UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11353
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LABORATORY CORPORATION OF AMERICA HOLDINGS
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of principal executive offices) (Zip code)
(336) 229-1127
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(Registrant's telephone number, including area code)
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 ___
The number of shares outstanding of the issuer's common stock is 125,269,420
shares as of October 31, 1998, of which 61,329,256 shares are held by
indirect wholly owned subsidiaries of Roche Holding Ltd.
The number of warrants outstanding to purchase shares of the issuer's common
stock is 22,151,308 as of October 31, 1998, of which 8,325,000 are held by
an indirect wholly owned subsidiary of Roche Holding Ltd.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11.6 $ 23.3
Accounts receivable, net 372.2 330.6
Inventories 28.8 36.0
Prepaid expenses and other 17.9 16.9
Deferred income taxes 36.2 112.0
Income taxes receivable 3.7 8.8
-------- --------
Total current assets 470.4 527.6
Property, plant and equipment, net 253.0 254.9
Intangible assets, net 843.7 851.3
Other assets, net 28.0 24.7
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$1,595.1 $1,658.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48.8 $ 55.9
Accrued expenses and other 131.6 140.7
Current portion of long-term debt 34.8 --
-------- --------
Total current liabilities 215.2 196.6
Revolving credit facility -- 40.0
Long-term debt, less current portion 608.9 643.8
Capital lease obligation 3.9 5.8
Other liabilities 116.4 142.3
Commitments and contingent liabilities -- --
Mandatorily redeemable preferred stock
(30,000,000 shares authorized):
Series A 8 1/2% Convertible
Exchangeable Preferred Stock,
$0.10 par value, 4,363,178 and
4,363,202 shares issued and
outstanding at September 30, 1998
and December 31, 1997, respectively
(aggregate preference value of $218.2) 212.9 212.6
Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock, $0.10 par value,
6,276,182 and 5,892,495 shares issued
and outstanding at September 30, 1998
and December 31, 1997, respectively
(aggregate preference value of $313.8) 308.1 288.3
Shareholders' equity:
Common stock, $0.01 par value;
520,000,000 shares authorized;
125,265,136 and 123,542,614 shares
issued and outstanding at September 30,
1998 and December 31, 1997, respectively 1.2 1.2
Additional paid-in capital 415.7 412.8
Accumulated deficit (285.4) (284.9)
Accumulated other comprehensive income (1.8) --
-------- --------
Total shareholders' equity 129.7 129.1
-------- --------
$1,595.1 $1,658.5
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
--------- -------- -------- --------
Net sales $ 398.3 $ 376.5 $1,157.4 $1,157.6
Cost of sales 270.3 262.7 783.9 811.6
-------- -------- -------- --------
Gross profit 128.0 113.8 373.5 346.0
Selling, general and
administrative expenses 86.0 79.4 249.7 237.7
Amortization of intangibles
and other assets 7.7 7.7 22.8 23.0
-------- -------- -------- --------
Operating income 34.3 26.7 101.0 85.3
Other income (expenses):
Gain on sale of assets 0.1 -- 2.0 --
Investment income 0.2 0.5 0.8 1.9
Interest expense (12.3) (13.8) (37.2) (57.7)
-------- -------- -------- --------
Earnings before income taxes 22.3 13.4 66.6 29.5
Provision for income taxes 10.9 8.0 33.1 17.7
-------- -------- -------- --------
Net earnings 11.4 5.4 33.5 11.8
-------- -------- -------- --------
Less preferred stock dividends 11.1 12.0 33.4 13.2
Less accretion of mandatorily
redeemable preferred stock 0.2 0.2 0.6 0.2
-------- -------- -------- --------
Net earnings (loss)
attributable to common
shareholders $ 0.1 $ (6.8) $ (0.5) $ (1.6)
======== ======== ======== ========
Basic and diluted earnings
(loss)per common share $ 0.00 $ (0.05) $ (0.00) $ (0.01)
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Additional
Common Paid-in Accumulated
Stock Capital Deficit
-------- ----------- -----------
PERIOD ENDED SEPTEMBER 30, 1997
Balance at beginning of year $ 1.2 $ 411.0 $ (154.1)
Comprehensive income:
Net income -- -- 11.8
