filings.toolsItem 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, 2020, the Company's revenues grew by 21.0%, due to organic growth of 19.0%, acquisitions of 1.8% and favorable foreign currency translation of 0.4%, partially offset by the disposition of a business of 0.2%. The 19.0% increase in organic revenues includes the 24.1% contribution from PCR and antibody COVID-19 testing (COVID-19 Testing), partially offset by the 5.1% reduction in the Company's organic Base Business due to the pandemic. Base Business includes the Company's business operations except for COVID-19 Testing. The decline in the organic Base Business includes the negative impact of the U.S. Protecting Access to Medicare Act of 2014 (PAMA) of 0.6%.
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.
In March 2020, COVID-19 was declared a pandemic. COVID-19 has had and continues to have an extensive impact on the global health and economic environments. Given the continued unpredictability of the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial results for 2021. Throughout 2020, the Company's COVID-19 Testing has helped to offset the pressure experienced in the Base Business. To date, the Company has performed more than 18 million PCR and 3.0 million antibody COVID-19 tests and as of February 25, 2021, has the capacity to perform 275,000 PCR and 300,000 antibody tests per day, subject to the availability of equipment and testing supplies and key personnel.
During 2020, the Company recorded goodwill and other asset impairment charges of $462.1, $450.5 within DD and $11.6 within Dx, as a result of the COVID-19 pandemic. The Company concluded that the fair value was less than carrying value for two of its reporting units and recorded goodwill impairment of $418.7 and $3.7 for DD and Dx, respectively. Additional impairment of identifiable intangible and tangible assets of $31.5 and $7.9 was recorded for DD and Dx, respectively, for impairment of a tradename, software, customer relationships, technology assets, and a note receivable.
There remains significant uncertainty regarding the duration and severity of the pandemic and its impact on the Company’s business, results of operations and financial position for 2021. For more information regarding the risks associated with COVID-19 and its impact on the Company’s business, see Risk Factors in Part I - Item 1A. The Company expects Phase II of Dx’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 in 2021, and one-third of the total savings have been realized in each of 2019 and 2020.
PAMA, which went into effect on January 1, 2018, resulted in a net reduction of revenue of approximately $72.0 and $107.0 in 2020 and 2019, respectively from all payers affected by the Clinical Lab Fee Schedule.
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 2019 results and comparison with 2018 results refer to “Management's Discussion and Analysis of Financial Conditions and Results of Operations” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Years ended December 31, 2020 and 2019
Revenues
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Dx | $ | 9,253.4 | $ | 7,000.1 | 32.2 | % | |||||||||||
| DD | 4,877.7 | 4,578.1 | 6.5 | % | |||||||||||||
| Intercompany eliminations | (152.6) | (23.4) | 552.1 | % | |||||||||||||
| Total | $ | 13,978.5 | $ | 11,554.8 | 21.0 | % |
The 21.0% increase in revenues for the year ended December 31, 2020, as compared with the corresponding period in 2019 was primarily due to organic growth of 19.0%, acquisitions of 1.8% and favorable foreign currency translation of 0.4%, partially offset by the disposition of a business of 0.2%. The 19.0% increase in organic revenues includes the 24.1% contribution from COVID-19 Testing, partially offset by the 5.1% reduction in the Company's organic Base Business, which the Company believes was due to the pandemic. The decline in the organic Base Business includes the negative impact of PAMA of 0.6%.
Dx revenues for the year ended December 31, 2020, were $9,253.4, an increase of 32.2% over revenues of $7,000.1 in the corresponding period in 2019. The increase in revenues was due to organic growth of 30.9% and acquisitions of 1.3%. The 30.9% increase in organic revenue was due to a 39.8% contribution from COVID-19 Testing, partially offset by an 8.9% decline of the organic Base Business which includes a 1.0% negative impact from PAMA.
Total volume, measured by requisitions, increased by 7.8% as organic volume increased by 6.5% and acquisition volume contributed growth of 1.3%. The organic volume growth is due to demand for COVID-19 Testing of 21.2%, partially offset by a 14.7% reduction of organic Base Business. Price/mix increased by 24.4% due to COVID-19 Testing of 18.6% and Base Business of 5.8%. The Base Business price includes the negative impact from PAMA of 1.0%.
