filings.toolsLabcorp Holdings 10-K 2019-12-31
Filed 2020-02-28. 22 sections, 625K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[☒] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
or
[☐] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number - 1-11353
LABORATORY CORP OF AMERICA HOLDINGS
(Exact name of registrant as specified in its charter)
| Delaware | 13-3757370 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 358 South Main Street | |||
| Burlington, | North Carolina | 27215 | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number, including area code) 336**-**229-1127
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered |
| Common Stock, $0.10 par value | LH | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X].
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [☐] No [X].
As of June 30, 2019, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $16.1 billion, based on the closing price on such date of the registrant’s common stock on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 97.3 million shares as of February 26, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated:
Portions of the Registrant’s Notice of Annual Meeting and Proxy Statement to be filed no later than 120 days following December 31, 2019, are incorporated by reference into Part III.
Index
Showing the first 8K of 172K characters. Open the full section
Item 1A. Risk Factors
Investors should carefully consider all of the information set forth in this report, including the following risk factors, before deciding to invest in any of the Company’s securities. The risks below are not the only ones that the Company faces. Additional risks not presently known to the Company, or that it presently deems immaterial, may also negatively impact the Company. The Company’s business, consolidated financial condition, revenues, results of operations, profitability, reputation or cash flows could be materially impacted by any of these factors.
This report also includes forward-looking statements that involve risks or uncertainties. The Company’s results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere. See “Forward-Looking Statements” in Item 7.
Changes in payer regulations or policies (or in the interpretation of current regulations or policies), insurance regulations or approvals, or changes in other laws, regulations or policies in the United States (U.S.), may adversely affect U.S. governmental and third-party coverage or reimbursement for clinical laboratory testing and may have a material adverse effect upon the Company.
U.S. and state government payers, such as Medicare and Medicaid, as well as insurers, including managed care organizations (MCOs), have increased their efforts to control the cost, utilization and delivery of healthcare services. From time to time, Congress has considered and implemented changes in Medicare fee schedules in conjunction with budgetary legislation. The first phase of reductions pursuant to the Protecting Access to Medicare Act (PAMA) came into effect on January 1, 2018, and will continue annually subject to certain phase-in limits through 2025, and without limitations for subsequent periods. Further reductions due to changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization, diagnosis code and other claims edits, or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reimbursement for pathology services performed by LabCorp Diagnostics (LCD) is also subject to statutory and regulatory reduction. Reductions in the reimbursement rates and changes in payment policies of other third-party payers may occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the commercial laboratory industry by adding more complex new regulatory and administrative requirements. Further changes in third-party payer regulations, policies, or laboratory benefit or utilization management programs may have a material adverse effect on LCD's business. Actions by federal and state agencies regulating insurance, including healthcare exchanges, or changes in other laws, regulations, or policies may also have a material adverse effect upon LCD's business.
The Company could face significant monetary damages and penalties and/or exclusion from government programs if it violates anti-fraud and abuse laws.
The Company is subject to extensive government regulation at the federal, state, and local levels in the U.S. and other countries where it operates. The Company’s failure to meet governmental requirements under these regulations, including those relating to billing practices and financial relationships with physicians, hospitals, and health systems could lead to civil and criminal penalties, exclusion from participation in Medicare and Medicaid and possible prohibitions or restrictions on the use of its laboratories. While the Company believes that it is in material compliance with all statutory and regulatory requirements, there is a risk that government authorities might take a contrary position. This risk includes, but is not limited to, the potential that government enforcement
authorities may take a contrary position with respect to the Eliminating Kickbacks in Recovery Act (EKRA), given its recent passage and lack of associated regulations to clarify or add exceptions. Such occurrences, regardless of their outcome, could damage the Company’s reputation and adversely affect important business relationships.
The Company’s business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of, the law or regulations of the Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988 (CLIA), or those of Medicare, Medicaid or other national, state or local agencies in the U.S. and other countries where the Company operates laboratories.
The commercial laboratory testing industry is subject to extensive U.S. regulation, and many of these statutes and regulations have not been interpreted by the courts. CLIA extends federal oversight to virtually all clinical laboratories operating in the U.S. by requiring that they be certified by the federal government or by a federally approved accreditation agency. The sanction for failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties. In addition, the Company is subject to regulation under state law. State laws may require that laboratories and/or laboratory personnel meet certain qualifications, specify certain quality controls or require maintenance of certain records. The Company also operates laboratories outside of the U.S. and is subject to laws governing its laboratory operations in the other countries where it operates.
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's business. Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material adverse effect on the Company’s business. In addition, compliance with future legislation could impose additional requirements on the Company, which may be costly.
U.S. Food and Drug Administration (FDA) regulation of diagnostic products and increased FDA regulation of laboratory-developed tests (LDTs) could result in increased costs and the imposition of fines or penalties, and could have a material adverse effect upon the Company’s business.
The FDA has regulatory responsibility for instruments, test kits, reagents and other devices used by clinical laboratories. The FDA enforces laws and regulations that govern the development, testing, manufacturing, performance, labeling, advertising, marketing, distribution and surveillance of diagnostic products, and it regularly inspects and reviews the manufacturing processes and product performance of diagnostic products. LCD’s point-of-care testing devices are subject to regulation by the FDA.
