A Dark Vector Cognition product

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in millions)

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in millions)

General

During the year ended December 31, 2018, the Company's revenue grew by 9.9%, driven by acquisitions of 7.6%, organic growth of 2.7%, and the benefit of foreign currency translation of 30 basis points, partially offset by the impact from divestitures of (0.7%). The Company defines organic growth as the increase in revenue excluding revenue from acquisitions for the first twelve months after the close of each acquisition.

During 2018, the Company divested its Covance Food Solutions business and its forensic testing services business in the United Kingdom (U.K.) and the United States (U.S.) Operating income for the divested businesses was $7.6 for the year ended December 31, 2018.

Effective January 1, 2018, the Company adopted Accounting Standards Codification ASC 606 Revenue from Contracts with Customers using the full retrospective method. All financial results and comparisons to financial results in 2017 and 2016 have been restated. This accounting change increased revenue, lowered earnings, and had no impact on cash flow. Upon adoption, bad debt expense within the LabCorp Diagnostics (LCD) segment is being classified as a reduction in revenue rather than as a selling, general and administrative expense. Within the Covance Drug Development (CDD) segment the standard impacts the accounting for changes in the scope of work, investigator fees, measures of progress and sales commissions.

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. CDD systems were not directly affected by the ransomware. As part of its response, the Company promptly took certain systems offline to contain and remove the ransomware from its systems. The incident 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 has incurred total expenditures related to addressing this attack of $12.6 in consulting fees and employee overtime during the recovery period following the attack in addition to estimated lost revenue of $9.8.

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 recorded 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.

The Company continues to invest in its technology and training to help protect its information technology systems and operations from cyber-attacks.

The Company remains on track to deliver $150.0 of net savings from CDD's three-year LaunchPad initiative by the end of 2020, and $30.0 of cost synergies from the integration of Chiltern by the end of 2019. 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.

The Protecting Access to Medicare Act (PAMA) which became law on April 1, 2014, and 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. Unless further implementation of PAMA is delayed or changed, an additional reduction of approximately $115.0 is expected for 2019, from all payers affected by the Clinical Lab Fee Schedule.

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Results of Operations

Years ended December 31, 2018, 2017, and 2016

Revenues

Years Ended December 31,Change
20182017201620182017
LCD$7,030.8$6,858.2$6,307.62.5%8.7%
CDD4,313.13,451.63,245.825.0%6.3%
Intercompany eliminations(10.5)(1.8)(0.5)483.3%260.0%
Total$11,333.4$10,308.0$9,552.99.9%7.9%

The 9.9% increase in net revenue for the year ended December 31, 2018, as compared with the corresponding period in 2017 was due to growth from acquisitions of 7.6%, organic growth of 2.7%, and the benefit of from foreign currency translation of approximately 0.3%, partially offset by a 0.7% decrease due to divestitures.

LCD revenues for the year ended December 31, 2018, were $7,030.8, an increase of 2.5% over revenues of $6,858.2 in the corresponding period in 2017. The increase in revenues was primarily driven by acquisitions, organic volume (measured by requisitions), partially offset by the impact of the implementation of PAMA and divestitures. Growth in volume, measured by requisitions, of 3.6%, was due to organic volume growth of 1.8% and acquisition volume growth of 2.0%, partially offset by the impact of divestitures of (0.2%). Price and mix negatively impacted revenue by (1.0%). The change in price and mix included the impact of divestitures of (0.9%), lower reimbursement from the implementation of PAMA of (1.0%), other organic price and mix, as well as acquisitions.

CDD revenues for the year ended December 31, 2018, were $4,313.1, an increase of 25.0% over revenues of $3,451.6 in the corresponding period in 2017. The increase in revenue was primarily due to acquisitions (including Chiltern), which contributed growth of 17.5%, an increase in organic growth of 6.6% and a favorable impact from foreign currency translation of approximately 0.9%.

The 7.9% increase in revenue for the year ended December 31, 2017, as compared with the corresponding period in 2016 was due to growth from acquisitions of 5.8% and organic growth of 2.1%.

LCD revenues for the year ended December 31, 2017, were $6,858.2, an increase of 8.7% over revenues of $6,307.6 in the corresponding period in 2016. The increase in revenue was the result of acquisitions, organic volume growth (measured by requisitions), price and mix. Total volume (measured by requisitions) increased by 5.8%, of which organic volume was 2.2% and acquisition volume was 3.6%. Revenue per requisition increased 2.9%.

CDD revenues for the year ended December 31, 2017, were $3,451.6, an increase of 6.3% over revenues of $3,245.8 in the corresponding period in 2016. The increase in revenue was primarily due to the acquisition of Chiltern, which contributed growth of 6.1%, an increase in organic growth of 0.4% and an unfavorable impact from foreign currency translation of approximately 0.2%.

Cost of Revenues

Years Ended December 31,Change
20182017201620182017
Cost of revenues$8,157.0$7,216.2$6,698.913.0%7.7%
Cost of revenues as a % of revenues72.0%70.0%70.1%

Cost of revenues (primarily laboratory, labor and distribution costs) increased 13.0% in 2018 as compared with 2017 primarily due to acquisitions and organic volume growth. The increase in cost of revenues as a percentage of revenues in 2018 as compared to 2017 was primarily due to the timing of acquisitions (Chiltern closed in September 2017) as well as higher costs of revenue for certain acquisitions. In addition, the Company paid a special one-time bonus of $31.1 ($24.8 of which was recorded in cost of revenues) to its non-bonus eligible employees in recognition of the benefits the Company is receiving from the passage of the U.S. Tax Cuts and Jobs Act (TCJA). As a direct result of the ransomware attack experienced during July, the Company incurred $6.8 in employee overtime during the recovery period following the attack. The increase in net cost of revenues in 2018 was negatively impacted by a net increase of 0.2% due to currency fluctuations.

Cost of revenues (primarily laboratory, labor and distribution costs) increased 7.7% in 2017 as compared with 2016 primarily due to increased volume, measured by requisitions, and test mix changes. The slight decrease in cost of revenues as a percentage of revenues in 2017 as compared to 2016 was due to LaunchPad savings and acquisition integration synergies offset by relatively higher costs of revenues for certain 2017 acquisitions. The increase in cost of revenues in 2017 was negatively impacted by a net increase of 0.1% due to currency fluctuations.