DD revenues for the year ended December 31, 2020, were $4,877.7, an increase of 6.5% over revenues of $4,578.1 in the corresponding period in 2019. The increase in revenues was due to the benefit of acquisitions of 2.6%, favorable foreign currency translation of 0.9% and organic growth of 3.5%, partially offset by a business disposition of 0.5%. The increase in organic revenue was primarily driven by COVID-19 PCR testing through its Central Laboratories unit along with broad based demand including COVID-19 vaccine and therapeutic work, partially offset by the negative impact from the pandemic. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain.
Cost of Revenues
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Cost of revenues | $ | 9,025.7 | $ | 8,302.3 | 8.7 | % | |||||||||||
| Cost of revenues as a % of revenues | 64.6 | % | 71.9 | % |
Cost of revenues (primarily laboratory, labor and distribution costs) increased 8.7% in 2020 as compared with 2019 primarily due to organic growth and acquisitions. Cost of revenues as a percentage of revenues decreased to 64.6% in 2020 as compared to 71.9% in 2019. This decrease was primarily due to the impact of COVID-19 Testing on revenues and LaunchPad savings, partially offset by PAMA and higher personnel costs (primarily driven by merit increases and one additional payroll day that predominantly impacted Dx).
During 2020, the Company incurred special charges of $1.9 of acquisition and divestiture related costs, $36.5 in COVID-related costs, and $1.1 related to miscellaneous other items. Additionally, the Company recorded COVID-19 related accounts receivable reserves of $17.0, which are recorded as a reduction of revenues. Excluding these charges, cost of revenues as a percentage of revenues were 64.2% for the year ended December 31, 2020.
Labor and testing supplies for the year ended December 31, 2020, comprise approximately 73.0% of the Company’s cost of revenues. Cost of revenues has increased over the two-year period ended December 31, 2020, primarily due to the impact of acquisitions, overall growth in the Company's volume, including COVID-19 Testing, and increases in merit-based labor costs.
Selling, General and Administrative Expenses
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Selling, general and administrative expenses | $ | 1,729.3 | $ | 1,624.5 | 6.5 | % | |||||||||||
| SG&A as a % of revenues | 12.4 | % | 14.1 | % |
Selling, general and administrative expenses as a percentage of revenues decreased to 12.4% in 2020 compared to 14.1% in 2019. The decrease in selling, general and administrative expenses as a percentage of revenues is primarily due to the contribution of COVID-19 Testing on revenues and less acquisition activity.
During 2020, the Company incurred special charges of $28.3 of acquisition and divestiture related costs, $10.4 in COVID-related costs, $14.6 in management transition costs, and $1.3 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative, partially offset by $2.7 related to miscellaneous other items. These items increased selling, general and administrative expenses by $51.9. Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 12.0% for the year ended December 31, 2020. The decrease in selling, general and administrative expenses as a percentage of revenues is primarily due to leveraging the Company's infrastructure on higher revenue, partially offset by a $15.0 initial contribution to establish the Labcorp Charitable Foundation which supports the Company's strategic mission to improve health and improve lives with contributions focused on health and welfare, education and community.
During 2019, the Company incurred special charges of $69.2 of acquisition and divestiture related costs, $15.2 in management transition costs, and $10.1 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative, partially offset by $11.7 in other miscellaneous items. These items increased selling, general and administrative expenses by $82.9. Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.3% for the year ended December 31, 2019.
Goodwill and Other Asset Impairments
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Goodwill and other asset impairments | $ | 462.1 | $ | — | N/A |
During 2020, the Company recorded goodwill and other asset impairment charges of $462.1, $450.5 within DD and $11.6 within Dx. The Company concluded that the fair value was less than carrying value for two of its reporting units and recorded goodwill impairment of $418.7 and $3.7 for DD and Dx, respectively. Additional impairment of identifiable intangible and tangible assets of $31.8 and $7.9 was recorded for DD and Dx, respectively, for impairment of a tradename, software, customer relationships, technology assets and a note receivable.
Amortization Expense
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Dx | $ | 104.9 | $ | 102.0 | 2.8 | % | |||||||||||
| DD | 170.5 | 141.2 | 20.8 | % | |||||||||||||
| Amortization of intangibles and other assets | $ | 275.4 | $ | 243.2 | 13.2 | % |
The increase in amortization of intangibles and other assets from 2019 through 2020 primarily reflects the impact of acquisitions partially offset by impairment of intangible assets recorded in fiscal 2020, and includes $27.5 of amortization acceleration of certain intangible assets related to the Covance trade name as a result of the Company's rebranding initiative.
