UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-11353
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) | ||
(Registrant's telephone number, including area code) 336 -229-1127
Securities registered pursuant to Section 12(b) of the Exchange Act.
Title of Each Class Trading Symbol Name of exchange on which registered
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
The number of shares outstanding of the issuer's common stock is 97.7 million shares as of August 6, 2019.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. | ||
June 30, 2019 and December 31, 2018 | ||
Three and six months ended June 30, 2019 and 2018 | ||
Three and six months ended June 30, 2019 and 2018 | ||
Three and six months ended June 30, 2019 and 2018 | ||
Six months ended June 30, 2019 and 2018 | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 5. | ||
Item 6. | ||
1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
June 30, 2019 | December 31, 2018 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable | |||||||
Unbilled services | |||||||
Supplies inventories | |||||||
Prepaid expenses and other | |||||||
Total current assets | |||||||
Property, plant and equipment, net | |||||||
Goodwill, net | |||||||
Intangible assets, net | |||||||
Joint venture partnerships and equity method investments | |||||||
Deferred income tax assets | |||||||
Other assets, net | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | $ | |||||
Accrued expenses and other | |||||||
Unearned revenue | |||||||
Short-term operating lease liabilities | |||||||
Short-term finance lease liabilities | |||||||
Short-term borrowings and current portion of long-term debt | |||||||
Total current liabilities | |||||||
Long-term debt, less current portion | |||||||
Operating lease liabilities | |||||||
Financing lease liabilities | |||||||
Deferred income taxes and other tax liabilities | |||||||
Other liabilities | |||||||
Total liabilities | |||||||
Commitments and contingent liabilities | |||||||
Noncontrolling interest | |||||||
Shareholders’ equity: | |||||||
Common stock, 97.8 and 98.9 shares outstanding at June 30, 2019 and December 31, 2018, respectively | |||||||
Additional paid-in capital | |||||||
Retained earnings | |||||||
Less common stock held in treasury | ( | ) | |||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total shareholders’ equity | |||||||
Total liabilities and shareholders’ equity | $ | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | $ | $ | $ | $ | |||||||||||
Cost of revenues | |||||||||||||||
Gross profit | |||||||||||||||
Selling, general and administrative expenses | |||||||||||||||
Amortization of intangibles and other assets | |||||||||||||||
Restructuring and other special charges | |||||||||||||||
Operating income | |||||||||||||||
Other income (expenses): | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Equity method income, net | |||||||||||||||
Investment income | |||||||||||||||
Other, net | ( | ) | ( | ) | ( | ) | |||||||||
Earnings before income taxes | |||||||||||||||
Provision for income taxes | |||||||||||||||
Net earnings | |||||||||||||||
Less: Net (earnings) loss attributable to the noncontrolling interest | ( | ) | ( | ) | ( | ) | |||||||||
Net earnings attributable to Laboratory Corporation of America Holdings | $ | $ | $ | $ | |||||||||||
Basic earnings per common share | $ | $ | $ | $ | |||||||||||
Diluted earnings per common share | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions, except per share data)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net earnings | $ | $ | $ | $ | |||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | |||||||||||
Net benefit plan adjustments | |||||||||||||||
Other comprehensive earnings (loss) before tax | ( | ) | ( | ) | |||||||||||
(Provision) benefit for income tax related to items of other comprehensive earnings | ( | ) | ( | ) | ( | ) | |||||||||
Other comprehensive earnings, net of tax | ( | ) | ( | ) | |||||||||||
Comprehensive earnings | |||||||||||||||
Less: Net (earnings) loss attributable to the noncontrolling interest | ( | ) | ( | ) | ( | ) | |||||||||
Comprehensive earnings attributable to Laboratory Corporation of America Holdings | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(in millions)
(unaudited)
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | ||||||||||||||||||
BALANCE AT DECEMBER 31, 2017 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Net earnings attributable to Laboratory Corporation of America Holdings | — | — | — | — | |||||||||||||||||||
Other comprehensive earnings, net of tax | — | — | — | — | |||||||||||||||||||
Issuance of common stock under employee stock plans | — | — | — | ||||||||||||||||||||
Net share settlement tax payments from issuance of stock to employees | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Stock compensation | — | — | — | — | |||||||||||||||||||
Purchase of common stock | ( | ) | — | — | — | ( | ) | ||||||||||||||||
BALANCE AT MARCH 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Net earnings attributable to Laboratory Corporation of America Holdings | — | — | — | — | |||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Issuance of common stock under employee stock plans | — | — | — | — | |||||||||||||||||||
Net share settlement tax payments from issuance of stock to employees | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Stock compensation | — | — | — | — | |||||||||||||||||||
Purchase of common stock | — | ( | ) | — | — | — | ( | ) | |||||||||||||||
BALANCE AT JUNE 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
BALANCE AT DECEMBER 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Net earnings attributable to Laboratory Corporation of America Holdings | — | — | — | — | |||||||||||||||||||
Other comprehensive earnings, net of tax | — | — | — | ||||||||||||||||||||
Issuance of common stock under employee stock plans | — | — | — | ||||||||||||||||||||
Net share settlement tax payments from issuance of stock to employees | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Stock compensation | — | — | — | — | |||||||||||||||||||
Purchase of common stock | ( | ) | ( | ) | — | — | — | ( | ) | ||||||||||||||
BALANCE AT MARCH 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||
Net earnings attributable to Laboratory Corporation of America Holdings | — | — | — | — | |||||||||||||||||||
Other comprehensive earnings, net of tax | — | — | — | ||||||||||||||||||||
Issuance of common stock under employee stock plans | — | — | — | ||||||||||||||||||||
Net share settlement tax payments from issuance of stock to employees | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Stock compensation | — | — | — | — | |||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | — | — | |||||||||||||||||
Purchase of common stock | ( | ) | ( | ) | — | — | — | ( | ) | ||||||||||||||
BALANCE AT JUNE 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net earnings | $ | $ | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||
Depreciation and amortization | |||||||
Stock compensation | |||||||
Loss (gain) on sale of assets | ( | ) | |||||
Loss on sale of business | |||||||
Accreted interest on zero-coupon subordinated notes | |||||||
Operating lease right-of-use asset expense | |||||||
Earnings less distributions (excess)/deficit from equity method investments | ( | ) | |||||
Asset impairment | |||||||
Deferred income taxes | |||||||
Change in assets and liabilities (net of effects of acquisitions): | |||||||
(Increase) decrease in accounts receivable | ( | ) | |||||
Increase in unbilled services | ( | ) | ( | ) | |||
Increase in inventories | ( | ) | ( | ) | |||
Decrease (increase) in prepaid expenses and other | ( | ) | |||||
Decrease in accounts payable | ( | ) | ( | ) | |||
(Decrease) increase in unearned revenue | ( | ) | |||||
Decrease in accrued expenses and other | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Proceeds from sale of assets | |||||||
Proceeds from sale of investment | |||||||
Net proceeds from sale of held for sale assets | |||||||
Investments in equity affiliates | ( | ) | ( | ) | |||
Acquisition of businesses, net of cash acquired | ( | ) | ( | ) | |||
Net cash used for investing activities | ( | ) | ( | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from term loan | |||||||
Payments on term loan | ( | ) | ( | ) | |||
Proceeds from revolving credit facilities | |||||||
Payments on revolving credit facilities | ( | ) | ( | ) | |||
Payments on zero-coupon subordinated notes | ( | ) | |||||
Noncontrolling interest distributions | ( | ) | ( | ) | |||
Deferred payments on acquisitions | ( | ) | |||||
Payments on other long-term obligations | ( | ) | ( | ) | |||
Net share settlement tax payments from issuance of stock to employees | ( | ) | ( | ) | |||
Net proceeds from issuance of stock to employees | |||||||
Purchase of common stock | ( | ) | ( | ) | |||
Net cash provided by (used for) financing activities | ( | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | |||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | |||
Cash and cash equivalents at beginning of period | |||||||
Cash and cash equivalents at end of period | $ | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
1. | BASIS OF FINANCIAL STATEMENT PRESENTATION |
Laboratory Corporation of America® Holdings together with its subsidiaries (the Company) is a leading global life sciences company that is deeply integrated in guiding patient care, providing comprehensive clinical laboratory and end-to-end drug development services. The Company’s mission is to improve health and improve lives by delivering world-class diagnostic solutions, bringing innovative medicines to patients faster and using technology to provide better care. The Company serves a broad range of customers, including managed care organizations (MCOs), biopharmaceutical companies, medical device companies, governmental agencies, physicians and other healthcare providers (e.g., physician assistants and nurse practitioners, generally referred to herein as physicians), hospitals and health systems, employers, patients and consumers, contract research organizations (CROs) and independent clinical laboratories. The Company believes that it generated more revenue from laboratory testing than any other company in the world in 2018.
The Company reports its business in two segments, LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). For further financial information about these segments, see Note 16 (Business Segment Information). During the three months ended June 30, 2019, LCD and CDD contributed approximately 61 % and 39 %, respectively, of revenues to the Company. During the six months ended June 30, 2019, LCD and CDD contributed approximately 61 % and 39 %, respectively, of revenues to the Company.
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries for which it exercises control. Long-term investments in affiliated companies in which the Company exercises significant influence, but which it does not control, are accounted for using the equity method. Investments in which the Company does not exercise significant influence (generally, when the Company has an investment of less than 20.0 %) are accounted for at fair value or at cost minus impairment for those investments that do not have readily determinable fair values. All significant inter-company transactions and accounts have been eliminated. The Company does not have any significant variable interest entities or special purpose entities whose financial results are not included in the condensed consolidated financial statements.
The financial statements of the Company's operating foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average monthly exchange rates prevailing during the period. Resulting translation adjustments are included in “Accumulated other comprehensive income.”
The accompanying condensed consolidated financial statements of the Company are unaudited. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows and financial position have been made. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.
The condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States (U.S.) Securities and Exchange Commission (SEC) and do not contain certain information included in the Company’s 2018 Annual Report on Form 10-K. Therefore, these interim statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report.
Recently Adopted Guidance
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The Company has elected to utilize the short-term lease exemption and not record leases with initial terms of 12 months or less on the balance sheet. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and direct financing leases.
The Company adopted the standard on January 1, 2019, using the modified retrospective method. Comparative periods were not adjusted and are presented in accordance with lease guidance in effect for that period. The Company elected the package of practical expedients, which includes not reassessing whether existing contracts contain leases under the new definition of a lease, reassessing the classification of existing leases, and reassessing whether previously capitalized initial direct costs qualify for
7
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
capitalization under the new standard. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets. Operating lease expense is recognized on a straight-line basis over the lease term.