Comprehensive income
Issuance of common stock -- 1.8 --
Preferred stock dividends -- -- (13.2)
Accretion of mandatorily
redeemable preferred sock -- -- (0.2)
-------- -------- --------
BALANCE AT SEPTEMBER 30, 1997 $ 1.2 $ 412.8 $ (155.7)
======== ======== ========
PERIOD ENDED SEPTEMBER 30, 1998
Balance at beginning of year $ 1.2 $ 412.8 $ (284.9)
Comprehensive income:
Net income -- -- 33.5
Other comprehensive income:
Unrealized loss on securities,
net of tax -- -- --
Comprehensive income
Issuance of common stock -- 2.9 --
Preferred stock dividends -- -- (33.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.6)
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BALANCE AT SEPTEMBER 30,1998 $ 1.2 $ 415.7 $ (285.4)
======== ======== ========
Accumulated
Other Total
Comprehensive Shareholders'
Income Equity
------------- ------------
PERIOD ENDED SEPTEMBER 30, 1997
Balance at beginning of year $ -- $ 258.1
Comprehensive income:
Net income -- 11.8
--------
Comprehensive income 11.8
Issuance of common stock -- 1.8
Preferred stock dividends -- (13.2)
Accretion of mandatorily
redeemable preferred stock -- (0.2)
-------- --------
BALANCE AT SEPTEMBER 30, 1997 $ -- $ 258.3
======== ========
PERIOD ENDED SEPTEMBER 30, 1998
Balance at beginning of year $ -- $ 129.1
Comprehensive income:
Net income -- 33.5
Other comprehensive income:
Unrealized loss on securities,
net of tax (1.8) (1.8)
--------
Comprehensive income 31.7
Issuance of common stock -- 2.9
Preferred stock dividends -- (33.4)
Accretion of mandatorily
redeemable preferred stock -- (0.6)
-------- --------
BALANCE AT SEPTEMBER 30, 1998 $ (1.8) $ 129.7
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 33.5 $ 11.8
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Net gain on disposals (1.8) --
Depreciation and amortization 62.9 64.9
Deferred income taxes, net 55.3 9.8
Change in assets and liabilities,
net of effects of acquisitions:
Net decrease in restructuring
reserves (4.8) (12.5)
Increase in accounts receivable, net (43.4) (7.9)
Decrease in inventories 7.1 5.7
Increase in prepaid expenses and other (0.9) (0.2)
Change in income taxes
receivable/payable, net (6.1) 54.3
Decrease in accounts payable (7.1) (22.9)
Decrease in accrued expenses and other (2.6) (2.0)
Other, net (2.2) (6.6)
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Net cash provided by operating activities 89.9 94.4
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40.1) (14.8)
Proceeds from sale of assets 12.4 --
Refund of lease guaranty 8.0 --
Acquisition of businesses (23.7) --
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Net cash used for investing
activities (43.4) (14.8)
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(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 20.0 $ 35.0
Payments on revolving credit
facilities (60.0) (346.0)
Payment on loan from affiliate -- (187.0)
Payments on long-term debt -- (68.7)
Payments on long-term lease obligations (0.8) --
Deferred payments on acquisitions (6.5) (4.5)
Net proceeds from sale of redeemable
preferred stock -- 487.0
Net proceeds from issuance of stock to
employee stock plan -- 1.6
Payment of preferred stock dividends (13.8) (5.2)
Cash received for issuance of common
stock 2.9 --
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Net cash used for financing activities (58.2) (87.8)
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Net decrease in cash and cash
equivalents (11.7) (8.2)
Cash and cash equivalents at
beginning of period 23.3 29.3
------- -------
Cash and cash equivalents at
end of period $ 11.6 $ 21.1
======= =======
Supplemental schedule of cash
flow information:
Cash (paid) received during the period
for:
Interest $ (37.3) $ (53.9)
Income taxes 14.3 55.5
Disclosure of non-cash financing
and investing activities:
Preferred stock dividends 19.6 8.0
Accretion of mandatorily redeemable
preferred stock 0.6 0.2
Unrealized loss on securities available-
for-sale (net of tax) 1.8 --
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its wholly owned subsidiaries
(the "Company") after elimination of all material intercompany accounts and
transactions.