Restructuring and Other Charges
| Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||||||
| Restructuring and other charges | $ | 40.6 | $ | 54.6 | (25.6) | % |
During 2020, the Company recorded net restructuring charges of $40.6; $15.3 within Dx and $25.3 within DD. The charges were comprised of $14.1 in severance and other personnel costs $17.4 for facility, operating lease right-of-use and equipment
impairments, and $18.9 in facility closures and general integration activities. The charges were offset by the reversal of previously established liability of $0.6 and $9.2 in unused severance costs and facility-related costs, respectively.
During 2019, the Company recorded net restructuring charges of $54.6; $26.7 within Dx and $27.9 within DD. The charges were comprised of $32.9 in severance and other personnel costs and $24.9 in facility-related costs primarily associated with general integration activities. The charges were offset by the reversal of previously established liability of $1.7 in unused severance and $1.5 in unused facility-related costs.
Interest Expense
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Interest expense | $ | 207.4 | $ | 240.7 | (13.8) | % |
The decrease in interest expense for 2020 as compared with the corresponding period in 2019 is primarily due to the repayment of debt and lower interest rates.
Equity Method Income, Net
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Equity method income, net | $ | 2.9 | $ | 9.8 | (70.4) | % |
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 the Dx segment. The decrease in income for 2020 as compared with the corresponding period in 2019 was primarily due to the impairment of an equity method investment and the decreased profitability of the Company's joint ventures.
Other, Net
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Other, net | $ | (32.1) | $ | (3.2) | (903.1) | % |
The change in Other, net for the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily due to an increase in the write-off or write down of certain of the Company's investments due to the negative impact of the COVID-19 global pandemic partially offset by lower foreign currency transaction losses. Foreign currency transaction losses of $10.1 and $11.1 were recognized for the years ended December 31, 2020 and 2019, respectively.
Income Tax Expense
| Years Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Income tax expense | $ | 662.1 | $ | 280.0 | |||||||
| Income tax expense as a % of income before tax | 29.8 | % | 25.3 | % |
In 2020, the Company's effective tax rate of 29.8% was unfavorable as compared to 2019 due to impairment charges which were not deductible and or generated tax assets which require a valuation allowance, and the geographic mix of earnings.
The Company considers substantially all of its foreign earnings to be permanently reinvested overseas.
Operating Results by Segment
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Dx operating income | $ | 2,634.9 | $ | 1,086.0 | 142.6 | % | |||||||||||
| Dx operating margin | 28.5 | % | 15.5 | % | 13.0 | % | |||||||||||
| DD operating income | $ | 37.3 | $ | 411.5 | (90.9) | % | |||||||||||
| DD operating margin | 0.8 | % | 9.0 | % | (8.2) | % | |||||||||||
| General corporate expenses | $ | (226.8) | $ | (167.3) | 35.6 | % | |||||||||||
| Total operating income | $ | 2,445.4 | $ | 1,330.2 | 83.8 | % |
Dx operating income was $2,634.9 for the year ended December 31, 2020, an increase of 142.6% over operating income of $1,086.0 in the corresponding period of 2019 and an increase of 1,300 basis points in operating margin year-over-year. The increase in operating income and margin were primarily due to the increase in COVID-19 Testing and LaunchPad savings, partially offset by a reduction in Base Business (primarily due to the pandemic), higher personnel costs and PAMA. The Company remains on track to deliver approximately $200.0 of net savings from its three-year, Phase II of Dx’s LaunchPad initiative by the end of 2021.
DD operating income was $37.3 for the year ended December 31, 2020, a decrease of 90.9% from operating income of $411.5 in the corresponding period of 2019 and a decrease of 820 basis points in operating margin year-over-year. The decrease in operating income and margin were primarily due to the negative impact of COVID-19, specifically goodwill and other asset impairment of $450.5, and higher personnel costs, partially offset by organic demand, acquisitions, and LaunchPad savings. The Company achieved its goal to deliver $150.0 of net savings from its three-year DD LaunchPad initiative by the end of 2020.
