the CDD reporting units. Based upon the results of the quantitative assessments, the Company concluded that the fair value was less than its carrying value for one of the CDD reporting units. A non-cash charge of $i418.7 was recognized and included in goodwill and other asset impairments
on the Consolidated Statement of Operations to reduce the carrying amount of goodwill for the CDD reporting unit to fair value. Following the impairment charge, the carrying value of goodwill for this reporting unit is $i1,560.5. The other CDD reporting unit evaluated indicated a fair value that exceeded carrying value by less than i10%.
Management notes that a i1% change in the discount rate in the March 31, 2020, analysis would reduce the headroom to approximately i2.0%.
Goodwill for this reporting unit as of June 30, 2020 is $i628.5.
The Company utilized the income approach to determine the fair value of the LCD reporting units. Based upon the results of the quantitative assessments, the Company concluded the fair value of one
of the reporting units was less than its carrying value. A non-cash charge of $i3.7 was recognized and included in goodwill and other asset impairments on the Consolidated Statement of Operations to reduce the carrying amount of goodwill for this LCD reporting unit to zero. The other LCD reporting unit evaluated indicated a fair value that exceeded carrying value by less than i10.0%.
Management notes that a i1% change in the discount rate in the March 31, 2020, analysis would cause the fair value to be less than carrying value and would result in an impairment of approximately $i40.0.
Goodwill and indefinite-lived intangibles of Canadian licenses for this reporting unit as of June 30, 2020 were $i84.4 and $i459.7,
respectively.
Although the Company believes that the current assumptions and estimates used in its goodwill analysis are reasonable, supportable, and appropriate, continued efforts to maintain or improve the performance of this business could be impacted by unfavorable or unforeseen changes which could impact the existing assumptions used in the impairment analysis. Various
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
factors could reasonably be expected to unfavorably impact existing assumptions: primarily delays in new customer bookings and the related delay in revenue from new customers, increases in customer termination activity or increases in operating costs. In addition, given the ongoing and rapidly changing nature of the COVID-19 pandemic, there is significant uncertainty regarding the duration and severity of the pandemic as well as any future government restrictions, which may unfavorably impact existing assumptions. Accordingly, there can be no assurance that the estimates and assumptions made for the purposes of the goodwill impairment analysis will prove to be accurate predictions of future performance.
The
Company will continue to monitor the financial performance of and assumptions for its reporting units. Management's impairment analysis utilizes significant judgments and assumptions related to the market comparable method analysis, such as selected market multiples, and those related to cash flow projections, such as revenue and terminal growth rates, projected operating margin, and the discount rate. A significant increase in the discount rate, decrease in the revenue and terminal growth rates, decreased operating margin, or substantial reductions in end markets and volume assumptions, could have a negative impact on the estimated fair value of the reporting units. A future impairment charge for goodwill or intangible assets could have a material effect on the Company's consolidated financial position and results of operations.
i
The
components of identifiable intangible assets are as follows:
The
Company recorded a non-cash charge of $i2.7 for the impairment of a CDD tradename during the six months ended June 30, 2020.
Amortization of intangible assets for the three months ended June 30, 2020 and 2019, was $i60.1
and $i60.2, respectively and for the six months ended June 30, 2020 and 2019 was $i122.4 and $i117.3,
respectively. Amortization expense for the net carrying amount of intangible assets is estimated to be $i118.2 for the remainder of fiscal 2020, $i235.6
in fiscal 2021, $i229.6 in fiscal 2022, $i224.2 in fiscal 2023, $i219.2
in fiscal 2024, and $i2,311.1 thereafter.
7. iDEBT
i
Short-term borrowings and the current portion of long-term debt at June 30, 2020, and December 31, 2019, consisted of the following:
On June 3, 2019, the Company entered into a new $i850.0 2019 term loan facility that matures on June 3, 2021. The 2019 term loan facility accrues interest at a per annum rate equal to,at the Company's election, either a LIBOR rate plus a margin ranging from i0.55%
to 1.175%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from i0.0% to 0.175%. The 2019 term loan balance at June 30, 2020 and December 31, 2019, was $i375.0
and $i375.0, respectively. As of June 30, 2020, the effective interest rate on the 2019 term loan was i0.98%.
The
Company also maintains a senior revolving credit facility consisting of a five-year facility in the principal amount of up to $i1,000.0, with the option of increasing the facility by up to an additional $i350.0,
subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. The revolving credit facility also provides for a subfacility of up to $i100.0 for swing line borrowings and a subfacility of up to $i150.0
for issuances of letters of credit. The Company is required to pay a facility fee on the aggregate commitments under the revolving credit facility, at a per annum rate ranging from i0.00% to 0.25%. The revolving credit facility is permitted to be used for general corporate purposes, including working capital, capital expenditures, funding of share repurchases and certain other payments, acquisitions and other investments. There were no balances outstanding on the
Company's current revolving credit facility at June 30, 2020, and December 31, 2019. As of June 30, 2020, the effective interest rate on the revolving credit facility was i1.14%. The credit facility expires on September 15, 2022.
Under the term loan facility and the revolving credit facility, the
Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers, and the Company is required to maintain certain leverage ratios. In May 2020, the Company entered into amendments to its term loan facility and its revolving credit facility, in each case to, among other things, increase the maximum leverage ratio covenant to i5.0x
debt to last twelve months EBITDA for each of the three periods ended June 30, September 30, and December 31, 2020, i4.5x for period ended March 31, 2021 and then reverts back to i4.0x.
The Company was in compliance with all covenants in the term loan facility and the revolving credit facility at June 30, 2020 and expects that it will remain in compliance with its existing debt covenants for the next twelve months.
The Company's availability of $i997.0 at June 30,
2020, under its revolving credit facility reflects a reduction equivalent to the amount of the Company's outstanding letters of credit.
Liquidity
During the fourth quarter of 2020, $i412.2 of the Company's senior notes mature. The Company has elected
to redeem these notes in August 2020 at par using from available cash on hand and borrowings under its revolving credit facility.
At June 30, 2020, the Company had $i557.0 of cash and $i997.0
of available borrowings under its revolving credit facility, which does not mature until 2022, and the Company was in compliance with all of its debt covenants. In May 2020, in order to obtain increased financial covenant flexibility, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to i5.0x
debt to last twelve months EBITDA for the three month periods ending June 30, September 30 and December 31, 2020 and i4.5x for the period ended March 31, 2021. The amendments also provide that during any period in which the Company's leverage ratio exceeds i4.5x
debt to last twelve months
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
EBITDA (i) the Company will be prohibited from consummating share repurchases, subject to limited exceptions, (ii) borrowings under the revolving credit facility
will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of i1.25% or a base rate plus a margin of i0.25%,
(iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be i0.25% per annum, and (iv) borrowings under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of i1.175%
or a base rate plus a margin of i0.175%.
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and the effects such impacts will have on the Company's liquidity.The significance of the impact on the Company’s business
is not yet certain and depends on numerous evolving factors that the Company may not be able to accurately predict.
8. iPREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY
The Company
is authorized to issue up to i265.0 shares of common stock, par value $i0.10 per share. The Company is authorized to issue up
to i30.0 shares of preferred stock, par value $i0.10 per share. There were ino
preferred shares outstanding as of June 30, 2020 and December 31, 2019.
i
The changes in common shares issued are summarized below:
At the end of 2019, the Company had outstanding authorization from the board of directors to purchase $i900.0 of Company common stock. During three months ended March 31, 2020, the Company purchased i0.6 shares
of its common stock. When the Company repurchases shares, the amount paid to repurchase the shares in excess of the par or stated value is allocated to additional paid-in-capital unless subject to limitation or the balance in additional paid-in-capital is exhausted. Remaining amounts are recognized as a reduction in retained earnings. As of June 30, 2020, the Company had outstanding authorization from the board of directors to purchase up to $i800.0
of the Company's common stock. The repurchase authorization has no expiration date; however, the Company temporarily suspended stock repurchases beginning in March 2020 due to the impact of the COVID-19 pandemic.
Accumulated Other Comprehensive Earnings
iThe
components of accumulated other comprehensive earnings (loss) are as follows:
The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit
that it believes is greater than i50% likely to be realized.
The gross unrecognized income tax benefits were $i40.4 and $i31.7
at June 30, 2020 and December 31, 2019, respectively. It is anticipated that the amount of the unrecognized income tax benefits will change within the next 12 months; however, these changes are not expected to have a significant impact on the results of operations, cash flows or the financial position of the Company.
As of June 30, 2020 and December 31, 2019, $i40.4
and $i31.7, respectively, are the approximate amounts of gross unrecognized income tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Company recognizes interest and penalties related to unrecognized income tax benefits in income tax expense. Accrued interest and penalties related to uncertain tax positions totaled $i8.2 and $i5.5
as of June 30, 2020 and December 31, 2019, respectively.
The Company has substantially concluded all U.S. federal income tax matters for years through 2015. Substantially all material state and local and foreign income tax matters have been concluded through 2014 and 2010, respectively.
The Company has various state and foreign income tax examinations ongoing throughout the year. The Company believes adequate provisions have been recorded related to all open tax years.
10.
iCOMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various claims and legal actions, including arbitrations, class actions, and other litigation (including those described in more detail below), arising in the ordinary course of business. Some of these actions involve claims that are substantial in amount. These matters include, but are not limited to, intellectual property disputes; commercial
and contract disputes; professional liability claims; employee-related matters; and inquiries, including subpoenas and other civil investigative demands, from governmental agencies, Medicare or Medicaid payers and MCOs reviewing billing practices or requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or third parties. The Company receives civil investigative demands or other inquiries from various governmental bodies in the ordinary course of its business. Such inquiries can relate to the Company or other parties, including physicians and other health care providers. The
Company works cooperatively to respond to appropriate requests for information.
The Company also is named from time to time in suits brought under the qui tam provisions of the False Claims Act and comparable state laws. These suits typically allege that the Company has made false statements and/or certifications in connection with claims for payment from U.S. federal or state healthcare programs. The suits may remain under seal (hence, unknown to the Company) for some time while the government decides whether to intervene on behalf of the qui tam plaintiff. Such claims are an
inevitable part of doing business in the healthcare field today.