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Labor and testing supplies for the year ended December 31, 2018, comprise over 70.7% of the Company’s cost of revenues. Cost of revenues has increased over the three-year period ended December 31, 2018, primarily due to the impact of acquisitions, overall growth in the Company's volume, and increases in merit-based labor costs.

Selling, General and Administrative Expenses

Years Ended December 31,Change
20182017201620182017
Selling, general and administrative expenses$1,570.9$1,499.2$1,345.54.8%11.4%
SG&A as a % of revenues13.9%14.5%14.1%

Selling, general and administrative expenses as a percentage of net revenues decreased to 13.9% in 2018 compared to 14.5% in 2017. The decrease in selling, general and administrative expenses as a percentage of revenues is primarily due to LaunchPad savings and acquisition synergies. The increase in selling, general and administrative expenses in 2018 was impacted by a net increase of 0.2% due to currency fluctuations.

The Company incurred integration and other costs of $54.7 primarily relating to the Chiltern acquisition and the sale of the CFS business. 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 a direct result of the ransomware attack experienced during July, the Company incurred $12.6 in consulting fees and employee overtime during the recovery period following the attack. The Company also recorded $9.6 in consulting expenses relating to the Chiltern integration and management integration costs along with a special one-time bonus of $31.1 ($6.3 of which was recorded in selling, general and administrative expenses) to its non-bonus eligible employees in recognition of the benefits the Company is receiving from the passage of the TCJA. In addition, the Company incurred $9.8 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.0% for the year ended December 31, 2018.

Selling, general and administrative expenses as a percentage of revenues increased to 14.5% in 2017 compared to 14.1% in 2016. The increase in selling, general and administrative expenses as a percentage of revenues is primarily due to current year acquisitions offset by LaunchPad savings. The increase in selling, general and administrative expenses in 2017 was impacted by a net increase of 0.1% due to currency fluctuations.

During 2017, the Company incurred legal and other costs of $43.9 primarily relating to the acquisition of Chiltern. The Company also recorded $23.3 in consulting and other expenses relating to Covance and Chiltern integration initiatives, along with $0.9 in short-term equity retention arrangements relating to the acquisition of Covance. In addition, the Company incurred $11.7 of non-capitalized cost associated with a major system as part of its LaunchPad business process improvement initiative. The Company also recognized asset impairment losses of $20.9 related to the termination of software development projects within the CDD segment and the forgiveness of certain indebtedness for LCD customers in areas heavily impacted by hurricanes during the third quarter. Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.6% for the year ended December 31, 2017.

During 2016, the Company incurred additional legal and other costs of $4.6 relating to the wind-down of two operations used to service minimum volume service contract operations. On February 9, 2016, the Company reached an agreement for the sale of assets and business of one of these sites. As required by U.K. law, substantially all of the employees were transferred with the business. On November 21, 2016, following the wind-down of the business, the Company reached an agreement for the sale of the property and assets of the other site. In addition, the Company incurred $8.0 in acquisition fees and expenses. The Company also recorded $6.9 in consulting expenses relating to fees incurred as part of its Covance acquisition integration costs and compensation analysis, along with $2.5 in short-term equity retention arrangements relating to the Covance acquisition and $8.9 of accelerated equity compensation relating to executive transition. In addition, the Company incurred $9.0 of non-capitalized costs associated with the implementation of a major system as part of LaunchPad. Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.7% for the year ended December 31, 2016.

Amortization Expense

Years Ended December 31,Change
20182017201620182017
LCD$104.0$116.7$93.4(10.9)%24.9%
CDD127.799.886.128.0%15.9%
Amortization of intangibles and other assets$231.7$216.5$179.57.0%20.6%

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The increase in amortization of intangibles and other assets from 2016 through 2018 primarily reflects the impact of acquisitions offset by the impact of business dispositions and working capital and earnout adjustments.

Restructuring and Other Special Charges

Years Ended December 31,
201820172016
Restructuring and other special charges$48.1$70.9$58.4

During 2018, the Company recorded net restructuring charges of $48.1; $20.5 within LCD and $27.6 within CDD. The charges were comprised of $40.3 in severance and other personnel costs and $11.8 in facility-related costs primarily associated with general integration activities. The charges were offset by the reversal of previously established reserves of $2.0 in unused severance and $2.0 in unused facility-related costs.

During 2017, the Company recorded net restructuring charges of $70.9; $16.8 within LCD and $54.1 within CDD. The charges were comprised of $36.1 in severance and other personnel costs, $18.8 in facility-related costs primarily associated with general integration activities, and an asset impairment loss of $20.9 related to the termination of a software development project within the CDD segment and the forgiveness of indebtedness for LCD customers in areas heavily impacted by hurricanes experienced during the third quarter of 2017. The charges were offset by the reversal of previously established reserves of $0.5 in unused severance and $4.4 in unused facility-related costs.

During 2016, the Company recorded net restructuring and other special charges of $58.4; $15.8 within LCD and $42.6 within CDD. The charges were comprised of $30.9 related to severance and other personnel costs along with $33.8 in costs associated with facility closures. A substantial portion of these costs relate to the planned closure of duplicative data center operations and other facilities. These charges were offset by the reversal of previously established reserves of $2.8 in unused severance and $3.5 in unused facility-related costs, as the result of selling one of its minimum volume service contract facilities to a third party.

Interest Expense

Years Ended December 31,Change
20182017201620182017
Interest expense$244.2$235.1$219.13.9%7.3%

The increase in interest expense for 2018 as compared with the corresponding period in 2017 is primarily due to the issuance of Senior Notes and the 2017 Term loan in the third quarter of 2017 and the impact of increasing interest rates on variable rate debt, partly offset by the repayment of Senior Notes in 2017 and 2018, lower borrowings under the Company's Revolving Credit Facility and the benefit of the cross currency swaps entered into in 2018.

