Securities registered pursuant to Section 12(b) of the Exchange Act.
Title of Each Class Trading Symbol Name of exchange on which registered
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.
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| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2018 |
| | U.S. | | Canada | | U.K. | | Switzerland | | Other Europe | | Other | | Total |
| Payer/Customer | | | | | | | | | | | | | |
| LCD | | | | | | | | | | | | | |
| Clients | 17 | % | | 1 | % | | — | % | | — | % | | — | % | | — | % | | 18 | % |
| Patients | 7 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 7 | % |
| Medicare and Medicaid | 9 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 9 | % |
| Third-party | 26 | % | | 2 | % | | — | % | | — | % | | — | % | | — | % | | 28 | % |
| Total LCD revenues by payer | 59 | % | | 3 | % | | — | % | | — | % | | — | % | | — | % | | 62 | % |
| | | | | | | | | | | | | | |
| CDD | | | | | | | | | | | | | |
| Biopharmaceutical and medical device companies | 20 | % | | — | % | | 4 | % | | 4 | % | | 3 | % | | 7 | % | | 38 | % |
| | | | | | | | | | | | | | |
| Total revenues | 79 | % | | 3 | % | | 4 | % | | 4 | % | | 3 | % | | 7 | % | | 100 | % |
9
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2019 |
| | U.S. | | Canada | | U.K. | | Switzerland | | Other Europe | | Other | | Total |
| Payer/Customer | | | | | | | | | | | | | |
| LCD | | | | | | | | | | | | | |
| Clients | 16 | % | | 1 | % | | — | % | | — | % | | — | % | | — | % | | 17 | % |
| Patients | 8 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 8 | % |
| Medicare and Medicaid | 8 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 8 | % |
| Third-party | 26 | % | | 2 | % | | — | % | | — | % | | — | % | | — | % | | 28 | % |
| Total LCD revenues by payer | 58 | % | | 3 | % | | — | % | | — | % | | — | % | | — | % | | 61 | % |
| | | | | | | | | | | | | | |
| CDD | | | | | | | | | | | | | |
Biopharmaceutical and medical
device companies | 20 | % | | — | % | | 4 | % | | 5 | % | | 3 | % | | 7 | % | | 39 | % |
| | | | | | | | | | | | | | |
| Total revenues | 78 | % | | 3 | % | | 4 | % | | 5 | % | | 3 | % | | 7 | % | | 100 | % |
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2020 |
| U.S. | | Canada | | United Kingdom | | Switzerland | | Other Europe | | Other | | Total |
| Payer/Customer | | | | | | | | | | | | | |
| LCD | | | | | | | | | | | | | |
| Clients | 19 | % | | 1 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 20 | % |
| Patients | 6 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 6 | % |
| Medicare and Medicaid | 7 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 7 | % |
| Third-party | 29 | % | | 1 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 30 | % |
| Total LCD revenues by payer | 61 | % | | 2 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 63 | % |
| | | | | | | | | | | | | |
| CDD | | | | | | | | | | | | | |
| Biopharmaceutical and medical device companies | 18 | % | | 0 | % | | 5 | % | | 4 | % | | 3 | % | | 7 | % | | 37 | % |
| | | | | | | | | | | | | |
| Total revenues | 79 | % | | 2 | % | | 5 | % | | 4 | % | | 3 | % | | 7 | % | | 100 | % |
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| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2018 |
| | U.S. | | Canada | | U.K. | | Switzerland | | Other Europe | | Other | | Total |
| Payer/Customer | | | | | | | | | | | | | |
| LCD | | | | | | | | | | | | | |
| Clients | 17 | % | | 1 | % | | — | % | | — | % | | — | % | | — | % | | 18 | % |
| Patients | 8 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 8 | % |
| Medicare and Medicaid | 9 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 9 | % |
| Third-party | 25 | % | | 2 | % | | — | % | | — | % | | — | % | | — | % | | 27 | % |
| Total LCD revenues by payer | 59 | % | | 3 | % | | — | % | | — | % | | — | % | | — | % | | 62 | % |
| | | | | | | | | | | | | | |
| CDD | | | | | | | | | | | | | |
Biopharmaceutical and medical
device companies | 20 | % | | — | % | | 3 | % | | 5 | % | | 3 | % | | 7 | % | | 38 | % |
| | | | | | | | | | | | | | |
| Total revenues | 79 | % | | 3 | % | | 3 | % | | 5 | % | | 3 | % | | 7 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 |
| U.S. | | Canada | | United Kingdom | | Switzerland | | Other Europe | | Other | | Total |
| Payer/Customer | | | | | | | | | | | | | |
| LCD | | | | | | | | | | | | | |
| Clients | 16 | % | | 1 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 17 | % |
| Patients | 8 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 8 | % |
| Medicare and Medicaid | 8 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 8 | % |
| Third-party | 26 | % | | 2 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 28 | % |
| Total LCD revenues by payer | 58 | % | | 3 | % | | 0 | % | | 0 | % | | 0 | % | | 0 | % | | 61 | % |
| | | | | | | | | | | | | |
| CDD | | | | | | | | | | | | | |
| Biopharmaceutical and medical device companies | 20 | % | | 0 | % | | 4 | % | | 5 | % | | 3 | % | | 7 | % | | 39 | % |
| | | | | | | | | | | | | |
| Total revenues | 78 | % | | 3 | % | | 4 | % | | 5 | % | | 3 | % | | 7 | % | | 100 | % |
Contract costs
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 12 months1 to 57 months,5 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 endpoint and 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 24-60 months.2 to 5 years. Amortization of deferred contract fulfillment costs is included in cost of goods sold.
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Sales commission assets | $ | 27.8 |
| | $ | 24.2 |
|
| Deferred contract fulfillment costs | 15.0 |
| | 12.9 |
|
| Total | $ | 42.8 |
| | $ | 37.1 |
|
| | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | | |
| Sales commission assets | $ | 32.8 | | | $ | 28.6 | | | | |
| Deferred contract fulfillment costs | 12.9 | | | 14.9 | | | | |
| Total | $ | 45.7 | | | $ | 43.5 | | | | |
Amortization related to sales commission assets and associated payroll taxes for the three months ended September 30, 2020, and 2019, was $6.0 and 2018, was $5.8, and $4.2, respectively, and for the nine months ended September 30, 2020, and 2019, was $16.8 and 2018, was $15.3, and $12.8, respectively. Amortization related to deferred contract fulfillment costs for the three-month periodsthree months ended September 30, 2019,2020,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and 2018,shares in millions, except per share data)
and 2019, was $2.3 and $0.8,$2.3, respectively, and was $7.6 and $6.1, respectively, for the nine months ended September 30, 2019,2020, and 2018, was $6.1 and $3.3, respectively. Impairment expense related to contract costs was immaterial to the Company’s consolidated statement of operations.2019.
Receivables, Unbilled Services and Unearned Revenue
The following table provides information about receivables, unbilled services, and unearned revenue (contract liabilities) from contracts with customers for the CDD segment. 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.
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Receivables, which are included in Accounts receivable | $ | 809.2 |
| | $ | 693.6 |
|
| Unbilled services | 479.3 |
| | 396.9 |
|
| Unearned revenue | 400.2 |
| | 354.1 |
|
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Receivables, which are included in accounts receivable | $ | 834.0 | | | $ | 771.1 | |
| Unbilled services | 609.8 | | | 483.7 | |
| Unearned revenue | 492.9 | | | 449.2 | |
Revenues recognized during the period, whichthat were included in the unearned revenue balance at the beginning of the period for the nine months ended September 30, 2019,2020, and September 30, 2018,2019, were $237.2 and $232.8, respectively.
Credit Loss Rollforward
With the adoption of the current expected credit loss standard in 2020, the Company estimates future expected losses on accounts receivable, unbilled services and $144.8, respectively. Bad debt expense on receivablesnotes receivable over the remaining collection period of the instrument. The rollforward for the allowance for credit losses for the nine months ended September 30, 2019,2020, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2020 |
| Accounts Receivable | | Unbilled Services | | Note and Other Receivables | | Total |
| Allowance for credit losses as of December 31, 2019 | $ | 19.0 | | | $ | 2.3 | | | $ | 0 | | | $ | 21.3 | |
| Current expected credit losses opening balance impact on retained earnings | 1.8 | | | 0.2 | | | 5.0 | | | 7.0 | |
| Plus, credit loss expense | 10.0 | | | 3.9 | | | 0.7 | | | 14.6 | |
| Less, write offs | 4.2 | | | 0.1 | | | 0 | | | 4.3 | |
| Ending allowance for credit losses | $ | 26.6 | | | $ | 6.3 | | | $ | 5.7 | | | $ | 38.6 | |
Notes and 2018, was immaterialother receivables includes the $110.0 due 2022 from the Envigo transaction which is recorded in Other assets, net. During the three months ended September 30, 2020, the Company recorded an impairment for a note receivable related to the Company’s consolidated statementan LCD investment of operations.$0.7.
Performance Obligations Under Long-Term Contracts
Long-term contracts at the Company consist primarily of fully managed clinical studies within the CDD segment.CDD. The amount of existing performance obligations under such long-term contracts unsatisfied as of September 30, 2019,2020, was $4,310.7.$4,795.0. The Company expects to recognize approximately 36%32% of the remaining performance obligations as revenuesof September 30, 2020, as revenue over the next 12 months, and the balance thereafter. The Company's long-term contracts generally range from 1 to 8 years.
Within CDD, revenues of $67.7$44.8 and $20.5$67.7 were recognized during the nine months ended September 30, 2019,2020, and 2018,2019, 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. | BUSINESS ACQUISITIONS AND DISPOSITIONS |
On June 3, 2019,3. BUSINESS ACQUISITIONS AND DISPOSITIONS
During the Company's CDD segment acquired Envigo's nonclinical contract research services business, expanding CDD's global nonclinical drug development capabilities with additional locations and resources. Additionally,nine months ended September 30, 2020, the Company divested the Covance Research Products (CRP)acquired various business which was a part of the CDD segment, to Envigo. As part of this sale, CDD entered into a multi-year, renewable supply agreement. The Company paidand related assets for approximately $208.8 in cash (including contingent consideration of $601.0, received a floating rate secured note$6.0 and net of $110.0,cash acquired), $113.4 within LCD and recorded a loss on the sale of CRP of $11.9.$95.4 within CDD. The Company funded the transaction through a new term loan facility.
The preliminary valuation of acquired assets and assumed liabilities as of June 3, 2019, include the following:
|
| | | | | | | | | | | | |
| Consideration Transferred | | | | | | |
| Cash consideration | | $ | 601.0 |
| | | | |
| Fair value of CRP | | 110.0 |
| | | | |
| Total | | $ | 711.0 |
| | | |
|
|
| | | | | | | |
| | | Preliminary June 30, 2019 | | Measurement Period Adjustments | | Preliminary September 30, 2019 |
| Net Assets Acquired | | | | | | |
| Cash and cash equivalents | | $ | 15.1 |
| | $ | (3.9 | ) | | $ | 11.2 |
|
| Accounts receivable | | 16.5 |
| | (1.2 | ) | | 15.3 |
|
| Unbilled services | | 26.5 |
| | — |
| | 26.5 |
|
| Inventories | | 4.5 |
| | — |
| | 4.5 |
|
| Prepaid expenses and other | | 3.5 |
| | — |
| | 3.5 |
|
| Property, plant and equipment (including ROU operating lease assets) | | 99.1 |
| | (15.0 | ) | | 84.1 |
|
| Deferred income taxes | | 25.5 |
| | (9.3 | ) | | 16.2 |
|
| Goodwill | | 432.2 |
| | (18.0 | ) | | 414.2 |
|
| Customer relationships | | 125.8 |
| | 18.7 |
| | 144.5 |
|
| Trade name and trademarks | | 0.6 |
| | — |
| | 0.6 |
|
| Other assets | | 9.9 |
| | — |
| | 9.9 |
|
| Total assets acquired | | 759.2 |
| | (28.7 | ) | | 730.5 |
|
| Accounts payable | | 15.4 |
| | (0.2 | ) | | 15.2 |
|
| Accrued expenses and other | | 11.6 |
| | (4.2 | ) | | 7.4 |
|
| Unearned revenue | | 49.9 |
| | — |
| | 49.9 |
|
| Operating lease liabilities | | 15.0 |
| | (15.0 | ) | | — |
|
| Other liabilities | | 66.3 |
| | (9.3 | ) | | 57.0 |
|
| Total liabilities acquired | | 158.2 |
| | (28.7 | ) | | 129.5 |
|
| Net Envigo assets acquired | | 601.0 |
| | $ | — |
| | $ | 601.0 |
|
| Floating rate secured note receivable due 2022 | | 110.0 |
| | | | |
| Total | | $ | 711.0 |
| | | | |
The preliminary purchase consideration for Envigoall acquisitions in the nine months ended September 30, 2020, has been allocated under the acquisition method of accounting to the estimated fair market value of the net assets acquired, including approximately $144.5$88.5 in identifiable intangible assets and a residual amount of non-tax-deductiblenon-tax deductible goodwill of approximately $414.2.$128.9. The amortization periodperiods for intangible assets acquired is 11from these businesses range from 5 to 15 years for customer relationships.relationships and non-compete agreements. 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Envigo transactionThese acquisitions contributed $52.0$13.1 and $9.0 and $68.5 and $9.7$13.8 of revenues and operating income, respectively,revenue during the three and nine months ended September 30, 2019,2020, respectively. The acquisitions contributed $3.5 and $3.6 of operating income, during the three and nine months ended September 30, 2020, respectively.