The Company believes that it is in compliance in all material respects with all statutes, regulations, and other requirements applicable to its commercial laboratory operations and drug development support services. The healthcare diagnostics and drug development industries are, however, subject to extensive regulation, and the courts have not interpreted many of the applicable statutes and regulations. Therefore, the applicable statutes and regulations could be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these statutes and regulations include significant civil and criminal
penalties, fines, the loss of various licenses, certificates and authorizations, additional liabilities from third-party claims, and/or exclusion from participation in government programs.
Many of the current claims and legal actions against the Company are in preliminary stages, and many of these cases seek an indeterminate amount of damages. The Company records an aggregate legal reserve, which is determined using calculations based on historical loss rates and assessment of trends experienced in settlements and defense costs. In accordance with FASB Accounting Standards Codification Topic 450 “Contingencies,”the Company establishes reserves for judicial, regulatory,
and arbitration matters outside the aggregate legal reserve if and when those matters present loss contingencies that are both probable and estimable and would exceed the aggregate legal reserve. When loss contingencies are not both probable and estimable, the Company does not establish separate reserves.
The Company is unable to estimate a range of reasonably probable loss for the proceedings described in more detail below in which damages either have not been specified or, in the Company's judgment, are unsupported and/or exaggerated and (i) the proceedings are in early stages; (ii) there is uncertainty as to the outcome of pending appeals or motions; (iii) there are significant
factual issues to be resolved; and/or (iv) there are novel legal issues to be presented. For these proceedings, however, the Company does not believe, based on currently available information, that the outcomes will have a material adverse effect on the Company's financial condition, though the outcomes could be material to the Company's operating results for any particular period, depending, in part, upon the operating results for such period.
As previously reported, the Company responded to an October 2007 subpoena from the U.S. Department of Health & Human Services Office of Inspector
General's regional office in New York. On August 17, 2011, the U.S. District Court for the Southern District of New York unsealed a False Claims Act lawsuit, United States of America ex rel. NPT Associates v. Laboratory Corporation of America Holdings, which alleges that the Company offered UnitedHealthcare kickbacks in the form of discounts in return for Medicare business. The Plaintiff's Third Amended Complaint further alleges that the Company's billing practices violated the False Claims Acts of 14 states and the District of Columbia. The lawsuit seeks actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses.
LABORATORY
CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Neither the U.S. government nor any state government has intervened in the lawsuit. The Company's Motion to Dismiss was granted in October 2014 and Plaintiff was granted the right to replead. On January 11, 2016, Plaintiff filed a motion requesting leave to file an amended complaint under seal and to vacate the briefing schedule for the Company's Motion to Dismiss,
while the government reviews the amended complaint. The Court granted the motion and vacated the briefing dates. Plaintiff then filed the Amended Complaint under seal. The Company will vigorously defend the lawsuit.
In addition, the Company has received various other subpoenas since 2007 related to Medicaid billing. In October 2009, the Company received a subpoena from the State of Michigan Department of Attorney General seeking documents related to its billing to Michigan Medicaid. The Company cooperated with this request. In October 2013, the
Company received a Civil Investigative Demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The Company cooperated with this request. On October 5, 2018, the Company received a second Civil Investigative Demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The Company is cooperating with this request.
On August 31, 2015, the Company was served with
a putative class action lawsuit, Patty Davis v. Laboratory Corporation of America, et al., filed in the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The complaint alleges that the Company violated the Florida Consumer Collection Practices Act by billing patients who were collecting benefits under the Workers' Compensation Statutes. The lawsuit seeks injunctive relief and actual and statutory damages, as well as recovery of attorney's fees and legal expenses. In April 2017, the Circuit Court granted the Company’s Motion for Judgment on the Pleadings. The Plaintiff appealed the Circuit Court’s ruling to the Florida Second District Court of Appeal. On October 16, 2019, the
Court of Appeal reversed the Circuit Court’s dismissal, but certified a controlling issue of Florida law to the Florida Supreme Court. On February 17, 2020, the Florida Supreme Court accepted jurisdiction of the lawsuit. The Company will vigorously defend the lawsuit.
In December 2014, the Company received a Civil Investigative Demand issued pursuant to the U.S. False Claims Act from the U.S. Attorney's Office for South Carolina, which requested information regarding alleged remuneration and services provided by the Company to physicians who also received draw and processing/handling fees from competitor laboratories Health
Diagnostic Laboratory, Inc. (HDL) and Singulex, Inc. (Singulex). The Company cooperated with the request. On April 4, 2018, the U.S. District Court for the District of South Carolina, Beaufort Division, unsealed a False Claims Act lawsuit, United States of America ex rel. Scarlett Lutz, et al. v. Laboratory Corporation of America Holdings, which alleges that the Company's financial relationships with referring physicians violate federal and state anti-kickback statutes. The Plaintiffs' Fourth Amended Complaint further alleges that the Company conspired with HDL and Singulex in violation of the Federal False Claims Act and
the California and Illinois insurance fraud prevention acts by facilitating HDL's and Singulex's offers of illegal inducements to physicians and the referral of patients to HDL and Singulex for laboratory testing. The lawsuit seeks actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. Neither the U.S. government nor any state government has intervened in the lawsuit. The Company filed a Motion to Dismiss seeking the dismissal of the claims asserted under the California and Illinois insurance fraud prevention statutes, the conspiracy claim, the reverse False Claims Act claim, and all claims based on the theory that the Company performed medically unnecessary testing. On January
16, 2019, the Court entered an order granting in part and denying in part the Motion to Dismiss. The Court dismissed the Plaintiffs' claims based on the theory that the Company performed medically unnecessary testing, the claims asserted under the California and Illinois insurance fraud prevention statutes, and the reverse False Claims Act claim. The Court denied the Motion to Dismiss as to the conspiracy claim. The Company will vigorously defend the lawsuit.
Prior to the Company's acquisition of Sequenom, Inc. (Sequenom) between August 15, 2016 and August 24, 2016, six putative
class-action lawsuits were filed on behalf of purported Sequenom stockholders (captioned Malkoff v. Sequenom, Inc., et al., No. 16-cv-02054- JAH-BLM, Gupta v. Sequenom, Inc., et al., No. 16-cv-02084-JAH-KSC, Fruchter v. Sequenom, Inc., et al., No. 16-cv-02101- WQH-KSC, Asiatrade Development Ltd. v. Sequenom, Inc., et al., No. 16-cv-02113-AJB-JMA, Nunes v. Sequenom, Inc., et al., No. 16-cv-02128-AJB-MDD, and Cusumano v. Sequenom, Inc., et al., No. 16-cv-02134-LAB-JMA) in the U.S. District Court for the Southern District of California challenging the acquisition transaction. The complaints asserted claims against Sequenom and members of its board of directors (the Individual Defendants). The
Nunes action also named the Company and Savoy Acquisition Corp. (Savoy), a wholly owned subsidiary of the Company, as defendants. The complaints alleged that the defendants violated Sections 14(e), 14(d)(4) and 20 of the Securities Exchange Act of 1934 by failing to disclose certain allegedly material information. In addition, the complaints in the Malkoff action, the Asiatrade action, and the Cusumano action alleged that the Individual Defendants breached their fiduciary duties to Sequenom shareholders. The actions sought, among other things, injunctive relief enjoining the merger. On August
30, 2016, the parties entered into a Memorandum of Understanding (MOU) in each of the above-referenced actions. On September 6, 2016, the Court entered an order consolidating for all pre-trial purposes the six individual actions described above under the caption In re Sequenom, Inc.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares
in millions, except per share data)
Shareholder Litig., Lead Case No. 16-cv-02054-JAH-BLM, and designating the complaint from the Malkoff action as the operative complaint for the consolidated action. On November 11, 2016, two competing motions were filed by two separate stockholders (James Reilly and Shikha Gupta) seeking appointment as lead plaintiff under the terms of the Private Securities Litigation Reform Act of 1995. On June 7, 2017, the Court entered an order declaring Mr. Reilly as the lead plaintiff and approving Mr. Reilly's selection of lead counsel. The parties agree that the MOU has been terminated. The Plaintiffs filed a Consolidated Amended Class Action Complaint on July 24, 2017, and the
Defendants filed a Motion to Dismiss, which remains pending. On March 13, 2019, the Court stayed the action in its entirety pending the U.S. Supreme Court's anticipated decision in Emulex Corp. v. Varjabedian. On April 23, 2019, however, the U.S. Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted. The Company will vigorously defend the lawsuit.
On March 10, 2017, the Company was served with a putative class action lawsuit, Victoria Bouffard, et al. v. Laboratory Corporation
of America Holdings, filed in the U.S. District Court for the Middle District of North Carolina. The complaint alleges that the Company's patient list prices unlawfully exceed the rates negotiated for the same services with private and public health insurers in violation of various state consumer protection laws. The lawsuit also alleges breach of implied contract or quasi-contract, unjust enrichment, and fraud. The lawsuit seeks statutory, exemplary, and punitive damages, injunctive relief, and recovery of attorney's fees and costs. In May 2017, the Company filed a Motion to Dismiss Plaintiffs' Complaint
and Strike Class Allegations; the Motion to Dismiss was granted in March 2018 without prejudice. On October 10, 2017, a second putative class action lawsuit, Sheryl Anderson, et al. v. Laboratory Corporation of America Holdings, was filed in the U.S. District Court for the Middle District of North Carolina. The complaint contained similar allegations and sought similar relief to the Bouffard complaint, and added additional counts regarding state consumer protection laws. On August 10, 2018, the Plaintiffs filed an Amended Complaint, which consolidated the Bouffard and Anderson actions. On September 10, 2018, the
Company filed a Motion to Dismiss Plaintiffs' Amended Complaint and Strike Class Allegations. On August 16, 2019, the court entered an order granting in part and denying in part the Motion to Dismiss the Amended Complaint, and denying the Motion to Strike the Class Allegations. The Company will vigorously defend the lawsuit.