Operating lease assets and liabilities are recognized at the commencement date, based on the present value of the future minimum lease payments over the lease term. A certain number of these leases contain rent escalation clauses either fixed or adjusted periodically for inflation or market rates that are factored into the Company's determination of lease payments. The Company also has variable lease payments that do not depend on a rate or index, for items such as volume purchase commitments, which are recorded as variable cost when incurred. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date to discount payments to the present value. Some operating leases contain renewal options, some of which also include options to early terminate the leases. The exercise of these options is at the Company's discretion. The Company determined that all renewal options within leases for main laboratories, STAT laboratories, branches or combination sites were reasonably possible to be exercised and therefore are included in the accounting lease term.
The standard had a material impact in the consolidated balance sheets, but no material impact in the consolidated income statements. The most significant impact was the recognition of right-of-use (ROU) assets and lease liabilities for operating leases, while the accounting for finance leases remained unchanged.
New Accounting Pronouncements
In June 2016, the FASB issued a new accounting standard intended to provide financial statement users with more decision-useful information about expected credit losses and other commitments to extend credit held by the reporting entity. The standard replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to reduce, modify, and add to the disclosure requirements on fair value measurements. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to reduce, modify, and add to the disclosure requirements on defined benefit pension and other postretirement plans. The standard is effective on January 1, 2021, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
Reclassifications and Revisions
The Company adopted Accounting Standard Update 2016-09 Compensation - Stock Compensation (Topic 718) during 2016 and incorrectly classified payments made to tax authorities for withheld shares from an employee’s equity award as cash flows from operating activities versus cash flows from financing activities. As a result, the Company has revised the consolidated statement of cash flows for these tax payments of $45.1 for the six months ended June 30, 2018, from operating activities to financing activities. The Company concluded that these errors were not material individually or in the aggregate to any of the periods impacted.
In conjunction with the adoption of the new lease standard, the Company reclassified the capital lease asset balance of $44.4 at December 31, 2018, from Property, plant and equipment, net to Other assets.
8
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
2. | REVENUES |
The Company's revenues by segment payers/customer groups for the three and six months ended June 30, 2019, and 2018, is as follows:
For the Three Months Ended June 30, 2019 | ||||||||||||||||||||
U.S. | Canada | U.K. | Switzerland | Other Europe | Other | Total | ||||||||||||||
Payer/Customer | ||||||||||||||||||||
LCD | ||||||||||||||||||||
Clients | % | % | % | % | % | % | % | |||||||||||||
Patients | % | % | % | % | % | % | % | |||||||||||||
Medicare and Medicaid | % | % | % | % | % | % | % | |||||||||||||
Third-party | % | % | % | % | % | % | % | |||||||||||||
Total LCD revenues by payer | % | % | % | % | % | % | % | |||||||||||||
CDD | ||||||||||||||||||||
Biopharmaceutical and medical device companies | % | % | % | % | % | % | % | |||||||||||||
Total revenues | % | % | % | % | % | % | % | |||||||||||||
For the Three Months Ended June 30, 2018 | ||||||||||||||||||||
U.S. | Canada | U.K. | Switzerland | Other Europe | Other | Total | ||||||||||||||
Payer/Customer | ||||||||||||||||||||
LCD | ||||||||||||||||||||
Clients | % | % | % | % | % | % | % | |||||||||||||
Patients | % | % | % | % | % | % | % | |||||||||||||
Medicare and Medicaid | % | % | % | % | % | % | % | |||||||||||||
Third-party | % | % | % | % | % | % | % | |||||||||||||
Total LCD revenues by payer | % | % | % | % | % | % | % | |||||||||||||
CDD | ||||||||||||||||||||
Biopharmaceutical and medical device companies | % | % | % | % | % | % | % | |||||||||||||
Total revenues | % | % | % | % | % | % | % | |||||||||||||
For the Six Months Ended June 30, 2019 | ||||||||||||||||||||
U.S. | Canada | U.K. | Switzerland | Other Europe | Other | Total | ||||||||||||||
Payer/Customer | ||||||||||||||||||||
LCD | ||||||||||||||||||||
Clients | % | % | % | % | % | % | % | |||||||||||||
Patients | % | % | % | % | % | % | % | |||||||||||||
Medicare and Medicaid | % | % | % | % | % | % | % | |||||||||||||
Third-party | % | % | % | % | % | % | % | |||||||||||||
Total LCD revenues by payer | % | % | % | % | % | % | % | |||||||||||||
CDD | ||||||||||||||||||||
Biopharmaceutical and medical device companies | % | % | % | % | % | % | % | |||||||||||||
Total revenues | % | % | % | % | % | % | % | |||||||||||||
9
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
For the Six Months Ended June 30, 2018 | ||||||||||||||||||||
U.S. | Canada | U.K. | Switzerland | Other Europe | Other | Total | ||||||||||||||
Payer/Customer | ||||||||||||||||||||
LCD | ||||||||||||||||||||
Clients | % | % | % | % | % | % | % | |||||||||||||
Patients | % | % | % | % | % | % | % | |||||||||||||
Medicare and Medicaid | % | % | % | % | % | % | % | |||||||||||||
Third-party | % | % | % | % | % | % | % | |||||||||||||
Total LCD revenues by payer | % | % | % | % | % | % | % | |||||||||||||
CDD | ||||||||||||||||||||
Biopharmaceutical and medical device companies | % | % | % | % | % | % | % | |||||||||||||
Total revenues | % | % | % | % | % | % | % | |||||||||||||
CDD incurs sales commissions in the process of obtaining contracts with customers, which are recoverable through the service fees in the contract. Sales commissions that are payable upon contract award are recognized as assets and amortized over the expected contract term, along with related payroll tax expense. The amortization of commission expense is based on the weighted average contract duration for all commissionable awards in the respective business in which the commission expense is paid, which approximates the period over which goods and services are transferred to the customer. The amortization period of sales commissions ranges from approximately 12 months to 57 months, depending on the business. For businesses that enter into primarily short-term contracts, the Company applies the practical expedient which allows costs to obtain a contract to be expensed when incurred if the amortization period of the assets that would otherwise have been recognized is one year or less. Amortization of assets from sales commissions is included in selling, general, and administrative expense.
CDD incurs costs to fulfill contracts with customers, which are recoverable through the service fees in the contract. Contract fulfillment costs include software implementation costs and setup costs for certain endpoint and market access solutions. These costs are recognized as assets and amortized over the expected term of the contract to which the implementation relates, which is the period over which services are expected to be provided to the customer. This period typically ranges from 24-60 months. Amortization of deferred contract fulfillment costs is included in cost of goods sold.
June 30, 2019 | December 31, 2018 | ||||||
Sales commission assets | $ | $ | |||||
Deferred contract fulfillment costs | |||||||
Total | $ | $ | |||||
Amortization related to sales commission assets and associated payroll taxes for the three-month periods ended June 30, 2019, and 2018, was $5.1 and $4.4 , respectively, and for the six-month periods ended June 30, 2019, and 2018, was $9.5 and $8.6 , respectively. Amortization related to deferred contract fulfillment costs for the three-month periods ended June 30, 2019, and 2018, was $1.9 and $1.9 , respectively, and was $3.8 and $2.5 , respectively, for the six-month periods ended June 30, 2019, and 2018. Impairment expense related to contract costs was immaterial to the Company’s consolidated statement of operations.
Receivables, Unbilled Services and Unearned Revenue
The following table provides information about receivables, unbilled services, and unearned revenue (contract liabilities) from contracts with customers for the CDD segment. Unbilled services are comprised primarily of unbilled receivables, but also include contract assets. A contract asset is recorded when a right to payment has been earned for work performed, but billing and payment for that work is determined by certain contractual milestones, whereas unbilled receivables are billable upon the passage of time. While CDD attempts to negotiate terms that provide for billing and payment of services prior or in close proximity to the provision of services, this is not always possible and there are fluctuations in the level of unbilled services and unearned revenue from period to period.
June 30, 2019 | December 31, 2018 | ||||||
Receivables, which are included in Accounts Receivable, net | $ | $ | |||||
Unbilled services | |||||||
Unearned revenue | |||||||
10
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Revenues recognized during the period, which was included in the unearned revenue balance at the beginning of the period for the six-month periods ended June 30, 2019, and June 30, 2018, was $161.6 and $135.6 , respectively. Bad debt expense on receivables for the six-month periods ended June 30, 2019, and 2018, was immaterial to the Company’s consolidated statement of operations.
Performance Obligations Under Long-Term Contracts
Long-term contracts at the Company consist primarily of fully managed clinical studies within the CDD segment. The amount of existing performance obligations under such long-term contracts unsatisfied as of June 30, 2019, was $4,138.0 . The Company expects to recognize approximately 34 % of the remaining performance obligations as revenues over the next 12 months, and the balance thereafter. The Company's long-term contracts generally range from 1 to 8 years.
Within CDD, revenue of $48.4 and $(12.5 ) was recognized during the six months ended June 30, 2019, and 2018, respectively, from performance obligations that were satisfied in previous periods. This revenue comes from adjustments related to changes in scope and estimates in full service clinical studies.
3. | BUSINESS ACQUISITIONS AND DISPOSITIONS |
On June 3, 2019, the Company's CDD segment completed the acquisition of Envigo's nonclinical contract research services business, expanding CDD's global nonclinical drug development capabilities with additional locations and resources. Envigo also completed the acquisition of the Covance Research Products (CRP) business, which was part of the CDD segment. The two companies will continue to collaborate through a multi-year, renewable supply agreement. The Company paid cash consideration of $601.0 , received a floating rate secured note of $110.0 , and recorded a loss on sale of CRP of $8.8 . The Company funded the transaction through a new term loan facility.
The preliminary valuation of acquired assets and assumed liabilities as of June 3, 2019, include the following:
Consideration Transferred | ||||
Cash consideration | $ | |||
Fair value of CRP | ||||
Total | $ | |||
Preliminary | ||||
Net Assets Acquired | ||||
Cash and cash equivalents | $ | |||
Accounts receivable | ||||
Unbilled services | ||||
Inventories | ||||
Prepaid expenses and other | ||||
Property, plant and equipment (including ROU operating lease assets) | ||||
Deferred tax asset | ||||
Goodwill | ||||
Customer relationships | ||||
Trade name and trademarks | ||||
Other assets | ||||
Total assets acquired | ||||
Accounts payable | ||||
Accrued expenses and other | ||||
Unearned revenue | ||||
Operating lease liabilities | ||||
Other liabilities | ||||
Total liabilities acquired | ||||
Net Envigo assets acquired | ||||
Floating rate secured note receivable due 2022 | ||||
Total | $ | |||
The amortization periods for intangible assets acquired are 11 years for customer relationships.