The increase in interest expense for 2017 as compared with the corresponding period in 2016 is primarily due to the issuance of Senior Notes, the addition of the 2017 term loan, and increased borrowings under the Company's Revolving Credit Facility, to fund the acquisition of Chiltern and support growth. This increase was partially offset by the repayment of the 2.20% Senior Notes in August 2017 and a portion of the zero-coupon subordinated notes, and the retirement of the convertible Senior Notes acquired as part of the Sequenom acquisition in October 2016.

Equity Method Income, Net

Years Ended December 31,Change
20182017201620182017
Equity method income, net$11.6$11.3$7.92.7%43.0%

Equity method income, net represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the healthcare industry. All of these partnerships and investments reside within LCD. The increase in income for 2018 as compared with the corresponding period in 2017 was primarily due to the increased profitability in two of the joint ventures offset by the consolidation of a joint venture during the second quarter of 2018 related to the acquisition of Pathology Associates Medical Laboratories (PAML).

Other, Net

Years Ended December 31,Change
20182017201620182017
Other, net$167.7$(6.0)$12.52,895.0%(148.0)%

The change in other, net for the year ended December 31, 2018 is primarily due to a gain of $258.3 recognized on the sale of the CFS business offset by losses on the dispositions of the Company's forensic testing services businesses in the U.K. and the

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U.S. of $48.9 and $24.5, respectively. The Company wrote-off a venture fund investment of $5.2 and also recorded a $7.5 pension settlement charge as a result of lump sum distributions exceeding threshold levels. In addition, foreign currency transaction losses were $3.6 and $5.3, respectively, for the 2018 and 2017 periods presented.

The decrease in other, net for the year ended December 31, 2017, is primarily due to the inclusion of a net gain of $9.7 on the sale of investment securities from the Company's venture fund in 2016, offset by an increase in net realized foreign currency transaction losses.

Income Tax Expense

Years Ended December 31,
201820172016
Income tax expense$384.4$(155.4)$360.7
Income tax expense as a % of income before tax30.3%(14.4)%33.6%

In 2018, the Company's effective tax rate was 30.3% and was favorably impacted by the U.S. federal corporate tax rate decreasing from 35.0% to 21.0%, partially offset by the additional tax recorded for TCJA under SAB 118 and the new TCJA global intangible low taxed income (GILTI) tax. Additionally, the 2018 rate was higher due to increased income taxes paid on divestitures where net tax basis was lower than net book basis and certain restructuring activities.

The 2017 tax rate of (14.4)% resulted from the Company recording a fourth quarter provisional estimate for the TCJA, which resulted in a reduction in income tax expense arising from a re-measurement of deferred taxes, and the release of deferred taxes on unremitted foreign earnings, partially offset by the deemed repatriation tax. Given the significant changes resulting from the TCJA, the estimated financial impact was provisional and subject to further clarification, which resulted in changes to these estimates in 2018. The 2017 rate was also favorably impacted by foreign earnings taxed at rates lower than the U.S. and by share-based compensation.

In 2016, the Company's effective rate of 33.6% was favorably impacted by foreign earnings taxed at lower rates than the U.S. statutory tax rate and, for 2016 specifically, by a reduction in certain foreign rates. The 2016 rate also benefited from the early adoption of share-based payment accounting and the reversal of uncertain tax position reserves.

The Company considers substantially all of its foreign earnings to be permanently reinvested overseas.

Operating Results by Segment

Years Ended December 31,Change
20182017201620182017
LCD operating income$1,166.7$1,300.9$1,182.0(10.3)%10.1%
LCD operating margin16.6%19.0%18.7%(2.4)%0.3%
CDD operating income$303.6$144.9$236.5109.5%(38.7)%
CDD operating margin7.0%4.2%7.3%2.8%(3.1)%
General corporate expenses$(144.6)$(140.6)$(147.9)2.8%(4.9)%
Total operating income$1,325.7$1,305.2$1,270.61.6%2.7%

LCD operating income was $1,166.7 for the year ended December 31, 2018, a decrease of (10.3)% over operating income of $1,300.9 in the corresponding period of 2017 and a decrease of 240 basis points in operating margin year-over-year. The decrease in margin was primarily due to the implementation of PAMA and the impact of business disruptions from the ransomware attack and Hurricane Florence, along with increased personnel costs. Operating margins were also impacted by the special one-time bonus paid to its non-bonus eligible employees.

CDD operating income was $303.6 for the year ended December 31, 2018, an increase of 109.5% over operating income of $144.9 in the corresponding period of 2017 and an increase of 280 basis points in operating margin year-over-year. The improved operating margin was primarily due to acquisitions and organic growth combined with lower restructuring and other special charges due to the expansion of LaunchPad partially offset by the special one-time bonus to its non-bonus eligible employees.

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 $144.6 for the year ended December 31, 2018, an increase of 2.8% over corporate expenses of $140.6 in the corresponding period of 2017. The increase in corporate expenses in 2018 is primarily due to an increase in professional services for accounting, auditing and consulting services.

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Liquidity, Capital Resources and Financial Position

The Company's strong cash-generating capability and financial condition typically have provided ready access to capital markets. The Company's principal source of liquidity is operating cash flow, supplemented by proceeds from debt offerings. The Company's senior unsecured revolving credit facility is further discussed in Note 12 to the Company's Consolidated Financial Statements.

In summary the Company's cash flows were as follows:

For the Year Ended December 31,
201820172016
Net cash provided by operating activities$1,305.4$1,498.1$1,197.1
Net cash provided by (used for) investing activities206.7(2,228.7)(795.7)
Net cash (used in) provided by financing activities(1,389.9)593.2(671.0)
Effect of exchange rate on changes in cash and cash equivalents(12.0)20.5(13.2)
Net change in cash and cash equivalents$110.2$(116.9)$(282.8)

Cash and Cash Equivalents

Cash and cash equivalents at December 31, 2018, 2017, and 2016 totaled $426.8, $316.6, and $433.6, respectively. Cash and cash equivalents consist of highly liquid instruments, such as time deposits and other money market investments, which have original maturities of three months or less.

Cash Flows from Operating Activities

During the year ended December 31, 2018, the Company's operations provided $1,305.4 of cash as compared to $1,498.1 in 2017. The $192.7 decrease in cash provided from operations in 2018 as compared with the corresponding 2017 period was primarily due to higher working capital requirements to support overall business growth in 2018 and a net tax payment of approximately $105.0 related to the divestiture of its food and forensic testing service businesses in 2018, the net proceeds from which are recorded in net cash provided by investing activities. The Company’s 2018 earnings were impacted by $48.1 of restructuring and special items compared to an impact of $70.9 during the same period in 2017.