The accompanying condensed consolidated financial statements of the
Company are unaudited. In the opinion of management, all adjustments (which
include only normal recurring accruals) necessary for a fair presentation of
such financial statements have been included. Interim results are not
necessarily indicative of results for a full year.
The financial statements and notes are presented in accordance with the
rules and regulations of the Securities and Exchange Commission and do not
contain certain information included in the Company's annual report.
Therefore, the interim statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
Company's annual report.
2. EARNINGS PER SHARE
Basic and diluted earnings (loss) per share are based upon the weighted
average number of shares outstanding during the three and nine months ended
September 30, 1998 of 125,199,880 shares and 124,704,341 shares,
respectively, and the weighted average number of shares outstanding during
the three and nine months ended September 30, 1997 of 123,541,076 and
123,139,298 shares, respectively.
The effect of conversion of the Company's redeemable preferred stock,
or exercise of certain of the Company's stock options or warrants was not
included in the computation of diluted earnings per common share as it would
have been anti-dilutive for all applicable periods presented.
3. RESTRUCTURING RESERVES
The following represents the Company's restructuring reserves activities
for the period indicated:
Asset Lease and
Severance revaluations other facility
costs and write-offs obligations Total
Balance at
December 31, 1997 $ 3.7 $ 4.0 $ 30.9 $ 38.6
Cash payments (1.2) (0.4) (3.1) (4.7)
------ ------ ------ ------
Balance at
September 30, 1998 $ 2.5 $ 3.6 $ 27.8 $ 33.9
====== ====== ====== ======
Current $ 17.9
Non-current 16.0
------
$ 33.9
======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
4. INCOME TAXES
The Company has received a Revenue Agents Report (RAR) from the
Internal Revenue Service, concluding audits of the tax years ended 1993,
1994 and 1995. Concurrent with the audits of these years, the Company has
filed amended Federal income tax returns for the years 1993-1997,
recalculating deductible amounts relating to the allowance for doubtful
accounts under Internal Revenue Code Section 475. The amended returns,
coupled with adjustments agreed-upon from the RAR, produced a net tax refund
receivable of approximately $13.6 which has been recorded in the
accompanying Consolidated Balance Sheet as of September 30, 1998. As a
result of these amended returns and generation of taxable income during
1998, the Company reduced the amount of its net deferred tax assets related
to accounts receivable and net operating loss carry forwards by
approximately $51.0.
The RAR also contained certain adjustments for additional taxes of
$14.6 plus interest. The Company disagrees with these adjustments and
believes it has sound legal defenses to those items. It is the opinion of
management that the ultimate outcome of the case will not result in a
material impact on the Company's consolidated results of operations or
financial position.
5. BUSINESS ACQUISITION
During August, the Company completed its acquisition of Universal
Standard Healthcare, Inc.'s (UHCI) Michigan-based clinical laboratory
division for $9.0 and purchased 1.4 shares of UHCI common stock for $4.3.
UHCI's laboratory had 1997 revenues of approximately $37.0. Concurrent with
the equity investment in UHCI, the Company has become UHCI's primary
clinical laboratory testing provider under a two-year marketing agreement.
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
At September 30, 1998, the Company recorded an unrealized loss on the
UHCI shares of $1.8, net of related deferred tax benefit of $1.2.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", was issued and establishes standards for
reporting and displaying comprehensive income and its components, as
recognized under the accounting standards, to be displayed in a financial
statement with the same prominence as other financial statements. The
disclosure requirements of SFAS No. 130 have been included in the Company's
Consolidated Statements of Changes in Shareholders' Equity.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", also issued
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
in June 1997, establishes new standards for reporting information about
operating segments in annual and interim financial statements. The standard
also requires descriptive information about the way the operating segments
are determined, the products and services provided by the segments and the
nature of differences between reportable segment measurements and those used
for the consolidated enterprise. This standard is effective for years
beginning after December 15, 1997. Adoption in interim financial statements
is not required until the year after initial adoption, however comparative
prior period information is required. The disclosure requirements will have
no impact on the Company's financial position or results of operations.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits"
was issued. This Statement is effective for fiscal years beginning after
December 15, 1997. The objective of SFAS No. 132 is to provide financial
statement users with more comparable, understandable and concise information
concerning the employer's obligations to fund retirement plans and provide
postretirement benefits. The Statement only applies to disclosures and does
not address the measurement of the employer's obligation. The disclosure
requirements will have no impact on the Company's financial position or
results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1), which provides guidance as to when it
is or is not appropriate to capitalize the cost of software developed or
obtained for internal use. Although SOP 98-1 is effective for fiscal years
beginning after December 15, 1998, the Company is currently accounting for
software costs following the guidance provided by SOP 98-1.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued.