The purchase price allocation for the Envigo transaction is still preliminary and subject to change. The areas of the purchase price allocation that are not yet finalized relate primarily to intangible assets, goodwill, fixed assets and the impact of finalizing deferred taxes. Accordingly, adjustments may be made as additional information is obtained about the facts and circumstances that existed as of the valuation date. The Company expects these purchase price allocations to be finalized by the second quarter of 2020. Any adjustments will be recorded in the period in which they are identified.
During the nine months ended September 30, 2019, the Company also acquired various businesses and related assets for approximately $263.1$852.9 in cash (net of cash acquired)., $647.4 within CDD and $205.5 within LCD. The purchase consideration for all acquisitions year to datein the nine months ended September 30, 2019, has been allocated to the estimated fair market value of the net assets acquired, including approximately $179.6$324.1 in identifiable intangible assets and a residual amount of non-tax-deductiblenon-tax deductible goodwill offor approximately $98.1.$512.3. The amortization periods for intangible assets acquired from these businesses range from 11 to 15 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’businesses' workforce and established relationships and the benefits of being able to leverage operational efficiencies with favorable growth opportunities in these markets.
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 its food solutions and forensic testing servicesthe Covance Research Products business in the United Kingdom (U.K.) and the U.S. in 2018. Total operating income for the three divested businesses(CRP), which was $3.0 and $8.4 for the three and nine months ended September 30, 2018, respectively.a part of CDD, to Envigo. As part of this sale, CDD entered into a multi-year, renewable supply agreement with Envigo. The Company recorded a net gain on salepaid cash consideration of businesses of 209.4 for the nine months ended September 30, 2018, which$601.0 (which is included in Other, net.the nine month acquisition numbers above), received a floating rate secured note of $110.0, and recorded a loss on the sale of CRP of $12.2. The Company funded the transaction through a new term loan facility.
The final valuation of acquired assets and assumed liabilities in the transaction as of June 3, 2019, include the following: | | | | | | | | |
4. Consideration Transferred | EARNINGS PER SHARE | |
| Cash consideration | | $ | 601.0 | |
| Fair value of CRP | | 110.0 | |
| Total | | $ | 711.0 | |
| | |
| | Final
June 30, 2020 |
| Net Assets Acquired | | |
| Cash and cash equivalents | | $ | 11.3 | |
| Accounts receivable | | 12.1 | |
| Unbilled services | | 25.6 | |
| Inventories | | 4.5 | |
| Prepaid expenses and other | | 10.8 | |
| Property, plant and equipment | | 128.4 | |
| Deferred income taxes | | 25.2 | |
| Goodwill | | 376.6 | |
| Customer relationships | | 140.8 | |
| Trade name and trademarks | | 0.6 | |
| Other assets | | 9.9 | |
| Total assets acquired | | 745.8 | |
| Accounts payable | | 15.2 | |
| Accrued expenses and other | | 10.4 | |
| Unearned revenue | | 49.9 | |
| | |
| | |
| Other liabilities | | 69.3 | |
| Total liabilities acquired | | 144.8 | |
| Net Envigo assets acquired | | 601.0 | |
| Floating rate secured note receivable due 2022 | | 110.0 | |
| Total | | $ | 711.0 | |
| | |
| | |
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The final purchase consideration for Envigo has been allocated to the estimated fair market value of the net assets acquired, including approximately $141.4 in identifiable intangible assets and a residual amount of non-tax-deductible goodwill of approximately $376.6. The amortization period for intangible assets acquired is 11 years for customer relationships.
Unaudited Pro Forma Information
Had the Company's total 2019 and 2020 acquisitions been completed as of January 1, 2018, or January 1, 2019, respectively, the Company's pro forma results would have been as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | 2019 | | 2020 | 2019 |
| Revenues | $ | 3,899.7 | | $ | 2,969.0 | | | $ | 9,524.2 | | $ | 8,827.7 | |
| Net earnings attributable to Laboratory Corporation of America Holdings | $ | 744.9 | | $ | 224.3 | | | $ | 666.3 | | $ | 612.9 | |
| | | | | |
4. EARNINGS PER SHARE
Basic earnings 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 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, and shares issuable upon conversion of zero-coupon subordinated notes.awards.
The following represents a reconciliation of basic earnings per share to diluted earnings per share:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | Earnings | | Shares | | Per Share Amount | | Earnings | | Shares | | Per Share Amount | | Earnings | | Shares | | Per Share Amount | | Earnings | | Shares | | Per Share Amount |
| Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | $ | 220.7 |
| | 97.6 |
| | $ | 2.26 |
| | $ | 318.8 |
| | 101.6 |
| | $ | 3.14 |
| | $ | 596.7 |
| | 98.1 |
| | $ | 6.08 |
| | $ | 725.8 |
| | 101.8 |
| | $ | 7.13 |
|
| Dilutive effect of employee stock options and awards | — |
| | 0.7 |
| | |
| | — |
| | 1.0 |
| | |
| | — |
| | 0.7 |
| | |
| | — |
| | 1.2 |
| | |
|
| Net earnings including impact of dilutive adjustments | $ | 220.7 |
| | 98.3 |
| | $ | 2.25 |
| | $ | 318.8 |
| | 102.7 |
| | $ | 3.10 |
| | $ | 596.7 |
| | 98.8 |
| | $ | 6.04 |
| | $ | 725.8 |
| | 103.1 |
| | $ | 7.04 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Earnings | | Shares | | Per Share Amount | | Earnings | | Shares | | Per Share Amount | | Earning | | Shares | | Per Share Amount | | Earnings | | Shares | | Per Share Amount |
| Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | $ | 703.4 | | | 97.4 | | | $ | 7.22 | | | $ | 220.7 | | | 97.6 | | | $ | 2.26 | | | $ | 617.8 | | | 97.3 | | | $ | 6.35 | | | $ | 596.7 | | | 98.1 | | | $ | 6.08 | |
| Dilutive effect of employee stock options and awards | — | | | 0.7 | | | | | — | | | 0.7 | | | | | — | | | 0.6 | | | | | — | | | 0.7 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings including impact of dilutive adjustments | $ | 703.4 | | | 98.1 | | | $ | 7.17 | | | $ | 220.7 | | | 98.3 | | | $ | 2.25 | | | $ | 617.8 | | | 97.9 | | | $ | 6.31 | | | $ | 596.7 | | | 98.8 | | | $ | 6.04 | |
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. The following table summarizes the potential common shares not included in the computation of diluted earnings per share because their impact would have been antidilutive:
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Stock options | 0.2 |
| | 0.1 |
| | 0.2 |
| | 0.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Employee stock options and awards | 0.2 | | | 0.2 | | | 0.4 | | | 0.2 | |
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollarsDuring the nine months ended September 30, 2020, the Company recorded net restructuring and sharesother charges of $38.9: $13.4 within LCD and $25.5 within CDD. The charges were comprised of $12.8 related to severance and other personnel costs, $11.0 for a CDD leased lab facility and equipment impairments, and $24.0 in millions, except per share data)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 $1.1 and $7.8 in unused severance costs and facility-related costs, respectively.
| |
5. | RESTRUCTURING AND OTHER SPECIAL CHARGES |
During the nine months ended September 30, 2019, the Company recorded net restructuring and other special charges of $48.4: $22.8 within LCD and $25.6 within CDD. The charges were comprised of $26.2 related to severance and other personnel costs and $22.0 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 severance reserves and decreased by a reversal of $0.2 in unused facility reserves.
During the nine months ended September 30, 2018, the Company recorded net restructuring and other special charges of $36.5: $13.2 within LCD and $23.3 within CDD. The charges were comprised of $30.0 related to severance and other personnel costs and $8.8 in costs associated with facility closures and general integration initiatives. The Company reversed previously established reserves of $1.2 and $1.1 in unused facility reserves and unused severance reserves, respectively. The Company also recorded $5.3 in impairment to land held for sale which is included in amortization expense.
The following represents the Company’s restructuring reserve activities for the period indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | LCD | | CDD | | |
| | Severance and Other Employee Costs | | Facility Costs | | Severance and Other Employee Costs | | Facility Costs | | Total |
| Balance as of December 31, 2018 | $ | 2.1 |
| | $ | 7.4 |
| | $ | 6.5 |
| | $ | 27.6 |
| | $ | 43.6 |
|
| Reclassification for ASC 842 adoption | — |
| | (5.7 | ) | | — |
| | (27.1 | ) | | (32.8 | ) |
| Restructuring charges | 15.3 |
| | 6.6 |
| | 10.9 |
| | 1.8 |
| | 34.6 |
|
| Adjustments to prior restructuring accruals | (0.1 | ) | | (0.1 | ) | | 0.5 |
| | (0.1 | ) | | 0.2 |
|
| Impairment of operating lease right-of-use asset | — |
| | 1.1 |
| | — |
| | 12.5 |
| | 13.6 |
|
| Cash payments and other adjustments | (17.0 | ) | | (6.4 | ) | | (11.0 | ) | | (10.0 | ) | | (44.4 | ) |
| Balance as of September 30, 2019 | $ | 0.3 |
| | $ | 2.9 |
| | $ | 6.9 |
| | $ | 4.7 |
| | $ | 14.8 |
|
| Current | |
| | |
| | | | | | $ | 11.1 |
|
| Non-current | |
| | |
| | | | | | 3.7 |
|
| | |
| | |
| | | | | | $ | 14.8 |
|
| |
6. | GOODWILL AND INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill for the nine months ended September 30, 2019, are as follows:
|
| | | | | | | | | | | |
| | LCD | | CDD | | Total |
| Balance as of January 1, 2019 | $ | 3,638.8 |
| | $ | 3,721.5 |
| | $ | 7,360.3 |
|
| Goodwill acquired during the period | 72.8 |
| | 467.2 |
| | 540.0 |
|
| Dispositions | — |
| | (12.6 | ) | | (12.6 | ) |
| Adjustments to goodwill | 0.9 |
| | (73.3 | ) | | (72.4 | ) |
| Balance as of September 30, 2019 | $ | 3,712.5 |
| | $ | 4,102.8 |
| | $ | 7,815.3 |
|
The components of identifiable intangible assets are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Customer relationships | $ | 4,370.9 |
| | $ | (1,274.5 | ) | | $ | 3,096.4 |
| | $ | 4,119.4 |
| | $ | (1,146.7 | ) | | $ | 2,972.7 |
|
| Patents, licenses and technology | 450.2 |
| | (229.0 | ) | | 221.2 |
| | 447.3 |
| | (211.2 | ) | | 236.1 |
|
| Non-compete agreements | 89.4 |
| | (58.4 | ) | | 31.0 |
| | 76.8 |
| | (53.7 | ) | | 23.1 |
|
| Trade name | 405.4 |
| | (209.8 | ) | | 195.6 |
| | 404.0 |
| | (189.1 | ) | | 214.9 |
|
| Land use right | 11.1 |
| | (5.2 | ) | | 5.9 |
| | 10.8 |
| | (4.1 | ) | | 6.7 |
|
| Canadian licenses | 471.2 |
| | — |
| | 471.2 |
| | 457.6 |
| | — |
| | 457.6 |
|
| | $ | 5,798.2 |
| | $ | (1,776.9 | ) | | $ | 4,021.3 |
| | $ | 5,515.9 |
| | $ | (1,604.8 | ) | | $ | 3,911.1 |
|
Amortization of intangible assets for the three months ended September 30, 2019, and 2018, was $61.7 and $54.7, respectively and for the nine months ended September 30, 2019, and 2018, was $179.0 and $175.5, respectively. Amortization expense for the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LCD | | CDD | | | |
| Severance and Other Employee Costs | | Facility Costs | | Severance and Other Employee Costs | | Facility Costs | | Total | |
| Balance as of December 31, 2019 | $ | 0.5 | | | $ | 2.7 | | | $ | 5.5 | | | $ | 4.7 | | | $ | 13.4 | | |
| | | | | | | | | | |
| Restructuring charges | 3.9 | | | 5.2 | | | 8.9 | | | 6.7 | | | 24.7 | | |
| | | | | | | | | | |
| Impairment of lab facility and equipment | 0 | | | 5.8 | | | 0 | | | 17.3 | | | 23.1 | | |
| | | | | | | | | | |
| Cash payments and other adjustments | (4.4) | | | (12.2) | | | (10.4) | | | (23.8) | | | (50.8) | | |
| Balance as of September 30, 2020 | $ | 0 | | | $ | 1.5 | | | $ | 4.0 | | | $ | 4.9 | | | $ | 10.4 | | |
| Current | | | | | | | | | $ | 8.1 | | |
| Non-current | | | | | | | | | 2.3 | | |
| | | | | | | | | | $ | 10.4 | | |
6. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of intangible assets is estimated to be $54.1goodwill for the remainder of fiscal 2019, $237.9 in fiscalnine months ended September 30, 2020, $231.1 in fiscal 2021, $225.1 in fiscal 2022, $221.4 in fiscal 2023 and $2,580.3 thereafter.are as follows:
7. LEASES
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| LCD | | | | CDD | | | | Total | | |
| | | | | | | | | | | |
| Balance as of December 31, 2019 | $ | 3,721.5 | | | | | $ | 4,143.5 | | | | | $ | 7,865.0 | | | |
| Goodwill acquired during the period | 66.1 | | | | | 73.0 | | | | | 139.1 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Impairment | (3.7) | | | | | (418.7) | | | | | (422.4) | | | |
| Foreign currency impact and other adjustments to goodwill | (2.2) | | | | | 34.3 | | | | | 32.1 | | | |
| Balance as of September 30, 2020 | $ | 3,781.7 | | | | | $ | 3,832.1 | | | | | $ | 7,613.8 | | | |
The Company hasassesses 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 finance leasesupdated its annual 2019 goodwill impairment testing as of March 31, 2020, for patient service centers, laboratoriesits CDD reporting units and testing facilities, clinical facilities, general office spaces, vehicles, and office and laboratory equipment. Leases have remaining lease terms ofits 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, including one where the 2019 fair value exceeded carrying value by approximately 10.0%, and recorded a year to 15 years, somegoodwill impairment of which include options to extend$418.7 for the leasesCDD segment and $3.7 for up to 15 years.