During the year ended December 31, 2017, the Company's operations provided $1,498.1 of cash as compared to $1,197.1 in 2016. The $301.0 increase in cash provided from operations in 2017 as compared with the corresponding 2016 period was primarily due to higher net earnings and improved working capital in 2017. The Company’s 2017 earnings were impacted by $70.9 of restructuring and special items compared to an impact of $58.4 during the same period in 2016.

Cash Flows from Investing Activities

Net cash provided by investing activities for the year ended December 31, 2018, was $206.7 as compared to $2,228.7 used for the year ended December 31, 2017. The $2,435.4 increase in cash provided by investing activities for the year ended December 31, 2018, was primarily due to a year over year decrease of $1,764.8 in cash paid for acquisitions. In addition, the Company had proceeds of $708.3 from the sale of assets and disposition of businesses during 2018 in comparison to $5.5 during 2017. Capital expenditures were $379.8 and $312.9 for the years ended December 31, 2018 and 2017, respectively. Capital expenditures in 2018 were 3.4% of revenues primarily in connection with projects to support growth in the Company's core businesses, projects related to LaunchPad and further Covance integration initiatives. The Company intends to continue to pursue acquisitions to fund growth, to make important investments in its business, including in information technology, and to improve efficiency and enable the execution of the Company's mission. Such expenditures are expected to be funded by cash flow from operations or, as needed, through borrowings under debt facilities, including the Company's revolving credit facility or any successor facility. The Company expects capital expenditures in 2019 to be approximately 4.0% of revenues, primarily in connection with projects to support growth in the Company's core businesses, facility updates, ongoing projects related to LaunchPad within the LCD business, LaunchPad's expansion within the CDD business, and further acquisition integration initiatives.

Net cash used in investing activities for the year ended December 31, 2017, was $2,228.7 as compared to $795.7 for the year ended December 31, 2016. The $1,433.0 increase in cash used in investing activities for the year ended December 31, 2017, was primarily due to a year over year increase of $1,334.0 in cash paid for acquisitions, primarily Chiltern. In addition, the Company had proceeds of $5.5 from the sale of assets during 2017 in comparison to $30.8 during 2016. Capital expenditures were $312.9 and $278.9 for the years ended December 31, 2017 and 2016, respectively. Capital expenditures in 2017 were 3.1% of revenues primarily in connection with projects to support growth in the Company's core businesses, projects related to LaunchPad and further Covance integration initiatives.

Cash Flows from Financing Activities

Net cash used for financing activities for the year ended December 31, 2018, was $1,389.9 compared to cash provided by financing activities of $593.2 for the year ended December 31, 2017. This movement in cash within financing activities for 2018,

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as compared to 2017, was primarily a result of $704.6 of debt and capital lease repayments and $700.0 in share repurchases in 2018 compared to $908.7 in net financing proceeds offset by $338.1 share repurchases in 2017.

Net cash provided by financing activities for the year ended December 31, 2017, was $593.2 compared to cash used for financing activities of $671.0 for the year ended December 31, 2016. This movement in cash within financing activities for 2017, as compared to 2016, was primarily a result of $908.7 of net financing proceeds offset by $338.1 in share repurchases in 2017 compared to $653.4 in debt repayments combined with $43.9 share repurchases in 2016.

On August 22, 2017, the Company issued new Senior Notes representing $1,200.0 in debt securities consisting of a $600.0 aggregate principal amount of 3.25% Senior Notes due 2024 and a $600.0 aggregate principal amount of 3.60% Senior Notes due 2027. Interest on these notes is payable semi-annually on March 1 and September 1 of each year, commencing on March 1, 2018. Net proceeds from the offering of these notes were $1,190.1 after deducting underwriting discounts and other expenses of the offering. Net proceeds were used to pay off the 2.20% Senior Notes due August 23, 2017, as well as a portion of the cash consideration and the fees and expenses in connection with the Chiltern acquisition.

On September 15, 2017, the Company entered into a new $750.0 term loan which will mature on September 15, 2022. The 2017 term loan balance at December 31, 2018, was $527.1.

On September 15, 2017, the Company also entered into an amendment and restatement of its existing senior revolving credit facility, which was originally entered into on December 21, 2011, was amended and restated on December 15, 2015 and was further amended on July 13, 2016. The senior revolving credit facility consists of a five-year revolving facility in the principal amount of up to $1,000.0, with the option of increasing the facility by up to an additional $350.0, subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. 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 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. There were no balances outstanding on the Company's current revolving credit facility at December 31, 2018, or December 31, 2017.

Under the Company's term loan credit facilities and the revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios. The Company was in compliance with all covenants under the term loan credit facilities and the revolving credit facility at December 31, 2018. As of December 31, 2018, the ratio of total debt to consolidated pro forma trailing 12 month earnings before interest, tax, depreciation, and amortization (EBITDA) was 3.0 to 1.0.

The 2017 term loan credit facility accrues interest at a per annum rate equal to, at the Company’s election, either a London Interbank Offered Rate (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%. Advances under 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%. Fees are payable on outstanding letters of credit under the revolving credit facility at a per annum rate equal to the applicable margin for LIBOR loans, and 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 0.10% to 0.25%. The interest margin applicable to the 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 S&P and Moody’s.

As of December 31, 2018, the effective interest rate on the revolving credit facility was 3.5% and the effective interest rate was 3.6% on the 2017 term loans.

As of December 31, 2018, the Company provided letters of credit aggregating $72.2, primarily in connection with certain insurance programs. Letters of credit provided by the Company are issued under the Company's revolving credit facility and are renewed annually.

During 2018, the Company purchased 4.2 shares of its common stock at a total cost of $700.0. At the end of 2018, the Company had outstanding authorization from the board of directors to purchase an additional $443.5 of Company common stock. On February 6, 2019, the board of directors replaced the Company’s existing share repurchase plan with a new plan authorizing repurchase of up to $1.25 billion of the Company’s shares. The repurchase authorization has no expiration date.