Since the 1990s, the FDA has asserted that it has authority to regulate LDTs as medical devices, but has exercised enforcement discretion to refrain from systematic regulation of LDTs. In 2014, the FDA issued draft guidance describing how it intended to discontinue its enforcement discretion policy and begin regulating LDTs as medical devices; however, that draft guidance has not been finalized, and FDA has instead continued its enforcement discretion policy and has indicated that it intends to work with Congress to enact comprehensive legislative preform of diagnostics oversight. As such, LDTs developed by high complexity clinical laboratories are currently generally offered as services to health care providers under the CLIA regulatory framework administered by the Centers for Medicare and Medicaid Ser
Showing the first 8K of 80K characters. Open the full section
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The Company's corporate headquarters are located in Burlington, North Carolina, and include facilities that are both owned and leased.
LabCorp Diagnostics (LCD) operates through a network of patient service centers, branches, rapid response laboratories, primary laboratories, and specialty laboratories. The table below summarizes certain information as to LCD's principal operating and administrative facilities as of December 31, 2019.
| Location | Nature of Occupancy |
| Primary Facilities: | |
| Birmingham, Alabama | Leased |
| Phoenix, Arizona | Owned |
| Los Angeles, California | Leased |
| Monrovia, California | Leased |
| San Diego, California | Leased |
| San Francisco, California | Leased |
| Shelton, Connecticut | Leased |
| Tampa, Florida | Leased |
| Westborough, Massachusetts | Leased |
| St. Paul, Minnesota | Owned |
| Kansas City, Missouri | Owned |
| Raritan, New Jersey | Owned |
| Burlington, North Carolina (5) | Owned/Leased |
| Research Triangle Park, North Carolina (3) | Leased |
| Dublin, Ohio | Owned |
| Brentwood, Tennessee | Leased |
| Dallas, Texas | Leased |
| Houston, Texas | Leased |
| Herndon, Virginia | Leased |
| Seattle, Washington | Leased |
| Spokane, Washington (3) | Leased |
Covance Drug Development (CDD) operates on a global scale. The table below summarizes certain information as to CDD's principal operating and administrative facilities as of December 31, 2019.
| Location | Nature of Occupancy |
| Primary Facilities: | |
| Mechelen, Belgium | Leased |
| Beijing, China | Leased |
| Shanghai, China (3) | Owned/Leased |
| Muenster, Germany | Owned |
| Pune, India | Leased |
| Bangalore, India | Leased |
| Singapore | Leased |
| Geneva, Switzerland | Owned |
| Eye, United Kingdom | Owned |
| Harrogate, United Kingdom | Owned |
| Huntington, United Kingdom | Owned |
| Leeds, United Kingdom | Owned |
| Maidenhead, United Kingdom | Leased |
| Shardlow, United Kingdom | Owned |
| York, United Kingdom | Leased |
| San Francisco, California | Leased |
| Daytona Beach, Florida | Leased |
| Greenfield, Indiana | Owned |
| Indianapolis, Indiana | Leased |
| Gaithersburg, Maryland | Leased |
| Ann Arbor, Michigan | Leased |
| Minneapolis, Minnesota | Leased |
| Princeton, New Jersey | Leased |
| Somerset, New Jersey | Owned |
| Dallas, Texas | Leased |
| Chantilly, Virginia | Leased |
| Madison, Wisconsin | Owned |
All of the Company’s primary laboratory and drug development facilities have been built or improved for the purpose of providing commercial laboratory testing or drug development services. The Company believes that these existing facilities and plans for expansion are suitable and adequate and will provide sufficient production capacity for the Company's currently foreseeable level of operations. The Company believes that if it were unable to renew a lease or if a lease were to be terminated on any of the facilities it presently leases, it could find alternate space at competitive market rates and readily relocate its operations to such new locations without material disruption to its operations.
Item 3. LEGAL PROCEEDINGS
See Note 16 Commitments and Contingencies to the Consolidated Financial Statements.
Item 4. MINE SAFETY DISCLOSURES
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock, par value $0.10 per share, or Common Stock, trades on the New York Stock Exchange or NYSE under the symbol “LH.”
Holders
On February 26, 2020, there were approximately 1,038 holders of record of the Common Stock.
Transfer Agent
The transfer agent for the Company's Common Stock is American Stock Transfer & Trust Company, Shareholder Services, 6201 Fifteenth Avenue, Brooklyn, NY 11219, telephone: 800-937-5449, website: www.amstock.com.
Dividends
The Company has not historically paid dividends on its Common Stock and does not presently anticipate paying any dividends on its Common Stock in the foreseeable future.
Common Stock Performance
The graph below shows the cumulative total return assuming an investment of $100 on December 31, 2014, in each of the Company’s common stock, the Standard & Poor’s, or S&P Composite-500 Stock Index and the S&P 500 healthcare Index, or Peer Group, and assuming that all dividends were reinvested.