On April 1, 2019, Covance Research Products was served with a Grand Jury Subpoena issued by the Department of Justice (DOJ) in Miami, Florida requiring the production of documents related to the importation into the United States of live non-human primate shipments originating from or transiting through China, Cambodia, and/or Vietnam from April 1, 2014 through March
28, 2019. The Company is cooperating with the DOJ.
On May 14, 2019, Retrieval-Masters Creditors Bureau, Inc. d/b/a American Medical Collection Agency (AMCA), an external collection agency, notified the Company about a security incident AMCA experienced that may have involved certain personal information about some of the Company’s patients (the AMCA Incident). The Company referred patient balances to AMCA only when direct collection efforts were unsuccessful. The
Company’s systems were not impacted by the AMCA Incident. Upon learning of the AMCA Incident, the Company promptly stopped sending new collection requests to AMCA and stopped AMCA from continuing to work on any pending collection requests from the Company. AMCA informed the Company that it appeared that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019, and that AMCA could not rule out the possibility that personal information on AMCA’s system was at risk during that time period. Information on AMCA’s affected system from the
Company may have included name, address, and balance information for the patient and person responsible for payment, along with the patient’s phone number, date of birth, referring physician, and date of service. The Company was later informed by AMCA that health insurance information may have been included for some individuals, and because some insurance carriers utilize the Social Security Number as a subscriber identification number, the Social Security Number for some individuals may also have been affected. No ordered tests, laboratory test results, or diagnostic information from the Company were in the AMCA affected system. The Company notified individuals for
whom it had a valid mailing address. For the individuals whose Social Security Number was affected, the notice included an offer to enroll in credit monitoring and identity protection services that will be provided free of charge for 24 months.
Twenty-three putative class action lawsuits were filed against the Company related to the AMCA Incident in various U.S. District Courts. Numerous similar lawsuits have been filed against other health care providers who used AMCA. These lawsuits have been consolidated into a multidistrict litigation in the District of New Jersey. On November 15, 2019, the Plaintiffs filed a Consolidated Class Action Complaint in the U.S. District Court of New Jersey. On January 22, 2020, the
Company filed Motions to Dismiss all claims. The consolidated Complaint generally alleges that the Company did not adequately protect its patients’ data and failed to timely notify those patients of the AMCA Incident. The Complaint asserts various causes of action, including but not limited to negligence, breach of implied contract, unjust enrichment, and the violation of state data protection statutes. The Complaint seeks damages on behalf of a class of all affected Company customers. The Company will vigorously defend the multi-district litigation.
LABORATORY
CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Company was served with a shareholder derivative lawsuit, Raymond Eugenio, Derivatively on Behalf of Nominal Defendant, Laboratory Corporation of America Holdings v. Lance Berberian, et al., filed in the Court of Chancery of the State of Delaware on April 23, 2020. The complaint asserts derivative claims on the Company’s
behalf against the Company’s board of directors and certain executive officers. The complaint generally alleges that the defendants failed to ensure that the Company utilized proper cybersecurity safeguards and failed to implement a sufficient response to data security incidents, including the AMCA Incident. The complaint asserts derivative claims for breach of fiduciary duty and seeks relief including damages, certain disclosures, and certain changes to the Company’s internal governance practices. On June 2, 2020, the Company filed a Motion to Stay the lawsuit due to its overlap with
the multi-district litigation referenced above. On July 2, 2020, the Company filed a Motion to Dismiss. On July 14, 2020, the court entered an order staying the lawsuit pending the resolution of the multi-district litigation. The lawsuit will be vigorously defended.
Certain governmental entities have requested information from the Company related to the AMCA Incident. The Company received a request for information from the Office for Civil Rights (OCR) of the Department of Health and Human Services. On April 28, 2020, OCR notified
the Company of the closure of its inquiry. The Company has also received requests from a multi-state group of state Attorneys General and is cooperating with these requests for information.
Three putative class action lawsuits related to California wage and hour laws have been served on the Company. On September 21, 2018, the Company was served with a putative class action lawsuit, Alma Haro v. Laboratory Corporation of America, et al., filed in the Superior Court of California, County of Los Angeles.
On June 10, 2019, the Company was served with a putative class action lawsuit, Ignacio v. Laboratory Corporation of America, filed in Superior Court of California, County of Los Angeles. On July 1, 2019, the Company was served with a putative class action lawsuit, Jan v. Laboratory Corporation of America, filed in the Superior Court of California, County of Sacramento. All three cases were subsequently removed to the U.S. District Court for the Central District of California, and then consolidated for all pre-trial proceedings. In the lawsuits, Plaintiffs allege that employees were not properly paid overtime compensation,
minimum wages, meal and rest break premiums, did not receive compliant wage statements, and were not properly paid wages upon termination of employment. The Plaintiffs assert these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuits seek monetary damages, civil penalties, and recovery of attorney's fees and costs. The parties reached a tentative settlement resolving the claims for all three cases. The settlement is subject to Court approval. If the settlement is not approved, the Company will vigorously defend the lawsuits.
On July 30, 2019, the Company was served with a class action lawsuit, Mitchell
v. Covance, Inc. et al., filed in the U.S. District Court for the Eastern District of Pennsylvania. Plaintiff alleges that certain individuals employed by Covance Inc. and Chiltern International Inc. were misclassified as exempt employees under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act and were thereby not properly paid overtime compensation. The lawsuit seeks monetary damages, liquidated damages, and recovery of attorneys’ fees and costs. On February 3, 2020, the Court denied without prejudice the Plaintiff's motion to conditionally certify a putative class action. The Company will vigorously defend the lawsuit.
On January 31, 2020, the
Company was served with a putative class action lawsuit, Luke Davis and Julian Vargas, et al. v. Laboratory Corporation of America Holdings, filed in the U.S. District Court for the Central District of California. The lawsuit alleges that visually impaired patients are unable to use the Company's touchscreen kiosks at Company patient service centers in violation of the Americans with Disabilities Act and similar California statutes. The lawsuit seeks statutory damages, injunctive relief, and attorney's fees and costs. On March 20, 2020, the Company filed a Motion to Dismiss Plaintiffs' Complaint and to Strike Class Allegations. The
Company will vigorously defend the lawsuit.
On May 14, 2020, the Company was served with a putative class action lawsuit, Jose Bermejo v. Laboratory Corporation of America filed in the Superior Court of California, County of Los Angeles Central District, alleging that certain non-exempt California-based employees were not properly compensated for driving time or properly paid wages upon termination of employment. The Plaintiff asserts these actions violate various California Labor Code provisions and Section 17200 of the Business and Professional Code. The lawsuit seeks monetary damages, civil penalties, and recovery of attorney’s fees and costs. On June 15, 2020, the lawsuit was removed to the
U.S. District Court for the Central District of California. On June 16, 2020, the Company was served with a Private Attorney General Act lawsuit by the same plaintiff in Jose Bermejo v. Laboratory Corporation of America, filed in the Superior Court of California, County of Los Angeles Central District, alleging that certain Company practices violated California Labor Code penalty provisions related to unpaid and minimum wages, unpaid overtime, unpaid mean and rest break premiums, untimely payment of wages following separation of employment, failure to maintain accurate pay records, and non-reimbursement of business expenses. The second lawsuit seeks to recover civil penalties and recovery of attorney's fees and costs. The
Company will vigorously defend both lawsuits.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Under the Company's present insurance programs, coverage is obtained for catastrophic exposure as well as those risks required to be insured
by law or contract. The Company is responsible for the uninsured portion of losses related primarily to general, professional and vehicle liability, certain medical costs and workers' compensation. The self-insured retentions are on a per-occurrence basis without any aggregate annual limit. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregated liability of claims incurred.
11. iPENSION
AND POSTRETIREMENT PLANS
Retirement Plans
All employees eligible for the LCD defined-contribution retirement plan (LCD 401(k) Plan) receive a minimum i3% non-elective contribution (NEC) concurrent with each payroll period. Employees are not required to make a contribution to the LCD 401(k) Plan to receive the NEC. The NEC is non-forfeitable and vests immediately. The LCD 401(k) Plan also permits discretionary contributions by the Company
of i1% to i3% of pay for eligible employees based on service. The Company incurred expense of
$i13.9 and $i16.2 for the LCD 401(k) Plan during the three months ended June 30, 2020 and 2019 respectively,
and $i27.4 and $i32.2 during the six months ended June 30, 2020 and 2019, respectively.
All
of the CDD U.S. employees are eligible to participate in the CDD 401(k) Plan, which is available on a voluntary basis and features a maximum i4.5% Company match, based upon a percentage of the employee’s contributions. The Company incurred expense of $i20.3
and $i17.9 for the Covance 401(k) plan during the three months ended June 30, 2020, and 2019, respectively, and $i43.8
and $i37.8 during the six months ended June 30, 2020 and 2019, respectively.
The Company also maintains several other small 401K plans associated with companies acquired over the last several years.
Pension Plans
The
Company has a defined-benefit retirement plan (Company Plan) and a nonqualified supplemental retirement plan (PEP). Both plans have been closed to new participants since December 31, 2009. Employees participating in the Company Plan and PEP no longer earn service-based credits, but continue to earn investment credits.
The Company Plan covers substantially all LCD employees employed prior to December 31, 2009. The benefits to be paid under the Company Plan are based on years of credited service through December 31, 2009, interest
credits and average compensation. The Company's policy is to fund the Company Plan with at least the minimum amount required by applicable regulations.
The PEP covers a portion of the Company's senior management group. Prior to 2010, the PEP provided for the payment of the difference, if any, between the amount of any maximum limitation on annual benefit payments under the Employee Retirement Income Security Act of 1974 and the annual benefit that would be payable under the Company Plan but for such limitation. Effective January 1, 2010, employees
participating in the PEP no longer earn service-based credits. The PEP is an unfunded plan.
i
The effect on operations for the Company Plan and the PEP is summarized as follows:
The
service cost component of net periodic pension cost and net periodic post-retirement benefit cost is included in operating expenses with other employee compensation costs. The other components of net benefit cost, including amortization or prior service cost/credit and settlement and curtailment effects are included in other, net non-operating expenses. During the six months ended June 30, 2020, the Company made no contributions to the Company Plan. The related net pension obligation for the Company Plan and PEP was $i92.7
and $i93.4 as of June 30, 2020 and December 31, 2019, respectively.