The Envigo transaction contributed $16.5 and $0.7 of revenues and operating income, respectively, during the three and six months ended June 30, 2019.
11
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The purchase price allocation for the Envigo transaction is still preliminary and subject to change. The areas of the purchase price allocation that are not yet finalized relate primarily to intangible assets, goodwill, fixed assets and the impact of finalizing deferred taxes. Accordingly, adjustments may be made as additional information is obtained about the facts and circumstances that existed as of the valuation date. The Company expects these purchase price allocations to be finalized by the second quarter of 2020. Any adjustments will be recorded in the period in which they are identified.
During the six months ended June 30, 2019, the Company also acquired various businesses and related assets for approximately $117.7 in cash (net of cash acquired). The purchase consideration for all acquisitions year to date has been allocated to the estimated fair market value of the net assets acquired, including approximately $90.7 in identifiable intangible assets and a residual amount of non-tax deductible goodwill of approximately $53.8 . The amortization periods for intangible assets acquired from these businesses range from 11 to 15 years for customer relationships. These acquisitions were made primarily to extend the Company's geographic reach in important market areas, enhance the Company's scientific differentiation and to expand the breadth and scope of the Company's CRO services. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. The goodwill reflects the Company's expectations to utilize the acquired businesses’ workforce and established relationships and the benefits of being able to leverage operational efficiencies with favorable growth opportunities in these markets.
Additionally, the Company divested its food solutions and forensic testing services business in the United Kingdom (U.K) and the U.S. in 2018. Total operating income for the three divested businesses was $3.4 and $5.4 for the three and six months ended June 30, 2018, respectively.
4. | EARNINGS PER SHARE |
Basic earnings per share is computed by dividing net earnings attributable to Laboratory Corporation of America Holdings by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings including the impact of dilutive adjustments by the weighted average number of common shares outstanding plus potentially dilutive shares, as if they had been issued at the earlier of the date of issuance or the beginning of the period presented. Potentially dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, restricted stock units, performance share awards, and shares issuable upon conversion of zero-coupon subordinated notes.
The following represents a reconciliation of basic earnings per share to diluted earnings per share:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||
Earnings | Shares | Per Share Amount | Earnings | Shares | Per Share Amount | Earnings | Shares | Per Share Amount | Earnings | Shares | Per Share Amount | ||||||||||||||||||||||||||||||||
Basic earnings per share: | |||||||||||||||||||||||||||||||||||||||||||
Net earnings | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
Dilutive effect of employee stock options and awards | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Net earnings including impact of dilutive adjustments | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
The following table summarizes the potential common shares not included in the computation of diluted earnings per share because their impact would have been antidilutive:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Stock options | |||||||||||
5. | RESTRUCTURING AND OTHER SPECIAL CHARGES |
During the six months ended June 30, 2019, the Company recorded net restructuring and other special charges of $34.2 : $16.1 within LCD and $18.1 within CDD. The charges were comprised of $20.3 related to severance and other personnel costs and $13.5 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were increased by the adjustment of previously established reserves of $0.4 in severance reserves.
12
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
During the six months ended June 30, 2018, the Company recorded net restructuring and other special charges of $26.5 : $9.1 within LCD and $17.4 within CDD. The charges were comprised of $23.1 related to severance and other personnel costs, $2.5 in costs associated with facility closures and general integration initiatives, and $2.3 in impairment to land held for sale. The Company reversed previously established reserves of $0.9 and $0.5 in unused facility reserves and unused severance reserves, respectively.
The following represents the Company’s restructuring reserve activities for the period indicated:
LCD | CDD | ||||||||||||||||||
Severance and Other Employee Costs | Facility Costs | Severance and Other Employee Costs | Facility Costs | Total | |||||||||||||||
Balance as of December 31, 2018 | $ | $ | $ | $ | $ | ||||||||||||||
Reclassification for ASC 842 adoption | ( | ) | ( | ) | ( | ) | |||||||||||||
Restructuring charges | |||||||||||||||||||
Adjustments to prior restructuring accruals | ( | ) | |||||||||||||||||
Impairment of operating lease right-of-use asset | |||||||||||||||||||
Cash payments and other adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Balance as of June 30, 2019 | $ | $ | $ | $ | $ | ||||||||||||||
Current | $ | ||||||||||||||||||
Non-current | |||||||||||||||||||
$ | |||||||||||||||||||
6. | GOODWILL AND INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill for the three-month period ended June 30, 2019, are as follows:
LCD | CDD | Total | |||||||||
Balance as of January 1, 2019 | $ | $ | $ | ||||||||
Goodwill acquired during the period | |||||||||||
Dispositions | ( | ) | ( | ) | |||||||
Adjustments to goodwill | |||||||||||
Balance at June 30, 2019 | $ | $ | $ | ||||||||
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||
Patents, licenses and technology | ( | ) | ( | ) | |||||||||||||||||||
Non-compete agreements | ( | ) | ( | ) | |||||||||||||||||||
Trade names | ( | ) | ( | ) | |||||||||||||||||||
Land use right | ( | ) | ( | ) | |||||||||||||||||||
Canadian licenses | |||||||||||||||||||||||
$ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
7. LEASES
The Company has operating and finance leases for patient service centers, laboratories and testing facilities, general office spaces, vehicles, and certain equipment. Leases have remaining lease terms of less than a year to 15 years, some of which include options to extend the leases for up to 15 years.
13
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The components of lease expense were as follows:
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||
Operating lease cost | $ | $ | |||||
Finance lease cost: | |||||||
Amortization of ROU assets | $ | $ | |||||
Interest on lease liabilities | |||||||
Total finance lease cost | $ | $ | |||||
Supplemental cash flow information related to leases was as follows:
Six Months Ended June 30, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | ( | ) |
Operating cash flows from finance leases | ( | ) | |
Financing cash flows from finance leases | ( | ) | |
ROU assets obtained in exchange for lease obligations: | |||
Operating leases | $ | ||
Finance leases | |||
Supplemental balance sheet information related to leases was as follows:
June 30, 2019 | |||
Operating Leases | |||
Operating lease ROU assets (included in Property, plant and equipment, net) | $ | ||
Short-term operating lease liabilities | |||
Operating lease liabilities | |||
Total operating lease liabilities | $ | ||
June 30, 2019 | |||
Finance Leases | |||
Finance lease ROU assets (included in Other assets) | $ | ||
Short-term finance lease liabilities | $ | ||
Finance lease liabilities | |||
Total finance lease liabilities | $ | ||
Weighted Average Remaining Lease Term | |||
Operating leases | |||
Finance leases | |||
Weighted Average Discount Rate | |||
Operating leases | % | ||
Finance leases | % | ||
14
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Maturities of lease liabilities are as follows:
Six Months Ended June 30, 2019 | Operating Leases | Finance Leases | |||||
2019 | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
Thereafter | |||||||
Total lease payments | |||||||
Less imputed interest | ( | ) | ( | ) | |||
Total | $ | $ | |||||
Rental expense for short term leases with a term less than one year for the three and six months ended June 30, 2019, amounted to $2.6 and $5.9 , respectively. The Company has variable lease payments that do not depend on a rate or index, primarily for purchase volume commitments, which are recorded as variable cost when incurred. Total variable payments for the three and six months ended June 30, 2019, were $4.7 and $9.2 , respectively. As of June 30, 2019, the Company has entered into approximately 50 additional operating leases, primarily for patient service centers, that have not yet commenced and are not significant to the overall lease portfolio. These operating leases will commence later in 2019 with lease terms ranging from less than a year to 11 years.
The Company leases various facilities and equipment under non-cancelable lease arrangements. Future minimum rental commitments for leases with non-cancelable terms of one year or more at December 31, 2018, under Accounting Standards Codification 840 are as follows:
Year Ended December 31, | Operating Leases | Finance Leases | |||||
2019 | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
Thereafter | |||||||
Rental expense, which includes rent for real estate, equipment and automobiles under operating leases, amounted to $85.1 and $167.5 , respectively, for the three and six months ended June 30, 2019.
8. | DEBT |
Short-term borrowings and the current portion of long-term debt at June 30, 2019, and December 31, 2018, consisted of the following:
June 30, 2019 | December 31, 2018 | ||||||
Zero-coupon convertible subordinated notes | $ | $ | |||||
2.625% senior notes due 2020 | |||||||
Debt issuance costs | ( | ) | ( | ) | |||
Current portion of note payable | |||||||
Total short-term borrowings and current portion of long-term debt | $ | $ | |||||
15
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Long-term debt at June 30, 2019, and December 31, 2018, consisted of the following:
June 30, 2019 | December 31, 2018 | ||||||
2.625% senior notes due 2020 | $ | $ | |||||
4.625% senior notes due 2020 | |||||||
3.20% senior notes due 2022 | |||||||
3.75% senior notes due 2022 | |||||||
4.00% senior notes due 2023 | |||||||
3.25% senior notes due 2024 | |||||||
3.60% senior notes due 2025 | |||||||
3.60% senior notes due 2027 | |||||||
4.70% senior notes due 2045 | |||||||
Revolving credit facility | |||||||
2019 Term loan | |||||||
2017 Term loan | |||||||
Debt issuance costs | ( | ) | ( | ) | |||
Note payable | |||||||
Total long-term debt | $ | $ | |||||
Senior Notes
During the third quarter of 2013, the Company entered into two fixed-to-variable interest rate swap agreements for its 4.625 % senior notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus 2.298 % to hedge against changes in the fair value of a portion of the Company's long-term debt. These derivative financial instruments are accounted for as fair value hedges of the senior notes due 2020. These interest rate swaps are included in other long-term assets or other long-term liabilities, as applicable, and added to or subtracted from the value of the senior notes, with an aggregate fair value asset of $3.7 at June 30, 2019, and an aggregate fair value liability of $3.1 at December 31, 2018.
Zero-Coupon Subordinated Notes
On March 11, 2019, the Company announced that for the period from March 11, 2019, to September 10, 2019, the zero-coupon subordinated notes will accrue contingent cash interest at a rate of no less than 0.125 % of the average market price of a zero-coupon subordinated note for the five trading days ended August 27, 2019, in addition to the continued accrual of the original issue discount.