Comparison of Five Year Cumulative Total Return
| 12/2014 | 12/2015 | 12/2016 | 12/2017 | 12/2018 | 12/2019 | ||||||||||||||||||
| Laboratory Corporation of America Holdings | $ | 100.00 | $ | 114.59 | $ | 118.98 | $ | 147.83 | $ | 117.11 | $ | 156.78 | |||||||||||
| S&P 500 Index | $ | 100.00 | $ | 101.38 | $ | 113.51 | $ | 138.29 | $ | 132.23 | $ | 173.86 | |||||||||||
| S&P 500 Health Care Index | $ | 100.00 | $ | 106.89 | $ | 104.01 | $ | 126.98 | $ | 135.19 | $ | 163.34 |
Issuer Purchases of Equity Securities (all amounts in millions, except per share amounts)
The following table sets forth information with respect to purchases of shares of the Company’s Common Stock made during the quarter ended December 31, 2019, by or on behalf of the Company:
| Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Program | Maximum Dollar Value of Shares that May Yet Be Repurchased Under the Program | ||||||||||
| October 1 - October 31 | 0.3 | $ | 165.91 | 0.3 | $ | 900.0 | |||||||
| November 1 - November 30 | — | — | — | 900.0 | |||||||||
| December 1 - December 31 | — | — | — | 900.0 | |||||||||
| 0.3 | $ | 165.91 | 0.3 |
At the end of 2018, the Company had outstanding authorization from the board of directors to purchase up to $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. During 2019, the Company purchased 2.9 shares of its common stock at an average price of $154.94 for a total cost of $450.0, of which $100.0 was repurchased prior to the new plan in February 2019. At the end of 2019, the Company had outstanding authorization from the board of directors to purchase an additional $900.0 of Company common stock.
Item 6. SELECTED FINANCIAL DATA (in millions, except per share amounts)
The selected financial data presented below under the captions “Statement of Operations Data” and “Balance Sheet Data” as of and for the five-year period ended December 31, 2019, are derived from consolidated financial statements of the Company, which have been audited by an independent registered public accounting firm.
| Years Ended December 31, | |||||||||||||||||||
| (a) 2019 | (b) 2018 | (c) 2017 | (d) 2016 | (e) 2015 | |||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Revenues | $ | 11,554.8 | $ | 11,333.4 | $ | 10,308.0 | $ | 9,552.9 | $ | 8,505.7 | |||||||||
| Gross profit | 3,252.5 | 3,176.4 | 3,091.8 | 2,854.0 | 2,903.3 | ||||||||||||||
| Operating income (h) | 1,330.2 | 1,325.7 | 1,305.2 | 1,270.6 | 996.8 | ||||||||||||||
| Net earnings attributable to Laboratory | |||||||||||||||||||
| Corporation of America Holdings | 823.8 | 883.7 | 1,227.1 | 711.8 | 437.6 | ||||||||||||||
| Basic earnings per common share | $ | 8.42 | $ | 8.71 | $ | 11.99 | $ | 6.94 | $ | 4.43 | |||||||||
| Diluted earnings per common share | $ | 8.35 | $ | 8.61 | $ | 11.81 | $ | 6.82 | $ | 4.35 | |||||||||
| Basic weighted average common shares outstanding | 97.9 | 101.4 | 102.4 | 102.5 | 98.8 | ||||||||||||||
| Diluted weighted average common shares outstanding | 98.6 | 102.6 | 103.9 | 104.3 | 100.6 | ||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents and short-term investments | $ | 337.5 | $ | 426.8 | $ | 316.6 | $ | 433.6 | $ | 716.4 | |||||||||
| Goodwill and intangible assets, net (g) | 11,899.5 | 11,271.4 | 11,567.0 | 9,824.9 | 9,526.6 | ||||||||||||||
| Total assets (g) (f) | 18,046.4 | 16,185.3 | 16,673.0 | 14,334.8 | 14,104.7 | ||||||||||||||
| Long-term obligations (f) | 7,107.6 | 6,059.8 | 6,762.1 | 5,849.5 | 6,364.2 | ||||||||||||||
| Total shareholders' equity | 7,567.0 | 6,971.4 | 6,804.1 | 5,518.2 | 4,945.1 |
| (a) | During 2019, the Company recorded net restructuring charges of $54.6. The charges were comprised of $32.9 in severance and other personnel costs and $24.9 in facility-related costs primarily associated with facility closures and general integration initiatives. These charges were offset by the reversal of previously established reserves of $1.7 in unused severance and $1.5 in unused facility-related costs. |
| (b) | During 2018, the Company recorded net restructuring charges of $48.1. The charges were comprised of $40.3 in severance and other personnel costs and $11.8 in facility-related costs primarily associated with facility closures and general integration initiatives. These charges were offset by the reversal of previously established reserves of $2.0 in unused severance and $2.0 in unused facility-related costs. |
| (c) | During 2017, the Company recorded net restructuring charges of $70.9. The charges were comprised of $36.1 in severance and other personnel costs and $39.9 in facility-related costs primarily associated with facility closures and general integration initiatives. These charges were offset by the reversal of previously established reserves of $0.5 in unused severance and $4.6 in unused facility-related costs. The Company also recognized asset impairment losses of $23.5 related to the termination of software development projects within the Covance Drug Development (CDD) segment and the forgiveness of certain indebtedness for LabCorp Diagnostics (LCD) customers in areas heavily impacted by hurricanes during the third quarter. |
| (d) | During 2016, the Company recorded net restructuring charges of $58.4. The charges were comprised of $30.9 in severance and other personnel costs and $33.8 in facility-related costs primarily associated with facility closures and general integration initiatives. 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. |
| (e) | During 2015, the Company recorded net restructuring charges of $113.9. The charges were comprised of $59.2 in severance and other personnel costs and $55.8 in facility-related costs primarily associated with facility closures and general integration initiatives. These charges were offset by the reversal of previously established reserves of $1.1 in unused facility-related costs. |
| (f) | See Note 5 Leases and Note 12 Debt to the Consolidated Financial Statements. |
| (g) | During 2016, the Company revised the final purchase price allocation for Covance. As a result, an out of period adjustment of $25.6 was recorded to reduce goodwill and increase a deferred tax asset as of December 31, 2015. The Company concluded that the impact of this adjustment was not material to the current or prior periods. |
| (h) | Net earnings attributable to Laboratory Corporation of America Holdings in 2017 includes a provisional net benefit of $519.0 due to the Tax Cuts and Jobs Act (TCJA). For additional information on the TCJA, see Note 14 Income Taxes to the Consolidated Financial Statements. |
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in millions)
General
During the year ended December 31, 2019, the Company's revenue grew by 2.0%, driven by growth from acquisitions of 2.3% and organic growth of 1.6% (which includes the negative impact from PAMA of 0.9%), partially offset by the disposition of businesses of 1.4% and negative foreign currency translation of 0.5%.