As a result of the Covance acquisition, the Company sponsors two defined benefit pension plans for the benefit of its employees at two U.K. subsidiaries (U.K. Plans) and one defined
benefit pension plan for the benefit of its employees at a German subsidiary (German Plan), all of which are legacy plans of previously acquired companies. The U.K. Plans were closed to future accrual as of December 31, 2019. Benefit amounts for all three plans are based upon years of service and compensation; however, the U.K. Plans were based on service and compensation through December 31, 2019. The German
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Plan is unfunded while the U.K. Plans are funded. The Company’s funding policy has been to contribute annually a fixed percentage of the eligible employee's salary, and additional amounts, at least equal to the local statutory funding requirements.
As a result of the Envigo acquisition, the Company assumed a defined benefit pension plan for the benefit of Envigo's U.K. employees (the Envigo Plan), which is a legacy plan of a company previously acquired by Envigo. The Envigo Plan is a funded plan that is closed to future accrual. The
Company’s funding policy has been to contribute amounts at least equal to the local statutory funding requirements.
The related net pension obligation for these plans inclusive of the U.K. Plans, German Plan, and the Envigo Plan, was $i86.0 and $i99.1 as
of June 30, 2020 and December 31, 2019, respectively.
The
Company has a noncontrolling interest put related to its Ontario subsidiary that has been classified as mezzanine equity in the Company’s condensed consolidated balance sheets. The noncontrolling interest put is valued at its contractually determined value, which approximates fair value.
The Company offers certain employees the opportunity to participate in an employee-funded deferred compensation plan (DCP). A participant's deferrals are allocated by the participant to one or more of i16
measurement funds, which are indexed to externally managed funds. From time to time, to offset the cost of the growth in the participant's investment accounts, the Company purchases life insurance policies, with the Company named as beneficiary of the policies. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments, which are typically invested in a similar manner to the participants' allocations. Changes in the fair value of the DCP obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash
LABORATORY
CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
surrender value and the DCP obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the hypothetical investments.
Contingent acquisition consideration liabilities are measured at fair value using Level 3 valuations. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent
consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3.
The carrying amounts of cash and cash equivalents, accounts receivable, income taxes receivable, and accounts payable are considered to be representative of their respective fair values due to their short-term nature. The fair market value of the Senior Notes, based on market pricing, was approximately $i6,433.0
and $i6,140.6 as of June 30, 2020 and December 31, 2019, respectively. The Company's note and debt instruments are classified as Level 2 instruments, as the fair market values of these instruments are determined using other observable inputs.
13. iDERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
The Company addresses its exposure to market risks, principally the market risk associated with changes in interest rates and foreign currency exchange rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments.The Company does not hold or issue derivative financial instruments for trading purposes. The Company does not believe that its exposure to market risk is material to the Company’s financial position or results of operations.
Interest
Rate Swap
The Company is party to a fixed-to-variable interest rate swap agreement for its i4.625% senior notes which mature on November 15, 2020, with a notional amount of $i300.0
and variable interest rates based on one-month LIBOR plus i2.298% to hedge against changes in the fair value of a portion of the Company's debt. On July 17, 2020, notice was given to holders of the notes that the Company had elected to redeem the outstanding securities on August 17, 2020. The interest
rate swap derivative financial instrument is accounted for as fair value hedge of the Senior Notes due 2020. These interest rate swaps are included in prepaid and other assets or liabilities, as applicable, and added to the value of the Senior Notes. As the specific terms and notional amount of the derivative financial instrument matches those of the fixed-rate debt being hedged, the derivative instrument is assumed to be a perfectly effective hedge and accordingly, there is no impact to the Company's Condensed Consolidated Statements of Operations. Cash flows from the interest rate swap are included in operating activities.
i
Carrying
amount of hedged liabilities as of
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities as of
Balance
Sheet Line Item in which Hedged Items are Included
Current portion, long term debt
$
i302.3
$
i301.5
$
i2.3
$
i1.5
/
Cross
Currency Swap
During the fourth quarter of 2018, the Company entered into six U.S. Dollar to Swiss Franc cross-currency swap agreements with an aggregate notional value of $i600.0 and which are accounted for as a hedge against the impact of foreign exchange movements on its net investment in a Swiss subsidiary. Of the notional value, $i300.0
matures in 2022 and $i300.0 matures in 2025. These cross currency swaps maturing in 2022 and 2025 are included in other long-term assets as of June 30, 2020. Changes in the fair value of the cross-currency swaps are recorded as a component of the foreign currency translation adjustment in accumulated other comprehensive income in the Condensed Consolidated Balance Sheet until the hedged item is recognized in earnings. The cumulative amount of the fair value hedging adjustment included in the current value of the cross currency swaps is $(i8.8)
and $i11.1 for the three and six months ended June 30, 2020, and was recognized as currency translation within the Condensed Consolidated Statement of Comprehensive Earnings. There were no amounts reclassified from the Condensed Consolidated Statement of Comprehensive Earnings to the Condensed Consolidated Statement of Operations during the three months or six months ended June 30, 2020.
The
table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value hedging relationships:
Amount
of pre-tax gain/(loss) included in other comprehensive income
Amounts reclassified to the Statement of Operations
Amount of pre-tax gain/(loss) included in other comprehensive income
Amounts reclassified to the Statement of Operations
No
gains or losses from derivative instruments classified as hedging instruments have been recognized into income for the three and six months ended June 30, 2020 and 2019.
Disclosure
of non-cash financing and investing activities:
Conversion of zero-coupon convertible debt
i—
i7.2
Change
in accrued property, plant and equipment
(i17.1)
(i12.5)
Floating
rate secured note receivable due 2022 from the sale of CRP
i—
i110.0
/
15.
iBUSINESS SEGMENT INFORMATION
The following table is a summary of segment information for the three and six months ended June 30, 2020 and 2019. The management approach has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments within an enterprise for making
operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating segment performance and deciding how to allocate resources to segments. The Company’s chief executive officer has been identified as the CODM.
Segment asset information is not presented because it is not used by the CODM at the segment level. Operating earnings of each segment represents revenues less directly identifiable expenses to arrive at operating income for the segment. General management and administrative corporate expenses are included in general corporate expenses below.
Less
net income attributable to noncontrolling interests
i—
(i0.3)
(i0.3)
(i0.6)
Net
income (loss) attributable to Laboratory Corporation of America Holdings
$
i231.6
$
i190.4
$
(i85.6)
$
i376.0
16.
iSUBSEQUENT EVENTS
In July 2020, the Company acquired two businesses and related assets for approximately $i200.0
in cash (net of cash acquired). These acquisitions will be included in both the LCD and CDD segments and were made primarily to extend the Company's geographic reach in important market areas, enhance the Company's scientific differentiation and to expand the breadth and scope of the Company's services.