General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were $226.8 for the year ended December 31, 2020, an increase of 35.6% over corporate expenses of $167.3 in the corresponding period of 2019. The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs, COVID-19 related expenses and funding of the Labcorp Charitable Foundation.
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 Debt to the Company's Consolidated Financial Statements.
Management’s discussion and analysis of cash flows for the year ended December 31, 2019 compared to the year ended December 31, 2018 may be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity, Capital Resources and Financial Position” section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
In summary the Company's cash flows were as follows:
| For the Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net cash provided by operating activities | $ | 2,135.3 | $ | 1,444.7 | $ | 1,305.4 | ||||||||||||||
| Net cash (used for) provided by investing activities | (643.2) | (1,283.1) | 206.7 | |||||||||||||||||
| Net cash used for financing activities | (517.4) | (252.7) | (1,389.9) | |||||||||||||||||
| Effect of exchange rate on changes in cash and cash equivalents | 8.6 | 1.8 | (12.0) | |||||||||||||||||
| Net change in cash and cash equivalents | $ | 983.3 | $ | (89.3) | $ | 110.2 |
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2020 and 2019 totaled $1,320.8 and $337.5, 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, 2020, the Company's operations provided $2,135.3 of cash as compared to $1,444.7 in 2019. The $690.6 increase in cash provided from operations in 2020 as compared with the corresponding 2019 period was primarily due to higher cash earnings, partially offset by increased working capital to support growth. Working capital increased primarily due to the increase in accounts receivable and supplies inventory as a result of the revenue growth, offset by increases in income tax payable as a result of a significant increase in taxable income during the fourth quarter and an increase in accrued payroll tax balances due to the deferral of 2020 U.S. payroll taxes as part of the CARES Act stimulus.
Cash Flows from Investing Activities
Net cash used by investing activities for the year ended December 31, 2020 was $643.2 as compared to net cash used by investing activities of $1,283.1 for the year ended December 31, 2019. The $639.9 decrease in net cash used by investing activities for the year ended December 31, 2020, was primarily due to a year over year decrease of $608.4 in cash paid for acquisitions. The Company had proceeds of $7.7 from the sale of assets and disposition of businesses during 2019 in
comparison to $42.1 during 2020. Capital expenditures were $381.7 and $400.2 for the years ended December 31, 2020 and 2019, respectively. Capital expenditures in 2020 were 2.7% of revenues, primarily in connection with projects to support growth in the Company's core businesses, projects related to LaunchPad, and further DD acquisition integration initiatives. The Company intends to continue to pursue acquisitions to drive 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 2021 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 Dx business, LaunchPad's expansion within the DD business, and further acquisition integration initiatives.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2020 was $517.4 compared to cash used in financing activities of $252.7 for the year ended December 31, 2019. This movement in cash within financing activities for 2020, as compared to 2019, was primarily a result of $412.2 net financing payments and $100.0 in share repurchases in 2020 compared to $198.5 in net financing receipts more than offset by $450.0 in share repurchases in 2019.
On August 17, 2020 the Company redeemed the remaining $412.2 of its 4.625% Senior Notes due November 15, 2020, using available cash on hand. The Company exited the remaining fixed-to-variable interest rate swap agreement in August 2020, in connection with this redemption and recorded a gain of $1.6 on the extinguishment. The gain was included in Other, net on the Consolidated Statement of Operations.
On June 3, 2019, the Company entered into a new $850.0 term loan facility in addition to the $577.0 balance then outstanding on its existing $750.0 2017 term loan facility. The 2019 term loan facility will mature on June 3, 2021. Proceeds of the 2019 term loan facility were used for general corporate purposes, including to repay approximately $250.0 of the 2017 term loan facility and in connection with the acquisition of Envigo's nonclinical research services business.
On November 25, 2019, the Company issued $1,050.0 in debt securities, consisting of $400.0 aggregate principal amount of 2.300% Senior Notes due 2024 and $650.0 aggregate principal amount of 2.950% Senior Notes due 2029. The net proceeds from the new Senior Notes were used to redeem all of the outstanding $500.0 principal amount of its 2.625% Senior Notes due February 1, 2020, redeem $187.9 of the outstanding 4.625% Senior Notes due November 15, 2020, and to repay $348.3 outstanding under the 2017 term loan credit facility.