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.
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 part of the CDD segment, to Envigo. As part of this sale, CDD entered into a multi-year, renewable supply agreement with Envigo. The Company paid cash consideration of $601.0, 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. During the year ended December 31, 2019, the Company also acquired various other businesses and related assets for approximately $286.4 in cash (net of cash acquired).
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 by the end of 2021, 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 Company is also exposed to risks related to information security arising from the information technology systems and operations of third parites, including thosse of the Company's vendors and partners. For example, on May 14, 2019, Retrieval-Masters Credit Bureau, Inc. d/b/a/ American Medical Collections 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 on behalf of the Company. AMCA informed the Company that it appeared that an unauthorized user had access to AMCA's system between August 1, 2018 and March 30, 2019, and that AMCA could not rule out the possibility that personal
information on AMCA's system was at risk during that time period. Information on AMCA's affected system from the Company may have included name, address, and balance information for the patient and person responsible for payment, along with the patient's phone number, date of birth, referring physician, and date of service. The Company was later informed by AMCA that health insurance information may have been included for some individuals, and because some insurance carriers utilize the Social Security Number as a subscriber identification number, the Social Security Number for some individuals may also have been affected. No ordered tests, laboratory test results, or diagnostic infonnation 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. The Company has incurred, and expects to continue to incur, costs related to the AMCA Incident. In addition, the Company is involved in pending and threatened litigation related to the AMCA Incident, as well as various government and regulatory inquiries and processes. For additional information about the AMCA Incident, see Note 16 Commitments and Contingencies to the Consolidated Financial Statements.
PAMA, which went into effect on January 1, 2018, resulted in a net reduction of revenue of approximately $107.0 and $70.0 in 2019 and 2018, respectively from all payers affected by the Clinical Lab Fee Schedule. Unless further implementation of PAMA is delayed or changed, an additional reduction of approximately $90.0 is expected for 2020.
Effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842 Leases using the modified retrospective method. The Company elected the package of practical expedients, which includes not reassessing whether existing contracts contain leases under the new definition of a lease, reassessing the classification of existing leases, 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. The adoption of this standard resulted in the recording of $778.1 of additional operating lease liabilities as of December 31, 2019.
Results of Operations
The following tables present the financial measures that management considers to be the most significant indicators of the Company's performance. For discussion of 2018 results and comparison with 2017 results refer to “Management's Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Years ended December 31, 2019 and 2018
Revenues
| Years Ended December 31, | ||||||||||
| 2019 | 2018 | Change | ||||||||
| LCD | $ | 7,000.1 | $ | 7,030.8 | (0.4 | )% | ||||
| CDD | 4,578.1 | 4,313.1 | 6.1 | % | ||||||
| Intercompany eliminations | (23.4 | ) | (10.5 | ) | 122.9 | % | ||||
| Total | $ | 11,554.8 | $ | 11,333.4 | 2.0 | % |
The 2.0% increase in revenues for the year ended December 31, 2019, as compared with the corresponding period in 2018 was primarily due to growth from acquisitions of 2.3%, organic growth of 1.6% (which includes the negative impact from PAMA of 0.9%), partially offset by the disposition of businesses of 1.4% and negative foreign currency translation of 0.5%.
LCD revenues for the year ended December 31, 2019, were $7,000.1, a decrease of 0.4% over revenues of $7,030.8 in the corresponding period in 2018. The decline in revenues was due to the negative impact from the disposition of businesses of 1.9% and negative currency translation of 0.1%, partially offset by acquisitions of 1.2% and organic revenue growth of 0.4% which includes the negative impact of lower reimbursement from PAMA of 1.5%.
CDD revenues for the year ended December 31, 2019, were $4,578.1, an increase of 6.1% over revenues of $4,313.1 in the corresponding period in 2018. The increase in revenues was due to acquisitions, which contributed growth of 4.1%, an increase in organic growth of 3.8%, partially offset by negative foreign currency translation of approximately 1.2% and a business disposition of 0.6%. Excluding pass-throughs, organic revenue grew mid-to-high single digits.