The Company had a $26.7 and $27.4 reserve for unrecognized income tax benefits, including interest and penalties, as of December 31, 2018 and December 31, 2017, respectively. For the year ended December 31, 2018, approximately $6.0 of the tax reserve is classified in accrued expenses and other in the Company's Consolidated Balance Sheet while the remaining $20.7 is classified in deferred income taxes and other tax liabilities. Substantially all of the tax reserve for the year ended December 31, 2017 are classified in deferred income taxes and other tax liabilities in the Company's Consolidated Balance Sheet.

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During 2018 and 2017, the Company settled notices to convert $0.3 and $25.2 aggregate principal amount at maturity of its zero-coupon subordinated notes with a conversion value of $0.7 and $33.9, respectively. The total cash used for these settlements was $0.3 and $33.9 and the Company also issued 0.0 and 0.3 additional shares of common stock, respectively. As a result of these conversions in 2018 and 2017, the Company also reversed approximately $0.2 and $13.7, respectively, of deferred tax liability to reflect the tax benefit realized upon issuance of the shares.

On September 11, 2018, the Company announced that for the period of September 11, 2018, to March 8, 2019, 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 8, 2017, in addition to the continued accrual of the original issue discount.

On January 3, 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 23, 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 January 1, 2019, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New York City time, on Friday, March 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.

Credit Ratings

The Company’s investment grade debt ratings from Moody’s and BBB from Standard & Poor's (S&P) contribute to its ability to access capital markets.

Contractual Cash Obligations
Payments Due by Period
2020 -2022 -2024 and
Total201920212023thereafter
Operating lease obligations$763.4$196.1$258.7$147.8$160.8
Contingent future licensing payments (a)18.11.67.77.61.2
Minimum royalty payments15.82.37.65.60.3
Purchase obligations8.18.1———
Capital lease obligations96.514.825.821.534.4
Scheduled interest payments on Senior Notes1,898.1208.1368.7291.61,029.7
Scheduled interest payments on Term Loan (d)84.321.146.516.7—
Long-term debt6,027.0—1,100.01,827.03,100.0
Total contractual cash obligations (b) (c)$8,911.3$452.1$1,815.0$2,317.8$4,326.4
(a)Contingent future licensing payments will be made if certain events take place, such as the launch of a specific test, the transfer of certain technology, and the achievement of specified revenue milestones.
(b)The table does not include obligations under the Company’s pension and postretirement benefit plans, which are included in “Note 17 to Consolidated Financial Statements.” Benefits under the Company's postretirement medical plan are made when claims are submitted for payment, the timing of which is not practicable to estimate.
(c)The table does not include the Company’s reserve for unrecognized tax benefits. The Company had a $26.7 and $27.4 reserve for unrecognized tax benefits, including interest and penalties, at December 31, 2018, and 2017, respectively, which is included in “Note 14 to Consolidated Financial Statements.” Substantially all of these tax reserves are classified in other long-term liabilities in the Company’s Consolidated Balance Sheets at December 31, 2018, and 2017.
(d)Interest payments due by period for the Company's debt subject to variable interest rates are calculated based on rates in place as of December 31, 2018.

Off-Balance Sheet Arrangements

The Company does not have transactions or relationships with “special purpose” entities, and the Company does not have any off-balance sheet financing other than normal operating leases and letters of credit.

Other Commercial Commitments

As of December 31, 2018, the Company provided letters of credit aggregating approximately $72.2, primarily in connection with certain insurance programs. Letters of credit provided by the Company are secured by the Company’s revolving credit facility and are renewed annually.

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The contractual value of the noncontrolling interest put in the Company's Ontario subsidiary totaled $15.0 and $16.3 at December 31, 2018, and 2017, respectively, and has been classified as mezzanine equity in the Company's consolidated balance sheet.

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

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. While the Company believes these estimates are reasonable and consistent, they are by their very nature estimates of amounts that will depend on future events. Accordingly, actual results could differ from these estimates. The Company’s Audit Committee periodically reviews the Company’s significant accounting policies. The Company’s critical accounting policies arise in conjunction with the following:

•Revenue recognition;
•Pension expense;
•Accruals for self-insurance reserves;
•Income taxes; and
•Goodwill and indefinite-lived assets.

Revenue Recognition

Within the LCD segment, a revenue transaction is initiated when LCD receives a requisition order to perform a diagnostic test. The information provided on the requisition form is used to determine the party that will be billed for the testing performed and the expected reimbursement. LCD recognizes revenue and satisfies its performance obligation for services rendered when the testing process is complete and the associated results are reported. Sales are distributed among four payer portfolios - clients, patients, Medicare and Medicaid and third-party.

The following are descriptions of the LCD payer portfolios:

Clients

Client payers represent the portion of LCD’s revenue related to physicians, hospitals, health systems, accountable care organizations (ACOs), employers and other entities where payment is received exclusively from the entity ordering the testing service. Generally, client sales are recorded on a fee-for-service basis at LCD’s client list price, less any negotiated discount. A portion of client billing is for laboratory management services, collection kits and other non-testing services or products. In these cases, revenue is recognized when services are rendered or delivered.

This portfolio also included LCD's nutritional chemistry services through CFS, which was sold on August 1, 2018. LCD offered a broad range of services to the food and nutraceutical and animal feed industries. Revenue was recognized using an output-based measure of progress based on the volume of activities in each period.

Patients

This portfolio includes revenue from uninsured patients and member cost-share for insured patients (e.g., coinsurance, deductibles and non-covered services). Uninsured patients are billed based upon LCD’s patient fee schedules, net of any discounts negotiated with physicians on behalf of their patients. LCD bills insured patients as directed by their health plan and after consideration of the fees and terms associated with an established health plan contract.

Medicare and Medicaid

This portfolio relates to fee-for-service revenue from traditional Medicare and Medicaid programs. Net revenue from these programs is based on the fee schedule established by the related government authority. In addition to contractual discounts, other adjustments including anticipated payer denials are considered when determining net revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to LCD’s results of operations in any period presented.