The componentsCompany utilized a combination of lease expenseincome 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 $418.7 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 $1,627.5 as of September 30, 2020. The other CDD reporting unit evaluated indicated a fair value that exceeded carrying value by less than 10.0%. Management notes that a +1.0% change in the discount rate in the March 31, 2020 analysis would reduce the headroom to approximately 2.0%. Goodwill for this reporting unit as of September 30, 2020 is $646.2.
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 $3.7 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 10.0%. Management notes that a +1.0% 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 $40.0. Goodwill and indefinite-lived intangibles of Canadian licenses for this reporting unit as of September 30, 2020, were as follows:$86.0 and $468.4, 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 these businesses could be impacted by unfavorable or unforeseen changes which could impact the existing assumptions used in the impairment analysis. Various 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
|
| | | | | | | |
| | For the Three Months Ended September 30, 2019 | | For the Nine Months Ended September 30, 2019 |
| Operating lease cost | $ | 58.9 |
| | $ | 169.7 |
|
| | |
| | |
| Finance lease cost: | |
| | |
| Amortization of right-of-use assets | $ | 2.0 |
| | $ | 6.5 |
|
| Interest on lease liabilities | 1.6 |
| | 4.8 |
|
| Total finance lease cost | $ | 3.6 |
| | $ | 11.3 |
|
14
Supplemental cash flow information related to leases was as follows:
|
| | | |
| | For the Nine Months Ended September 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from operating leases | $ | (174.3 | ) |
| Operating cash flows from finance leases | (4.8 | ) |
| Financing cash flows from finance leases | (6.7 | ) |
| | |
| ROU assets obtained in exchange for lease obligations: | |
| Operating leases | $ | 50.8 |
|
| Finance leases | 0.2 |
|
Supplemental balance sheet information related to leases was as follows:
|
| | | |
| | September 30, 2019 |
| Operating Leases | |
| Operating lease ROU assets (included in Property, plant and equipment, net) | $ | 681.1 |
|
| | |
|
| Short-term operating lease liabilities | 202.1 |
|
| Operating lease liabilities | 530.7 |
|
| Total operating lease liabilities | $ | 732.8 |
|
|
| | | |
| | September 30, 2019 |
| Finance Leases | |
|
| Finance lease ROU assets (included in Other assets) | $ | 85.6 |
|
| | |
|
| Short-term finance lease liabilities | $ | 8.3 |
|
| Other long-term liabilities | 92.8 |
|
| Total finance lease liabilities | $ | 101.1 |
|
| | |
| Weighted Average Remaining Lease Term | |
| Operating leases | 7.4 |
|
| Finance leases | 16.5 |
|
| | |
|
| Weighted Average Discount Rate | |
| Operating leases | 4.3 | % |
| Finance leases | 5.3 | % |
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
MaturitiesThe components of lease liabilitiesidentifiable intangible assets are as follows:
|
| | | | | | | |
| Nine months ended September 30, 2019 | Operating Leases | | Finance Leases |
| | | | |
| 2019 | $ | 181.8 |
| | $ | 3.6 |
|
| 2020 | 146.3 |
| | 13.8 |
|
| 2021 | 105.2 |
| | 12.0 |
|
| 2022 | 77.7 |
| | 10.8 |
|
| 2023 | 57.4 |
| | 10.7 |
|
| Thereafter | 277.5 |
| | 107.2 |
|
| Total lease payments | 845.9 |
| | 158.1 |
|
| Less imputed interest | (113.1 | ) | | (57.0 | ) |
| Total | $ | 732.8 |
| | $ | 101.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net | | | |
| Customer relationships | $ | 4,530.7 | | | $ | (1,473.1) | | | $ | 3,057.6 | | | $ | 4,441.7 | | | $ | (1,329.5) | | | $ | 3,112.2 | | | | |
| Patents, licenses and technology | 427.7 | | | (245.3) | | | 182.4 | | | 453.6 | | | (235.7) | | | 217.9 | | | | |
| Non-compete agreements | 105.3 | | | (67.6) | | | 37.7 | | | 90.9 | | | (60.5) | | | 30.4 | | | | |
| Trade name | 410.2 | | | (240.1) | | | 170.1 | | | 408.2 | | | (219.9) | | | 188.3 | | | | |
| Land use right | 10.8 | | | (6.5) | | | 4.3 | | | 10.9 | | | (5.5) | | | 5.4 | | | | |
| Canadian licenses | 468.4 | | | 0 | | | 468.4 | | | 480.3 | | | 0 | | | 480.3 | | | | |
| | $ | 5,953.1 | | | $ | (2,032.6) | | | $ | 3,920.5 | | | $ | 5,885.6 | | | $ | (1,851.1) | | | $ | 4,034.5 | | | | |
Rental expense for short term leases with a term less than one yearThe Company recorded non-cash charges of $30.5 for the three andimpairment of identifiable intangible assets during the nine months ended September 30, 2019, amounted2020, within CDD. During the three months ended March 31, 2020, a $2.7 impairment charge was recorded for a tradename. During the three months ended September 30, 2020, additional impairment charges of $10.1 and $17.7 for customer relationships and technology intangible assets, respectively were recorded due to $1.5 and $7.4, respectively. The Company has variable lease payments that do not depend onthe loss of a rate or index, primarily for purchase volume commitments, which are recorded as variable cost when incurred. Total variable paymentscontract from a prior acquisition.
Amortization of intangible assets for the three months ended September 30, 2020, and 2019, was $62.2 and $61.7, respectively and for the nine months ended September 30, 2020, and 2019 were $5.1was $184.6 and $14.3,$179.0, respectively. As of September 30, 2019, the Company has entered into approximately 20 additional operating leases, primarily for patient service centers, that have not yet commenced and are not significant to the overall lease portfolio. These operating leases will commence later in 2019 with lease terms ranging from less than a year to 5 years.
The Company leases various facilities and equipment under non-cancelable lease arrangements. Future minimum rental commitments for leases with non-cancelable terms of one year or more at December 31, 2018 under Accounting Standards Codification 840 are as follows:
|
| | | | | | | |
| Year Ended December 31, 2018 | Operating Leases | | Finance Leases |
| | | | |
| 2019 | $ | 191.1 |
| | $ | 8.6 |
|
| 2020 | 145.4 |
| | 8.0 |
|
| 2021 | 107.0 |
| | 6.7 |
|
| 2022 | 80.9 |
| | 6.0 |
|
| 2023 | 61.5 |
| | 6.5 |
|
| Thereafter | 155.6 |
| | 23.1 |
|
RentalAmortization expense which includes rent for real estate, equipment and automobiles under operating leases, amounted to $100.0 and $291.5, respectively, for the threenet carrying amount of intangible assets is estimated to be $60.0 for the remainder of fiscal 2020, $238.5 in fiscal 2021, $232.6 in fiscal 2022, $229.5 in fiscal 2023, $224.6 in fiscal 2024, and nine months ended September 30, 2019.$2,380.2 thereafter.
8.7. DEBT
Short-term borrowings and the current portion of long-term debt at September 30, 2019,2020, and December 31, 2018,2019, consisted of the following:
| | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 |
| | | |
| 4.625% senior notes due 2020 | $ | — | | | $ | 413.7 | |
| 2019 Term Loan | 375.0 | | | 0 | |
| Debt issuance costs | (0.6) | | | (0.7) | |
| Current portion of note payable | 2.2 | | | 2.2 | |
| Total short-term borrowings and current portion of long-term debt | $ | 376.6 | | | $ | 415.2 | |
| | | |
| | | |
|
| | | | | | | |
| | September 30,
2019 | | December 31, 2018 |
| Zero-coupon convertible subordinated notes | $ | 1.4 |
| | $ | 8.7 |
|
2.625% senior notes due 2020
| 500.0 |
| | — |
|
| Debt issuance costs | (0.2 | ) | | (0.5 | ) |
| Current portion of note payable | 1.4 |
| | 1.8 |
|
| Total short-term borrowings and current portion of long-term debt | $ | 502.6 |
| | $ | 10.0 |
|
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Long-term debt at September 30, 2019,2020, and December 31, 2018,2019, consisted of the following:
|
| | | | | | | |
| | September 30,
2019 | | December 31, 2018 |
| 2.625% senior notes due 2020 | $ | — |
| | $ | 500.0 |
|
| 4.625% senior notes due 2020 | 604.1 |
| | 596.9 |
|
| 3.20% senior notes due 2022 | 500.0 |
| | 500.0 |
|
| 3.75% senior notes due 2022 | 500.0 |
| | 500.0 |
|
| 4.00% senior notes due 2023 | 300.0 |
| | 300.0 |
|
| 3.25% senior notes due 2024 | 600.0 |
| | 600.0 |
|
| 3.60% senior notes due 2025 | 1,000.0 |
| | 1,000.0 |
|
| 3.60% senior notes due 2027 | 600.0 |
| | 600.0 |
|
| 4.70% senior notes due 2045 | 900.0 |
| | 900.0 |
|
| Revolving credit facility | — |
| | — |
|
| 2019 Term Loan | 850.0 |
| | — |
|
| 2017 Term Loan | 277.0 |
| | 527.0 |
|
| Debt issuance costs | (35.5 | ) | | (40.2 | ) |
| Note payable | 5.7 |
| | 7.2 |
|
| Total long-term debt | $ | 6,101.3 |
| | $ | 5,990.9 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31, 2019 |
| | | |
| | | |
| | | |
| 3.20% senior notes due 2022 | $ | 500.0 | | | $ | 500.0 | |
| 3.75% senior notes due 2022 | 500.0 | | | 500.0 | |
| 4.00% senior notes due 2023 | 300.0 | | | 300.0 | |
| 3.25% senior notes due 2024 | 600.0 | | | 600.0 | |
| 2.30% senior notes due 2024 | 400.0 | | | 400.0 | |
| 3.60% senior notes due 2025 | 1,000.0 | | | 1,000.0 | |
| 3.60% senior notes due 2027 | 600.0 | | | 600.0 | |
| | | |
| | | |
| 2.95% senior notes due 2029 | 650.0 | | | 650.0 | |
| | | |
| 4.70% senior notes due 2045 | 900.0 | | | 900.0 | |
| | | |
| 2019 Term Loan | 0 | | | 375.0 | |
| | | |
| Debt issuance costs | (38.8) | | | (42.2) | |
| | | |
| Note payable | 6.1 | | | 7.0 | |
| Total long-term debt | $ | 5,417.3 | | | $ | 5,789.8 | |
| | | |
Senior Notes
During the third quarter of 2013,On August 17, 2020, the Company entered into tworedeemed the remaining $412.2 of its 4.625% Senior Notes due November 15, 2020, using available cash on hand. The Company exited the remaining fixed-to-variable interest rate swap agreements for its 4.625% senior notes duearrangement in August 2020, in connection with an aggregate notional amountthis redemption and recorded a gain of $600.0 and variable interest rates based$1.6 on one-month LIBOR plus 2.298% to hedge against changes in the fair value of a portion of the Company's long-term debt. These derivative financial instruments are accounted for as fair value hedges of the senior notes due 2020. These interest rate swaps areextinguishment. The gain was included in other long-term assets or other long-term liabilities, as applicable, and added to or subtracted from the value of the senior notes, with an aggregate fair value asset of $4.1 at September 30, 2019, and an aggregate fair value liability of $3.1 at December 31, 2018.