Cost of Revenues
| Years Ended December 31, | ||||||||||
| 2019 | 2018 | Change | ||||||||
| Cost of revenues | $ | 8,302.3 | $ | 8,157.0 | 1.8 | % | ||||
| Cost of revenues as a % of revenues | 71.9 | % | 72.0 | % |
[Index](#s042820
Showing the first 8K of 84K characters. Open the full section
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (in millions)
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 the 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, cross currency swaps and interest rate swap agreements. Although, as set forth below, the Company’s zero-coupon subordinated notes contained features were considered to be embedded derivative instruments, the Company does not hold or issue derivative financial instruments for trading purposes.
Foreign Currency Exchange Rates
Approximately 12.7% and 13.6% of the Company's revenues for the year ended December 31, 2019 and 2018, respectively, were denominated in currencies other than the U.S. dollar (USD). The Company's financial statements are reported in USD and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into USD for purposes of reporting the Company's consolidated financial results. In both 2019 and 2018, the most significant
currency exchange rate exposures were to the Canadian dollar, Swiss franc, euro and British pound. Excluding the impacts from any outstanding or future hedging transactions, a hypothetical change of 10% in average exchange rates used to translate all foreign currencies to USD would have impacted income before income taxes for 2019 by approximately $4.3. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $104.4 and $(176.6) at December 31, 2019, and 2018, respectively. The Company does not have significant operations in countries in which the economy is considered to be highly inflationary.
The Company earns revenue from service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company's profitability with respect to such contracts. The Company is also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in some of its contracts with customers, or it may hedge transaction risk with foreign currency forward contracts. At December 31, 2019, the Company had 34 open foreign exchange forward contracts with various amounts maturing monthly through January 2020 with a notional value totaling approximately $369.2. At December 31, 2018, the Company had 34 open foreign exchange forward contracts with various amounts maturing monthly through January 2019 with a notional value totaling approximately $487.9.
The Company is party to USD to Swiss Franc cross-currency swap agreements with an aggregate notional amount of $600.0, maturing in 2022 and 2025, as a hedge against the impact of foreign exchange movements on its net investment in a Swiss Franc functional currency subsidiary.
Interest Rates
Some of the Company's debt is subject to interest at variable rates. As a result, fluctuations in interest rates affect the Company's financial results. The Company attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of fixed and variable rate debt including the utilization of derivative financial instruments, primarily interest rate swaps.
Borrowings under the Company's term loan credit facilities and revolving credit facility are subject to variable interest rates, unless fixed through interest rate swaps or other agreements. As of December 31, 2019, and 2018, the Company had approximately $375.0 and $0.0, respectively, of unhedged variable rate debt under the 2019 term loan credit facility and $0.0 and $527.1, respectively, under the 2017 term loan credit facility.
Each quarter-point increase or decrease in the variable rate would result in the Company's interest expense changing by approximately $0.9 per year for the Company's unhedged variable rate debt.
During the third quarter of 2013, the Company entered into two fixed-to-variable interest rate swap agreements for its 4.625% Senior Notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month London Interbank Offered Rate **(**LIBOR) plus 2.298% to hedge against changes in the fair value of a portion of the Company's long-term debt. The Company exited one of these swap arrangements in December 2019 in connection with the redemption of $187.9 of the 4.625% Senior Notes due 2020 and recorded a gain of $1.6.
On December 19, 2019, the Company redeemed any remaining outstanding zero-coupon subordinated notes due 2021 (the zero-coupon notes) that did not convert.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated by reference to the Report of Independent Registered Public Accounting Firm and the consolidated financial statements, related notes and supplementary data. See the Index on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Company’s principal executive officer and principal
financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Changes in Internal Control over Financial Reporting
On June 3, 2019, the Company completed the acquisition of Envigo's nonclinical contract research services business. The Company’s management has extended its oversight and monitoring processes that support internal control over financial reporting to include the acquired Envigo operations. The Company’s management is continuing to integrate the acquired operations of Envigo's nonclinical contract research services business into the Company’s overall internal control over financial reporting process. However, management has excluded these operations from its annual assessment of internal controls over financial reporting for the year ending December 31, 2019. There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
The internal control over financial reporting at the Company was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S. Internal control over financial reporting includes those policies and procedures that:
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S.; |
| • | provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
The Company's management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework 2013” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the Company's management determined that, as of December 31, 2019, the Company maintained effective internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company’s board of directors.
On June 3, 2019, the Company completed the acquisition of Envigo's nonclinical contract research services business. As a result, management has excluded Envigo from its assessment of internal control over financial reporting. Envigo is a wholly-owned subsidiary whose total assets and total revenues, excluded from management's assessment, represent 1.3% and 1.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who audited and reported on the consolidated financial statements of the Company included in this annual report, also audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, as stated in its report, which is included herein immediately preceding the Company’s audited financial statements.
Item 9B. OTHER INFORMATION
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by the item regarding directors is incorporated by reference to the Company’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 2020 (the 2020 Proxy Statement) under the caption Election of Directors. Information regarding executive officers is incorporated by reference to the Company’s 2020 Proxy Statement under the caption Executive Officers. Information concerning the Company’s Audit Committee, including the designation of audit committee financial experts and information regarding compliance with Section 16(a) of the Exchange Act responsive to this item is incorporated by reference to the Company’s 2020 Proxy Statement under the captions Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance respectively. Information concerning the Company's code of ethics is incorporated by reference to the Company's 2020 Proxy Statement under the caption Corporate Governance Policies and Procedures.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to information in the 2020 Proxy Statement under the captions “Executive Compensation” and “Director Compensation.”