This Statement is effective for fiscal years beginning after June 15, 1999,
and standardizes the accounting for derivative instruments by requiring that
an entity recognize those items as assets or liabilities and measure them at
fair value. Adoption is not expected to have a material impact on the
Company's financial position or results of operations.
8. INTEREST RATE SWAP
The Company entered into a Rate Collar Transaction effective September
20, 1998 through September 20, 2002. The notional amount of the rate collar
transaction is $150.0 through September 20, 2002. The Company will pay the
three month LIBOR with the exception that if LIBOR falls below 4.25% the
Company will pay 5.02% and if LIBOR exceeds 5.90% the Company will pay
5.90%. At September 30, 1998, the interest rate
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
exposure on $500.0 of floating rate debt has effectively changed to a
weighted average fixed interest rate of 6.70% as a result of existing swap
activity. The notional amounts of the agreements are used to measure
interest to be paid or received and do not represent the amount of exposure
to credit loss.
OVERVIEW
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. In
addition, from time to time, the Company or its representatives have made or
may make forward-looking statements, orally or in writing. Such forward-
looking statements may be included in, but are not limited to, various
filings made by the Company with the Securities and Exchange Commission,
press releases or oral statements made by or with the approval of an
authorized executive officer of the Company. Actual results could differ
materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors and conditions, which
have been described in the section of the Company's Annual Report on Form 10-
K for the year ended December 31, 1997, entitled, "Cautionary Statement for
Purposes of the `Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995" and other documents the Company files from
time to time with the Securities and Exchange Commission including the
Company's quarterly reports on Form 10-Q and current reports on Form 8-K,
and shareholders are specifically referred to these documents with regard to
factors and conditions that may affect future results.
RESULTS OF OPERATIONS
Three Months ended September 30, 1998 compared with Three Months ended
September 30, 1997.
Net sales for the three months ended September 30, 1998 were $398.3, an
increase of 5.8% from $376.5 reported in the comparable 1997 period. The
sales increase was a result of a 4.4% increase in price and a 1.4% increase
in volume in comparison to the corresponding 1997 quarter.
Cost of sales, which includes primarily laboratory and distribution
costs, was $270.3 for the three months ended September 30, 1998 compared to
$262.7 in the corresponding 1997 period, an increase of $7.6. Cost of sales
increased approximately $3.6 due to the increase in volume and approximately
$4.0 due to an increase in personnel expenses. Telephone, royalty, and
miscellaneous expenses increased which was directly offset by decreases in
depreciation, testing supplies and freight expenses. Cost of sales as a
percentage of net sales was 67.9% for the three months ended September 30,
1998 and 69.8% in the corresponding 1997 period. The decrease in the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
cost of sales percentage of net sales primarily resulted from ongoing cost
reduction efforts.
Selling, general and administrative expenses increased to $86.0 for the
three months ended September 30, 1998 from $79.4 in the same period in 1997.
This increase is primarily due to higher personnel expenses, telephone
expenses and marketing related expenses. Total bad debt expense remained
consistent as a percentage of net sales from the comparable 1997 period. As
a percentage of net sales, selling, general and administrative expenses were
21.6% and 21.1% for the three months ended September 30, 1998 and 1997,
respectively.
The amortization of intangibles and other assets was $7.7 for both the
three months ended September 30, 1998 and 1997.
Net interest expense was $12.1 for the three months ended September 30,
1998 compared with $13.3 for the same period in 1997. The change resulted
primarily from decreased borrowings resulting from payments made to reduce
the Company's revolving credit facility. It should be noted that since the
interest rate that the Company pays on its debt is linked to the Company's
quarterly financial performance, the third quarter results will entitle the
Company to a reduction in its interest rate on the term debt from LIBOR plus
1.0% to LIBOR plus 0.5% (and from LIBOR plus 0.75% to LIBOR plus 0.3125% on
the revolving credit facility).