Zero-Coupon Subordinated Notes
On September 11, 2019, the Company announced that for the period from September 11, 2019, to March 10, 2020, the zero-coupon subordinated notes will accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a zero-coupon subordinated note for the five trading days ended September 6, 2019, in addition to the continued accrual of the original issue discount.
During the nine months ended September 30, 2019, the Company settled notices to convert $7.7 aggregate principal amount of its zero-coupon subordinated notes with a conversion value of $14.5. The total cash used for these settlements was $7.3. As a result of these conversions, the Company also reversed deferred tax liabilities of $1.7.
On October 15, 2019, the Company announced that its zero-coupon subordinated notes may be converted into cash and common stock at the conversion rate of 13.4108 per $1,000.0 principal amount at maturity of the notes, subject to the terms of the zero-coupon subordinated notes and the Indenture, dated as of October 24, 2006, between the Company and The Bank of New York Mellon, as trustee and the conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter beginning October 1, 2019, through the close of businessOther, net on the last business dayCondensed Consolidated Statement of the calendar quarter, which is 5:00 p.m., New York City time, on Tuesday, December 31, 2019. If notices of conversion are received, the Company plans to settle the cash portion of the conversion obligation with cash on hand and/or borrowings under its revolving credit facility.Operations.
Credit Facilities
On June 3, 2019, the Company entered into a new $850.0 2019 term loan facility in addition to its $750.02017 term loan facility.The 2019 term loan facility will maturethat matures on June 3, 2021. Proceeds of the 2019 term loan facility were used for general corporate purposes, including to repay approximately $250.0 of the 2017 term loan facility and in connection with the acquisition of Envigo's nonclinical research services business.
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 0.55% to 1.175%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0% to 0.175%. The 2019 term loan balance at September 30, 2020, and December 31, 2019, was $850.0.$375.0 and $375.0, respectively. As of September 30, 2019,2020, the effective interest rate on the 2019 term loan was 2.84%0.95%.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The 2017 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 0.875% to 1.50%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0% to 0.50%. The 2017 term loan balance at September 30, 2019, was $277.0 and at December 31, 2018, was $527.0. As of September 30, 2019, the effective interest rate on the 2017 term loan was 3.17%.
The Company also maintains a senior revolving credit facility consisting 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. The revolving credit facility also provides for a subfacility of up to $100.0 for swing line borrowings and a subfacility of up to $150.0 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 0.00% 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, and acquisitions and other investments. The Company hadThere were no balances outstanding balance on itsthe Company's current revolving credit facility at September 30, 2019,2020, and December 31, 2018.
Advances under2019. As of September 30, 2020, the effective interest rate on the revolving credit facility accrue interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging from 0.775% to 1.25%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.00% to 0.25%was 1.12%. Fees are payable on outstanding letters of credit under the revolvingThe credit facility at a per annum rate equal to the applicable margin for LIBOR loans, and the Company is required to pay a facility feeexpires on the aggregate commitments under the revolving credit facility, at a per annum rate ranging from 0.10% to 0.25%.
The interest margin applicable to the term loan and credit facilities, and the facility fee and letter of credit fees payable under the revolving credit facility, are based on the Company’s senior credit ratings as determined by Standard & Poor’s and Moody’s.September 15, 2022.
Under the term loan facilitiesfacility 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 5.0x debt to last twelve months EBITDA for each of the three periods ended June 30, September 30, and December 31, 2020, and 4.5x for period ended March 31, 2021. From and including the period ending June 30, 2021, the maximum leverage ratio reverts back to 4.0x. The Company was in compliance with all covenants in the term loan facilitiesfacility and the revolving credit facility at September 30, 2019. As of September 30, 2019,2020, and expects that it will remain in compliance with its existing debt covenants for the ratio of total debt to consolidated proforma trailing 12 month EBITDA was 3.3 to 1.0.next twelve months.
As of September 30, 2019, the Company had provided letters of credit aggregating approximately $72.4, primarily in connection with certain insurance programs. The Company's availability of $927.6$997.0 at September 30, 2019,2020, under its revolving credit facility is reduced byreflects a reduction equivalent to the amount of thesethe Company's outstanding letters of credit.
9. PREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY
The Company is authorized to issue up to 265.0 shares of common stock, par value $0.10 per share. The Company’s treasury shares were recorded at aggregate cost and were retired during the second quarter of 2019. The Company is authorized to issue up to 30.0 shares of preferred stock, par value $0.10 per share. There were 0 preferred shares outstanding as of At September 30, 2019, and December 31, 2018.
The changes in common shares issued and held in treasury are summarized below:
|
| | | | | | | | |
| | Issued | | Held in Treasury | | Outstanding |
| Common shares at December 31, 2018 | 122.4 |
| | (23.5 | ) | | 98.9 |
|
| Common stock issued under employee stock plans | 1.2 |
| | — |
| | 1.2 |
|
| Surrender of restricted stock and performance share awards | — |
| | (0.1 | ) | | (0.1 | ) |
| Retirement of common stock | (2.6 | ) | | — |
| | (2.6 | ) |
| Retirement of treasury stock | (23.6 | ) | | 23.6 |
| | — |
|
| Common shares at September 30, 2019 | 97.4 |
| | — |
| | 97.4 |
|
Share Repurchase Program
At the end of 2018,2020, the Company had outstanding authorization from the board$667.2 of directors to purchase up to $443.5cash and cash equivalents and $997.0 of Company common stock. During January 2019,available borrowings under its revolving credit facility, which does not mature until 2022, and the Company purchased 0.8 shareswas in compliance with all of its common stock at an average price of $131.71 for a total cost of $100.1 under this plan. On February 6, 2019, the board of directors replaced the Company's existing share repurchase plan with a new plan authorizing repurchases of updebt covenants. In May 2020, in order to $1,250.0 of the Company's common stock. The repurchase authorization has no expiration. Since the new plan authorization,obtain increased financial covenant flexibility, the Company has purchased 1.8 shares ofand its common stock at an average price of $162.80 per share for a total cost of $299.9. As of September 30, 2019, the Company had outstanding authorization from the board of directors to purchase up to $950.0 of the Company's common stock.
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 is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and the effects such impacts are having and 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. PREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY
The Company is authorized to issue up to 265.0 shares of common stock, par value $0.10 per share. The Company is authorized to issue up to 30.0 shares of preferred stock, par value $0.10 per share. There were 0 preferred shares outstanding as of September 30, 2020, and December 31, 2019.
The changes in common shares issued are summarized below:
| | | | | | | | | |
| Issued and Outstanding | | | | |
| Common shares at December 31, 2019 | 97.2 | | | | | |
| Common stock issued under employee stock plans | 0.8 | | | | | |
| | | | | |
| | | | | |
| Retirement of common stock | (0.6) | | | | | |
| | | | | |
| Common shares at September 30, 2020 | 97.4 | | | | | |
Share Repurchase Program
At the end of 2019, the Company had outstanding authorization from the board of directors to purchase $900.0 of Company common stock. During three months ended March 31, 2020, the Company purchased 0.6 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 September 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. The Company reinstated its share repurchase program in October 2020 following the temporary suspension of stock repurchases beginning in March 2020 as a result of the anticipated impact of the COVID-19 pandemic.
Accumulated Other Comprehensive Earnings (Loss)
The components of accumulated other comprehensive earnings (loss) are as follows:
|
| | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Net Benefit Plan Adjustments | | Accumulated Other Comprehensive Earnings (Loss) |
| Balance as of December 31, 2018 | $ | (389.8 | ) | | $ | (73.3 | ) | | $ | (463.1 | ) |
| Other comprehensive earnings (loss) | (45.4 | ) | | 8.7 |
| | (36.7 | ) |
| Tax effect of adjustments | — |
| | (2.4 | ) | | (2.4 | ) |
| Balance as of September 30, 2019 | $ | (435.2 | ) | | $ | (67.0 | ) | | $ | (502.2 | ) |
| | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Net Benefit Plan Adjustments | | | | Accumulated Other Comprehensive Earnings (Loss) |
| Balance as of December 31, 2019 | $ | (285.4) | | | $ | (87.0) | | | | | $ | (372.4) | |
| Current year adjustments | 52.4 | | | 7.5 | | | | | 59.9 | |
| | | | | | | |
| Tax effect of adjustments | 0 | | | (2.1) | | | | | (2.1) | |
| Balance as of September 30, 2020 | $ | (233.0) | | | $ | (81.6) | | | | | $ | (314.6) | |
The provision for income tax expense of $66.4 and $214.4 for the three months and nine months ended September 30, 2019, respectively, primarily resulted from the application of the Company's estimated effective blended U.S. federal and state income tax rate as well as a reduction in tax rates in a foreign jurisdiction. The provision for income tax expense of $180.6 and $328.1 for the three and nine months ended September 30, 2018, respectively, primarily resulted from the application of the Company's estimated effective blended U.S. federal and state income tax rate, the Company's foreign tax rates and the tax impact of acquisitions, divestitures and tax reform. 9. INCOME TAXES
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 50% likely to be realized.
The gross unrecognized income tax benefits were $24.2$41.3 and $18.0$31.7 at September 30, 2019,2020, and December 31, 2018,2019, respectively. It is anticipated that the amount of the unrecognized income tax benefits will change within the next 12 months;
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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 September 30, 2019,2020, and December 31, 2018, $24.22019, $41.3 and $18.0,$31.7, 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.
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 $5.2$9.0 and $8.7$5.5 as of September 30, 2019,2020, and December 31, 2018,2019, respectively.
The Company has substantially concluded all U.S. federal income tax matters for years through 2015.2016. Substantially all material state and local and foreign income tax matters have been concluded through 2014.2015 and 2011, 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.
| |
11. | COMMITMENTS AND CONTINGENCIES |
10. COMMITMENTS 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.
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 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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. 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 Court has scheduled oral arguments for December 9, 2020. 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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.
On August 3, 2016, the Company was served with a putative class action lawsuit, Daniel L. Bloomquist v. Covance Inc., et al., filed in the Superior Court of California, County of San Diego. The Complaint alleges that Covance Inc. violated the California Labor Code and California Business & Professions Code by failing to provide overtime wages, failing to provide meal and rest periods, failing to pay for all hours worked, failing to pay for all wages owed upon termination, and failing to provide accurate itemized wage statements to Clinical Research Associates and Senior Clinical Research Associates employed by Covance in California. The lawsuit seeks monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. On October 13, 2016, the case was removed to the U.S. District Court for the Southern District of California. On May 3, 2017, the U.S. District Court for the Southern District of California remanded the case to the Superior Court. This matter has been settled in principle and the settlement is subject to judicial review and approval.