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See Note 15 Stock Compensation Plans to the Consolidated Financial Statements for a discussion of the Company’s Stock Compensation Plans. Except for the above referenced footnote, the information called for by this item is incorporated by reference to information in the 2020 Proxy Statement under the captions “Security Ownership of Certain Beneficial Holders and Management,” “Compensation Discussion and Analysis” and “Executive Compensation.”
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to information in the 2020 Proxy Statement under the captions “Board Independence” and “Related Party Transactions.”
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to information in the 2020 Proxy Statement under the caption “Fees to Independent Registered Public Accounting Firm.”
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this report:
| (1) | Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm included herein: |
| See Index on page F-1 | |
| (2) | Financial Statement Schedules: |
| All schedules are omitted as they are inapplicable or the required information is furnished in the Consolidated Financial Statements or notes thereto. | |
| (3) | Index to and List of Exhibits |
Item 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
| By: | /s/ ADAM H. SCHECHTER | ||
| Adam H. Schechter | |||
| President and Chief Executive Officer | |||
| Dated: | February 28, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on February 28, 2020 in the capacities indicated.
| Signature | Title | |
| /s/ ADAM H. SCHECHTER | President and Chief Executive Officer | |
| Adam H. Schechter | (Principal Executive Officer) | |
| /s/ GLENN A. EISENBERG | Executive Vice President, Chief Financial Officer | |
| Glenn A. Eisenberg | (Principal Financial Officer) | |
| /s/ PETER J. WILKINSON | Senior Vice President and Chief Accounting Officer | |
| Peter J. Wilkinson | (Principal Accounting Officer) | |
| * | Director | |
| Kerrii B. Anderson | ||
| * | Director | |
| Jean-Luc Bélingard | ||
| * | Director | |
| Jeffrey A. Davis | ||
| * | Director | |
| D. Gary Gilliland, M.D., Ph.D. | ||
| * | Executive Chairman of the Board, Director | |
| David P. King | ||
| * | Director | |
| Garheng Kong, M.D., Ph.D. | ||
| * | Director | |
| Peter M. Neupert | ||
| * | Director | |
| Richelle Parham | ||
| * | Director | |
| R. Sanders Williams, M.D. | ||
- Sandra van der Vaart, by her signing her name hereto, does hereby sign this report on behalf of the directors of the Registrant after whose typed names asterisks appear, pursuant to powers of attorney duly executed by such directors and filed with the Securities and Exchange Commission.
| By: | /s/ Sandra van der Vaart | |
| Sandra van der Vaart | ||
| Attorney-in-fact |
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Laboratory Corporation of America Holdings
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Laboratory Corporation of America Holdings and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive earnings, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in the Report of Management on Internal Control over Financial Reporting, management has excluded Envigo's nonclincial contract research services business (Envigo) from its assessment of internal control over financial reporting as of December 31, 2019, because it was acquired by the Company in a purchase business combination during 2019. We have also excluded Envigo from our audit of internal control over financial reporting. Envigo is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 1.3% and 1.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.
F-2
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of LabCorp Diagnostics Segment (LCD) Net Accounts Receivable
As described in Notes 2 and 7 to the consolidated financial statements, the LCD business’s revenues are distributed among four payer portfolios - clients, patients, Medicare and Medicaid, and third-party. LCD accounts receivable due from these payer portfolios was $798.1 million as of December 31, 2019. The Company has a formal process to estimate implicit price concessions for uncollectable accounts. The Company considers negotiated discounts and anticipated adjustments, including historical collection experience for each of the payer portfolios, when revenues and accounts receivable are recorded. Anticipated write-offs are recorded as an adjustment to revenue and at an amount considered necessary to record the revenue at its net realizable value. In addition to contractual discounts, other adjustments including anticipated payer denials and other external factors that could affect the collectability of its receivables are considered when determining revenue and the net receivable amounts.
The principal considerations for our determination that performing procedures relating to the valuation of LCD net accounts receivable is a critical audit matter are there was significant judgment and estimation by management to determine net accounts receivable related to the LCD segment. This in turn led to a high degree of auditor judgment, subjectivity and effort to evaluate the audit evidence obtained related to the valuation of net LCD accounts receivable. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of LCD net accounts receivable, including controls over management’s valuation analysis, data, and assumptions used to estimate amounts due from payers. These procedures also included, among others, testing management's process for developing the estimate of net accounts receivable, and the relevance of historical billing and collection data as an input to the analysis; testing the accuracy of a sample of revenue transactions and a sample of cash collections from the historical billing data and the historical collection which is used in management’s analysis; and performing a retrospective comparison of actual cash collected to the prior year estimate of net accounts receivable.
Revenue Recognition - Estimating Costs to Complete for Clinical Research Services
As described in Note 21 to the consolidated financial statements, Covance Drug Development (CDD) revenue was $4,578.1 million for the year ended December 31, 2019. Clinical services utilizing the cost-based measure of progress account for 50% of CDD revenue. The majority of clinical development and commercialization service long-term contracts within the Covance Drug Development segment (CDD) are service contracts for clinical research that represent a single performance obligation (e.g., management of a clinical study). Revenue for these service contracts is recognized over time based on the progress of the performance obligation which was measured by the proportion of the actual costs incurred to the total costs expected to complete the contract (including labor and pass-through costs such as investigator grants and reimbursable out-of-pocket expenses). This cost-based method of revenue recognition required management to estimate the costs to complete these service contracts on an ongoing basis.