The provision for income taxes as a percentage of earnings before taxes
was 48.9% for the three months ended September 30, 1998 compared to 59.7%
for the three months ended September 30, 1997. The Company's effective tax
rate is significantly impacted by non-deductible amortization of intangible
assets. As earnings before income taxes increases, this non-deductible
amortization decreases in proportion to such earnings resulting in a
decrease in the effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997.
Net sales for the nine months ended September 30, 1998 were $1,157.4, as
compared to $1,157.6 reported in the comparable 1997 period. Sales declined
2.6% as a result of lower testing volume, which is a result of industry-wide
trends. The decline in sales resulting from volume declines was offset by
an increase in price per accession of approximately 2.6% from the comparable
1997 period. The increase in the price per accession was a direct result of
the Company's effort to negotiate better pricing on new contracts, raising
prices on existing contracts that do not meet Company profitability targets
and other price increases.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Cost of sales, which includes primarily laboratory and distribution
costs, was $783.9 for the nine months ended September 30, 1998 compared to
$811.6 in the corresponding 1997 period, a decrease of $27.7. Cost of sales
decreased approximately $21.2 due to the decrease in volume, and
approximately $12.7 due to a decrease in testing supplies, consulting fees,
maintenance and rental expense categories as a result of the Company's cost
reduction programs. These decreases are partially offset by increases in
telephone, postage and royalty expenses. Cost of sales as a percentage of
net sales was 67.7% for the nine months ended September 30, 1998 and 70.1%
in the corresponding 1997 period. The decrease in the cost of sales
percentage of net sales primarily resulted from ongoing cost reduction
efforts.
Selling, general and administrative expenses increased to $249.7 for
the nine months ended September 30, 1998 from $237.7 in the same period in
1997. This increase is primarily due to higher personnel expenses,
commissions, consulting fees and marketing related expenses. Total bad debt
expense remained consistent as a percentage of net sales from the comparable
1997 period. As a percentage of net sales, selling, general and
administrative expenses were 21.6% and 20.5% for the nine months ended
September 30, 1998 and 1997, respectively. The increase in the selling,
general and administrative percentage primarily resulted from the factors
noted above.
The amortization of intangibles and other assets was $22.8 and $23.0
for the nine months ended September 30, 1998 and 1997, respectively.
Net interest expense was $36.4 for the nine months ended September 30,
1998 compared with $55.8 for the same period in 1997. The change resulted
primarily from decreased borrowings resulting from the Company's
recapitalization in June, 1997 and payments made to reduce the Company's
revolving credit facility.
The provision for income taxes as a percentage of earnings before taxes
was 49.7% for the nine months ended September 30, 1998 compared to 60.0% for
the nine months ended September 30, 1997. The Company's effective tax rate
is significantly impacted by non-deductible amortization of intangible
assets. As earnings before income taxes increases, this non-deductible
amortization decreases in proportion to such earnings resulting in a
decrease in the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $89.9 and $94.4 for the
nine months ended September 30, 1998 and September 30, 1997, respectively.
The decrease in cash flow from operations primarily
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
resulted from an increase in accounts receivable offset by improved earnings
and an increase in accounts payable. Capital expenditures were $40.1 and
$14.8 for 1998 and 1997, respectively. The Company expects capital
expenditures to be approximately $60.0 in 1998 in order to further automate
laboratory and billing processes to improve efficiency. Such expenditures
are expected to be funded by cash flow from operations as well as borrowings
under the Company's credit facilities. The Company received approximately
$12.4 in proceeds from the sale of assets and an additional $8.0 refund of a
lease guaranty and made payments for business acquisitions in the amount of
approximately $23.7.