During the six months ended June 30, 2019, the Company settled notices to convert $7.7 aggregate principal amount of its zero-coupon subordinated notes with a conversion value of $14.5 . The total cash used for these settlements was $7.3 . As a result of these conversions, the Company also reversed deferred tax liabilities of $1.7 .
On July 1, 2019, the Company announced that its zero-coupon subordinated notes may be converted into cash and common stock at the conversion rate of 13.4108 per $1,000.0 principal amount at maturity of the notes, subject to the terms of the zero-coupon subordinated notes and the Indenture, dated as of October 24, 2006, between the Company and The Bank of New York Mellon, as trustee and the conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter beginning July 1, 2019, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New York City time, on Monday, September 30, 2019. If notices of conversion are received, the Company plans to settle the cash portion of the conversion obligation with cash on hand and/or borrowings under its revolving credit facility.
Credit Facilities
On June 3, 2019, the Company entered into a new $850.0 term loan facility in addition to its $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. This net change of $600.0 represents the only contractual obligation as of June 30, 2019, that materially changed from December 31, 2018.
The 2019 term loan facility accrues interest at a per annum rate equal to at the Company's election, either a LIBOR rate plus a margin ranging from 0.55% to 1.175% , or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0% to 0.175% . The 2019 term loan balance at June 30, 2019, was $850.0 . As of June 30, 2019, the effective interest rate on the 2019 term loan was 3.24 %.
16
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
On September 15, 2017, the Company entered into a $750.0 term loan facility in addition to its then existing $1,000.0 term loan entered into in December 2014. The 2017 term loan facility will mature on September 15, 2022. The Company paid off the 2014 term loan during the second quarter of 2018.
The 2017 term loan facility accrues interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin ranging from 0.875% to 1.50% , or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0% to 0.50% . The 2017 term loan balance at June 30, 2019, was $277.0 and at December 31, 2018, was $527.0 . As of June 30, 2019, the effective interest rate on the 2017 term loan was 3.56 %.
The Company entered into a senior unsecured revolving credit facility on December 21, 2011, which was amended and restated on December 19, 2014, further amended on July 13, 2016, and further amended and restated on September 15, 2017. The revolving credit facility consists of a five-year revolving facility in the principal amount of up to $1,000.0 , with the option of increasing the facility by up to an additional $350.0 , subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. The revolving credit facility also provides for a subfacility of up to $100.0 for swing line borrowings and a subfacility of up to $150.0 for issuances of letters of credit. The revolving credit facility is permitted to be used for general corporate purposes, including working capital, capital expenditures, funding of share repurchases and certain other payments, and acquisitions and other investments. The Company had $35.0 outstanding on its revolving credit facility at June 30, 2019, and no outstanding balance on December 31, 2018.
Advances 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 ranging from 0.775% to 1.25% , or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.00% to 0.25% . Fees are payable on outstanding letters of credit under the revolving credit facility at a per annum rate equal to the applicable margin for LIBOR loans, and the Company is required to pay a facility fee on the aggregate commitments under the revolving credit facility, at a per annum rate ranging from 0.10% to 0.25% .
The interest margin applicable to the term loan and credit facilities, and the facility fee and letter of credit fees payable under the revolving credit facility, are based on the Company’s senior credit ratings as determined by Standard & Poor’s and Moody’s.
Under the term loan 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 in the term loan facilities and the revolving credit facility at June 30, 2019. As of June 30, 2019, the ratio of total debt to consolidated proforma trailing 12 month EBITDA was 3.4 to 1.0.
As of June 30, 2019, the Company had provided letters of credit aggregating approximately $72.2 , primarily in connection with certain insurance programs. The Company's availability of $892.8 at June 30, 2019, under its revolving credit facility is reduced by the amount of these letters of credit.
9. PREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY
The Company is authorized to issue up to 265.0 shares of common stock, par value $0.10 per share. The Company’s treasury shares were recorded at aggregate cost and were retired during the second quarter of 2019. The Company is authorized to issue up to 30.0 shares of preferred stock, par value $0.10 per share. There were no preferred shares outstanding as of June 30, 2019, and December 31, 2018.
The changes in common shares issued and held in treasury are summarized below:
Issued | Held in Treasury | Outstanding | ||||||
Common shares at December 31, 2018 | ( | ) | ||||||
Common stock issued under employee stock plans | ||||||||
Surrender of restricted stock and performance share awards | ( | ) | ( | ) | ||||
Retirement of common stock | ( | ) | ( | ) | ||||
Retirement of treasury stock | ( | ) | ||||||
Common shares at June 30, 2019 | ||||||||
Share Repurchase Program
At the end of 2018, the Company had outstanding authorization from the board of directors to purchase up to $443.5 of Company common stock. During January 2019, the Company purchased 0.8 shares of its common stock at an average price of $131.71 for a total cost of $100.1 under this plan. On February 6, 2019, the board of directors replaced the Company's existing share repurchase plan with a new plan authorizing repurchase of up to $1.25 billion of the Company's common stock. The repurchase authorization
17
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
has no expiration. During the three months ended June 30, 2019, the Company purchased 1.3 shares of its common stock at an average price of $159.13 for a total cost of $199.9 . As of June 30, 2019, the Company had outstanding authorization from the board of directors to purchase up to $1.05 billion of the Company's common stock.
Accumulated Other Comprehensive Earnings
The components of accumulated other comprehensive earnings are as follows:
Foreign Currency Translation Adjustments | Net Benefit Plan Adjustments | Accumulated Other Comprehensive Earnings (Loss) | |||||||||
Balance at December 31, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Other comprehensive earnings before reclassifications | |||||||||||
Tax effect of adjustments | ( | ) | ( | ) | |||||||
Balance at June 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
10. | INCOME TAXES |
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 gross unrecognized income tax benefits were $25.6 and $18.0 at June 30, 2019, and December 31, 2018, respectively. It is anticipated that the amount of the unrecognized income tax benefits will change within the next 12 months; however, these changes are not expected to have a significant impact on the results of operations, cash flows or the financial position of the Company.
As of June 30, 2019, and December 31, 2018, $25.6 and $18.0 , respectively, are the approximate amounts of gross unrecognized income tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.
The Company recognizes interest and penalties related to unrecognized income tax benefits in income tax expense. Accrued interest and penalties related to uncertain tax positions totaled $10.3 and $8.7 as of June 30, 2019, and December 31, 2018, respectively.
The Company has substantially concluded all U.S. federal income tax matters for years through 2014. Substantially all material state and local, and foreign income tax matters have been concluded through 2013 and 2014, respectively.
The IRS has not initiated a new examination of any of the Company's federal income tax returns. The Company has various state and foreign income tax examinations ongoing throughout the year. The Company believes adequate provisions have been recorded related to all open tax years.
11. | COMMITMENTS AND CONTINGENCIES |
The Company is involved from time to time in various claims and legal actions, including arbitrations, class actions, and other litigation (including those described in more detail below), arising in the ordinary course of business. Some of these actions involve claims that are substantial in amount. These matters include, but are not limited to, intellectual property disputes; commercial and contract disputes; professional liability claims; employee-related matters; and inquiries, including subpoenas and other civil investigative demands, from governmental agencies, Medicare or Medicaid payers and MCOs reviewing billing practices or requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or third parties. The Company receives civil investigative demands or other inquiries from various governmental bodies in the ordinary course of its business. Such inquiries can relate to the Company or other parties, including physicians and other health care providers. The Company works cooperatively to respond to appropriate requests for information.
The Company also is named from time to time in suits brought under the qui tam provisions of the False Claims Act and comparable state laws. These suits typically allege that the Company has made false statements and/or certifications in connection with claims for payment from U.S. federal or state healthcare programs. The suits may remain under seal (hence, unknown to the Company) for some time while the government decides whether to intervene on behalf of the qui tam plaintiff. Such claims are an inevitable part of doing business in the healthcare field today.
18
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
The Company believes that it is in compliance in all material respects with all statutes, regulations and other requirements applicable to its commercial laboratory operations and drug development support services. The healthcare diagnostics and drug development industries are, however, subject to extensive regulation, and the courts have not interpreted many of the applicable statutes and regulations. Therefore, the applicable statutes and regulations could be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these statutes and regulations include significant civil and criminal penalties, fines, the loss of various licenses, certificates and authorizations, additional liabilities from third-party claims, and/or exclusion from participation in government programs.
Many of the current claims and legal actions against the Company are in preliminary stages, and many of these cases seek an indeterminate amount of damages. The Company records an aggregate legal reserve, which is determined using calculations based on historical loss rates and assessment of trends experienced in settlements and defense costs. In accordance with FASB Accounting Standards Codification Topic 450 “Contingencies,” the Company establishes reserves for judicial, regulatory, and arbitration matters outside the aggregate legal reserve if and when those matters present loss contingencies that are both probable and estimable and would exceed the aggregate legal reserve. When loss contingencies are not both probable and estimable, the Company does not establish separate reserves.
The Company is unable to estimate a range of reasonably probable loss for the proceedings described in more detail below in which damages either have not been specified or, in the Company's judgment, are unsupported and/or exaggerated and (i) the proceedings are in early stages; (ii) there is uncertainty as to the outcome of pending appeals or motions; (iii) there are significant factual issues to be resolved; and/or (iv) there are novel legal issues to be presented. For these proceedings, however, the Company does not believe, based on currently available information, that the outcomes will have a material adverse effect on the Company's financial condition, though the outcomes could be material to the Company's operating results for any particular period, depending, in part, upon the operating results for such period.
As previously reported, the Company responded to an October 2007 subpoena from the U.S. Department of Health & Human Services Office of Inspector General's regional office in New York. On August 17, 2011, the U.S. District Court for the Southern District of New York unsealed a False Claims Act lawsuit, United States of America ex rel. NPT Associates v. Laboratory Corporation of America Holdings, which alleges that the Company offered UnitedHealthcare kickbacks in the form of discounts in return for Medicare business. The Plaintiff's Third Amended Complaint further alleges that the Company's billing practices violated the False Claims Acts of 14 states and the District of Columbia. The lawsuit seeks actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. Neither the U.S. government nor any state government has intervened in the lawsuit. The Company's Motion to Dismiss was granted in October 2014 and Plaintiff was granted the right to replead. On January 11, 2016, Plaintiff filed a motion requesting leave to file an amended complaint under seal and to vacate the briefing schedule for the Company's Motion to Dismiss, while the government reviews the amended complaint. The Court granted the motion and vacated the briefing dates. Plaintiff then filed the Amended Complaint under seal. The Company will vigorously defend the lawsuit.