F-3
The principal considerations for our determination that performing procedures relating to estimating costs to complete for clinical research services is a critical audit matter are there was significant judgment and estimation by management when developing the costs to complete, including the labor and third party costs to complete the service contracts. This led to a high degree of auditor judgment, subjectivity and effort in evaluating evidence related to the cost estimates made by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of estimated costs to complete. These procedures also included, among others, testing, for a sample of contracts, actual costs incurred and evaluating the reasonableness of management’s estimation of costs to complete projects, including labor and third party costs to complete service contracts, based upon current scope, as well as evaluating whether the assumptions used were reasonable by performing a retrospective comparison of current year project costs to historical cost estimates made by management.
Acquisition of Nonclinical Contract Research Services Business of Envigo
As described in Note 3 to the consolidated financial statements, the Company acquired the nonclinical contract research services business of Envigo for consideration of $601.0 million in 2019, which resulted in $141.4 million of identifiable intangible assets. As disclosed, management applied significant judgment in estimating the fair value of identifiable intangible assets, which involved the use of significant estimates and assumptions with respect to the customer attrition rates and the discount rate.
The principal considerations for our determination that performing procedures relating to the acquisition of the nonclinical contract research services business of Envigo is a critical audit matter are there was significant judgment and estimation by management to determine the identifiable intangible assets. This in turn led to a high degree of auditor judgment, subjectivity and effort to evaluate the significant assumptions relating to the estimate, such as the customer attrition rates and the discount rate and to evaluate the audit evidence obtained related to the valuation of identifiable intangible assets acquired. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the identifiable intangible assets and controls over development of the assumptions related to the valuation of the identifiable intangible assets, including customer attrition rates and the discount rate. These procedures also included, among others, reading the purchase agreement, testing management’s process for estimating the fair value of identifiable intangible assets, and testing management’s significant assumptions used to estimate the fair value of the identifiable intangible assets. Testing management’s process included evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions including customer attrition rates, and the discount rate for identifiable intangible assets. Evaluating the reasonableness of customer attrition rates involved considering past performance of the acquired business as well as economics and industry forecasts. The discount rate was evaluated by considering the costs of capital of comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in testing the discount rate.
Goodwill Impairment Assessment - Reporting Unit within the Covance Drug Development Segment
As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $7.9 billion as of December 31, 2019, and the goodwill associated with one of its reporting units within the Company’s Covance Drug Development (CDD) segment was $2.2 billion. The Company assesses goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. Fair value of a reporting unit is estimated using both income-based and market-based valuation methods. In particular, management’s impairment analysis for this reporting unit utilized significant judgments and assumptions related to the market comparable method analysis, such as selected market multiples and related to cash flow projections, such as revenue and terminal growth rates, projected operating margin, and the discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the reporting unit within the CDD segment is a critical audit matter are there was significant judgment by management when developing the fair value estimate of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures to evaluate management’s market comparable method analysis and cash flow projections, including significant assumptions for the selected market multiples, revenue and terminal growth rates, projected operating margin,
F-4
and the discount rate. Also, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the significant assumptions used in the valuation of the reporting unit. These procedures also included, among others, testing management's process for estimating the fair value of the reporting unit which involved evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions used in the market comparable method analysis and cash flow projections, including the revenue and terminal growth rates, projected operating margin, discount rate and selected market multiples. Evaluating the reasonableness of the revenue and terminal growth rates and projected operating margin involved considering the past performance of the reporting unit and considering whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s valuation methods and the reasonableness of the significant assumptions, including (i) the terminal growth rates impacting the reporting unit’s future cash flows, (ii) the selected market multiple applied to the reporting unit’s financial information and (iii) the discount rate.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 28, 2020
We have served as the Company’s auditor since 1997.