During 1996 and 1997, the Company experienced a deterioration in the
timeliness of cash collections and a corresponding increase in accounts
receivable. The primary causes of this situation were the increased medical
necessity and related diagnosis code requirements from third-party payors
and the complexities in the billing process (data capture) arising from
changing requirements of private insurance companies (managed care). Days
Sales Outstanding (DSO) at third quarter was 84 days. This compares to 83
days at the end of the second quarter. Two acquisitions occurred during the
third quarter which influenced the increase in DSO. Obtaining required
licenses and private certifications, as well as transitioning accounts onto
the Company's systems caused delay by several months in billing customers in
these two acquisitions. The Company anticipates having all bills out to
customers by mid-November. Although the Company continues to work towards
reducing the overall number of days sales outstanding, additional changes in
requirements of third-party payors could increase the difficulty in
collections. There can be no assurance of the success of the Company's plans
to improve collections and, due to the previously mentioned factors, to
reduce accounts receivable balances.
For a discussion of legal proceedings which may impact the Company's
liquidity and capital resources see "Part II - Other Information -- Item 1:
Legal Proceedings."
Cash and cash equivalents on hand, cash flows from operations and
additional borrowing capabilities under the Amended Revolving Credit
Facility are expected to be sufficient to meet anticipated operating
requirements and provide funds for capital expenditures and working capital
for the foreseeable future.
YEAR 2000 UPDATE
The Company has an ongoing work effort to identify and remediate data
recognition problems that will be caused in computer systems, software, and
lab equipment by the change in date from the year 1999 to the year 2000.
The Company is also working to address potential problems in systems and
equipment that contain imbedded hardware or software that may have a time
element (referred to as "non-IT" systems).
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
The Company's Year 2000 project has five phases: 1) inventory of
the business critical functional equipment and systems affected by the Year
2000 issue; 2) assessment of the key elements identified by the inventory
including development of strategies to address affected critical equipment
and systems; 3) contingency planning; 4) remediation of affected equipment
and systems; and 5) testing and validation of its systems for Year 2000 date
recognition.
Initial inventories of business critical functional equipment and
systems have been completed. Assessment of the key elements identified by
the inventories, the development of strategies to address key equipment and
systems are targeted for completion by December 31, 1998. Contingency
planning is scheduled to be completed during the first quarter of 1999.
Completion of all material phases for remediation, testing and validation
for business critical equipment and systems is scheduled for June 30, 1999.
The Company is also working to assess Year 2000 readiness on the part
of its significant service providers, vendors, suppliers, customers and
governmental entities. There can be no guarantee that the failure by these
other companies to successfully and timely achieve Year 2000 compliance
would not have an adverse effect on the Company's operations.
The total cost associated with required Year 2000 modifications and
related activities is not expected to be material to the Company's financial
position and is expected to be funded through capital and operating cash
flows. It is currently estimated that the total future expenditures relating
to the Year 2000 project will be between $20 and $25, with $2.5 having been
spent through September 30, 1998. The amounts required to address Year 2000
readiness do not include significant investments in new systems which are
being incurred in the normal course of business and are Year 2000 compliant.
None of the Company's other information technology projects have been
delayed due to the implementation of the Year 2000 project.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Due to the
general uncertainly inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REGULATION AND REIMBURSEMENT
On April 1, 1997, the Health Care Financing Administration's (HCFA) new
Automated Chemistry Profile Rules went into effect. The policy, which was
developed by HCFA working with the American Medical Association, eliminates
the old commonly used "19-22 test" automated chemistry profile, sometimes
referred to as a "SMAC" and replaces it with four new panels of "clinically
relevant" automated tests (each containing from 4 to 12 chemistry tests).
The Company believes that it has taken all steps necessary to be in
compliance with the new HCFA requirements.
As discussed in the First Quarter 10-Q, all major laboratory companies,
including the Company, were required to eliminate the old chemistry profiles
from their standard test requisition forms and standard test offerings by
July 1, 1998. The Company developed and implemented a new "universal"
test requisition and "standard test offerings" which successfully
incorporated all required changes by the July 1, 1998 deadline. Estimated
year-to-date costs associated with these changes are approximately $3.0 to
$4.0.