Third-Party

Third-party includes revenue related to MCOs. The majority of LCD's third-party revenue is reimbursed on a fee-for-service basis. These payers are billed at LCD's established list price and revenue is recorded net of contractual discounts. The majority of

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LCD’s MCO sales are recorded based upon contractually negotiated fee schedules with sales for non-contracted MCOs recorded based on historical reimbursement experience.

Third-party reimbursement is also received through capitation agreements with MCOs and independent physician associations (IPAs). Under capitated agreements, revenue is recognized based on a negotiated per-member, per-month payment for an agreed upon menu of tests, or based upon the proportionate share earned by LCD from a capitation pool. When the agreed upon reimbursement is based solely on an established rate per member, revenue is not impacted by the volume of testing performed. Under a capitation pool arrangement, the aggregate value of an established rate per member is distributed based on the volume and complexity of the procedures performed by laboratories participating in the agreement. LCD recognizes revenue monthly, based upon the established capitation rate or anticipated distribution from a capitated pool.

LCD has a formal process to estimate and review the collectability of its receivables based on the period of time they have been outstanding. The majority of LCD's collection risk is related to accounts receivable from both insured and uninsured patients who are unwilling or unable to pay. Anticipated write-offs are recorded as an adjustment to revenue and at an amount considered necessary to record the segment's revenue at its net realizable value. In addition to contractual discounts, other adjustments including anticipated payer denials are considered when determining revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to LCD’s results of operations in any period presented.

The nature of CDD’s obligations include agreements to manage a full clinical trial, provide services for a specific phase of a trial, or provide research products to the customer. Generally, the amount of the transaction price estimated at the beginning of the contract is equal to the amount expected to be billed to the customer. Other payments may also factor into the calculation of transaction price, such as volume-based rebates that are retroactively applied to prior transactions in the period.

Historically a majority of CDD's revenues have been earned under contracts that range in duration from a few months to a few years, but can extend in duration up to five years or longer. Occasionally, CDD also has entered into minimum volume arrangements with certain customers. Under these types of arrangements, if the annual minimum dollar value of a service commitment is not reached, the customer is required to pay CDD for the shortfall. Annual minimum commitment shortfalls are not recognized until the end of the period when the amount has been determined and agreed to by the customer.

CDD recognizes revenue either as services are performed or as products are delivered, depending on the nature of the work contracted. If performance is completed at a specific point in time, the Company evaluates the nature of the agreement to determine when the good or service is transferred into the customer’s control.

Service contracts generally take the form of fee-for-service or fixed-price arrangements subject to pricing adjustments based on changes in scope. In cases where performance spans multiple accounting periods, revenue is recognized as services are performed, measured on a proportional-performance basis, using either input or output methods that are specific to the service provided. In an output method, revenue is determined by dividing the actual units of output achieved by the total units of output required under the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of the agreed upon services to be provided.

When using an input method, revenue is recognized by dividing the actual units of input incurred by the total units of input budgeted in the contract, and multiplying that percentage by the total contract value. In each situation, the Company believes that the methods used most accurately depict the progress of the Company towards completing its obligations. Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, CDD bills the customer for the total contract value in progress-based installments as certain non-contingent billing milestones are reached over the contract duration. These milestones include, but are not limited to, contract signing, initial dosing, investigator site initiation, patient enrollment and/or database lock. The term “billing milestone” relates only to a billing trigger in a contract whereby amounts become billable and payable in accordance with a negotiated predetermined billing schedule throughout the term of a project. These billing milestones are generally not performance-based (i.e., there is no potential additional consideration tied to specific deliverables or performance). In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract value and aggregate amounts billed to the customer would be the same at the end of the project.

Proportional performance contracts typically contain a single service (e.g., management of a clinical study) and therefore no allocation of the contract price is required. Fee-for-service contracts are typically priced based on transaction volume. Since the volume of activities in a fee-for-service contract is unspecified, the contract price is entirely variable and is allocated to the time period in which it is earned. For contracts that include multiple distinct goods and services, CDD allocates the contract price to the goods and services based on a customer price list, if available. If a price list is not available, CDD will estimate the transaction price using either market prices or an “expected cost plus margin” approach.

While CDD attempts to negotiate terms that provide for billing and payment of services prior or within close proximity to the provision of services, this is not always possible. While a project is ongoing, cash payments are not necessarily representative of

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aggregate revenue earned at any particular point in time, as revenues are recognized when services are provided, while amounts billed and paid are in accordance with the negotiated billing and payment terms.

In some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide for an upfront payment of 10% of the full contract value upon contract signing, but at the time of signing performance of services has not yet begun. Payments received in advance of services being provided are deferred as contract liabilities on the balance sheet. As the contracted services are subsequently performed and the associated revenue is recognized, the contract liability balance is reduced by the amount of revenue recognized during the period.

In other cases, services may be provided and revenue recognized before the customer is invoiced. In these cases, revenue recognized will exceed amounts billed, and the difference, representing a contract asset, is recorded for the amount that is currently not billable to the customer pursuant to contractual terms. Once the customer is invoiced, the contract asset is reduced for the amount billed, and a corresponding account receivable is recorded. All contract assets are billable to customers within one year from the respective balance sheet date.

Most contracts are terminable with or without cause by the customer, either immediately or upon notice. These contracts often require payment to CDD of expenses to wind down the study or project, fees earned to date and, in some cases, a termination fee or a payment to CDD of some portion of the fees or profits that could have been earned by CDD under the contract if it had not been terminated early. Termination fees are included in net revenues when services are performed and realization is assured.

The following are descriptions of the full range of drug development services provided by CDD:

Preclinical services include the sale of research models, fee-for-service activities such as bioanalytical testing services, and proportional performance activities such as toxicology studies. Revenue for sale of research models is recognized at a point in time, typically upon shipment, when control transfers to the customer. Revenue for bioanalytical testing services is recognized at a point in time upon communication of results to the customer. Revenue for proportional performance activities, including toxicology studies, is recognized using an input-based measure of progress in which revenue is recognized as expenses are incurred for the research models, labor hours, and other costs attributable to the study.