In total, during 2019, the Company redeemed or repaid $687.9 million of its Senior Notes and $1,002.0 million of its term loans. In addition, the Company borrowed and repaid a total of $495.0 million of debt through its revolving credit facility within 2019 and $151.7 within 2020.
The Company continues to evaluate its outstanding debt portfolio to take advantage of market conditions that would allow the Company to reduce its interest rate or financing risk and provide a lower long-term borrowing cost.
The Company's revolving credit facility consists of a five year revolving facility in the principal amount of up to $1,000.0 with the option of increasing the facility by up to an additional $350.0, subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions.
Under the Company's term loan credit 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 facility and the revolving credit facility at December 31, 2020. In May 2020, in order to obtain increased financial covenant flexibility, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to 5.0x debt to last twelve months EBITDA for the three month periods ending June 30, September 30 and December 31, 2020, and 4.5x for the period ended March 31, 2021. From and including the period ending June 30, 2021, the maximum leverage ratio reverts back to 4.0x. The amendments also provide that during any period in which the Company's leverage ratio exceeds 4.5x debt to last twelve months EBITDA (i) the Company will be prohibited from consummating share repurchases, subject to limited exceptions, (ii) borrowings under the revolving credit facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.25% or a base rate plus a margin of 0.25%, (iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be 0.25% per annum, and (iv) borrowings under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.175% or a base rate plus a margin of 0.175%. The Company's leverage ratio did not exceed 4.5x debt to last twelve months EBITDA as of December 31, 2020.
At the end of 2019, the Company had outstanding authorization from the board of directors to purchase up to $900.0 of Company common stock. During 2020, the Company repurchased 0.6 shares of its common stock at an average price of $178.85 for a total cost of $100.0. At the end of 2020, the Company had outstanding authorization from the board of directors to purchase $800.0 of Company common stock. The repurchase authorization has no expiration date.
During 2019, the Company settled notices to convert $8.6 aggregate principal amount at maturity of its zero-coupon subordinated notes due 2021 (the zero-coupon notes) with a conversion value of $16.6. The total cash used for these settlements was $8.2 and the Company also issued 0.1 additional shares of common stock. As a result of these conversions in 2019, the Company also reversed approximately $2.0 of deferred tax liability to reflect the tax benefit realized upon issuance of the shares. On December 19, 2019, the Company redeemed any remaining outstanding zero-coupon notes that did not convert.
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 | |||||||||||||||||||||||||||||
| Total | Short-term | Long-term | |||||||||||||||||||||||||||
| Operating lease obligations | $ | 869.6 | $ | 192.0 | $ | 677.6 | |||||||||||||||||||||||
| Contingent future licensing payments (a) | 21.6 | 3.5 | 18.1 | ||||||||||||||||||||||||||
| Purchase obligations | 60.1 | 45.5 | 14.6 | ||||||||||||||||||||||||||
| Finance lease obligations | 91.1 | 6.7 | 84.4 | ||||||||||||||||||||||||||
| Scheduled interest payments on Senior Notes | 1,734.4 | 194.5 | 1,539.9 | ||||||||||||||||||||||||||
| Scheduled interest payments on Term Loan (d) | 1.5 | 1.5 | — | ||||||||||||||||||||||||||
| Long-term debt (e) | 1,676.7 | 376.7 | 1,300.0 | ||||||||||||||||||||||||||
| Total contractual cash obligations (b) (c) | $ | 4,455.0 | $ | 820.4 | $ | 3,634.6 |
(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 Pension and Postretirement Plans to Consolidated Financial Statements. Benefits under the Company's postretirement medical plan are paid 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 $57.1 and $37.2 reserve for unrecognized tax benefits, including interest and penalties, at December 31, 2020, and 2019, respectively, which is included in Note 14 Income Taxes to Consolidated Financial Statements.
(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, 2020.
(e)Excludes amount of debt issuance costs included in the long-term debt balance.
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, 2020, the Company provided letters of credit aggregating approximately $77.4, primarily in connection with certain insurance program which are renewed annually.
The contractual value of the noncontrolling interest put in the Company's Ontario subsidiary totaled $16.2 and $15.8 at December 31, 2020, and 2019, 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:
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Revenue recognition;
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Business combinations;
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Pension expense;
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Accruals for self-insurance reserves;
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Income taxes; and
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Goodwill and indefinite-lived assets.