F-5
PART I – FINANCIAL INFORMATION
Item 1. Financial Information
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
| December 31, 2019 | December 31, 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 337.5 | $ | 426.8 | |||
| Accounts receivable | 1,543.9 | 1,467.9 | |||||
| Unbilled services | 481.4 | 394.4 | |||||
| Supplies inventory | 244.7 | 237.3 | |||||
| Prepaid expenses and other | 373.7 | 309.0 | |||||
| Total current assets | 2,981.2 | 2,835.4 | |||||
| Property, plant and equipment, net | 2,636.6 | 1,740.3 | |||||
| Goodwill, net | 7,865.0 | 7,360.3 | |||||
| Intangible assets, net | 4,034.5 | 3,911.1 | |||||
| Joint venture partnerships and equity method investments | 84.9 | 60.5 | |||||
| Deferred income taxes | 8.8 | 1.7 | |||||
| Other assets, net | 435.4 | 276.0 | |||||
| Total assets | $ | 18,046.4 | $ | 16,185.3 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 632.3 | $ | 634.6 | |||
| Accrued expenses and other | 942.4 | 870.0 | |||||
| Unearned revenue | 451.0 | 356.4 | |||||
| Short-term operating lease liabilities | 206.5 | — | |||||
| Short-term finance lease liabilities | 8.4 | 7.9 | |||||
| Short-term borrowings and current portion of long-term debt | 415.2 | 10.0 | |||||
| Total current liabilities | 2,655.8 | 1,878.9 | |||||
| Long-term debt, less current portion | 5,789.8 | 5,990.9 | |||||
| Operating lease liabilities | 596.6 | — | |||||
| Financing lease liabilities | 91.1 | 51.0 | |||||
| Deferred income taxes and other tax liabilities | 942.8 | 940.0 | |||||
| Other liabilities | 383.2 | 334.0 | |||||
| Total liabilities | 10,459.3 | 9,194.8 | |||||
| Commitments and contingent liabilities | |||||||
| Noncontrolling interest | 20.1 | 19.1 | |||||
| Shareholders’ equity | |||||||
| Common stock, 97.2 and 98.9 shares outstanding at December 31, 2019 and 2018, respectively | 9.0 | 11.7 | |||||
| Additional paid-in capital | 26.8 | 1,451.1 | |||||
| Retained earnings | 7,903.6 | 7,079.8 | |||||
| Less common stock held in treasury | — | (1,108.1 | ) | ||||
| Accumulated other comprehensive loss | (372.4 | ) | (463.1 | ) | |||
| Total shareholders’ equity | 7,567.0 | 6,971.4 | |||||
| Total liabilities and shareholders’ equity | $ | 18,046.4 | $ | 16,185.3 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenues | $ | 11,554.8 | $ | 11,333.4 | $ | 10,308.0 | |||||
| Cost of revenues | 8,302.3 | 8,157.0 | 7,216.2 | ||||||||
| Gross profit | 3,252.5 | 3,176.4 | 3,091.8 | ||||||||
| Selling, general and administrative expenses | 1,624.5 | 1,570.9 | 1,499.2 | ||||||||
| Amortization of intangibles and other assets | 243.2 | 231.7 | 216.5 | ||||||||
| Restructuring and other charges | 54.6 | 48.1 | 70.9 | ||||||||
| Operating income | 1,330.2 | 1,325.7 | 1,305.2 | ||||||||
| Other income (expense): | |||||||||||
| Interest expense | (240.7 | ) | (244.2 | ) | (235.1 | ) | |||||
| Equity method income, net | 9.8 | 11.6 | 11.3 | ||||||||
| Investment income | 8.8 | 7.5 | 2.1 | ||||||||
| Other, net | (3.2 | ) | 167.7 | (6.0 | ) | ||||||
| Earnings before income taxes | 1,104.9 | 1,268.3 | 1,077.5 | ||||||||
| Provision (benefit) for income taxes | 280.0 | 384.4 | (155.4 | ) | |||||||
| Net earnings | 824.9 | 883.9 | 1,232.9 | ||||||||
| Less: Net earnings attributable to the noncontrolling interest | (1.1 | ) | (0.2 | ) | (5.8 | ) | |||||
| Net earnings attributable to Laboratory Corporation of America Holdings | $ | 823.8 | $ | 883.7 | $ | 1,227.1 | |||||
| Basic earnings per common share | $ | 8.42 | $ | 8.71 | $ | 11.99 | |||||
| Diluted earnings per common share | $ | 8.35 | $ | 8.61 | $ | 11.81 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In Millions, Except Per Share Data)
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Net earnings | $ | 824.9 | $ | 883.9 | $ | 1,232.9 | |||||
| Foreign currency translation adjustments | 104.4 | (176.6 | ) | 265.1 | |||||||
| Net benefit plan adjustments | (17.4 | ) | 29.3 | 20.9 | |||||||
| Other comprehensive earnings (loss) before tax | 87.0 | (147.3 | ) | 286.0 | |||||||
| Provision (benefit) for income tax related to items of comprehensive earnings | 3.7 | 17.9 | (37.8 | ) | |||||||
| Other comprehensive earnings (loss), net of tax | 90.7 | (129.4 | ) | 248.2 | |||||||
| Comprehensive earnings | 915.6 | 754.5 | 1,481.1 | ||||||||
| Less: Net earnings attributable to the noncontrolling interest | (1.1 | ) | (0.2 | ) | (5.8 | ) | |||||
| Comprehensive earnings attributable to Laboratory Corporation of America Holdings | $ | 914.5 | $ | 754.3 | $ | 1,475.3 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Millions)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Earnings (Loss) | Total Shareholders’ Equity | ||||||||||||||||||
| BALANCE AT DECEMBER 31, 2016 | $ | 12.1 | $ | 2,131.7 | $ | 4,969.0 | $ | (1,012.7 | ) | $ | (581.9 | ) | $ | 5,518.2 | |||||||||
| Net earnings attributable to Laboratory Corporation of America Holdings | — | — | 1,227.1 | — | — | 1,227.1 | |||||||||||||||||
| Other comprehensive earnings, net of tax | — | — | — | — | 248.2 | 248.2 | |||||||||||||||||
| Issuance of common stock under employee stock plans | 0.1 | 73.5 | — | — | — | 73.6 | |||||||||||||||||
| Net share settlement tax payments from issuance of stock to employees | — | — | — | (47.4 |
Showing the first 8K of 222K characters. Open the full section