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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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. 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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 courtCourt 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 September 7, 2017, the Company was served with a putative class action lawsuit, John Sealock, et al. v. Covance Market Access Services, Inc., filed in the U.S. District Court for the Southern District of New York. The complaint alleged that Covance Market Access Services, Inc. violated the Fair Labor Standards Act and New York labor laws by failing to provide overtime wages, failing to pay for all hours worked, and failing to provide accurate wage statements. The lawsuit sought monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. In November 2017, the Company filed a Motion to Strike Class Allegations, which was denied. In December 2017, the Plaintiff filed a Motion for Conditional Certification of a Collective Action, which was granted in May 2018. In December 2018, Plaintiff filed, and the Court granted, a second motion to conditionally certify an expanded class to a nationwide class action. This matter has been settled in principle and the settlement is subject to judicial review and approval.
On July 16, 2018, the Company reported that it had detected suspicious activity on its information technology network and was taking steps to respond to and contain the activity. The activity was subsequently determined to be a new variant of ransomware affecting certain LCD information technology systems. As part of its response, the Company took certain systems offline, which temporarily affected test processing and customer access to test results, and also affected certain other information technology systems involved in conducting Company-wide operations. Operations were returned to normal within a few days of the incident. As part of its in-depth investigation into this incident, the Company engaged outside security experts and worked with authorities, including law enforcement. The investigation determined that the ransomware did not and could not transfer patient or client data outside of Company systems and that there was no theft or misuse of patient or client data. The Company cooperated with law enforcement and regulatory authorities with respect to the incident.
The Company has insurance coverage for costs resulting from cyber-attacks and has filed a claim for recovery of its losses resulting from this incident. However, disputes over the extent of insurance coverage for claims are not uncommon and the Company has not recognized any estimated proceeds resulting from this claim. Furthermore, while the Company has not been the subject of any legal proceedings involving this incident, it is possible that the Company could be the subject of claims from persons alleging they suffered damages from the incident, or actions by governmental authorities.
On September 21, 2018, the Company was served with a putative class action lawsuit, Alma Haro v. Laboratory Corporation of America, et al., which was filed in the Superior Court of California, County of Los Angeles. Plaintiff alleges 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. Plaintiff asserts these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuit seeks monetary damages, civil penalties, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
On December 20, 2018, the Company was served with a putative class action lawsuit, Feckley v. Covance Inc., et al., filed in the Superior Court of California, County of Orange. The complaint alleges that Covance Inc. violated the California Labor Code and California Business & Professions Code by failing to properly pay commissions to employees under a sales incentive compensation plan upon their termination of employment. The lawsuit seeks monetary damages, civil penalties, punitive damages, and recovery of attorney’s fees and costs. On January 22, 2018, the case was removed to the U.S. District Court for the Central District of California. 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 April 22, 2019, the Company was served with a putative class action lawsuit, Kawa Orthodontics LLP, et al. v. Laboratory Corporation of America Holdings, et al., filed in the U.S. District Court for the Middle District of Florida. The lawsuit alleges that on or about February 6, 2019, the defendants violated the U.S. Telephone Consumer Protection Act (TCPA) by sending unsolicited facsimiles to Plaintiff and at least 40 other recipients without the recipients' prior express invitation or permission. The lawsuit seeks the greater of actual damages or the sum of $0.0005 for each violation, subject to trebling under the TCPA, and injunctive relief. The Company filed a motion to dismiss the case on May 28, 2019. In response to the Motion to Dismiss, the Plaintiff filed an amended complaint, which contains additional allegations, including allegations related to another facsimile. The Company filed a Motion to Dismiss the amended complaint. The Company will vigorously defend the lawsuit.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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 someindividuals 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-twoTwenty-three putative class action lawsuits were filed against the Company related to the AMCA Incident.Incident in various U.S. District Courts. Numerous similar lawsuits have been filed against other health care providers who used AMCA. TheThese lawsuits againsthave 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 were filed in various United States District Courts.Motions to Dismiss all claims. The lawsuitsconsolidated Complaint generally allegealleges that the Company did not adequately protect its
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
patients’ data and assertfailed 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 lawsuits seekComplaint seeks damages on behalf of a class of all affected Company consumers. The attorneys for certain of the Plaintiffs filed a motion with the Judicial Panel on Multi-District Litigation (JPML) seeking to have all cases related to the AMCA Incident consolidated for pre-trial proceedings in a multi-district litigation. The JPML ordered the transfer of the cases to the District of New Jersey.customers. The Company will vigorously defend the multi-district litigation.
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 and individuals have requested information from the Company related to the AMCA Incident. The Company has received requestsa request for information from United States Senators Robert Menendezthe Office for Civil Rights (OCR) of the Department of Health and Cory A. Booker andHuman Services. On April 28, 2020, OCR notified the Company of the closure of its inquiry. The Company has also received requests from thea multi-state group of state Attorneys General of Colorado, Connecticut, Illinois, Florida, New York, and Indiana. The request from Indiana includes a Civil Investigative Demand, which requests certain documents from the Company. The Company also provided notice of the AMCA Incident to state and federal regulators where appropriate. The Company is cooperating with these requests.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 the State of California, for the County of Los Angeles. Plaintiff alleges that non-exempt employees based in California were not properly paid overtime compensation, minimum wages, and meal and rest break premiums, were not indemnified for business expenses, did not receive compliant wage statements, and were not properly paid wages upon termination of employment. Plaintiff asserts these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuit seeks monetary damages, liquidated damages, injunctive relief, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
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 for the State of California, for the County of Sacramento. Plaintiff allegesAll three lawsuits 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, the Plaintiffs allege that non-exempt employees based in California 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. Plaintiff assertsThe Plaintiffs assert these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuit seekslawsuits seek monetary damages, liquidated damages, injunctive relief,civil penalties, and recovery of attorney's fees and costs. TheOn July 22, 2020, the Court issued an order granting preliminary approval of a settlement resolving all three lawsuits. If the settlement does not receive final approval, the Company will vigorously defend the lawsuit.lawsuits.
On July 30, 2019, the Company was served with a class action lawsuit, Mitchell v. Covance, Inc. et al., filed in the United StatesU.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. On July 20, 2020, Plaintiff executed a settlement agreement resolving 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. In August 2020, the Plaintiffs filed an Amended Complaint. 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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.
On August 14, 2020, the Company was served with a Subpoena Duces Tecum issued by the State of Colorado Office of the Attorney General requiring the production of documents related to urine drug testing in all states. The Company is cooperating with this request.
On October 2, 2020, the Company was served with a putative class action lawsuit, Peterson v. Laboratory Corporation of America Holdings, filed in the U.S. District Court for the Northern District of New York, alleging claims for a failure to properly pay service representatives compensation for all hours worked and overtime under the Fair Labor Standards Act, as well as notice and recordkeeping claims under the New York Labor Code. The lawsuit seeks monetary damages, liquidated damages, equitable and injunctive relief, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
On October 5, 2020, the Company was served with a putative class action lawsuit, Williams v. LabCorp Employer Services, Inc. et al, filed in the Superior Court of California, County of Los Angeles, alleging that certain non-exempt California-based employees were not properly compensated for work and overtime hours, not properly paid meal and rest break premiums, not reimbursed for certain business-related expenses, not properly paid for driving or wait times, and received inaccurate wage statements. The Plaintiff also asserts claims for unfair competition under Section 17200 of the Business and Professional Code. The lawsuit seeks monetary damages, liquidated damages, civil penalties, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
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. PENSION AND POSTRETIREMENT PLANS
Retirement Plans
All employees eligible for the LCD defined-contribution retirement plan (LCD 401(k) Plan) receive a minimum 3% 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 1% to 3% of pay for eligible employees based on service. The Company incurred expense of $14.0 and $16.7 for the LCD 401(k) Plan during the three months ended September 30, 2020, and 2019, respectively, and $41.4 and $48.9 during the nine months ended September 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 4.5% Company match, based upon a percentage of the employee’s contributions. The Company incurred expense of $21.0 and $18.2 for the Covance 401(k) plan during the three months ended September 30, 2020, and 2019, respectively, and $64.8 and $56.0 during the nine months ended September 30, 2020, and 2019, respectively.
The Company also maintains several other small 401(k) 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
| |
12. | PENSION AND POST-RETIREMENT PLANS |
The Company has two defined contribution retirement plans (LabCorp 401K Plans) which cover substantially all U.S. employees. All employees eligiblePEP covers a portion of the Company's senior management group. Prior to 2010, the PEP provided for the LabCorp 401K Plan receive a minimum 3% non-elective contribution concurrent with each payroll period. The 401K Plan also permits discretionary contributions by the Company of up to 3% of pay for eligible employees based on years of service with the Company. The cost of this plan was $13.7 and $17.3 for the three months ended September 30, 2019, and 2018, respectively, and was $50.7 and $49.1 for the nine months ended September 30, 2019, and 2018, respectively. Allpayment of the Covance U.S. employees, including legacy Chiltern employees, are eligible to participate indifference, if any, between the Covance 401K plan, which features aamount of any maximum 4.5% Company match, based upon a percentagelimitation on annual benefit payments under the Employee Retirement Income Security Act of 1974 and the employee’s contributions. Chiltern employees were previously eligible to participate in the Chiltern 401K plan, which featured a maximum 3.0% Company match, based upon a percentage of the employee's contributions. The Chiltern 401K plan merged into the Covance 401K plan effective January 7, 2019. The Company incurred expense of $18.2 and $16.3 for the Covance 401K plan during the three months ended September 30, 2019, and 2018, respectively, and $56.0 and $51.6 during the nine months ended September 30, 2019, and 2018, respectively. The Company also maintains several other small 401K plans associated with companies acquired over the last several years.
The Company also maintains a frozen definedannual benefit retirement plan (Company Plan), which as of December 31, 2009, covered substantially all employees. The benefits tothat would be paidpayable under the Company Plan are based on years of credited service through December 31, 2009, and ongoing interest credits.but for such limitation. Effective January 1, 2010, employees participating in the Company Plan was closed to new participants. The Company’s policy is to fund the Company Plan with at least the minimum amount required by applicable regulations.
The Company maintains a second, unfunded, non-contributory, non-qualified defined benefit retirement plan (PEP), which as of December 31, 2009, covered substantially all of its senior management group.PEP no longer earn service-based credits. The PEP supplements the Company Plan and was closed to new participants effective January 1, 2010.is an unfunded plan.
The effect on operations for the Company Plan and the PEP is summarized as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Service cost for administrative expenses | $ | 1.1 |
| | $ | 1.3 |
| | $ | 3.1 |
| | $ | 3.9 |
|
| Interest cost on benefit obligation | 3.4 |
| | 3.3 |
| | 10.4 |
| | 9.8 |
|
| Expected return on plan assets | (3.7 | ) | | (4.1 | ) | | (11.3 | ) | | (12.3 | ) |
| Net amortization and deferral | 3.0 |
| | 2.9 |
| | 8.2 |
| | 8.8 |
|
| Defined benefit plan costs | $ | 3.8 |
| | $ | 3.4 |
| | $ | 10.4 |
| | $ | 10.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Service cost for administrative expenses | $ | 1.3 | | | $ | 1.1 | | | $ | 3.9 | | | $ | 3.1 | |
| Interest cost on benefit obligation | 2.8 | | | 3.4 | | | 8.4 | | | 10.4 | |
| Expected return on plan assets | (3.7) | | | (3.7) | | | (11.2) | | | (11.3) | |
| Net amortization and deferral | 2.4 | | | 3.0 | | | 7.2 | | | 8.2 | |
| Defined benefit plan costs | $ | 2.8 | | | $ | 3.8 | | | $ | 8.3 | | | $ | 10.4 | |
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 nine months ended September 30, 2019,2020, the Company made no contributions to the Company Plan. The related net pension obligation for the Company Plan and PEP was $92.6 and $93.4 as of September 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.compensation; however, the U.K. Plans were based on service and compensation through December 31, 2019. The German planPlan is unfunded while the U.K. pension plansPlans 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. The related net pension obligation for these plans was $37.5 and $39.6 as of September 30, 2019 and December 31, 2018, respectively.
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)Plan), which is a legacy plan of a company previously acquired by Envigo. The Envigo planPlan is a funded plan that is closed to future accrual. The related net pension obligation of $56.8, based on the preliminary valuation of acquired assets and assumed liabilities, is reported under Other liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2019. The Company’s funding policy has been to make annual contributions to the plan ofcontribute amounts that are at least equal to the local statutory funding requirements, whichrequirements.
The related net pension obligation for these plans inclusive of the U.K. Plans, German Plan, and the Envigo Plan, was $85.4 and $99.1 as of September 30, 2020, and December 31, 2019, respectively.