In addition, the Company has received various other subpoenas since 2007 related to Medicaid billing. In October 2009, the Company received a subpoena from the State of Michigan Department of Attorney General seeking documents related to its billing to Michigan Medicaid. The Company cooperated with this request. In October 2013, the Company received a Civil Investigative Demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The Company cooperated with this request. On October 5, 2018, the Company received a second Civil Investigative Demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The Company is cooperating with this request.
On May 2, 2013, the Company was served with a False Claims Act lawsuit, State of Georgia ex rel. Hunter Laboratories, LLC and Chris Riedel v. Quest Diagnostics Incorporated, et al., filed in the State Court of Fulton County, Georgia. The lawsuit, filed by a competitor laboratory, alleges that the Company overcharged Georgia's Medicaid program. The State of Georgia filed a Notice of Declination on August 13, 2012, before the Company was served with the complaint. The case was removed to the U.S. District Court for the Northern District of Georgia. The lawsuit sought actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. On March 14, 2014, the Company's Motion to Dismiss was granted. The Plaintiffs repled their complaint, and the Company filed a Motion to Dismiss the First Amended Complaint. In May 2015, the Court dismissed the Plaintiffs' anti-kickback claim and remanded the remaining state law claims to the State Court of Fulton County. In July 2015, the Company filed a Motion to Dismiss these remaining claims. The Plaintiffs filed an opposition to the Company's Motion to Dismiss in August 2015. Also, the State of Georgia filed a brief as amicus curiae. In May, 2019, the parties settled the lawsuit.
On August 31, 2015, the Company was served with a putative class action lawsuit, Patty Davis v. Laboratory Corporation of America, et al., filed in the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The complaint alleges
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
that the Company violated the Florida Consumer Collection Practices Act by billing patients who were collecting benefits under the Workers' Compensation Statutes. The lawsuit seeks injunctive relief and actual and statutory damages, as well as recovery of attorney's fees and legal expenses. In April 2017, the Circuit Court granted the Company’s Motion for Judgment on the Pleadings. The Plaintiff has appealed the Circuit Court’s ruling to the Florida Second District Court of Appeal. The Company will vigorously defend the lawsuit.
In December 2014, the Company received a Civil Investigative Demand issued pursuant to the U.S. False Claims Act from the U.S. Attorney's Office for South Carolina, which requested information regarding alleged remuneration and services provided by the Company to physicians who also received draw and processing/handling fees from competitor laboratories Health Diagnostic Laboratory, Inc. (HDL) and Singulex, Inc. (Singulex). The Company cooperated with the request. On April 4, 2018, the U.S. District Court for the District of South Carolina, Beaufort Division, unsealed a False Claims Act lawsuit, United States of America ex rel. Scarlett Lutz, et al. v. Laboratory Corporation of America Holdings, which alleges that the Company's financial relationships with referring physicians violate federal and state anti-kickback statutes. The Plaintiffs' Fourth Amended Complaint further alleges that the Company conspired with HDL and Singulex in violation of the Federal False Claims Act and the California and Illinois insurance fraud prevention acts by facilitating HDL's and Singulex's offers of illegal inducements to physicians and the referral of patients to HDL and Singulex for laboratory testing. The lawsuit seeks actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. Neither the U.S. government nor any state government has intervened in the lawsuit. The Company filed a Motion to Dismiss seeking the dismissal of the claims asserted under the California and Illinois insurance fraud prevention statutes, the conspiracy claim, the reverse False Claims Act claim, and all claims based on the theory that the Company performed medically unnecessary testing. On January 16, 2019, the Court entered an order granting in part and denying in part the Motion to Dismiss. The Court dismissed the Plaintiffs' claims based on the theory that the Company performed medically unnecessary testing, the claims asserted under the California and Illinois insurance fraud prevention statutes, and the reverse False Claims Act claim. The Court denied the Motion to Dismiss as to the conspiracy claim. The Company will vigorously defend the lawsuit.
On August 3, 2016, the Company was served with a putative class action lawsuit, Daniel L. Bloomquist v. Covance Inc., et al., filed in the Superior Court of California, County of San Diego. The Complaint alleges that Covance Inc. violated the California Labor Code and California Business & Professions Code by failing to provide overtime wages, failing to provide meal and rest periods, failing to pay for all hours worked, failing to pay for all wages owed upon termination, and failing to provide accurate itemized wage statements to Clinical Research Associates and Senior Clinical Research Associates employed by Covance in California. The lawsuit seeks monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. On October 13, 2016, the case was removed to the U.S. District Court for the Southern District of California. On May 3, 2017, the U.S. District Court for the Southern District of California remanded the case to the Superior Court. The Company will vigorously defend the lawsuit.
Prior to the Company's acquisition of Sequenom, Inc. (Sequenom) between August 15, 2016, and August 24, 2016, six putative class-action lawsuits were filed on behalf of purported Sequenom stockholders (captioned Malkoff v. Sequenom, Inc., et al., No. 16-cv-02054- JAH-BLM, Gupta v. Sequenom, Inc., et al., No. 16-cv-02084-JAH-KSC, Fruchter v. Sequenom, Inc., et al., No. 16-cv-02101- WQH-KSC, Asiatrade Development Ltd. v. Sequenom, Inc., et al., No. 16-cv-02113-AJB-JMA, Nunes v. Sequenom, Inc., et al., No. 16-cv-02128-AJB-MDD, and Cusumano v. Sequenom, Inc., et al., No. 16-cv-02134-LAB-JMA) in the U.S. District Court for the Southern District of California challenging the acquisition transaction. The complaints asserted claims against Sequenom and members of its board of directors (the Individual Defendants). The Nunes action also named the Company and Savoy Acquisition Corp. (Savoy), a wholly owned subsidiary of the Company, as defendants. The complaints alleged that the defendants violated Sections 14(e), 14(d)(4) and 20 of the Securities Exchange Act of 1934 by failing to disclose certain allegedly material information. In addition, the complaints in the Malkoff action, Asiatrade action, and the Cusumano action alleged that the Individual Defendants breached their fiduciary duties to Sequenom shareholders. The actions sought, among other things, injunctive relief enjoining the merger. On August 30, 2016, the parties entered into a Memorandum of Understanding (MOU) in each of the above-referenced actions. On September 6, 2016, the Court entered an order consolidating for all pre-trial purposes the six individual actions described above under the caption In re Sequenom, Inc. Shareholder Litig., Lead Case No. 16-cv-02054-JAH-BLM, and designating the complaint from the Malkoff action as the operative complaint for the consolidated action. On November 11, 2016, two competing motions were filed by two separate stockholders (James Reilly and Shikha Gupta) seeking appointment as lead plaintiff under the terms of the Private Securities Litigation Reform Act of 1995. On June 7, 2017, the Court entered an order declaring Mr. Reilly as the lead plaintiff and approving Mr. Reilly's selection of lead counsel. The parties agree that the MOU has been terminated. The Plaintiffs filed a Consolidated Amended Class Action Complaint on July 24, 2017, and the Defendants filed a Motion to Dismiss, which remains pending. On March 13, 2019, the Court stayed the action in its entirety pending the U.S. Supreme Court's anticipated decision in Emulex Corp. v. Varjabedian. On April 23, 2019, however, the U.S.
20
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted. The Company will vigorously defend the lawsuit.
On March 10, 2017, the Company was served with a putative class action lawsuit, Victoria Bouffard, et al. v. Laboratory Corporation of America Holdings, filed in the U.S. District Court for the Middle District of North Carolina. The complaint alleges that the Company's patient list prices unlawfully exceed the rates negotiated for the same services with private and public health insurers in violation of various state consumer protection laws. The lawsuit also alleges breach of implied contract or quasi-contract, unjust enrichment, and fraud. The lawsuit seeks statutory, exemplary, and punitive damages, injunctive relief, and recovery of attorney's fees and costs. In May 2017, the Company filed a Motion to Dismiss Plaintiffs' Complaint and Strike Class Allegations; the Motion to Dismiss was granted in March 2018 without prejudice. On October 10, 2017, a second putative class action lawsuit, Sheryl Anderson, et al. v. Laboratory Corporation of America Holdings, was filed in the U.S. District Court for the Middle District of North Carolina. The complaint contained similar allegations and sought similar relief to the Bouffard complaint, and added additional counts regarding state consumer protection laws. On August 10, 2018, the Plaintiffs filed an Amended Complaint, which consolidated the Bouffard and Anderson actions. On September 10, 2018, the Company filed a Motion to Dismiss Plaintiffs' Amended Complaint and Strike Class Allegations, which remains pending. The Company will vigorously defend the lawsuit.
On September 7, 2017, the Company was served with a putative class action lawsuit, John Sealock, et al. v. Covance Market Access Services, Inc., filed in the U.S. District Court for the Southern District of New York. The complaint alleged that Covance Market Access Services, Inc. violated the Fair Labor Standards Act and New York labor laws by failing to provide overtime wages, failing to pay for all hours worked, and failing to provide accurate wage statements. The lawsuit sought monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. In November 2017, the Company filed a Motion to Strike Class Allegations, which was denied. In December 2017, the Plaintiff filed a Motion for Conditional Certification of a Collective Action, which was granted in May 2018. In December 2018, Plaintiff filed, and the Court granted, a second motion to conditionally certify an expanded class to a nationwide class action. This matter has been settled in principle and the settlement is subject to judicial review and approval.
On July 16, 2018, the Company reported that it had detected suspicious activity on its information technology network and was taking steps to respond to and contain the activity. The activity was subsequently determined to be a new variant of ransomware affecting certain LCD information technology systems. As part of its response, the Company took certain systems offline, which temporarily affected test processing and customer access to test results, and also affected certain other information technology systems involved in conducting Company-wide operations. Operations were returned to normal within a few days of the incident. As part of its in-depth investigation into this incident, the Company engaged outside security experts and worked with authorities, including law enforcement. The investigation determined that the ransomware did not and could not transfer patient or client data outside of Company systems and that there was no theft or misuse of patient or client data. The Company cooperated with law enforcement and regulatory authorities with respect to the incident.
The Company has insurance coverage for costs resulting from cyber-attacks and has filed a claim for recovery of its losses resulting from this incident. However, disputes over the extent of insurance coverage for claims are not uncommon and the Company has not recognized any estimated proceeds resulting from this claim. Furthermore, while the Company has not been the subject of any legal proceedings involving this incident, it is possible that the Company could be the subject of claims from persons alleging they suffered damages from the incident, or actions by governmental authorities.