Revenue Recognition
Dx
Within the Dx segment, a revenue transaction is initiated when Dx 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. Dx recognizes revenue and satisfies its performance obligation for services rendered when the testing process is complete and the associated results are reported. Revenues are distributed among four payer portfolios - clients, patients, Medicare and Medicaid and third-party. Dx considers negotiated discounts and anticipated adjustments, including historical collection experience for the payer portfolio, when sales are recorded.
The following are descriptions of the Dx payer portfolios:
Clients
Client payers represent the portion of Dx’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 revenues are recorded on a fee-for-service basis at Dx’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.
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 Dx’s patient fee schedules, net of any discounts negotiated with physicians on behalf of their patients. Dx 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 Dx’s results of operations in any period presented.
Third-Party
Third-party includes revenue related to MCOs. The majority of Dx's third-party revenue is reimbursed on a fee-for-service basis. These payers are billed at Dx's established list price and revenue is recorded net of contractual discounts. The majority of Dx’s MCO revenues are recorded based upon contractually negotiated fee schedules with revenues 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 Dx 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. Dx recognizes revenue monthly, based upon the established capitation rate or anticipated distribution from a capitated pool.
Dx has a formal process to estimate implicit price concessions for uncollectable accounts. The majority of Dx'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 adjustments to revenue 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 and other external factors that could affect the collectability of its receivables are considered when determining revenue and the net receivable amount. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to Dx's results of operations in any period presented.
DD
The nature of DD’s obligations includes agreements to provide preclinical services, 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 DD'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, DD 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 DD 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.
DD 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, DD 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, DD allocates the contract price to the goods and services based on a customer price list, if available. If a price list is not available, DD will estimate the transaction price using either market prices or an “expected cost plus margin” approach.
While DD 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 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 DD of expenses to wind down the study or project, fees earned to date and, in some cases, a termination fee or a payment to DD of some portion of the fees or profits that could have been earned by DD under the contract if it had not been terminated early. Termination fees are included in revenues when services are performed and realization is assured.
The following are descriptions of the revenue recognition models of the drug development services provided by DD:
Preclinical services include 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 transferred 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, DD 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. DD also provides long-term specimen storage services, for which revenue is recognized using an input-based measure of progress based on costs incurred.
DD 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. The majority of clinical development and commercialization service long-term contracts 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 is 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 requires management to estimate the costs to complete these services on an ongoing basis. Clinical services utilizing the input-based measure of progress account for approximately 50% of DD 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.
DD endeavors to assess and monitor the creditworthiness of its customers to which it grants credit terms in the ordinary course of business. DD 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.
Business Combinations
The Company accounts for business combination transactions under the acquisition method of accounting and reported the results of operations of the acquired entities from its respective date of acquisition. Assets acquired were recorded at their estimated fair values as of the acquisition date. Estimated fair values were based on various valuation methodologies, including an income approach using primarily discounted cash flow techniques for the customer relationships intangible assets. The aforementioned income methods utilize management's estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the assets acquired was recorded as goodwill. The goodwill reflects management's expectations
of the ability to gain access to and penetrate the acquired entities' historical patient base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities based on positive demographic trends in the market. None of the goodwill recorded as a result of the current year transactions is deductible for federal income tax purposes.
As described in Note 3 Business Acquisitions and Dispositions to the consolidated financial statements, the Company acquired various businesses and related assets for approximately $267.6 in cash (net of cash acquired). The purchase consideration for all acquisitions has been allocated to the estimated fair market value of the net assets acquired, including approximately $121.3 in identifiable intangible assets and a residual amount of non-tax-deductible goodwill of approximately $166.2. The amortization periods for intangible assets acquired from these businesses range from 12 to 15 years for customer relationships. These acquisitions were made primarily to extend the Company's geographic reach in important market areas, enhance the Company's scientific differentiation and to expand the breadth and scope of the Company's CRO services. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. The goodwill reflects the Company's expectations to utilize the acquired businesses’ workforce and established relationships and the benefits of being able to leverage operational efficiencies with favorable growth opportunities in these markets.