12. FAIR VALUE MEASUREMENTS
The Company’s population of financial assets and liabilities subject to fair value measurements as of September 30, 2020, and December 31, 2019, is estimated to be $7.0 based on preliminary valuation.as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements as of |
| | | Fair Value
as of | | September 30, 2020 |
| Balance Sheet | | | Using Fair Value Hierarchy |
| | Classification | | September 30, 2020 | | Level 1 | | Level 2 | | Level 3 |
| Noncontrolling interest put | Noncontrolling interest | | $ | 15.4 | | | $ | 0 | | | $ | 15.4 | | | $ | 0 | |
| Cross currency swaps | Other liabilities | | 8.8 | | | 0 | | | 8.8 | | | 0 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Cash surrender value of life insurance policies | Other assets, net | | 82.9 | | | 0 | | | 82.9 | | | 0 | |
| Deferred compensation liability | Other liabilities | | 81.0 | | | 0 | | | 81.0 | | | 0 | |
| Contingent consideration | Other liabilities | | 9.0 | | | 0 | | | 0 | | | 9.0 | |
| | | | | | | | | |
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements as of |
| | | Fair Value
as of | | December 31, 2019 |
| Balance Sheet | | | Using Fair Value Hierarchy |
| | Classification | | December 31, 2019 | | Level 1 | | Level 2 | | Level 3 |
| Noncontrolling interest put | Noncontrolling interest | | $ | 15.8 | | | $ | 0 | | | $ | 15.8 | | | $ | 0 | |
| Cross currency swaps | Other assets, net | | 3.2 | | | 0 | | | 3.2 | | | 0 | |
| Interest rate swaps | Other assets, net | | 1.5 | | | 0 | | | 1.5 | | | 0 | |
| Cash surrender value of life insurance policies | Other assets, net | | 80.2 | | | 0 | | | 80.2 | | | 0 | |
| Deferred compensation liability | Other liabilities | | 76.7 | | | 0 | | | 76.7 | | | 0 | |
| Investment in equity securities | Other current assets | | 9.1 | | | 9.1 | | | 0 | | | 0 | |
| Contingent consideration | Other liabilities | | 9.9 | | | 0 | | | 0 | | | 9.9 | |
| | | | | | | | |
13.Fair Value Measurement of Level 3 Liabilities | FAIR VALUE MEASUREMENTS | Contingent Consideration |
| Balance at December 31, 2019 | | $ | 9.9 | |
| Payments | | (4.8) | |
| Adjustments | | (2.1) | |
| Additions | | 6.0 | |
| Balance at September 30, 2020 | | $ | 9.0 | |
The Company’s population of financial assets and liabilities subject to fair value measurements as of September 30, 2019, and December 31, 2018, is as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements as of |
| | | | Fair Value as of | | September 30, 2019 |
| | Balance Sheet | | | Using Fair Value Hierarchy |
| | Classification | | September 30, 2019 | | Level 1 | | Level 2 | | Level 3 |
| Noncontrolling interest puts | Noncontrolling interest | | $ | 15.5 |
| | $ | — |
| | $ | 15.5 |
| | $ | — |
|
| Cross currency swap asset | Other assets, net | | 20.0 |
| | — |
| | 20.0 |
| | — |
|
| Interest rate swap | Other assets, net | | 4.1 |
| | — |
| | 4.1 |
| | — |
|
| Cash surrender value of life insurance policies | Other assets, net | | 75.9 |
| | — |
| | 75.9 |
| | — |
|
| Deferred compensation liability | Other liabilities | | 72.3 |
| | — |
| | 72.3 |
| | — |
|
| Contingent consideration | Other liabilities | | 6.2 |
| | — |
| | — |
| | 6.2 |
|
| Investment in equity securities | Other assets, net | | 22.0 |
| | 22.0 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements as of |
| | | | Fair Value as of | | December 31, 2018 |
| | Balance Sheet | | | Using Fair Value Hierarchy |
| | Classification | | December 31, 2018 | | Level 1 | | Level 2 | | Level 3 |
| Noncontrolling interest put | Noncontrolling interest | | $ | 15.0 |
| | $ | — |
| | $ | 15.0 |
| | $ | — |
|
| Cross currency swap liability | Other liabilities | | 2.8 |
| | — |
| | 2.8 |
| | — |
|
| Interest rate swap | Other liabilities | | 3.1 |
| | — |
| | 3.1 |
| | — |
|
| Cash surrender value of life insurance policies | Other assets, net | | 63.5 |
| | — |
| | 63.5 |
| | — |
|
| Deferred compensation liability | Other liabilities | | 64.2 |
| | — |
| | 64.2 |
| | — |
|
| Contingent consideration | Other liabilities | | 18.6 |
| | — |
| | — |
| | 18.6 |
|
|
| | | | |
| Fair Value Measurement of Level 3 Liabilities | | Contingent Consideration |
| Balance at December 31, 2018 | | 18.6 |
|
| Additions | | 1.5 |
|
| Adjustments | | (13.9 | ) |
| Balance at September 30, 2019 | | $ | 6.2 |
|
During the three months ended September 30, 2019, the Company adjusted its estimate of an acquisition related contingent consideration liability and recorded a gain of $13.9 million as a reduction to selling, general, and administrative expenses.
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 2216 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 thesethe life insurance policies are based upon earnings and changes in the value of the underlying investments, which are typically invested in a similar manner similar 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 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.
The Company has contingent accrued earn-out businessContingent acquisition consideration liabilities whichare 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
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 zero-coupon subordinated notes,Senior Notes, based on market pricing, was approximately $1.8$6,107.9 and $16.9 as of September 30, 2019, and December 31, 2018, respectively. The fair market value of all of the senior notes, based on market pricing, was approximately $5,763.9 and $5,318.0 as of September 30, 2019, and December 31, 2018, respectively. The fair market value of the floating rate secured note due 2022 received for the sale of CRP was $110.0$6,140.6 as of September 30, 2019. The effective interest rate on the floating rate secured note receivable was 7.63% as of September 30, 2019.2020, 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.
| |
14. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
13. DERIVATIVE 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 such as interest rate and cross currency swap agreements (see Interest Rate Swap and Cross Currency Swap sections below). Although the Company’s zero-coupon subordinated notes contain features that are considered to be embedded derivative instruments (see Embedded Derivatives Related to the Zero-Coupon Subordinated Notes section below), theinstruments. The Company does not hold or issue derivative financial instruments for trading purposes. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. 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
On August 17, 2020, the Company redeemed its remaining $412.2 4.625% Senior Notes due November 15, 2020, using available cash on hand. The Company is party to twoexited the remaining fixed-to-variable interest rate swap agreements for its 4.625% senior notes duearrangement in August 2020, in connection with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus 2.298% to hedge against changes in the fair value of a portionredemption of the Company's long term debt. These derivative financial instruments are accounted for as fair value hedges of the senior notes4.625% Senior Notes due 2020. These interest rate swaps are included
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in other long-term assets or other long-term liabilities, as applicable, and added to or subtracted from the value of the senior notes, with an aggregate fair value of $4.1 (asset) and $3.1 (liability) at September 30, 2019, and December 31, 2018, respectively. As the specific terms and notional amounts of the derivative financial instruments match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges and accordingly, there is no impact to the Company's Condensed Consolidated Statements of Operations.millions, except per share data)
|
| | | | | | | | | | | | | | | | |
| | | 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 |
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2019 | | December 31, 2018 |
| Balance Sheet Line Item in which Hedged Items are Included |
| Long-term debt, less current portion | | $ | 604.1 |
| | $ | 597.0 |
| | $ | 4.1 |
| | $ | (3.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| Balance Sheet Line Item in which Hedged Items are Included |
| Current portion, long term debt | | $ | 0 | | | $ | 301.5 | | | $ | 0 | | | $ | 1.5 | |
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 $600.0 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, $300.0 matures in 2022 and $300.0 matures in 2025. These cross currency swaps maturing in 2022 and 2025 are included in other long-term assets with an aggregate fair value of $8.5 and $11.5, respectively, as of September 30, 2019 and are included in other long-term liabilities with an aggregate fair value of $1.0 and $1.8, respectively, as of December 31, 2018.2020. Changes in the fair value of the cross-currency swaps are charged or credited throughrecorded as a component of the foreign currency translation adjustment in accumulated other comprehensive earningsincome 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 $18.8was $(23.1) and $22.8, respectively,$(12.0) for the three and nine months ended September 30, 2019,2020, respectively, 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 nine months ended September 30, 2020.
The table below presents the fair value of derivatives on a gross basis and the balance sheet classification of those instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2020 | | December 31, 2019 |
| | | Fair Value of Derivative | | Fair Value of Derivative |
| | Balance Sheet Caption | | Asset | | Liability | | U.S. Dollar Notional | | Asset | | Liability | | U.S. Dollar Notional |
| Derivatives Designated as Hedging Instruments | | | | |
| | | | | | | | | | | | | |
| Interest rate swap | Prepaid expenses and other/Other liabilities | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1.5 | | | $ | 0 | | | $ | 300.0 | |
| Cross currency swaps | Other assets, net or Other liabilities | | $ | 0 | | | $ | 8.8 | | | $ | 600.0 | | | $ | 3.2 | | | $ | 0 | | | $ | 600.0 | |
The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value hedging:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | Three Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Interest rate swap contracts | | $ | 0 | | | $ | 0.4 | | | $ | 1.6 | | | $ | 0 | | | $ | 0.8 | | | $ | 7.2 | | | $ | 1.6 | | | $ | 0 | |
| Cross currency swaps | | $ | (23.1) | | | $ | 18.8 | | | $ | 0 | | | $ | 0 | | | $ | (12.0) | | | $ | 22.8 | | | $ | 0 | | | $ | 0 | |
The Company recorded a gain of $1.6 on the extinguishment of the interest rate swap arrangement, which was included in Other, net on the Condensed Consolidated Statement of Operations. No additional gains or losses from derivative instruments have been recognized into income for the three and nine months ended September 30, 2020, and 2019.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The table below presents the fair value of derivatives on a gross basis and the balance sheet classification of those instruments: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2019 | | December 31, 2018 |
| | | | Fair Value of Derivative | | Fair Value of Derivative |
| | Balance Sheet Caption | | Asset | | Liability | | U.S. Dollar Notional | | Asset | | Liability | | U.S. Dollar Notional |
| Derivatives Designated as Hedging Instruments | | | | |
| Interest rate swap | Other assets, net or Other liabilities | | $ | 4.1 |
| | $ | — |
| | $ | 600.0 |
| | $ | — |
| | $ | (3.1 | ) | | $ | 600.0 |
|
| Cross currency swaps | Other assets, net or Other liabilities | | $ | 20.0 |
| | $ | — |
| | $ | 600.0 |
| | $ | — |
| | $ | (2.8 | ) | | $ | 600.0 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| | 2020 | | 2019 |
| Supplemental schedule of cash flow information: | | | |
| Cash paid during period for: | | | |
| Interest | $ | 195.8 | | | $ | 216.5 | |
| Income taxes, net of refunds | 217.5 | | | 181.6 | |
| Disclosure of non-cash financing and investing activities: | | | |
| | | |
| Conversion of zero-coupon convertible debt | 0 | | | 1.7 | |
| | | |
| Change in accrued property, plant and equipment | (24.5) | | | (15.9) | |
| Floating rate secured note receivable due 2022 | 0 | | | 110.0 | |
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 |
| | | Three Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Interest rate swap contracts | | $ | 0.4 |
| | $ | 6.1 |
| | $ | — |
| | $ | — |
| | $ | 7.2 |
| | $ | (3.6 | ) | | $ | — |
| | $ | — |
|
| Cross currency swaps | | $ | 18.8 |
| | $ | (16.2 | ) | | $ | — |
| | $ | — |
| | $ | 22.8 |
| | $ | 8.1 |
| | $ | — |
| | $ | — |
|
No gains or losses from derivative instruments classified as hedging instruments have been recognized into income for the three and nine months ended September 30, 2019 and 2018.
Embedded Derivatives Related to the Zero-Coupon Subordinated Notes
The Company’s zero-coupon subordinated notes contain the following two features that are considered to be embedded derivative instruments under authoritative guidance in connection with accounting for derivative instruments and hedging activities:
| |
1) | The Company will pay contingent cash interest on the zero-coupon subordinated notes after September 11, 2006, if the average market price of the notes equals 120% or more of the sum of the issue price, accrued original issue discount and contingent additional principal, if any, for a specified measurement period. |
| |
2) | Holders may surrender zero-coupon subordinated notes for conversion during any period in which the rating assigned to the zero-coupon subordinated notes by Standard & Poor’s Ratings Services is BB- or lower. |
The Company believes these embedded derivatives had 0 fair value at September 30, 2019, and December 31, 2018. These embedded derivatives also had 0 impact on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2019, and 2018.