On July 17, 2020, notice was given to holders of $i412.2
of the Company’s senior notes, due November 15, 2020, that the Company had elected to redeem the outstanding securities on August 17, 2020 at par. The Company will repay the notes with available cash on hand and borrowings under its revolving credit facility.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Laboratory Corporation of America® Holdings together with its subsidiaries (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 relate to future events and expectations and 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 speak only as of the time they are made and are subject to various risks and uncertainties. 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, including in the "Risk Factors" section of the Annual Report on Form 10-K, and in the Company’s other public filings, press releases, and discussions with Company management, including:
1. changes in government and third-party payer regulations, reimbursement, or coverage policies or other future reforms in the healthcare system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (e.g., health insurance exchanges) affecting governmental and third-party coverage or reimbursement for commercial laboratory testing, including the impact of the U.S. Protecting Access to Medicare Act of 2014 (PAMA);
2. significant
monetary damages, fines, penalties, assessments, refunds, repayments, damage to the Company’s reputation, unanticipated compliance expenditures, and/or exclusion or debarment from or ineligibility to participate in government programs, among other adverse consequences, arising from enforcement of anti-fraud and abuse laws and other laws applicable to the Company in jurisdictions in which the Company conducts business;
3. significant fines, penalties, costs, unanticipated compliance expenditures and/or damage to the Company’s reputation arising from the failure to comply with applicable
privacy and security laws and regulations, including the U.S. Health Insurance Portability and Accountability Act of 1996, the U.S. Health Information Technology for Economic and Clinical Health Act, the European Union's General Data Protection Regulation and similar laws and regulations in jurisdictions in which the Company conducts business;
4. loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of applicable licensing laws or regulations regarding the operation of clinical laboratories and the delivery of clinical laboratory test results, including, but not limited to, the U.S. Clinical Laboratory Improvement Act of 1967 and the U.S. Clinical Laboratory Improvement Amendments of 1988 and similar laws and regulations in jurisdictions in which the
Company conducts business;
5. penalties or loss of license arising from the failure to comply with applicable occupational and workplace safety laws and regulations, including the U.S. Occupational Safety and Health Administration requirements and the U.S. Needlestick Safety and Prevention Act and similar laws and regulations in jurisdictions in which the Company conducts business;
6. fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, damage to the Company’s reputation, injunctions, or criminal prosecution arising from failure to maintain compliance with current good manufacturing practice regulations and similar requirements of various regulatory agencies in jurisdictions
in which the Company conducts business;
7. sanctions or other remedies, including fines, unanticipated compliance expenditures, enforcement actions, injunctions or criminal prosecution arising from failure to comply with the Animal Welfare Act or applicable national, state and local laws and regulations in jurisdictions in which the Company conducts business;
8. changes in testing guidelines or recommendations by government agencies, medical specialty societies and other authoritative bodies affecting the utilization of laboratory tests;
9. changes in applicable government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic
tests, drug development, or the conduct of drug development and medical device and diagnostic studies and trials, including regulations and policies of the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the Medicine and Healthcare products Regulatory Agency in the United Kingdom (U.K.), the National Medical Products Administration in China, the Pharmaceutical and Medical Devices Agency in Japan, the
European Medicines Agency and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business;
10. changes
in government regulations or reimbursement pertaining to the biopharmaceutical and medical device and diagnostic industries, changes in reimbursement of biopharmaceutical products or reduced spending on research and development by biopharmaceutical customers;
11. liabilities that result from the failure to comply with corporate governance requirements;
12. increased competition, including price competition, potential reduction in rates in response to price transparency and consumerism, competitive bidding and/or changes or reductions to fee schedules and competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry;
13. changes in payer mix or payment structure, including insurance carrier participation in health insurance exchanges, an increase in capitated
reimbursement mechanisms, the impact of a shift to consumer-driven health plans or plans carrying an increased level of member cost-sharing, and adverse changes in payer reimbursement or payer coverage policies (implemented directly or through a third-party utilization management organization) related to specific diagnostic tests, categories of testing or testing methodologies;
14. failure to retain or attract managed care organization (MCO) business as a result of changes in business models, including new risk-based or network approaches, out-sourced laboratory network management or utilization management companies, or other changes in strategy or business models by MCOs;
15. failure to obtain and retain new customers, an unfavorable change in the mix of testing services ordered, or a reduction in tests ordered, specimens submitted or services requested by existing customers,
and delays in payment from customers;
16. difficulty in maintaining relationships with customers or retaining key employees as a result of uncertainty surrounding the integration of acquisitions and the resulting negative effects on the business of the Company;
17. consolidation and convergence of MCOs, biopharmaceutical companies, health systems, large physician organizations and other customers, potentially causing material shifts in insourcing, utilization, pricing and reimbursement, including full and partial risk-based models;
18. failure to effectively develop and deploy new systems, system modifications or enhancements required in response to evolving market and business needs;
19. customers choosing to
insource services that are or could be purchased from the Company;
20. failure to identify, successfully close, and effectively integrate and/or manage acquisitions of new businesses;
21. inability to achieve the expected benefits and synergies of newly-acquired businesses, including due to items not discovered in the due-diligence process, and the impact on the Company's cash position, levels of indebtedness and stock price;
22. termination, loss, delay, reduction in scope or increased costs of contracts, including large contracts
and multiple contracts;
23. liability arising from errors or omissions in the performance of testing services, contract research services, or other contractual arrangements;
24. changes or disruption in the provision or transportation of services or supplies provided by third parties; or their termination for failure to follow the Company's performance standards and requirements;
25. damage or disruption to the Company's facilities;
26. damage to
the Company's reputation, loss of business, or other harm from acts of animal rights activists or potential harm and/or liability arising from animal research activities;
27. adverse results in litigation matters;
28. inability to attract and retain experienced and qualified personnel or the loss of significant personnel as a result of illness or otherwise;
29. failure to develop or acquire licenses for new or improved technologies, such as point-of-care testing, mobile health technologies, and digital pathology, or potential use of new technologies by customers and/or consumers to perform their own tests;
30.
substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests;
31. failure to obtain, maintain and enforce intellectual property rights for protection of the Company's products and services and defend against challenges to those rights;
32. scope, validity and enforceability of patents and other proprietary rights held by third parties that may impact the Company's ability to develop, perform, or market the Company's products or services or operate its business;
33. business interruption,
receivable impairment, delays in cash collection impacting days sales outstanding, supply chain disruptions, increases in operating costs, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes, political crises, including terrorism and war, public health crises and disease epidemics and pandemics, and other events outside of the Company's control;
34. discontinuation or recalls of existing testing products;
35. a failure in the Company's information technology systems, including with respect to testing turnaround time and billing processes, or the failure of the Company or its
third-party suppliers and vendors to maintain the security of business information or systems or to protect against cybersecurity attacks such as denial of service attacks, malware, ransomware and computer viruses, or delays or failures in the development and implementation of the Company’s automation platforms, any of which could result in a negative effect on the Company’s performance of services, a loss of business or increased costs, damages to the Company’s reputation, significant litigation exposure, an inability to meet required financial reporting deadlines, or the failure to meet future regulatory or customer information technology, data security and connectivity requirements;
36. business
interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, general labor unrest or failure to comply with labor or employment laws;
37. failure to maintain the Company's days sales outstanding levels, cash collections (in light of increasing levels of patient responsibility), profitability and/or reimbursement arising from unfavorable changes in third-party payer policies, payment delays introduced by third party utilization management organizations and increasing levels of patient payment responsibility;
38. impact on the Company's revenues,
cash collections and the availability of credit for general liquidity or other financing needs arising from a significant deterioration in the economy or financial markets or in the Company's credit ratings by Standard & Poor's and/or Moody's;
39. failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment grade rating, or leverage ratio covenants under its term loan facility and revolving credit facility;
40. changes in reimbursement by foreign governments and foreign currency fluctuations;
41. inability to obtain certain
billing information from physicians, resulting in increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and revenues;
42. expenses and risks associated with international operations, including, but not limited to, compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, other applicable anti-corruption laws and regulations, trade sanction laws and regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions;
43. failure to achieve expected efficiencies and savings in connection with the Company's business process improvement initiatives;
44. changes in tax laws and regulations or changes in their interpretation, including the U.S.
Tax Cuts and Jobs Act (TCJA);
45. global economic conditions and government and regulatory changes, including, but not limited to the U.K.'s exit from the European Union; and
46. effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, and liquidity, and the actions the Company, or governments, have taken or may take in response, and damage to the Company's reputation or loss of business resulting from the perception of the Company's response to the COVID-19 pandemic, including the availability and accuracy and timeliness of delivery of any tests that the
Company develops, collaborates on or provides for the detection of COVID-19.
Except as may be required by applicable law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Given these uncertainties, one should not put undue reliance on any forward-looking statements.
GENERAL
(dollars in millions, except per share data)
Revenues for the six months ended June 30, 2020 were $5,592.6, a decrease of (1.4)% from $5,672.9 during the six months ended June 30, 2019. The decrease in revenues was due to a 3.6% decline of organic revenue, 0.4% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 2.6% from acquisitions. The 3.6% decline of organic revenue was due to the pandemic, which reduced the Company's organic Base Business by 11.7%, partially offset by 8.1% from COVID-19 related business. Base Business includes the Company's business operations
except for molecular and serology COVID-19 testing (COVID-19 Testing). The decline in the organic Base Business includes the negative impact from PAMA of 0.6%.
In March 2020, COVID-19 was declared a pandemic. COVID-19 has had and continues to have an extensive impact on the global health and economic environments. Given the continued unpredictability of the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial results for 2020. While the Company's Base Business continues to be negatively impacted by the COVID-19 pandemic, the Company's outlook has improved across the enterprise.
In LCD, demand for its Base Business continues to be below
the Company's historical levels; however, the Company's Base Business has been steadily recovering from its trough in April, while at the same time COVID-19 Testing continues to grow. To date, the Company has performed more than 9.2 million molecular and 2.2 million antibody COVID-19 tests and has a current capacity of 180,000 molecular and 300,000 antibody tests per day. The Company continues to increase capacity across multiple platforms for its COVID-19 Testing subject to the availability of equipment and testing supplies and key personnel.
In CDD, while the pandemic is expected to continue
to negatively impact its business, this impact is expected to subside throughout the year as CDD continues to work on projects supporting global vaccine and treatment development, with additional support from COVID-19 Testing.
As a result of the impact of COVID-19, during the six months ended June 30, 2020, the Company recorded goodwill and other asset impairment charges of $437.4, $426.4 within CDD and $11.0 within LCD, all of which were recorded in the three months ended March 31, 2020. See Note 6 Goodwill and Intangible Assets for discussion of goodwill and intangible asset impairments and Note 2 Revenue for the discussion of credit losses and additional price concessions. The
Company also wrote-off or wrote down certain of the Company's investments by $25.4 due to the impact of COVID-19, $7.1 included in Equity method earnings (loss), net (recorded in the three months ended March 31, 2020), and $18.3 included in Other, net ($13.1 recorded during the three months ended March 31, 2020 and $5.2 recorded during the three months ended June 30, 2020).
The Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) plan contributions in the
United States (U.S.). In response to its improved outlook, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in the U.S.
In April 2020, the Company received cash payments of approximately $55.9 from the Public Health and Social Services Emergency Fund for provider relief (Relief Fund) that was appropriated by Congress to the Department of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Upon receiving and satisfying the terms and conditions associated with the distributed funds, the Company accounted for the transaction
by applying the guidance in ASC 450-30 Gain Contingencies, and recorded these funds in Other, net non-operating income in the Consolidated Statement of Operations as of June 30, 2020.
On July 30, the Company announced plans to create a program to offer total antibody testing at no charge through the patient’s doctor in support of increased blood plasma donations for use as a possible COVID-19 treatment. The Company is working with public health authorities and the provider community on the details of the three-month program and is evaluating the impact this program will have on the consolidated financial statements.
There
remains significant uncertainty regarding the duration and severity of the pandemic and its impact on the Company’s business, results of operations and financial position for the balance of 2020 and beyond. For more information regarding the risks associated with COVID-19 and its impact on the Company’s business, see Risk Factors in Part II - Item 1A.
The
decrease in revenues for the three months ended June 30, 2020, as compared with the corresponding period in 2019 was 3.9%. The decrease in revenue was due to a 5.4% decline of organic revenue, 0.3% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 1.9% from acquisitions. The 5.4% decline of organic revenue was due to the pandemic, which reduced the Company's organic Base Business by 20.9%, partially offset by COVID-19 Testing of 15.4%. The decline in organic Base Business includes the lower Medicare and Medicaid pricing as a result of PAMA of 0.5%.
LCD revenues for the quarter were $1,692.7, a decrease of 3.9% compared to revenues of $1,760.9 in the second quarter of 2019. The decrease in revenues was primarily due to a 4.9% decline
in organic revenue and 0.1% from unfavorable foreign currency translation, partially offset by 1.1% from acquisitions. The 4.9% organic revenue decline includes a 30.1% decline of the organic Base Business (due to the pandemic), partially offset by 25.2% from COVID-19 Testing. The 30.1% decline of the organic Base Business includes a 0.8% negative impact from PAMA and a 1.2% reduction due to the September 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market.