Pension Expense
The Company sponsors both funded and unfunded defined benefit pension plans which provide benefits based on various criteria such as years of service and salary. The Company maintained two plans in the United States, three plans in the United Kingdom and one in Germany.
The two plans in the United States (U.S. Plans) were closed to new entrants and the accrual of service credits at the end of 2009. The U.K. pension plans were closed to new entrants and the accrual of service credits for one plan as of December 31, 2002 and the accrual of service credits for the other two plans as of December 31, 2019. The German plan is closed to new entrants but participants continue to accrue service credits. The U.K. and German plans are aggregated for disclosure as the Non-U.S. Plans.
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 are summarized below:
Weighted average assumptions used to determine net periodic benefit costs are as follows:
| U. S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||||
| Year ended December 31, 2020 | ||||||||||||||||||||||||||||||||
| Discount rate | 3.3 | % | 1.7 | % | ||||||||||||||||||||||||||||
| Salary increases | N/A | 3.1 | % | |||||||||||||||||||||||||||||
| Expected long term rate of return | 6.0 | % | 3.5 | |||||||||||||||||||||||||||||
| Cash balance interest credit rate | 4.0 | % | N/A |
Weighted average assumptions used to determine net periodic benefit obligations are as follows:
| U. S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
| Year Ended December 31, 2020 | |||||||||||||||||||||||
| Discount rate | 2.3 | % | 1.2 | % | |||||||||||||||||||
| Salary increases | N/A | 2.0 | % |
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 2020 retirement plan expense of $1.9 for the U.S Plans. A one percentage point decrease or increase in the discount rate would have resulted in a respective increase or decrease in 2020 retirement plan expense of $2.1 for the Non-U.S. 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 2020 pension expense of $2.5 for the U.S. Plans. A one percentage point increase or decrease in the expected return on plan assets would have resulted in a corresponding change in 2020 pension expense of $4.8 for the Non-U.S. Plans.
Net pension cost for 2020 was $11.0 as compared with $13.8 in 2019. The decrease in pension expense was due to market performance partially offset by lower discount rates. Pension expense for the U.S. Plans is expected to decrease to $6.5 in 2021 primarily due to the impact of strong asset returns in 2020, and the $30.0 contribution made in December 2020, offset by lower discount rates in certain plans. Pension expense for the Non-U.S. Plans is expected to decrease by approximately $0.2 in 2021, primarily due to lower service cost partially offset by a lower discount rate in 2021.
Further information on the Company’s defined-benefit retirement plans is provided in Note 17 Pension and Postretirement Plans 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 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.
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:
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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.
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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.
The Company assesses goodwill and indefinite-lived intangibles for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Based upon the revised forecasted revenues and operating income following the declaration of the COVID-19 global pandemic, management concluded there was a triggering event and updated its annual 2019 goodwill impairment testing as of March 31, 2020, for certain of its DD and Dx reporting units. Based on the quantitative impairment assessment performed in the same manner as the Company's annual quantitative assessment, the Company concluded that the fair value was less than carrying value for two of its reporting units, including one where the 2019 fair value exceeded carrying value by approximately 10.0%, and recorded a goodwill impairment of $418.7 for the DD segment and $3.7 for the Dx segment.
Management performed its annual goodwill and intangible asset impairment testing as of the beginning of the fourth quarter of 2020. The Company elected to perform the qualitative assessment for goodwill and intangible assets for the domestic Dx reporting units and certain DD reporting units, a quantitative assessment for two of the DD reporting units, and a quantitative assessment for the Canadian reporting unit and its indefinite-lived assets consisting of acquired Canadian licenses.
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 2020, the Company utilized a combination of the market and income approaches to determine the fair value of the DD reporting units and the income approach to determine the fair value of the Canadian reporting unit and its indefinite-lived assets consisting of acquired Canadian licenses. Based upon the results of the quantitative assessments, the Company concluded that the fair values of the goodwill and intangible assets, including 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 2020 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 2020 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. Management's impairment analysis for certain reporting units 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 rate, projected operating income, and the discount rate. A significant increase in the discount rate, decrease in the revenue and terminal growth rate, decreased operation margin or substantial reductions in end markets and volume assumptions could have a negative impact on the estimated fair value of certain reporting units. A future impairment charge for goodwill or intangible assets could have a material effect on the Company's consolidated financial position and results of operations.
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