On September 10, 2018, the Company was served with a Labor Code Private Attorneys General Act (LCPAGA) lawsuit, Terri Wilson v. Laboratory Corporation of America Holdings, which was filed in the U.S. District Court for the Northern District of California. Plaintiff alleged claims for failure to pay meal and rest break premiums, failure to provide compliant wage statements, failure to compensate employees for all hours worked, and failure to pay wages upon termination of employment. Plaintiff asserted these actions violated various California Labor Code provisions and constituted an unfair competition practice under California law. The lawsuit sought monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. In June, 2019, the parties settled the lawsuit.
On September 21, 2018, the Company was served with a putative class action lawsuit, Alma Haro v. Laboratory Corporation of America, et al., which was filed in the Superior Court of California, County of Los Angeles. Plaintiff alleges that employees were not properly paid overtime compensation, minimum wages, meal and rest break premiums, did not receive compliant wage statements, and were not properly paid wages upon termination of employment. Plaintiff asserts these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuit seeks monetary damages, civil penalties, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
On December 20, 2018, the Company was served with a putative class action lawsuit, Feckley v. Covance Inc., et al., filed in the Superior Court of California, County of Orange. The complaint alleges that Covance Inc. violated the California Labor Code and California Business & Professions Code by failing to properly pay commissions to employees under a sales incentive
21
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
compensation plan upon their termination of employment. The lawsuit seeks monetary damages, civil penalties, punitive damages, and recovery of attorney’s fees and costs. On January 22, 2018, the case was removed to the U.S. District Court for the Central District of California. The Company will vigorously defend the lawsuit.
On April 1, 2019, Covance Research Products was served with a Grand Jury Subpoena issued by the Department of Justice (DOJ) in Miami, Florida requiring the production of documents related to the importation into the United States of live non-human primate shipments originating from or transiting through China, Cambodia, and/or Vietnam from April 1, 2014 through March 28, 2019. The Company is cooperating with the DOJ.
On April 4, 2019, Tri-Cities Laboratory (a joint venture that was acquired as part of the Pathology Associates Medical Laboratories transaction in May 2017) was served with a subpoena issued by the DOJ in Newark, New Jersey requiring the production of documents related to test orders and payments to various third party companies and individuals. The Company cooperated with the DOJ.
On April 22, 2019, the Company was served with a putative class action lawsuit, Kawa Orthodontics LLP, et al. v. Laboratory Corporation of America Holdings, et al., filed in the U.S. District Court for the Middle District of Florida. The lawsuit alleges that on or about February 6, 2019, the defendants violated the U.S. Telephone Consumer Protection Act (TCPA) by sending unsolicited facsimiles to Plaintiff and at least 40 other recipients without the recipients' prior express invitation or permission. The lawsuit seeks the greater of actual damages or the sum of $0.0005 for each violation, subject to trebling under the TCPA, and injunctive relief. The Company filed a motion to dismiss the case on May 28, 2019. In response to the Motion to Dismiss, the Plaintiff filed an amended complaint, which contains additional allegations, including allegations related to another facsimile. The Company filed a Motion to Dismiss the amended complaint. The Company will vigorously defend the lawsuit.
On May 14, 2019, Retrieval-Masters Creditors Bureau, Inc. d/b/a American Medical Collection Agency (AMCA), an external collection agency, notified the Company about a security incident AMCA experienced that may have involved certain personal information about some of the Company’s patients (the AMCA Incident). The Company referred patient balances to AMCA only when direct collection efforts were unsuccessful. The Company’s systems were not impacted by the AMCA Incident. Upon learning of the AMCA Incident, the Company promptly stopped sending new collection requests to AMCA and stopped AMCA from continuing to work on any pending collection requests from the Company. AMCA informed the Company that it appeared that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019, and that AMCA could not rule out the possibility that personal information on AMCA’s system was at risk during that time period. Information on AMCA’s affected system from the Company may have included name, address, and balance information for the patient and person responsible for payment, along with the patient’s phone number, date of birth, referring physician, and date of service. The Company was later informed by AMCA that health insurance information may have been included for some individuals, and because some insurance carriers utilize the Social Security Number as a subscriber identification number, the Social Security Number for some individuals may also have been affected. No ordered tests, laboratory test results, or diagnostic information from the Company were in the AMCA affected system. The Company notified individuals for whom it had a valid mailing address. For the individuals whose Social Security Number was affected, the notice included an offer to enroll in credit monitoring and identity protection services that will be provided free of charge for 24 months.
Eighteen putative class action lawsuits were filed against the Company related to the AMCA Incident. Numerous similar lawsuits have been filed against other health care providers who used AMCA. The lawsuits against the Company were filed in various United States District Courts. The lawsuits generally allege that the Company did not adequately protect its patients’ data, and assert various causes of action, including but not limited to negligence, breach of implied contract, unjust enrichment, and the violation of state data protection statutes. The lawsuits seek damages on behalf of a class of all affected Company consumers. The attorneys for certain of the Plaintiffs filed a motion with the Judicial Panel on Multi-District Litigation (JPML) seeking to have all cases related to the AMCA Incident consolidated for pre-trial proceedings in a multi-district litigation. The JPML ordered the transfer of the cases to the District of New Jersey. The Company will vigorously defend the multi-district litigation.
Certain governmental entities and individuals have requested information from the Company related to the AMCA Incident. The Company has received requests for information from United States Senators Robert Menendez and Cory A. Booker and from the Attorneys General of Colorado, Connecticut, Illinois, Florida, New York, and Indiana. The request from Indiana includes a Civil Investigative Demand, which requests certain documents from the Company. The Company also provided notice of the AMCA Incident to state and federal regulators where appropriate. The Company is cooperating with these requests.
On June 10, 2019, the Company was served with a class action lawsuit, Ignacio v. Laboratory Corporation of America, filed in Superior Court of the State of California for the County of Los Angeles. Plaintiff alleges that non-exempt employees based in California were not properly paid overtime compensation, minimum wages, meal and rest break premiums, were not indemnified for business expenses, did not receive compliant wage statements, and were not properly paid wages upon termination of
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
employment. Plaintiff asserts these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuit seeks monetary damages, liquidated damages, injunctive relief, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
On June 26, 2019, a class action lawsuit, Jan v. Laboratory Corporation of America, was filed in the Superior Court for the State of California for the County of Sacramento. Plaintiff alleges that non-exempt employees based in California were not properly paid meal and rest break premiums, did not receive compliant wage statements, and were not properly paid wages upon termination of employment. Plaintiff asserts these actions violate various California Labor Code provisions and constitute an unfair competition practice under California law. The lawsuit seeks monetary damages, liquidated damages, injunctive relief, and recovery of attorney's fees and costs. The Company will vigorously defend the lawsuit.
On July 1, 2019, a class action lawsuit, Mitchell v. Covance, Inc. et al., was filed in the United States District Court for the Eastern District of Pennsylvania. Plaintiff alleges that certain individuals employed by Covance Inc. and Chiltern International Inc. were misclassified as exempt employees under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act and were thereby not properly paid overtime compensation. The lawsuit seeks monetary damages, liquidated damages, and recovery of attorneys’ fees and costs. The Company will vigorously defend the lawsuit.
Under the Company's present insurance programs, coverage is obtained for catastrophic exposure as well as those risks required to be insured by law or contract. The Company is responsible for the uninsured portion of losses related primarily to general, professional and vehicle liability, certain medical costs and workers' compensation. The self-insured retentions are on a per-occurrence basis without any aggregate annual limit. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregated liability of claims incurred.
12. |
The Company has two defined contribution retirement plans (401K Plans) which cover substantially all U.S. employees. All employees eligible for the LabCorp 401K Plan receive a minimum 3 % non-elective contribution concurrent with each payroll period. The 401K Plan also permits discretionary contributions by the Company of up to 1 % and up to 3 % of pay for eligible employees based on years of service with the Company. The cost of this plan was $12.9 and $15.8 for the three months ended June 30, 2019, and 2018, respectively, and was $37.1 and $31.8 for the six months ended June 30, 2019, and 2018, respectively. All of the Covance U.S. employees, including legacy Chiltern employees, are eligible to participate in the Covance 401K plan, which features a maximum 4.5 % Company match, based upon a percentage of the employee’s contributions. Chiltern employees were previously eligible to participate in the Chiltern 401K plan, which featured a maximum 3.0 % Company match, based upon a percentage of the employee's contributions. The Chiltern 401K plan merged into the Covance Plan effective January, 7, 2019. The Company incurred expense of $17.9 and $16.5 for the Covance 401K plan during the three months ended June 30, 2019, and 2018, respectively, and $37.8 and $35.3 during the six months ended June 30, 2019, and 2018, respectively. The Company also maintains several other immaterial 401K plans associated with companies acquired over the last several years.
The Company also maintains a frozen defined benefit retirement plan (Company Plan), which as of December 31, 2009, covered substantially all employees. The benefits to be paid under the Company Plan are based on years of credited service through December 31, 2009, and ongoing interest credits. Effective January 1, 2010, the Company Plan was closed to new participants. The Company’s policy is to fund the Company Plan with at least the minimum amount required by applicable regulations.
The Company maintains a second, unfunded, non-contributory, non-qualified defined benefit retirement plan (PEP), which as of December 31, 2009, covered substantially all of its senior management group. The PEP supplements the Company Plan and was closed to new participants effective January 1, 2010.
The effect on operations for the Company Plan and the PEP is summarized as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Service cost for administrative expenses | $ | $ | $ | $ | |||||||||||
Interest cost on benefit obligation | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net amortization and deferral | |||||||||||||||
Defined benefit plan costs | $ | $ | $ | $ | |||||||||||
During the six months ended June 30, 2019, the Company made no contributions to the Company Plan.
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
(German Plan), all of which are legacy plans of previously acquired companies. Benefit amounts for all three plans are based upon years of service and compensation. The German plan is unfunded while the U.K. pension plans are funded. The Company’s funding policy has been to contribute annually amounts at least equal to the local statutory funding requirements.