Total volume (measured by requisitions) decreased by 19.5% as organic volume declined by 20.7%, partially offset by acquisition volume of 1.2%. The decline in organic volume includes a 35.3% reduction of organic Base Business (due to the pandemic), partially offset by increased demand for COVID-19 Testing
of 14.6%. The organic Base Business volumes continued to improve throughout the quarter with daily volume in June averaging approximately 17.0% below June volume in 2019. At the same time, demand for COVID-19 Testing continues to increase, contributing approximately 23.0% to total volume in June. While total volume declined 19.5%, price/mix increased by 15.6% due to COVID-19 Testing of 10.7% and the Base Business of 4.9%. The Base Business price includes the negative impact from PAMA of 0.8% and the non-renewal of the BeaconLBS contract of 1.2%.
CDD revenues for the second quarter were $1,093.7, a decrease of 2.9% over revenues of $1,126.3 in the second quarter of 2019. The decrease in revenues was primarily due to a 5.2% decline in organic revenue, 0.7% from the disposition of a business, and 0.1% from unfavorable foreign currency translation,
partially offset by 3.1% benefit from an acquisition. The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 1.1% increase from COVID-19 molecular testing through its Central Laboratories business. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit.
Cost of revenues decreased 2.4% during the three months ended June 30, 2020, as compared with the corresponding period in 2019. Cost of revenues as a percentage of revenues during the three months ended June 30, 2020, increased to 72.5% as compared to 71.4% in the corresponding period in 2019. This increase was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases), and PAMA, partially offset by LaunchPad savings.
During
the three months ended June 30, 2020, the Company incurred $4.6 of acquisition and divestiture related costs and $7.8 in management transition costs. In addition, the Company recorded $0.2 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $1.8 related to miscellaneous other items. These charges were offset by insurance proceeds of $10.0 related to the 2018 ransomware attack. These items increased selling, general and administrative expenses by $7.7.
During the three months ended June 30, 2019, the
Company incurred $33.2 in acquisition and divestiture costs, $1.5 in management transition costs and $0.1 in costs related to the 2018 ransomware attack. In addition, the Company recorded $2.6 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by $37.4.
Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 14.0% and 13.1% during each of the three months ended June 30, 2020, and 2019, respectively.
Total
amortization of intangibles and other assets
$
60.1
$
60.2
(0.2)
%
The decrease in amortization of intangibles and other assets within LCD primarily reflects the impact of acquisitions occurring after June 30, 2019, net of Amortization of intangible assets within CDD increased primarily due to the impact of acquisitions occurring after June 30, 2019.
During the three months ended June 30, 2020, the Company recorded net restructuring and other charges of $6.4: $3.7 within LCD and $2.7 within CDD. The charges were comprised of $5.4 related to severance and other personnel costs, $3.3 for a CDD lab facility and equipment impairment, and $4.2 in facility closures, impairment of operating
lease right-of use assets and general integration activities. The charges were offset by the reversal of previously established liability of $1.0 and $5.5 in unused severance costs and facility-related costs, respectively.
During the three months ended June 30, 2019, the Company recorded net restructuring and other special charges of $13.6: $3.0 within LCD and $10.6 within CDD. The charges were comprised of $3.5 related to severance and other personnel costs along with $10.2 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were offset by the reversal of previously established reserves of $0.1 in unused facility reserves.
The
decrease in interest expense for the three months ended June 30, 2020, as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of $1,050.0 in debt securities in November 2019.
Equity
method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. The
decrease in income for the three months ended June 30, 2020, as compared with the corresponding period in 2019, was primarily due to decreased profitability of the Company's joint ventures.
The change in other, net for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, is primarily due to $55.9 of funding from the Relief Fund that was appropriated by Congress to the HHS in the CARES Act. This funding was partially offset by the $5.2 write-off or write down of certain of the
Company's investments primarily due to the negative impact of the COVID-19 global pandemic. In addition, foreign currency transaction losses of $1.7 were recognized for the three months ended June 30, 2020 and losses of $3.2 were recognized in the corresponding period of 2019.
LCD
operating income was $281.3 for the three months ended June 30, 2020, a decrease of 10.0% over operating income of $312.5 in the corresponding period of 2019, and LCD operating margin decreased 1.1% basis points year-over-year.The decrease was primarily due to the reduction in the Base Business (primarily due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings. The Company remains on track to deliver approximately $200.0 of net savings from its three-year LCD's LaunchPad initiative by the end of 2021.
CDD operating income was $65.5 for the three months ended June 30, 2020, a decrease over operating income of $65.8 in the corresponding period of 2019. The decrease was primarily
due to the negative impact from the pandemic and higher personnel costs, partially offset by molecular COVID-19 testing and LaunchPad savings. The Company remains on track to deliver approximately $150.0 of net savings from its three-year CDD's LaunchPad initiative by the end of 2020.
General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were $49.1 for the three months ended June 30, 2020, an increase of 15.3% over corporate expenses of $42.6 in the corresponding period of 2019. The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs.
Revenues
for the six months ended June 30, 2020 were $5,592.6, a decrease of (1.4)% from $5,672.9 during the six months ended June 30, 2019. The decrease in revenues was due to a 3.6% decline of organic revenue, 0.4% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 2.6% from acquisitions. The 3.6% decline of organic revenue was due to a 11.7% decline in the Company's organic Base Business (as a result of the pandemic), partially offset by 8.1% from COVID-19 related business. The decline in the organic Base Business includes the negative impact from PAMA of 0.6%.
LCD revenues for the six months ended June 30, 2020 were $3,394.7, a decrease of
2.5% compared to revenues of $3,482.9 for the six months ended June 30, 2019. The decrease in revenue was due to a 3.9% decline in organic revenue, partially offset by 1.4% from acquisitions. The 3.9% decline in organic revenue,was due to a 17.1% decline of the organic Base Business (due to the pandemic), partially offset by 13.2% from COVID-19 Testing. The 17.1% decline of organic Base Business includes a 1.0% negative impact from PAMA and a 1.2% reduction due to the September 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to the Florida market.
Total volume (measured by requisitions) decreased by 12.0% as organic volume declined by 13.4%, partially offset by acquisition volume of 1.4%. The decline in organic volume includes a 21.0% reduction of organic Base Business
(due to the pandemic), partially offset by increased demand for COVID-19 Testing of 7.6%. The organic Base Business volumes continued to improve throughout the second quarter with daily volume in June averaging approximately 17.0% below June volume in 2019. At the same time, demand for COVID-19 Testing continues to increase, contributing approximately 23.0% to total volume in June. While total volume declined 12.0%, price/mix increased by 9.4% due to COVID-19 Testing of 5.5% and Base Business of 3.9%. The Base Business price includes the negative impact from PAMA of 1.0% and the non-renewal of the BeaconLBS contract of 1.2%.
CDD revenues for six months ended June 30, 2020 were $2,237.5, an increase of 1.7% over revenues of $2,201.0 for the six months ended June 30,
2019. The increase in revenue was primarily due to the benefit of acquisitions of 4.6%, partially offset by a decline in organic revenue 1.9% and disposition of a business of 1.0%. The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 0.6% increase from COVID-19 molecular testing through its Central Laboratories business. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit.
Cost of revenues increased 1.1% during the six months ended June 30, 2020, as compared with the corresponding period in 2019. Cost of revenues as a percentage of revenues during the six months ended June 30, 2020, increased to 73.4% as compared to 71.5% in the corresponding period in 2019. This increase was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases and one additional payroll day that predominantly impacted LCD),
and PAMA, partially offset by LaunchPad savings.
Selling, general and administrative expenses as a % of revenues
14.2
%
14.3
%
During
the six months ended June 30, 2020, the Company incurred $13.0 of acquisition and divestiture related costs and $10.6 in management transition costs. In addition, the Company recorded $1.1 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and $1.2 related to miscellaneous other items.These charges were offset by insurance proceeds of $10.0 related to the 2018 ransomware attack. These items increased selling, general and administrative expenses by $19.6.
During the six months ended June 30, 2019, the
Company incurred $44.3 in acquisition and divestiture costs, $2.9 in consulting expenses relating to fees incurred as part of its integration and management transition costs and $0.7 in costs related to the 2018 ransomware attack. In addition, the Company recorded $5.0 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by $52.9.
Excluding these charges, selling, general and administrative expenses
as a percentage of revenues were 13.8% and 13.3% during each of the six months ended June 30, 2020, and 2019, respectively.
Total amortization of intangibles and other assets
$
122.4
$
117.3
4.3
%
The
increase in amortization of intangibles and other assets within LCD primarily reflects the impact of acquisitions occurring after June 30, 2019. Amortization of intangible assets within CDD increased primarily due to the impact of acquisitions occurring after June 30, 2019.
During
the six months ended June 30, 2020 , the Company recorded goodwill and other asset impairment charges of $437.4, $426.4 within CDD and $11.0 within LCD, representing 3.9% of the Company's total goodwill and intangible assets. The Company concluded that the fair value was less than carrying value for two of its reporting units and recorded goodwill impairment of $418.7 in the CDD segment and $3.7 in the LCD segment. The Company also recorded a charge of $2.7 for the impairment of a CDD tradename, $7.3 for LCD software, and $5.0 for the impairment of the CDD floating rate secured note receivable
due 2022.
During the six months ended June 30, 2020, the Company recorded net restructuring and other charges of $31.8: $11.8 within LCD and $20.0 within CDD. The charges were comprised of $10.5 related to severance and other personnel costs, $8.0 for a CDD lab facility impairment, and $20.0 in facility closures, impairment of operating lease
right-of use assets and general integration activities. The charges were offset by the reversal of previously established liability of $1.0 and $5.7 in unused severance costs and facility-related costs, respectively.