Through its central laboratory, CDD produces and supplies specimen collection kits that are utilized in clinical studies, and provides transportation, project management, data management, and laboratory testing services on an as-needed basis throughout the duration of its customers’ clinical studies. Revenue for central laboratory services is recognized using an output-based measure of progress based on volume of activities in each period. CDD also provides long-term specimen storage services, for which revenue is recognized using an input-based measure of progress based on costs incurred.

CDD provides clinical development and commercialization services, including clinical pharmacology services, full management of Phase II through IV clinical studies, and market access solutions. Revenue for clinical pharmacology services, which includes first-in-human trials, is recognized using an output-based measure of progress based on bed nights. Revenue for full service clinical studies is recognized using an input-based measure of progress based on costs incurred (including pass-through costs such as investigator grants and reimbursable out-of-pocket expenses). Clinical services utilizing the input-based measure of progress account for approximately 50% of CDD revenue. Revenue for market access solutions is recognized using various methods. Revenue for fee-for-service arrangements, such as reimbursement consulting hotlines and patient assistance programs, is recognized using an output method based on transaction volume which corresponds to the amount charged to the customer. For consulting services billed based on time and materials, revenue is recognized using the right to invoice practical expedient.

CDD endeavors to assess and monitor the creditworthiness of its customers to which it grants credit terms in the ordinary course of business. CDD maintains a provision for doubtful accounts relating to amounts due that may not be collected. This bad debt provision is monitored on a monthly basis and adjusted as circumstances warrant. Since the recorded bad debt provision is based upon management's judgment, actual bad debt write-offs may be greater or less than the amount recorded. Historically, bad debt write-offs have not been material.

Pension Expense

The Company has a defined-benefit retirement plan (Company Plan) and a non-qualified supplemental retirement plan (PEP). In October 2009, the Company received approval from its board of directors to freeze any additional service-based credits for any years of service after December 31, 2009, on the Company Plan and the PEP. Both plans have been closed to new participants. Employees participating in the Company Plan and the PEP no longer earn service-based credits, but continue to earn interest credits. In addition, effective January 1, 2010, all employees eligible for the defined-contribution retirement plan (401K Plan) receive a minimum 3% non-elective contribution (NEC) concurrent with each payroll period. The 401K Plan also permits discretionary contributions by the Company of up to 1% and up to 3% of pay for eligible employees, based on service.

The Company Plan covers substantially all employees employed by the Company 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

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compensation. The Company's policy is to fund the Company Plan with at least the minimum amount required by applicable regulations. The PEP covers a portion of the Company's senior management group. Prior to 2010, the PEP provided for the payment of the difference, if any, between the amount of any maximum limitation on annual benefit payments under the Employee Retirement Income Security Act of 1974 and the annual benefit that would be payable under the Company Plan but for such limitation. Effective January 1, 2010, employees participating in the PEP no longer earn service-based credits. The PEP is an unfunded plan.

In addition, as a result of the Covance acquisition, the Company has a frozen non-qualified Supplemental Executive Retirement Plan (SERP). The SERP, which is not funded, is intended to provide retirement benefits for certain employees who were executive officers of Covance prior to the Covance acquisition. Benefit amounts are based upon years of service and compensation of the participating employees. As a result of the Covance acquisition, the Company also 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 and are closed to new entrants. Benefit amounts for all three plans are based upon years of service and compensation. The German Plan is unfunded while the U.K. Plans are funded. The Company’s funding policy for the U.K. Plans has been to contribute annually amounts at least equal to the local statutory funding requirements.

The Company's net pension cost is developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets, which are updated on an annual basis at the beginning of each year. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in pension costs may occur in the future due to changes in these assumptions. The key assumptions used in accounting for the defined-benefit retirement plans were a 4.3% discount rate and a 6.5% expected long-term rate of return on plan assets for the Company Plan, a 4.4% discount rate for the PEP, a 1.7% discount rate and a 2.0% expected salary increase for the German plan and a 2.5% discount rate and a 3.6% expected salary increase for the U.K. Plans as of December 31, 2018.

Discount Rate

The Company evaluates several approaches toward setting the discount rate assumption that is used to value the benefit obligations of its retirement plans. At year-end, priority was given to use of the Towers Watson Bond:Link model, which simulates the purchase of investment-grade corporate bonds at current market yields with principal amounts and maturity dates closely matching the Company's projected cash disbursements from its plans. This completed model represents the yields to maturity at which the Company could theoretically settle its plan obligations at year end. The weighted-average yield on the modeled bond portfolio is then used to form the discount rate assumption used for each retirement plan. A one percentage point decrease or increase in the discount rate would have resulted in a respective increase or decrease in 2018 retirement plan expense of $2.4 for the Company Plan and PEP. A one percentage point decrease or increase in the discount rate would have resulted in a respective increase or decrease in 2018 retirement plan expense of $0.9 for the U.K. Plans.

Return on Plan Assets

In establishing its expected return on plan assets assumption, the Company reviews its asset allocation and develops return assumptions based on different asset classes adjusting for plan operating expenses. Actual asset over/under performance compared to expected returns will respectively decrease/increase unrecognized loss. The change in the unrecognized loss will change amortization cost in upcoming periods. A one percentage point increase or decrease in the expected return on plan assets would have resulted in a corresponding change in 2018 pension expense of $2.5 for the Company Plan. A one percentage point increase or decrease in the expected return on plan assets would have resulted in a corresponding change in 2018 pension expense of $2.8 for the U.K. Plans.

Net pension cost for 2018 was $20.9 as compared with $14.6 in 2017 and $14.9 in 2016. The increase in pension expense was due to increases in the amount of net amortization and deferral as a result of lower discount rates as well as a $7.5 settlement charge. Pension expense for the Company Plan and the PEP is expected to increase to $13.3 in 2019 as a result of a lower assumed discount rate and changes in participant mortality tables. Pension expense for the Germany Plan and the U.K. Plans is expected to increase to $1.2 in 2019 as a result of a decrease in the expected return on plan assets.

Further information on the Company’s defined-benefit retirement plans is provided in Note 17 to the Consolidated Financial Statements.

Accruals for Self-Insurance Reserves

Accruals for self-insurance reserves (including workers’ compensation, auto and employee medical) are determined based on a number of assumptions and factors, including historical payment trends and claims history, actuarial assumptions and current and estimated future economic conditions. These estimated liabilities are not discounted.