U.K. Plans | |||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Service cost for administrative expenses | $ | $ | $ | $ | |||||||||||
Interest cost on benefit obligation | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Defined benefit plan costs | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
U.K. Plans | |||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Assumptions used to determine defined benefit plan cost | |||||||||||
Discount rate | % | % | % | % | |||||||
Expected return on assets | % | % | % | % | |||||||
Salary increases | % | % | % | % | |||||||
German Plan | |||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Service cost for administrative expenses | $ | $ | $ | $ | |||||||||||
Interest cost on benefit obligation | |||||||||||||||
Defined benefit plan costs | $ | $ | $ | $ | |||||||||||
Assumptions used to determine defined benefit plan cost | |||||||||||||||
Discount rate | % | % | % | % | |||||||||||
Expected return on assets | N/A | N/A | N/A | N/A | |||||||||||
Salary increases | % | % | % | % | |||||||||||
13. | FAIR VALUE MEASUREMENTS |
The Company’s population of financial assets and liabilities subject to fair value measurements as of June 30, 2019, and December 31, 2018, is as follows:
Fair Value Measurements as of | |||||||||||||||||
Fair Value as of | June 30, 2019 | ||||||||||||||||
Balance Sheet | Using Fair Value Hierarchy | ||||||||||||||||
Classification | June 30, 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||
Noncontrolling interest put | Noncontrolling interest | $ | $ | $ | $ | ||||||||||||
Cross currency swap asset | Other assets, net | ||||||||||||||||
Interest rate swap | Other assets, net | ||||||||||||||||
Cash surrender value of life insurance policies | Other assets, net | ||||||||||||||||
Deferred compensation liability | Other liabilities | ||||||||||||||||
Contingent consideration | Other liabilities | ||||||||||||||||
Investment in equity securities | Prepaid expenses and other | ||||||||||||||||
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Fair Value Measurements as of | |||||||||||||||||
Fair Value as of | December 31, 2018 | ||||||||||||||||
Balance Sheet | Using Fair Value Hierarchy | ||||||||||||||||
Classification | December 31, 2018 | Level 1 | Level 2 | Level 3 | |||||||||||||
Noncontrolling interest put | Noncontrolling interest | $ | $ | $ | $ | ||||||||||||
Cross currency swap liability | Other liabilities | ||||||||||||||||
Interest rate swap | Other liabilities | ||||||||||||||||
Cash surrender value of life insurance policies | Other assets, net | ||||||||||||||||
Deferred compensation liability | Other liabilities | ||||||||||||||||
Contingent consideration | Other liabilities | ||||||||||||||||
Fair Value Measurement of Level 3 Assets | Contingent Consideration | |||
Balance at December 31, 2018 | ||||
Addition | ||||
Balance at June 30, 2019 | $ | |||
The Company has a noncontrolling interest put related to its Ontario subsidiary that has been classified as mezzanine equity in the Company’s condensed consolidated balance sheets. The noncontrolling interest put is valued at its contractually determined value, which approximates fair value.
The Company offers certain employees the opportunity to participate in an employee-funded deferred compensation plan (DCP). A participant's deferrals are allocated by the participant to one or more of 22 measurement funds, which are indexed to externally managed funds. From time to time, to offset the cost of the growth in the participant's investment accounts, the Company purchases life insurance policies, with the Company named as beneficiary of the policies. Changes in the cash surrender value of these policies are based upon earnings and changes in the value of the underlying investments, which are typically invested in a manner similar to the participants' allocations. Changes in the fair value of the DCP obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash surrender value and the DCP obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the hypothetical investments.
The Company has contingent accrued earn-out business acquisition consideration liabilities which were recorded at fair value on the acquisition date and are remeasured quarterly based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3.
14. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
The Company addresses its exposure to market risks, principally the market risk associated with changes in interest rates and foreign currency exchange rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such as interest rate and cross currency swap agreements (see Interest Rate Swap and Cross Currency Swap sections below). Although the Company’s zero-coupon subordinated notes contain features that are considered to be embedded derivative instruments (see Embedded Derivatives Related to the Zero-Coupon Subordinated Notes section below), the Company does not hold or issue derivative financial instruments for trading purposes. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not believe that its exposure to market risk is material to the Company’s financial position or results of operations.
25
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Interest Rate Swap
The Company is party to two fixed-to-variable interest rate swap agreements for its 4.625 % senior notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus 2.298 % to hedge against changes in the fair value of a portion of the Company's long term debt. These derivative financial instruments are accounted for as fair value hedges of the senior notes due 2020. These interest rate swaps are included in other long-term assets or other long-term liabilities, as applicable, and added to or subtracted from the value of the senior notes, with an aggregate fair value of $3.7 (asset) and $3.1 (liability) at June 30, 2019, and December 31, 2018, respectively. As the specific terms and notional amounts of the derivative financial instruments match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges and accordingly, there is no impact to the Company's Condensed Consolidated Statements of Operations.
Carrying amount of hedged liabilities as of | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities as of | |||||||||||||||
June 30, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||
Balance Sheet Line Item in which Hedged Items are Included | ||||||||||||||||
Long-term debt, less current portion | $ | $ | $ | $ | ( | ) | ||||||||||
Cross Currency Swap
During the fourth quarter of 2018, the Company entered into six U.S. Dollar to Swiss Franc cross-currency swap agreements with an aggregate notional value of $600.0 and which are accounted for as a hedge against its net investment in a Swiss subsidiary. Of the notional value, $300.0 matures in 2022 and $300.0 matures in 2025. These cross currency swaps maturing in 2022 and 2025 are included in other long-term assets with an aggregate fair value of $0.3 and $0.9 , respectively, as of June 30, 2019 and are included in other long-term liabilities with an aggregate fair value of $1.0 and $1.8 , respectively, as of December 31, 2018. Changes in the fair value of the cross-currency swaps are charged or credited through accumulated other comprehensive income in the Condensed Consolidated Balance Sheet until the hedged item is recognized in earnings. The cumulative amount of the fair value hedging adjustment included in the current value of the cross currency swaps is $(7.8 ) and $4.0 , respectively, for the three and six months ended June 30, 2019, and was recognized as currency translation within the Condensed Consolidated Statement of Comprehensive Earnings. There were no amounts reclassified from the Condensed Consolidated Statement of Comprehensive Earnings to the Condensed Consolidated Statement of Operations during the three months ended June 30, 2019.
The table below presents the fair value of derivatives on a gross basis and the balance sheet classification of those instruments:
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||
Fair Value of Derivative | Fair Value of Derivative | ||||||||||||||||||||||||
Balance Sheet Caption | Asset | Liability | U.S. Dollar Notional | Asset | Liability | U.S. Dollar Notional | |||||||||||||||||||
Derivatives Designated as Hedging Instruments | |||||||||||||||||||||||||
Interest rate swap | Other assets, net or Other liabilities | $ | $ | — | $ | $ | — | $ | ( | ) | $ | ||||||||||||||
Cross currency swaps | Other assets, net or Other liabilities | $ | $ | — | $ | $ | — | $ | ( | ) | $ | ||||||||||||||
The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value hedging relationships:
Amount of pre-tax gain/(loss) included in other comprehensive income | Amounts reclassified to the Statement of Operations | Amount of pre-tax gain/(loss) included in other comprehensive income | Amounts reclassified to the Statement of Operations | |||||||||||||||||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Interest rate swap contracts | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
Cross currency swaps | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
No gains or losses from derivative instruments classified as hedging instruments have been recognized into income for the three and six months ended June 30, 2019 and 2018.
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Embedded Derivatives Related to the Zero-Coupon Subordinated Notes
The Company’s zero-coupon subordinated notes contain the following two features that are considered to be embedded derivative instruments under authoritative guidance in connection with accounting for derivative instruments and hedging activities:
1) | The Company will pay contingent cash interest on the zero-coupon subordinated notes after September 11, 2006, if the average market price of the notes equals |
2) | Holders may surrender zero-coupon subordinated notes for conversion during any period in which the rating assigned to the zero-coupon subordinated notes by Standard & Poor’s Ratings Services is BB- or lower. |
The Company believes these embedded derivatives had no fair value at June 30, 2019, and December 31, 2018. These embedded derivatives also had no impact on the Condensed Consolidated Statements of Operations for the six months ended June 30, 2019, and 2018.
Other Derivative Instruments
15. | SUPPLEMENTAL CASH FLOW INFORMATION |
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Supplemental schedule of cash flow information: | |||||||
Cash paid during period for: | |||||||
Interest | $ | $ | |||||
Income taxes, net of refunds | |||||||
Disclosure of non-cash financing and investing activities: | |||||||
Conversion of zero-coupon convertible debt | |||||||
Change in accrued property, plant and equipment | ( | ) | |||||
Floating rate secured note receivable due 2022 from the sale of CRP | |||||||
16. | BUSINESS SEGMENT INFORMATION |
The following table is a summary of segment information for the three and six months ended June 30, 2019, and 2018. The management approach has been used to present the following segment information. This approach is based upon the way the management of the Company organizes its business unit operations for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating segment performance and deciding how to allocate resources to segments. The Company’s chief executive officer has been identified as the CODM.