During the six months ended June 30, 2019, the Company recorded net restructuring and other special charges of $34.2: $16.1 within LCD and $18.1 within CDD. The charges were comprised of $20.3 related to severance and other personnel costs along with $13.5 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were increased by the adjustment of previously established reserves of $0.4 in facility reserves.
The
decrease in interest expense for the six months ended June 30, 2020, as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of $1,050.0 in debt securities in November 2019.
Equity
method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. The decrease in income for the six months ended June 30, 2020, as compared with the corresponding period in 2019, was primarily due to the impairment of an equity method investment and decreased profitability of the Company's joint ventures.
The
change in other, net for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, is primarily due to the $55.9 funding from the Relief Fund that was appropriated by Congress to the HHS in the CARES Act. This funding was partially offset by the $18.3 write-off or write down of certain of the Company's investments primarily due to the negative impact of the COVID-19 global pandemic. In addition, foreign currency transaction losses of $4.5 were recognized for the six months ended June 30, 2020 and losses of $7.8 were recognized in the corresponding period of 2019.
Income
tax expense as a % of earnings before income taxes
391.1
%
28.2
%
The 2020 tax rate was unfavorable to the 2019 tax rate due to impairment charges for which either no tax benefit was recorded (as they were not deductible) or the associated tax assets required a full valuation allowance.
LCD operating
income was $486.7 for the six months ended June 30, 2020, a decrease of 16.2% over operating income of $580.8 in the corresponding period of 2019, and LCD operating margin decreased (2.4)% basis points year-over-year. The decrease in operating income and margin were primarily due to the reduction in Base Business (primarily due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings. The Company remains on track to deliver approximately $200.0 of net savings from its three-year, phase II of LCD's LaunchPad initiative by the end of 2021.
CDD operating loss was $(273.2) for the six months ended June 30, 2020, a decrease over operating income of $153.8 in the corresponding period of
2019. The decrease in operating income and margin was primarily due to the negative impact of COVID-19, specifically goodwill and other asset impairments of $426.4, and higher personnel costs, partially offset by organic demand, acquisitions, and LaunchPad savings. The Company is on track to deliver $150.0 of net savings from its three-year CDD LaunchPad initiative by the end of 2020.
General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were $108.4 for the six months ended June 30, 2020, an increase of 34.3% over corporate expenses of $80.7 in the corresponding period of 2019. The increase in corporate expenses in 2020 is primarily due to higher
personnel costs, including executive transition costs, and COVID-19 related expenses.
LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)
The Company's strong cash-generating ability 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. The Company's senior unsecured revolving credit facility is further discussed in Note 7 Debt to the
Company's Condensed Consolidated Financial Statements.
Effect of exchange rate changes on cash and cash equivalents
(5.3)
(1.1)
Net (decrease) increase in cash and cash equivalents
$
219.5
$
(161.4)
Cash
and Cash Equivalents
Cash and cash equivalents at June 30, 2020 and 2019, totaled $557.0 and $265.4, respectively. Cash and cash equivalents consist of highly liquid instruments, such as time deposits, commercial paper, and other money market investments, substantially all of which have original maturities of three months or less.
Operating Activities
During the six months ended June 30, 2020, the Company's operations provided $574.5 of cash as compared to $419.3 during the same period in 2019. The $155.2 increase in cash provided from operations in 2020 as compared with the corresponding
2019 period is primarily due to higher cash earnings partially offset by higher working capital. For the first six months of 2020, cash earnings included the $55.9 CARES Act funding and benefited from income and payroll tax deferrals, while working capital was negatively impacted by an increase in COVID-19 related testing supplies inventory and accounts receivable. The COVID-19 pandemic has created uncertainty about the Company's near-term operating cash flows. Based on current expectations of the impact of COVID-19, the Company expects to continue to generate positive cash flows from operating activities, however, should the COVID-19 impact worsen or last longer than anticipated, the Company may see a significant decline
in cash flows from operating activities. For more information regarding the risks associated with the COVID-19 and its impact on the Company's business, see Risk Factors in Part II - Item IA.
Investing Activities
Net cash used for investing activities for the six months ended June 30, 2020, was $230.0 as compared to net cash used for investing activities of $891.3 for the six months ended June 30, 2019. The change in cash used for investing activities was primarily due to a decrease in business acquisitions during the six months ended June 30, 2020. Capital expenditures were $205.1 and $179.4 for the six months ended June 30,
2020, and 2019, respectively.
Financing Activities
Net cash used for financing activities for the six months ended June 30, 2020, was $119.7 compared to net cash provided by financing activities of $311.7 for the six months ended June 30, 2019. The change in cash flows from financing activities for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, were primarily due to net financing proceeds from the term loan and revolving credit facilities in 2019 of $635.0 offset by $200.0 more in share repurchases in 2019.
The
Company's revolving credit facility consists of a five-year revolving facility in the principal amount of up to $1,000.0, with the option of increasing the facility by up to an additional $350.0, subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions.
Under the Company's term loan credit facility and the revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios. The
Company was in compliance with all covenants under the term loan credit facility and the revolving credit facility at June 30, 2020 and expects that it will remain in compliance with its existing debt covenants for the next twelve months.
During the fourth quarter of 2020, $412.2 of the Company's senior notes mature. The Company has elected to redeem these notes in August 2020 at par using available cash on hand and borrowings under its revolving credit facility.
At June 30, 2020the Company had $557.0 of cash and $997.0 of available
borrowings under its revolving credit facility, which does not mature until 2022. In May 2020, in order to obtain increased financial covenant flexibility, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to 5.0x debt to last twelve months EBITDA for the three month periods ending June 30, September 30 and December 31, 2020, 4.5x for period ended March 31, 2021 and then reverts back to 4.0x. The amendments also provide that during any period in which the Company's leverage ratio exceeds 4.5x debt to last twelve months EBITDA (i) the
company will be prohibited from consummating share repurchases, subject to limited exceptions, (ii) borrowings under the revolving credit facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.25% or a base
rate plus a margin of 0.25%, (iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be 0.25% per annum, and (iv) borrowings
under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.175% or a base rate plus a margin of 0.175%.
The Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) plan contributions in the United States (U.S.). In response to its improved outlook, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in the U.S.
At
the end of 2019, the Company had outstanding authorization from the board of directors to purchase up to $900.0 of Company common stock. As of June 30, 2020, the Company had outstanding authorization from the board of directors to purchase up to $800.0 of the Company's common stock. The repurchase authorization has no expiration date; however, the Company temporarily suspended stock repurchases beginning in March 2020 due to impact of the COVID-19 pandemic.
Credit Ratings
The
Company’s investment grade debt ratings from Moody’s and from Standard and Poor’s (S&P) contribute to its ability to access capital markets.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange and interest rates, and the Company regularly evaluates its
exposure to such changes. The Company addresses its exposure to market risks, principally the market risks associated with changes in foreign currency exchange rates and interest rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such as foreign currency forward contracts, and interest rate and cross currency swap agreements.
Foreign Currency Exchange Rates
Approximately 12.0% of the Company's revenues for the six months ended June 30, 2020, and approximately 12.5% of the
Company's revenue for the six months ended June 30, 2019, were denominated in currencies other than the U.S. dollar. The Company's financial statements are reported in U.S. dollars and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into U.S. dollars for purposes of reporting the Company's consolidated financial results. In the second quarter of 2020 and the year ended December 31, 2019, the most significant currency exchange rate exposures were to the Canadian dollar, Swiss Franc, Euro and British Pound. Excluding the impacts from any outstanding or future hedging transactions, a hypothetical change of 10% in average
exchange rates used to translate all foreign currencies to U.S. dollars would have impacted income before income taxes for the six months ended June 30, 2020 by approximately $2.6. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $(i80.5) and $i47.2
at June 30, 2020 and 2019, respectively. The Company does not have significant operations in countries in which the economy is considered to be highly-inflationary.
The Company earns revenue from service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company's profitability with respect to such contracts.
The Company is also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in some of its contracts with customers, or it may hedge transaction risk with foreign currency forward contracts. At June 30, 2020, the Company had 38 open foreign exchange forward contracts
relating to service contracts with various amounts maturing monthly through July 2020 with a notional value totaling approximately $612.5. At December 31, 2019, the Company had 34 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly through January 2020 with a notional value totaling approximately $369.2.
The Company is party to U.S. Dollar to Swiss Franc cross-currency swap agreements
with an aggregate notional amount of $i600.0, maturing in 2022 and 2025, as a hedge against the impact of foreign exchange movements on its net investment in a Swiss Franc functional currency subsidiary.
Interest Rates
Some of the Company's debt is subject to interest at variable rates. As a result, fluctuations in interest rates affect the business. The Company
attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of fixed and variable rate debt including by the utilization of derivative financial instruments, primarily interest rate swaps.
Borrowings under the Company's term loan credit facility and revolving credit facility are subject to variable interest rates, unless fixed through interest rate swaps or other agreements. As of June 30, 2020 and December 31, 2019, the
Company had $i375.0 and $375.0, respectively, of unhedged variable debt from the 2019 term loan credit facility and $0.0 and $0.0, respectively, outstanding on its revolving credit facility.
To hedge against changes in the fair value of a portion of the Company's long-term debt, the Company is party to a fixed-to-variable interest rate swap agreement for a portion of the 4.625% senior notes due 2020 with an aggregate notional
amount of $i300.0 and variable interest rates based on one-month LIBOR plus i2.298%.
Each quarter-point increase or decrease in the variable rate would result in the
Company's interest expense changing by approximately $0.9 per year for the Company's unhedged variable rate debt.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out, under the supervision and with the participation of the Company’s management, including the
Company’s principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in the
Company’s internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The risk factors set forth below revise and supplement the corresponding risk factors set forth in Part I - Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as amended. With the exception of the following, there have been no material changes in the risk factors that appear in Part I - Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
The effects of the outbreak of the COVID-19 pandemic have had and could continue to have material adverse impacts on the
Company’s business, results of operations, cash flows, and financial position.