These new rules are intended to reduce the number of non-Medicare
covered "screening tests" which Medicare believes have in the past been
inappropriately billed to Medicare. Due to the variety of new rules
(including limited coverage rules) which have been adopted recently to
address this issue, the Company does not believe a meaningful estimate of
the potential revenue impact of this new rule can be made at this time. The
Company's analysis to date do not indicate a currently measurable impact on
revenues. The Company will continue to monitor this issue going forward.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in litigation which purports to be a
class action brought on behalf of certain patients, private
insurers and benefit plans that paid for laboratory testing
services during the time frame covered by the 1996 Government
Settlement. The Company has also received certain similar claims
brought on behalf of certain other insurance companies, some of
which have been resolved for immaterial amounts. These claims for
private reimbursement are similar to the government claims settled
in 1996. However, no amount of damages has been specified at this
time and, with the exception of the above, no settlement
discussions have taken place. The Company is carefully evaluating
these claims, however, due to the early stage of the claims, the
ultimate outcome of these claims cannot presently be predicted.
The Company is also involved in certain claims and legal
actions arising in the ordinary course of business. These matters
include, but are not limited to, inquiries from governmental
agencies and Medicare or Medicaid carriers requesting comment on
allegations of billing irregularities that are brought to their
attention through billing audits or third parties. In the opinion
of management, based upon the advice of counsel and consideration
of all facts available at this time, the ultimate disposition of
these matters will not have a material adverse effect on the
financial position, results of operations or liquidity of the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 27 Financial Data Schedule (electronically
filed version only).
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated July 16, 1998
was filed on August 17, 1998, by the registrant, in
connection with the press release dated July 16, 1998
announcing that it entered into a definitive agreement
to acquire Universal Standard Healthcare, Inc.'s (UHCI)
Michigan-based clinical laboratory division which had
1997 revenues of approximately $37 million. The Company
also acquired an equity position in UHCI and has become
UHCI's primary clinical laboratory testing provider under
a two-year marketing agreement.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
(2) A current report on Form 8-K dated July 20, 1998 was
filed on August 17, 1998, by the registrant, in
connection with the press release dated July 20, 1998
announcing that the Antivirogram-TM- and the VircoGEN-
TM-, two new diagnostic testing procedures enabling
physicians to evaluate resistance of HIV to antiretroviral
drugs, are now available for commercial use exclusively
from the Company's facilities in the U.S. These new
testing systems are an important advance in optimizing
treatment choices in the fight against HIV/AIDS.
(3) A current report on Form 8-K dated July 21, 1998 was
filed on August 17, 1998, by the registrant, in
connection with the press release dated July 21, 1998
announcing operating results of the Company for the
quarter and six months ended June 30, 1998.
(4) A current report on Form 8-K dated August 5, 1998
was filed on August 17, 1998, by the registrant, in
connection with the press release dated August 5, 1998
announcing that it completed its previously announced
acquisition of Universal Standard Healthcare,
Inc.'s (UHCI) Michigan-based clinical laboratory
division. The Company also acquired an equity position
in UHCI and has become UHCI's primary clinical laboratory
testing provider under a two-year marketing agreement.
(5) A current report on Form 8-K dated August 5, 1998
was filed on August 17, 1998, by the registrant, in
connection with the press release dated August 5, 1998
announcing that its forensic crime laboratory located at
the Company's Center for Molecular Biology and Pathology
in Research Triangle Park, North Carolina, was accredited
by the American Society of Crime Laboratory Directors,
Laboratory Accreditation Board (ASCLD/LAB) in the
category of DNA testing.
(6) A current report on Form 8-K dated August 20, 1998
was filed on August 26, 1998, by the registrant,
in connection with the press release dated August 20, 1998
announcing that its Board of Directors declared dividends
on the Company's 8 1/2% Series A Convertible Exchangeable
Preferred Stock and the Company's 8 1/2% Series B
Convertible Pay-in-Kind Preferred Stock.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
By:/s/ THOMAS P. MAC MAHON
---------------------------------
Thomas P. Mac Mahon
Chairman, President and Chief
Executive Officer
By:/s/ WESLEY R. ELINGBURG
---------------------------------
Wesley R. Elingburg
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 13, 1998
5
0000920148
LABORATORY CORPORATION OF AMERICA HOLDINGS
1000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
11,600
0
568,800
196,600
28,800
470,400
489,800
236,800
1,595,100
215,200
608,900
521,000
0
1,200
128,500
1,595,100
1,157,400
1,157,400
783,900
783,900
272,500
0
37,200
66,600
33,100
33,500
0
0
0
33,500
(0.00)
(0.00)