The Company is self-insured (up to certain limits) for professional liability claims arising in the normal course of business, generally related to the testing and reporting of laboratory test results. The Company maintains excess insurance which limits the

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Company’s maximum exposure on individual claims. The Company estimates a liability that represents the ultimate exposure for aggregate losses below those limits. The liability is based on assumptions and factors for known and incurred but not reported claims, including the frequency and payment trends of historical claims.

If actual trends differ from these estimates, the financial results could be impacted. Historical trends have not differed significantly from these estimates.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company does not recognize a tax benefit, unless the Company 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 the Company believes is greater than 50% likely to be realized. The Company records interest and penalties in income tax expense.

During the fourth quarter of 2017, the Company recorded the estimated impact of the TCJA, which resulted in a favorable remeasurement of deferred taxes, partially offset by the deemed repatriation tax. In 2018, the Company completed the analysis of the 2017 provisional estimated of the TCJA in accordance with SAB 118. The Company recorded $45.0 of additional income tax expense in 2018 related to the TCJA provisions implemented in 2017.

Goodwill and Indefinite-Lived Assets

The Company assesses goodwill and indefinite-lived intangibles for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In accordance with updates to the Financial Accounting Standards Board's (FASB) authoritative guidance regarding goodwill and indefinite-lived intangible asset impairment testing, an entity is allowed to first assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If an entity determines that it is not more likely than not that the estimated fair value of an asset is less than its carrying value, then no further testing is required. Otherwise, impairment testing must be performed in accordance with the original accounting standards. The updated FASB guidance also allows an entity to bypass the qualitative assessment for any reporting unit in its goodwill assessment and proceed directly to performing the quantitative assessment. Similarly, a company can proceed directly to a quantitative assessment in the case of impairment testing for indefinite-lived intangible assets as well.

The quantitative goodwill impairment test includes the estimation of the fair value of each reporting unit as compared to the carrying value of the reporting unit. Reporting units are businesses with discrete financial information that is available and reviewed by management. The Company estimates the fair value of a reporting unit using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit's forecasted future cash flows that are discounted to the present value using the reporting unit's weighted average cost of capital. For the market-based approach, the Company utilizes a number of factors such as publicly available information regarding the market capitalization of the Company as well as operating results, business plans, market multiples, and present value techniques. Based upon the range of estimated values developed from the income and market-based methods, the Company determines the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds the carrying value, the goodwill is not impaired and no further review is required. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The income-based fair value methodology requires management's assumptions and judgments regarding economic conditions in the markets in which the Company operates and conditions in the capital markets, many of which are outside of management's control. At the reporting unit level, fair value estimation requires management's assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit's strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management's estimates and assumptions regarding:

•Annual cash flows, on a debt-free basis, arising from future revenues and profitability, changes in working capital, capital spending and income taxes for at least a five-year forecast period.
•A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.

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•A discount rate that reflects the risks inherent in realizing the forecasted cash flows. A discount rate considers the risk-free rate of return on long-term treasury securities, the risk premium associated with investing in equity securities of comparable companies, the beta obtained from the comparable companies and the cost of debt for investment grade issuers. In addition, the discount rate may consider any company-specific risk in achieving the prospective financial information.

Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of the reporting units.

Management performed its annual goodwill and intangible asset impairment testing as of the beginning of the fourth quarter of 2018. The Company elected to perform the qualitative assessment for goodwill and intangible assets for all reporting units except the Canadian reporting unit and its indefinite-lived assets consisting of acquired Canadian licenses for which a quantitative assessment was performed.

In the qualitative assessment, the Company considered relevant events and circumstances for each reporting unit, including (i) current year results, ii) financial performance versus management’s annual and five-year strategic plans, iii) changes in the reporting unit carrying value since prior year, (iv) industry and market conditions in which the reporting unit operates, (v) macroeconomic conditions, including discount rate changes, and (vi) changes in products or services offered by the reporting unit. If applicable, performance in recent years was compared to forecasts included in prior valuations. Based on the results of the qualitative assessment, the Company concluded that it was not more likely than not that the carrying values of the goodwill and intangible assets were greater than their fair values, and that further quantitative testing was not necessary.

In 2018, the Company utilized an income approach to determine the fair value of its Canadian reporting unit and its indefinite-lived assets consisting of acquired Canadian licenses. Based upon the results of the quantitative assessment, the Company concluded that the fair value of the indefinite-lived Canadian licenses was greater than the carrying value.

It is possible that the Company's conclusions regarding impairment or recoverability of goodwill or intangible assets in any reporting unit could change in future periods. There can be no assurance that the estimates and assumptions used in the Company's goodwill and intangible asset impairment testing performed as of the beginning of the fourth quarter of 2018 will prove to be accurate predictions of the future, if, for example, (i) the businesses do not perform as projected, (ii) overall economic conditions in 2018 or future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies for a specific reporting unit change from current assumptions, including loss of major customers, (iv) investors require higher rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA. The Company will particularly monitor the financial performance of and assumptions for two of the CDD reporting units for which an income approach was performed in 2018. A future impairment charge for goodwill or intangible assets could have a material effect on the Company's consolidated financial position and results of operations.

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FORWARD-LOOKING STATEMENTS

The Company has made in this report, and from time to time may otherwise make in its public filings, press releases and discussions by Company management, forward-looking statements concerning the Company’s operations, performance and financial condition, as well as its strategic objectives. Some of these forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or the negative of those words or other comparable terminology. Such forward-looking statements are subject to various risks and uncertainties and the Company claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those currently anticipated due to a number of factors in addition to those discussed elsewhere herein, including in Item 1A Risk Factors, and in the Company’s other public filings, press releases and discussion 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 PAMA;
2.significant monetary damages, fines, penalties, assessments, refunds, repayments, damage to the Company's reputation, unanticipated compliance expenditures and/or exclusion or disbarment 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 similar 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 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;
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;

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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 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 services or supplies provided by third parties, including transportation;
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 or the provision of animal research products;
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;
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;
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 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 benefit management organizations and increasing levels of patient payment responsibility;
38.impact on the Company's revenue, 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;
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 net 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 TCJA; and
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.

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