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. In the second half of March, daily volume for routine tests started to decline as a result of decreased consumer demand driven by a significant reduction in physician office visits, the cancellation of elective medical procedures, and the negative impacts on discretionary spending resulting from the economic downturn, among other factors. In addition, the performance of the Company’s drug development business was challenged by COVID-19 due to actions that clients have taken and are taking that slowed clinical trial progress and the associated testing as well as restrictions in
trial site access in certain countries and interruptions in the supply chain. Given the continued unpredictability pertaining to the COVID-19 pandemic and the corresponding government restrictions and customer behavior, the impact on the Company's business is not yet certain and depends on the number of evolving factors that the Company may not be able to predict or effectively respond to.
The further spread of COVID-19, and the Company’s initiatives to help limit the spread of the illness, will impact the Company’s ability to carry out its business as usual, which could materially adversely
impact its business and financial condition. The Company has incurred additional costs for the safety of its employees and the continuity of its operations, including increased frequency of deep cleaning and sanitation at each of its physical locations, additional safety training and processes, enhanced hygiene practices and materials, flexible and remote working where possible, and allowing for greater social distancing for the Company’s employees who must work on-site. Additionally, the Company has made a number of changes at the Company’s patient service centers for the comfort and safety of the patients, many of which have also increased
costs for the Company. For example, the Company has set aside the first business hour of every day for vulnerable patients, launched a mobile check-in process that allows patients to wait for their appointment from within their car or other nearby location, and increased sanitation and disinfection in check-in areas, waiting rooms, bathrooms, and hallways with Centers for Disease Control and Prevention (CDC)-approved disinfectants.
The Company faces increased cybersecurity risks due to the number of employees that are working remotely in regions impacted by stay-at-home orders. Increased levels of remote access create additional opportunities for cybercriminals to exploit
vulnerabilities, and employees may be more susceptible to phishing and social engineering attempts. The Company may also be subject to increased cyber-attacks, such as phishing attacks by threat actors using the attention placed on the pandemic as a method for targeting the Company's personnel. In addition, technological resources may be strained due to the number of remote users.
Adverse changes in government and third-party payer regulations, reimbursement, or coverage policies (or in the interpretation of current regulations) relating to COVID-19 testing could materially impact the Company's results of operations, cash flows and financial position.
The
Company expects to continue to incur additional costs, which may be significant, as it continues to implement operational changes in response to this pandemic. Further, the COVID-19 outbreak has disrupted and could continue to disrupt the Company’s supply chain, including by impacting its ability to secure test collection supplies, equipment and testing supplies for its facilities, personal protective equipment for its employees in its testing locations, patient service centers, and drug development clinics. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, third parties that are critical to the Company’s business, including vendors, suppliers, and business partners. These developments, and others that are difficult or impossible to predict,
could impact materially the Company’s business, financial results, cash flows, and financial position.
The Company has diverted resources to developing and enhancing the accessibility of COVID-19 testing, while at the same time taking certain steps with respect to its business strategy in order to increase cash flexibility. For example, the Company
temporarily
suspended its share repurchase program, applied a heightened threshold to acquisition activity, delayed some of its capital expenditures, and temporarily suspended merit pay increases and 401(k) contributions for U.S. employees for 2020. In response to its improved outlook, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in the U.S. These measures, and any other measures the Company has taken and will continue to take to mitigate COVID-19, may be insufficient to ensure the financial stability of the Company, or may have other adverse impacts on the
Company’s business, results of operations, cash flows, and financial position. Additionally, if the pandemic continues for an extended period of time, the Company may be forced to prioritize its application of resources to the continued mitigation of COVID-19, at the expense of other potentially profitable opportunities or initiatives, such as through the development of new products or selected business acquisitions.
If the Company does not respond appropriately to the COVID-19 pandemic, or if the Company’s customers do not perceive its response to be adequate, the Company could suffer
damage to its reputation, which could adversely affect its business.
On March 11, 2020, the outbreak of COVID-19 was declared a global pandemic and containment and mitigation measures were recommended; six days prior to this characterization, the Company announced the availability of its LabCorp 2019 Novel Coronavirus (COVID-19) NAA test, which detects the presence of the underlying virus that causes COVID-19, for use with patients who meet current guidance for evaluation of infection with COVID-19. On April 9, 2020, the Company announced an agreement to collaborate on a comprehensive U.S.-based COVID-19 patient data registry. The
Company has performed more than 9.2 million molecular tests since making its first COVID-19 test available. The Company also launched a self-collection kit for its COVID-19 NAA test under an emergency use authorization from the FDA, as well as expanded availability of serology tests to detect antibodies to the virus that causes COVID-19. The Company has performed more than 2.2 million antibody tests as of July 30, 2020. The Company continues to increase capacity for COVID-19 molecular testing but the Company's testing capacity is dependent on access to multiple testing platforms and
the availability of equipment and testing supplies and key personnel. Despite the Company's efforts to expand capacity and access to COVID-19 testing, the Company may not be successful in meeting expectations, and the Company’s customers and other stakeholders may perceive the Company’s responses to the pandemic as insufficient, inadequate or not equivalent to or better than competitors, including with respect to the availability of testing and the amount of time it takes for delivery of test results. Factors that may be out of the Company’s control,
such as the availability of equipment, supplies, and key personnel and geographical changes in demand, may impact the Company’s ability to maintain testing capacity and timely delivery of test results and the Company's other responses to the COVID-19 pandemic, and may have an adverse effect on the Company’s operations. Any such disruptions could result in negative publicity, and the Company could suffer damage to its reputation, which could adversely affect its business, results of operations, cash flows, and financial position.
The success of the
Company is dependent in part on the efforts of its management team and employees, and the COVID-19 pandemic could divert or hinder the Company’s human capital resources, which may adversely affect the Company’s operations.
The Company’s management team and employees have been acutely focused on efforts to respond to and mitigate COVID-19, including developing the LabCorp 2019 Novel Coronavirus (COVID-19) NAA test. Since that time, the Company has been continuously working to increase the number of tests that can be performed and improve the time for delivering test results. The
Company’s management team is also working closely with federal and state authorities, health officials, and other key constituencies to make testing available to patients who meet the CDC criteria for who should be tested, and Department of Health and Human Services (HHS) guidance for prioritization of testing. These response efforts have required, and will continue to require, a large investment of time and resources that would otherwise be focused on the development and growth of the Company. Further, the Company's ability to maintain and expand testing capacity depend upon maintaining and expanding its employee population. If the Company’s management team or employees become unavailable due to illness or from
other related factors, its operations could be materially adversely affected.
The ongoing COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption that could have an adverse impact on the Company’s financial position, including with respect to the Company’s ability to repay its senior notes due in the fourth quarter of 2020 and maintain its maximum leverage ratio covenant under its term loan facility and revolving credit facility.
While the Company believes that it maintains a solid financial position, including a strong balance sheet, investment grade ratings, and significant access to credit,
the sweeping nature of the rapidly-evolving COVID-19 pandemic has created cascading effects, all of which are difficult to predict. As the pandemic continues to create disruptions or turmoil in the credit and financial markets, the Company’s ability to access capital on favorable terms and continue to meet its liquidity needs in the future could be adversely impacted. The Company may also experience greater than normal impact due to fluctuations in foreign exchange rates and interest rates, decreased sales volumes, changes in employment rates and health insurance coverage, the speed of the anticipated recovery, the ability of its customers to pay for its services, and governmental and business reactions to the pandemic, all of which are highly uncertain and cannot be predicted. The
Company implemented several measures in order to
increase cash flexibility in light of these economic uncertainties, including temporarily suspending its share repurchase program, applying a heightened threshold to acquisition activity, delaying some of its capital expenditures, and suspending merit pay increases and U.S. employee 401(k) contributions for 2020. As the Company's business performance has improved, the Company will proceed with merit adjustments and will
retroactively reinstate 401(k) contributions for 2020. These measures, and any other measures the Company may take to mitigate COVID-19, may be insufficient to ensure the financial stability of the Company, and may have other adverse impacts on the Company’s business, results of operations, cash flows, and financial position.
In May 2020, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio covenant to 5.0x debt to last twelve months EBITDA for each of the three month periods ending June 30, September
30, and December 31, 2020 and 4.5x debt to last twelve months EBITDA for the three month period ending March 31, 2021. Violation of that covenant could preclude the Company from borrowing on the revolving credit facility and require repayment of its term loan of $375.0, if demanded by a majority of the Company's bank group. There can be no assurance that the Company will be able to maintain compliance with this modified covenant due to the uncertainties of the Company's financial performance as a result of the COVID-19 pandemic. If the
Company were not able to do so, any future covenant amendment or waiver that the Company may need or seek in the future may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections. There can be no assurance that the Company would be able to obtain additional amendments or waivers in a timely manner, on acceptable terms, or at all.
During the fourth quarter of 2020, $412.2 of the Company's senior notes mature. The Company has elected to redeem these notes in the third quarter from available cash on hand and borrowings under
its revolving credit facility. However, any failure to pay the senior notes prior to or at maturity, or a violation of its term loan and revolving credit facility leverage ratio covenants or other covenants, a failure to obtain any additional covenant amendments or waivers, or a failure to obtain alternative financing, if required, could result in a default, which would result in defaults under the Company’s other debt agreements and have material adverse consequences for the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (dollars in millions, except per share data)
The
following table sets forth information with respect to purchases of shares of the Company’s common stock based on settled trades made during the three months ended June 30, 2020, by or on behalf of the Company:
Total
Number of Shares Repurchased
Average Price Paid Per Share
Total Number of Shares Repurchased as Part of Publicly Announced Program
Maximum Dollar Value of Shares that May Yet Be Repurchased Under the Program
April 1 - April 30
—
$
—
—
$
800.0
May
1 - May 31
—
—
—
800.0
June 1 - June 30
—
—
—
800.0
—
$
—
—
$
800.0
As
of June 30, 2020, the Company had outstanding authorization from the board of directors to purchase up to $800.0 of the Company's common stock. The repurchase authorization has no expiration date; however the Company temporarily suspended stock repurchases beginning in March 2020 due to impact of the COVID-19 pandemic.
Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