Other Derivative Instruments
The Company periodically enters into foreign currency forward contracts, which are recognized as assets or liabilities at their fair value. These contracts do not qualify for hedge accounting and the changes in fair value are recorded directly to earnings. The contracts are short-term in nature and the fair value of these contracts is based on market prices for comparable contracts. The fair value of these contracts is not significant as of September 30, 2019, and December 31, 2018.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
| |
15. | SUPPLEMENTAL CASH FLOW INFORMATION |
|
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
| Supplemental schedule of cash flow information: | | | |
| Cash paid during period for: | | | |
| Interest | $ | 216.5 |
| | $ | 276.3 |
|
| Income taxes, net of refunds | 181.6 |
| | 235.0 |
|
| Disclosure of non-cash financing and investing activities: | |
| | |
|
| Conversion of zero-coupon convertible debt | 1.7 |
| | 0.3 |
|
| Change in accrued property, plant and equipment | (15.9 | ) | | 6.9 |
|
| Floating rate secured note receivable due 2022 from the sale of CRP | 110.0 |
| | — |
|
| |
16. | BUSINESS SEGMENT INFORMATION |
The following table is a summary of segment information for the three and nine months ended September 30, 2019,2020, and 2018.2019. 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 its business unit operationssegments 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 net 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. The table below represents information about the Company’s reporting segments for the three and nine months ended September 30, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenues: |
| LCD | $ | 2,704.2 | | | $ | 1,759.2 | | | $ | 6,098.8 | | | $ | 5,242.1 | |
| CDD | 1,241.9 | | | 1,175.4 | | | 3,479.4 | | | 3,376.4 | |
| Intercompany eliminations and other | (50.0) | | | (6.2) | | | (90.0) | | (17.1) | |
| Revenues | 3,896.1 | | | 2,928.5 | | | 9,488.7 | | | 8,601.4 | |
| | | | | | | |
| Operating earnings (loss): |
| LCD | 964.9 | | | 262.2 | | | 1,451.5 | | | 843.0 | |
| CDD | 142.0 | | | 123.8 | | | (131.2) | | | 277.6 | |
| General corporate expenses | (59.8) | | | (46.1) | | | (168.2) | | | (126.8) | |
| Total operating income | 1,047.1 | | | 339.9 | | | 1,152.2 | | | 993.8 | |
| Non-operating expenses, net | (100.0) | | | (52.5) | | | (175.7) | | | (181.8) | |
| Earnings before income taxes | 947.1 | | | 287.4 | | | 976.4 | | | 812.0 | |
| Provision for income taxes | 243.4 | | | 66.4 | | | 358.0 | | | 214.4 | |
| Net earnings | 703.7 | | | 221.0 | | | 618.4 | | | 597.6 | |
| Less: Net earnings attributable to the noncontrolling interest | (0.3) | | | (0.3) | | | (0.6) | | | (0.9) | |
| Net earnings attributable to Laboratory Corporation of America Holdings | $ | 703.4 | | | $ | 220.7 | | | $ | 617.8 | | | $ | 596.7 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Revenues: |
| LCD | $ | 1,759.2 |
| | $ | 1,752.0 |
| | $ | 5,242.1 |
| | $ | 5,336.3 |
|
| CDD | 1,175.4 |
| | 1,081.5 |
| | 3,376.4 |
| | 3,214.1 |
|
| Intercompany eliminations | (6.1 | ) | | (2.2 | ) | | (17.1 | ) | | (4.5 | ) |
| Revenues | 2,928.5 |
| | 2,831.3 |
| | 8,601.4 |
| | 8,545.9 |
|
| | | | | | | | |
| Operating earnings: |
| LCD | 262.2 |
| | 289.4 |
| | 843.0 |
| | 929.2 |
|
| CDD | 123.8 |
| | 87.9 |
| | 277.6 |
| | 195.3 |
|
| Unallocated corporate expenses | (46.1 | ) | | (33.9 | ) | | (126.8 | ) | | (106.5 | ) |
| Total operating income | 339.9 |
| | 343.4 |
| | 993.8 |
| | 1,018.0 |
|
| Other income (expense), net | (52.5 | ) | | 156.2 |
| | (181.8 | ) | | 35.8 |
|
| Earnings before income taxes | 287.4 |
| | 499.6 |
| | 812.0 |
| | 1,053.8 |
|
| Provision for income taxes | 66.4 |
| | 180.6 |
| | 214.4 |
| | 328.1 |
|
| Net earnings | 221.0 |
| | 319.0 |
| | 597.6 |
| | 725.7 |
|
| Less (earnings) loss attributable to noncontrolling interests | (0.3 | ) | | (0.2 | ) | | (0.9 | ) | | 0.1 |
|
| Net income attributable to Laboratory Corporation of America Holdings | $ | 220.7 |
| | $ | 318.8 |
| | $ | 596.7 |
| | $ | 725.8 |
|
26
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 and theuncertainties. 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 discussiondiscussions 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 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 Health Insurance Portability and Accountability Act of 1996, the 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 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 State Drug Administration in China (formerly the China Food and Drug Administration), the Pharmaceutical and Medical Devices Agency in Japan, the European Medicines Agency and similar regulations and policies of agencies in jurisdictions in which the Company conducts business; |
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
| |
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; |
| |
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; |
| |
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; |
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, liquidity, and collections, 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.
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33. | business interruption or other impact on the business due to adverse weather, fires and/or other natural disasters, acts of war, terrorism or other criminal acts, and/or widespread outbreak of influenza or other pandemic illness; |
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34. | discontinuation or recalls of existing testing products; |
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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; |
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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; |
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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 benefit management organizations and increasing levels of patient payment responsibility; |
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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; |
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39. | failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment grade rating; |
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40. | changes in reimbursement by foreign governments and foreign currency fluctuations; |
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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 net revenues; |
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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; |
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43. | failure to achieve expected efficiencies and savings in connection with the Company's business process improvement initiatives; |
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44. | changes in tax laws and regulations or changes in their interpretation, including the Tax Cuts and Jobs Act (TCJA); and |
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45. | global economic conditions and government and regulatory changes, including, but not limited to the U.K.'s announced intention to exit from the European Union. |
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 nine months ended September 30, 2020, were $9,488.7, an increase of 10.3% from $8,601.4 during the nine months ended September 30, 2019. The increase in revenues was due to organic growth of 8.3%, acquisitions of 2.1%, and favorable foreign currency translation 0.1%, partially offset by the disposition of a business of 0.2%. The 8.3% increase in organic revenue includes the 16.4% contribution from COVID-19 Testing, partially offset by the 8.1% reduction in the Company's organic Base Business due to the pandemic. Base Business includes the Company's business operations except for PCR and antibody COVID-19 testing (COVID-19 Testing). The decline in the organic Base Business includes the negative impact of 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. Throughout the year, the Company's COVID-19 Testing has helped to offset the pressure experienced in the Base Business. To date, the Company has performed more than 18 million PCR and 3.0 million antibody COVID-19 tests and has a current capacity of 210,000 PCR 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.
During the nine months ended September 30, 2019, revenues were $8,601.4, an increase2020, the Company recorded goodwill and other asset impairment charges of 0.6% from $8,545.9$437.4, as a result of the negative financial impact of COVID-19 during the first quarter of 2020. See Note 6 Goodwill and Intangible Assets for a discussion of goodwill and intangible asset impairment and Note 2 Revenues for a discussion of credit losses and additional price concessions. The Company also impaired certain of the Company's investments by a total of $25.4 during the nine months ended September 30, 2018. The increase in revenues was primarily2020, due to growththe impact of COVID-19; $7.1 was included in Equity method earnings (loss), net during the three months ended March 31, 2020, and $13.1 and $5.2 were included in Other, net during the three months ended March 31, 2020, and June 30, 2020, respectively.
In April 2020, the Company received cash payments of approximately $55.9 from acquisitionsthe Public Health and Social Services Emergency Fund for provider relief that was appropriated by Congress to the Department of 1.6%Health and organic growthHuman Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act Provider Relief Funds). 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 1.4% (which includesOperations as of June 30, 2020. In August 2020, the Company received an additional $76.2 in CARES Act Provider Relief Funds. As the Company's Diagnostic business demonstrated recovery and demand for COVID-19 testing increased, the Company determined that the negative financial impact from PAMA of 0.9%), partially offset byCOVID-19 which the disposition of businesses of 1.7% and foreign currency translation of 0.7%.
Effective January 1, 2019,CARES Act Provider Relief Funds were designed to address no longer applied to the Company. As a result, the Company adopted Accounting Standards Codification (ASC) 842 Leases usingderecognized the effective date method.income associated with the $55.9 received during the second quarter as a change in estimate and did not recognize any income related to the cash payment of $76.2 received in the third quarter. The Company electedplans to return the packageCARES Act Provider Relief Funds to the government in the fourth quarter of practical expedients, which includes not reassessing whether existing contracts contain leases under2020 and has recorded a liability of $132.1 in Accrued expenses and other as of September 30, 2020.
There remains significant uncertainty regarding the new definition of a lease, reassessing the classification of existing leases,duration and reassessing whether previously capitalized initial direct costs qualify for capitalization under the new standard. The Company also elected not to separate lease and non-lease components.
On June 3, 2019, the Company's CDD segment completed the acquisition of 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 partseverity of the CDD segment, to Envigo. As part of this sale, CDD entered into a multi-year, renewable supply agreement. The Company paid cash consideration of $601.0, received a floating rate secured note of $110.0,pandemic and recorded a lossits impact on sale of CRP of $11.9. The Company funded the transaction through a new term loan facility.
The Company remains on track to deliver $150.0 of net savings from CDD's three-year LaunchPad initiative by the end of 2020. The Company expects phase II of LCD’s LaunchPad initiative to deliver approximately $200.0 in net savings over the next
three years, while incurring approximately $40.0 in one-time implementation costs. Approximately one-third of the total savings are expected to be realized each year.
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 learningbusiness, results of the AMCA Incident, the Company promptly stopped sending new collection requests to AMCAoperations 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 informationfinancial position for the patientbalance of 2020 and person responsible for payment, alongbeyond. For more information regarding the risks associated with COVID-19 and its impact on 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 wereCompany’s business, see Risk Factors 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.Part II - Item 1A.
PAMA, which went into effect on January 1, 2018, resulted in a net reduction of revenue of approximately $70.0 in 2018 from all payers affected by the Clinical Lab Fee Schedule. A reduction of approximately $80.8 has been incurred through the first nine months of 2019. Unless further implementation of PAMA is delayed or changed, an additional reduction of approximately $30.0 is expected for 2019.
RESULTS OF OPERATIONS (dollars in millions)
Three months ended September 30, 2019,2020, compared with three months ended September 30, 20182019
Revenues
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2020 | | 2019 | | Change |
| LCD | $ | 2,704.2 | | | $ | 1,759.2 | | | 53.7 | % |
| CDD | 1,241.9 | | | 1,175.4 | | | 5.7 | % |
| Intercompany eliminations and other | (50.0) | | | (6.2) | | | 705.1 | % |
| Total | $ | 3,896.1 | | | $ | 2,928.5 | | | 33.0 | % |
| | | | | |
Revenues
|
| | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change |
| LCD | $ | 1,759.2 |
| | $ | 1,752.0 |
| | 0.4 | % |
| CDD | 1,175.4 |
| | 1,081.5 |
| | 8.7 | % |
| Intercompany eliminations | (6.1 | ) | | (2.2 | ) | | 177.3 | % |
| Total | $ | 2,928.5 |
| | $ | 2,831.3 |
| | 3.4 | % |
The increase in revenues for the three months ended September 30, 2019,2020, as compared with the corresponding period in 20182019 was 3.4%33.0%. The increase in revenuesrevenue was primarily due to acquisitions of 2.8% and organic growth of 2.2% (which31.5%, acquisitions of 1.0%, and favorable foreign currency translation of 0.5%. The 31.5% increase in organic revenue includes the negative impact32.6% contribution from PAMA of 0.9%),COVID-19 Testing, partially offset by the disposition1.1% reduction in the Company's organic Base Business due to the pandemic. The decline in organic Base Business includes the lower Medicare and Medicaid pricing as a result of businessesPAMA of 1.3% and negative foreign currency translation of 0.3%0.7%.
LCD revenues for the quarter were $1,759.2,$2,704.2, an increase of 0.4%53.7% compared to revenues of $1,752.0$1,759.2 in the third quarter of 2018.2019. The increase in revenues was primarily due to organic growth of 0.9%52.3% and acquisitions of 0.8%,1.4%. The 52.3% increase in organic revenue was due to a 54.2% contribution from COVID-19 Testing, partially offset by a 1.9% decline in the negative impact from disposition of businesses of 1.3%. The organic revenue growth of 0.9%Base Business, which includes the negative impact from PAMA of 1.5%1.1%.
Total LCD volume, (measuredmeasured by requisitions) excluding the disposition of businesses,requisitions, increased by 0.7%,21.8% as acquisition volume contributed 0.5% and organic volume increased by 0.3%20.0% and acquisition volume contributed 1.8%. OrganicThe organic volume was negatively impactedgrowth includes increased demand for COVID-19 Testing of 28.8%, partially offset by approximately 1.0% from managed care contract changes. Excludingan 8.9% reduction of organic Base Business due to the disposition of businesses, revenue per requisitionpandemic. Price/mix increased by 1.0%31.9% due to COVID-19 Testing of 25.4% and organic Base Business of 7.0%, despitewhich includes the negative impact from PAMA of 1.5%1.1%.
CDD revenues for the secondthird quarter were $1,175.4,$1,241.9, an increase of 8.7%5.7% over revenues of $1,081.5$1,175.4 in the third quarter of 2018.2019. The increase in revenues was primarily due to acquisitions of 6.0%and organic growth of 4.7%3.8%, partially offset by the dispositionacquisitions of the Covance Research Products business of 1.2%0.5%, and negativefavorable foreign currency translation of 0.8%1.4%.
Cost of Revenues
| | | | Three Months Ended September 30, | | | | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change |
| Cost of revenues | $ | 2,111.2 |
| | $ | 2,041.4 |
| | 3.4 | % | Cost of revenues | $ | 2,336.7 | | | $ | 2,111.2 | | | 10.7 | % |
| Cost of revenues as a % of revenues | 72.1 | % | | 72.1 | % | | |
| Cost of revenues as a % of revenues | 60.0 | % | | 72.1 | % | | |
Cost of revenues increased 3.4%decreased 10.7% during the three months ended September 30, 2019,2020, as compared with the corresponding period in 2018.2019. Cost of revenues as a percentage of revenues during the three months ended September 30, 2019, remained consistent at 72.1%2020, decreased to 60.0% as compared to 72.1% in the corresponding period in 2018.2019. This decrease was primarily due to the impact of COVID-19 testing and LaunchPad savings, partially offset by the reduction in Base Business as a result of the pandemic and PAMA and higher personnel costs primarily driven by merit increases.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2020 | | 2019 | | Change |
| Selling, general and administrative expenses | $ | 419.5 | | | $ | 401.5 | | | 4.5 | % |
| Selling, general and administrative expenses as a % of revenues | 10.8 | % | | 13.7 | % | | |
|
| | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change |
| Selling, general and administrative expenses | $ | 401.5 |
| | $ | 381.8 |
| | 5.2 | % |
| Selling, general and administrative expenses as a % of revenues | 13.7 | % | | 13.5 | % | | |
|
During the three months ended September 30, 2019, the Company incurred $9.6 ofin acquisition and divestiture related costs, $5.3 in management transition costs and $11.3 in costs related to the AMCA data breach. In addition, the Company recorded $2.4 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and reversed $13.9 related to the settlement of a contingent purchase price related to a 2016 acquisition. These items increased selling, general and administrative expenses by $14.7.
During the three months ended September 30, 2018, the Company incurred $5.5 in consulting expenses relating to fees incurred as part of its integration and management transition costs. As a direct result of the ransomware attack experienced during July 2018, the Company incurred $5.8 in consulting fees and employee overtime during the recovery period following the attack. In addition, the Company recorded $3.1 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. The Company also reversed $0.2 in accrued expenses incurred as part of integration and management transition costs. These items increased selling, general and administrative expenses by $14.2.
Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.2%10.6% and 13.0%13.2% during the three months ended September 30, 2019,2020, and 2018,2019, respectively, primarily due to leveraging the decrease inCompany's infrastructure on higher revenue, partially offset by a $15.0 initial contribution to establish the LabCorp Charitable Foundation which supports the Company's strategic mission to improve health and improve lives with contributions focused on health and welfare, education and community.
Goodwill and Other Asset Impairments
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2020 | | 2019 | | Change |
| Goodwill and other asset impairments | $ | 23.5 | | | $ | — | | | N/A |
During the three months ended September 30, 2020, the Company recorded goodwill and other asset impairment charges of $10.1 and $17.7 for customer relationships and technology intangible assets, respectively, due to the loss of a contract from a CDD prior acquisition. The Company reversed the implementation$5.0 charge for the estimated loss related to the CDD floating rate secured note receivable due 2022 from Envigo. The Company also recorded an impairment for a note receivable related to an LCD investment of PAMA.$0.7 during the three months ended September 30, 2020.
Amortization of Intangibles and Other Assets
| | | | Three Months Ended September 30, | | | | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change |
| LCD | $ | 24.9 |
| | $ | 23.4 |
| | 6.4 | % | LCD | $ | 25.9 | | | $ | 24.9 | | | 3.8 | % |
| CDD | 36.8 |
| | 31.3 |
| | 17.6 | % | CDD | 36.3 | | | 36.8 | | | (1.2) | % |
| Total amortization of intangibles and other assets | $ | 61.7 |
| | $ | 54.7 |
| | 12.8 | % | Total amortization of intangibles and other assets | $ | 62.2 | | | $ | 61.7 | | | 0.8 | % |
The increase in amortization of intangibles and other assets within the LCD segment primarily reflects the impact of acquisitions occurring after September 30, 2018,2019, partially offset by the reduction of amortizable intangible assets pursuant to the divestiture of three LCD businesses in 2018. Amortizationimpairment of intangible assets within the CDD segment increased primarily due to the impact of acquisitions occurring after September 30, 2018, offset by the reduction of amortizable intangible assets pursuant to the divestiture of one CDD business during the second quarter of 2019.in fiscal 2020.
Restructuring and Other Special Charges
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2020 | | 2019 | | Change |
| Restructuring and other charges | $ | 7.1 | | | $ | 14.2 | | | (49.8) | % |
|
| | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change |
| Restructuring and other special charges | $ | 14.2 |
| | $ | 10.0 |
| | 42.0 | % |
During the three months ended September 30, 2019, the Company recorded net restructuring and other special charges of $14.2: $6.7 within LCD and $7.5 within CDD. The charges were comprised of $5.9 related to severance and other personnel costs along with $8.5 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 $0.2 in unused facility reserves.
During the three months ended September 30, 2018, the Company recorded net restructuring and other special charges of $10.0: $4.1 within LCD and $5.9 within CDD. The charges were comprised of $6.6 related to severance and other personnel costs along with $4.0 in costs associated with facility closures, impairment of land held for sale and general integration initiatives. The
charges were offset by the reversal of previously established reserves of $0.4 and $0.2 in unused facility reserves and unused severance reserves, respectively.
Interest Expense
|
| | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change |
| Interest expense | $ | (60.5 | ) | | (59.4 | ) | | 1.9 | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| | 2020 | | 2019 | | Change |
| Interest expense | $ | (51.4) | | | $ | (60.5) | | | (15.0) | % |
The increasedecrease in interest expense for the three months ended September 30, 2019,2020, as compared with the corresponding period in 2018,2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the new 2019 term loan,repayment of the 2.625% senior notes and the 4.625% senior notes, partially offset by the repaymentissuance of the 2.50% senior notes$1,050.0 in 2018, the repayment of the 2014 term loan and partial repayment of the 2017 term loan.debt securities in November 2019.
Equity Method Income
|
| | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change |
| Equity method income, net | $ | 2.4 |
| | $ | 3.0 |
| | (20.0 | )% |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2020 | | 2019 | | Change |
| Equity method income, net | $ | 3.0 | | | $ | 2.4 | | | 26.0 | % |
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 decreaseincrease in income for the three months ended September 30, 2019,2020, as compared with the corresponding period in 2018,2019, was primarily due to decreasedincreased profitability of the Company's joint ventures.
Other, net
|
| | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change |
| Other, net | $ | 2.7 |
| | $ | 209.8 |
| | (98.7 | )% |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2020 | | 2019 | | Change |
| Other, net | $ | (54.2) | | | $ | 2.7 | | | (2,096.1) | % |
The change in other, net for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, is primarily due to the gain of $258.3 recognized on the salederecognition of the Food Solutions business inincome associated with the third$55.9 from the CARES Act Provider Relief Funds received during the second quarter of 2018 offset by a $48.9 loss on the divestiture of the Company's forensic testing services business in the U.K. During the three months ended September 30, 2019,as the Company recognized otherplans to return the funding. The Company recorded investment gains of $8.6 which were partially offset by$4.6, including a $3.1 lossgain of $1.6 on disposition of a business and a $4.3 write-off of twothe extinguishment of the Company's cost method investments.interest rate swap arrangement. In addition, foreign currency transaction losses of $2.9$1.9 were recognized for the three months ended September 30, 20192020, and gainslosses of $1.3$2.9 were recognized in the corresponding period of 2018.2019.
Income Tax Expense
| | | | Three Months Ended September 30, | | | | Three Months Ended September 30, | | |
| | 2019 | | 2018 | | Change | | 2020 | | 2019 | | Change |
| Income tax expense | $ | 66.4 |
| | $ | 180.6 |
| | (63.2 | )% | Income tax expense | $ | 243.4 | | | $ | 66.4 | | | 266.9 | % |
| Income tax expense as a % of earnings before income taxes | 23.1 | % | | 36.1 | % | | |
| Income tax expense as a % of earnings before income taxes | 25.7 | % | | 23.1 | % | | |
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 $46.159.8 for the three months ended September 30, 2019,2020, an increase of 36.0%29.3% over corporate expenses of $33.946.2 in the corresponding period of 2018.2019. The increase in corporate expenses in 2019 is2020 was primarily due to higher personnel costs, including executive transition costs.the funding of the LabCorp Charitable Foundation.
Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.3%12.5% and 13.0%13.3% during the nine months ended September 30, 2019,2020, and 2018,2019, respectively, primarily due to leveraging the decreasedCompany's infrastructure on higher revenue, frompartially offset by a $15.0 initial contribution to establish the implementation of PAMA.LabCorp Charitable Foundation which supports the Company's strategic mission to improve health and improve lives with contributions focused on health and welfare, education and community.
During the nine months ended September 30, 2019, the Company recorded net restructuring and other special charges of $48.4: $22.8 within LCD and $25.6 within CDD. The charges were comprised of $26.2 related to severance and other personnel costs along with $22.0 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 severancefacility reserves and decreased by a reversal of $0.2 in unused facility reserves.
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 nine months ended September 30, 2019,2020, as compared with the corresponding period in 2018,2019, was primarily due to the impairment of an equity method investment and decreased profitability of the Company's joint ventures.
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 $126.8$168.2 for the nine months ended September 30, 2019,2020, an increase of 19.1%32.6% over corporate expenses of $106.5$126.8 in the corresponding period of 2018.2019. The increase in corporate expenses in 2019 is2020 was primarily due to higher personnel costs, including executive transition costs, COVID-19 related expenses and the benefitfunding of a favorable legal settlement in 2018 offsetting normal corporate expenses.the LabCorp Charitable Foundation.
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. Although, as set forth below, the Company’s zero-coupon subordinated notes contain features that are considered to be embedded derivative instruments, the Company does not hold or issue derivative financial instruments for trading purposes.
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 September 30, 2019,2020, the Company had 2838 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly through October 20192020 with a notional value totaling approximately $358.5.$564.6. At December 31, 2018,2019, the Company had 34 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly through January 20192020 with a notional value totaling approximately $487.9.$369.2.
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.
Each quarter-point increase or decrease in the variable rate would result in the Company's interest expense changing by approximately $2.8$0.9 per year for the Company's unhedged variable rate debt.
ITEM 4. Controls and Procedures
Item 1. Legal Proceedings
Item 1A. Risk Factors
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 September 30, 2019,2020, by or on behalf of the Company:
Item 5. Other Information
Item 6. Exhibits
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.