Segment asset information is not presented because it is not used by the CODM at the segment level. Operating earnings of each segment represents net revenues less directly identifiable expenses to arrive at operating income for the segment. General management and administrative corporate expenses are included in general corporate expenses below. The table below represents information about the Company’s reporting segments for the three and six months ended June 30, 2019, and 2018:
27
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues: | |||||||||||||||
LCD | $ | $ | $ | $ | |||||||||||
CDD | |||||||||||||||
Intercompany eliminations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Revenues | |||||||||||||||
Operating earnings: | |||||||||||||||
LCD | |||||||||||||||
CDD | |||||||||||||||
Unallocated corporate expenses | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total operating income | |||||||||||||||
Other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Earnings before income taxes | |||||||||||||||
Provision for income taxes | |||||||||||||||
Net earnings | |||||||||||||||
Less (earnings) loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | |||||||||
Net income attributable to Laboratory Corporation of America Holdings | $ | $ | $ | $ | |||||||||||
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Laboratory Corporation of America® Holdings together with its subsidiaries (the Company) has made in this report, and from time to time may otherwise make in its public filings, press releases and discussions by Company management, forward-looking statements concerning the Company’s operations, performance and financial condition, as well as its strategic objectives. Some of these forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or the negative of those words or other comparable terminology. Such forward-looking statements are subject to various risks and uncertainties and the Company claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those currently anticipated due to a number of factors in addition to those discussed elsewhere herein and in the Company’s other public filings, press releases and discussion with Company management, including:
1. | changes in government and third-party payer regulations, reimbursement, or coverage policies or other future reforms in the healthcare system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (e.g., health insurance exchanges) affecting governmental and third-party coverage or reimbursement for commercial laboratory testing, including the impact of the Protecting Access to Medicare Act of 2014 (PAMA); |
2. | significant monetary damages, fines, penalties, assessments, refunds, repayments, damage to the Company’s reputation, unanticipated compliance expenditures, and/or exclusion or debarment from or ineligibility to participate in government programs, among other adverse consequences, arising from enforcement of anti-fraud and abuse laws and other laws applicable to the Company in jurisdictions in which the Company conducts business; |
3. | significant fines, penalties, costs, unanticipated compliance expenditures and/or damage to the Company’s reputation arising from the failure to comply with applicable privacy and security laws and regulations, including the Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act, the European Union's General Data Protection Regulation and similar laws and regulations in jurisdictions in which the Company conducts business; |
4. | loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of applicable licensing laws or regulations regarding the operation of clinical laboratories and the delivery of clinical laboratory test results, including, but not limited to, the U.S. Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory Improvement Amendments of 1988 and similar laws and regulations in jurisdictions in which the Company conducts business; |
5. | penalties or loss of license arising from the failure to comply with applicable occupational and workplace safety laws and regulations, including the U.S. Occupational Safety and Health Administration requirements and the U.S. Needlestick Safety and Prevention Act and similar laws and regulations in jurisdictions in which the Company conducts business; |
6. | fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, damage to the Company’s reputation, injunctions, or criminal prosecution arising from failure to maintain compliance with current good manufacturing practice regulations and similar requirements of various regulatory agencies in jurisdictions in which the Company conducts business; |
7. | sanctions or other remedies, including fines, unanticipated compliance expenditures, enforcement actions, injunctions or criminal prosecution arising from failure to comply with the Animal Welfare Act or applicable national, state and local laws and regulations in jurisdictions in which the Company conducts business; |
8. | changes in testing guidelines or recommendations by government agencies, medical specialty societies and other authoritative bodies affecting the utilization of laboratory tests; |
9. | changes in applicable government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests, drug development, or the conduct of drug development and medical device and diagnostic studies and trials, including regulations and policies of the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the Medicine and Healthcare products Regulatory Agency in the United Kingdom (U.K.), the State Drug Administration in China (formerly the China Food and Drug Administration), the Pharmaceutical and Medical Devices Agency in Japan, the European Medicines Agency and similar regulations and policies of agencies in jurisdictions in which the Company conducts business; |
29
10. | changes in government regulations or reimbursement pertaining to the biopharmaceutical and medical device and diagnostic industries, changes in reimbursement of biopharmaceutical products or reduced spending on research and development by biopharmaceutical customers; |
11. | liabilities that result from the failure to comply with corporate governance requirements; |
12. | increased competition, including price competition, potential reduction in rates in response to price transparency and consumerism, competitive bidding and/or changes or reductions to fee schedules and competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry; |
13. | changes in payer mix or payment structure, including insurance carrier participation in health insurance exchanges, an increase in capitated reimbursement mechanisms, the impact of a shift to consumer-driven health plans or plans carrying an increased level of member cost-sharing, and adverse changes in payer reimbursement or payer coverage policies (implemented directly or through a third-party utilization management organization) related to specific diagnostic tests, categories of testing or testing methodologies; |
14. | failure to retain or attract managed care organization (MCO) business as a result of changes in business models, including new risk-based or network approaches, out-sourced Laboratory Network Management or Utilization Management companies, or other changes in strategy or business models by MCOs; |
15. | failure to obtain and retain new customers, an unfavorable change in the mix of testing services ordered, or a reduction in tests ordered, specimens submitted or services requested by existing customers; |
16. | difficulty in maintaining relationships with customers or retaining key employees as a result of uncertainty surrounding the integration of acquisitions and the resulting negative effects on the business of the Company; |
17. | consolidation and convergence of MCOs, biopharmaceutical companies, health systems, large physician organizations and other customers, potentially causing material shifts in insourcing, utilization, pricing and reimbursement, including full and partial risk-based models; |
18. | failure to effectively develop and deploy new systems, system modifications or enhancements required in response to evolving market and business needs; |
19. | customers choosing to insource services that are or could be purchased from the Company; |
20. | failure to identify, successfully close and effectively integrate and/or manage acquisitions of new businesses; |
21. | inability to achieve the expected benefits and synergies of newly-acquired businesses, including due to items not discovered in the due-diligence process, and the impact on the Company's cash position, levels of indebtedness and stock price; |
22. | termination, loss, delay, reduction in scope or increased costs of contracts, including large contracts and multiple contracts; |
23. | liability arising from errors or omissions in the performance of testing services, contract research services or other contractual arrangements; |
24. | changes or disruption in the provision or transportation of services or supplies provided by third parties, or their termination for failure to follow the Company's performance standards and requirements; |
25. | damage or disruption to the Company's facilities; |
26. | damage to the Company's reputation, loss of business, or other harm from acts of animal rights activists or potential harm and/or liability arising from animal research activities; |
27. | adverse results in litigation matters; |
28. | inability to attract and retain experienced and qualified personnel; |
29. | failure to develop or acquire licenses for new or improved technologies, such as point-of-care testing, mobile health technologies, and digital pathology, or potential use of new technologies by customers and/or consumers to perform their own tests; |
30. | substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests; |
31. | failure to obtain, maintain and enforce intellectual property rights for protection of the Company's products and services and defend against challenges to those rights; |
32. | scope, validity and enforceability of patents and other proprietary rights held by third parties that may impact the Company's ability to develop, perform, or market the Company's products or services or operate its business; |
30
33. | business interruption or other impact on the business due to adverse weather, fires and/or other natural disasters, acts of war, terrorism or other criminal acts, and/or widespread outbreak of influenza or other pandemic illness; |
34. | discontinuation or recalls of existing testing products; |
35. | a failure in the Company's information technology systems, including with respect to testing turnaround time and billing processes, or the failure of the Company or its third-party suppliers and vendors to maintain the security of business information or systems or to protect against cybersecurity attacks such as denial of service attacks, malware, ransomware and computer viruses, or delays or failures in the development and implementation of the Company’s automation platforms, any of which could result in a negative effect on the Company’s performance of services, a loss of business or increased costs, damages to the Company’s reputation, significant litigation exposure, an inability to meet required financial reporting deadlines, or the failure to meet future regulatory or customer information technology, data security and connectivity requirements; |
36. | business interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, general labor unrest or failure to comply with labor or employment laws; |
37. | failure to maintain the Company's days sales outstanding levels, cash collections (in light of increasing levels of patient responsibility), profitability and/or reimbursement arising from unfavorable changes in third-party payer policies, payment delays introduced by third party benefit management organizations and increasing levels of patient payment responsibility; |
38. | impact on the Company's revenues, cash collections and the availability of credit for general liquidity or other financing needs arising from a significant deterioration in the economy or financial markets or in the Company's credit ratings by Standard &Poor's and/or Moody's; |
39. | failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment grade rating; |
40. | changes in reimbursement by foreign governments and foreign currency fluctuations; |
41. | inability to obtain certain billing information from physicians, resulting in increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues; |
42. | expenses and risks associated with international operations, including, but not limited to, compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, other applicable anti-corruption laws and regulations, trade sanction laws and regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions; |
43. | failure to achieve expected efficiencies and savings in connection with the Company's business process improvement initiatives; |
44. | changes in tax laws and regulations or changes in their interpretation, including the Tax Cuts and Jobs Act (TCJA); and |
45. | global economic conditions and government and regulatory changes, including, but not limited to the U.K.'s announced intention to exit from the European Union. |
GENERAL (dollars in millions, except per share data)
During the six months ended June 30, 2019, revenues were $5,672.9, a decrease of 0.7% from $5,714.6 in the first half of 2018. The decline in revenue was primarily due to the disposition of businesses of 1.9% and foreign currency translation of 0.8%, partially offset by acquisitions of 1.0% and organic growth of 1.0% (which includes the negative impact from PAMA of 1.0%).
Effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842 Leases using the effective date method. The Company elected the package of practical expedients, which includes not reassessing whether existing contracts contain leases under the new definition of a lease, reassessing the classification of existing leases, and reassessing whether previously capitalized initial direct costs qualify for capitalization under the new standard. The Company also elected not to separate lease and non-lease components. The adoption of this standard resulted in the recording of $770.0 of additional operating lease liabilities as of March 31, 2019.
On June 3, 2019, the Company's CDD segment completed the acquisition of Envigo's nonclinical contract research services business, expanding CDD's global nonclinical drug development capabilities with additional locations and resources. Envigo also completed the acquisition of the Covance Research Products (CRP) business, which was part of the CDD segment. The two companies will continue to collaborate through a multi-year, renewable supply agreement. The Company paid cash consideration of $601.0, received a floating rate secured note of $110.0, and recorded a loss on sale of CRP of $8.8. The Company funded the transaction through a new term loan facility.
The Company remains on track to deliver $150.0 of net savings from CDD's three-year LaunchPad initiative by the end of 2020. The Company expects phase II of LCD’s LaunchPad initiative to deliver approximately $200.0 in net savings over the next
31
three years, while incurring approximately $40.0 in one-time implementation costs. Approximately one-third of the total savings are expected to be realized each year.
On May 14, 2019, Retrieval-Masters Creditors Bureau, Inc. d/b/a American Medical Collection Agency (AMCA), an external collection agency, notified the Company about a security incident AMCA experienced that may have involved certain personal information about some of the Company’s patients (the AMCA Incident). The Company referred patient balances to AMCA only when direct collection efforts were unsuccessful. The Company’s systems were not impacted by the AMCA Incident. Upon learning of the AMCA Incident, the Company promptly stopped sending new collection requests to AMCA and stopped AMCA from continuing to work on any pending collection requests from the Company. AMCA informed the Company that it appeared that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019, and that AMCA could not rule out the possibility that personal information on AMCA’s system was at risk during that time period. Information on AMCA’s affected system from the Company may have included name, address, and balance information for the patient and person responsible for payment, along with the patient’s phone number, date of birth, referring physician, and date of service. The Company was later informed by AMCA that health insurance information may have been included for some individuals, and because some insurance carriers utilize the Social Security Number as a subscriber identification number, the Social Security Number for some individuals may also have been affected. No ordered tests, laboratory test results, or diagnostic information from the Company were in the AMCA affected system. The Company notified individuals for whom it had a valid mailing address. For the individuals whose Social Security Number was affected, the notice included an offer to enroll in credit monitoring and identity protection services that will be provided free of charge for 24 months.
PAMA, which went into effect on January 1, 2018, resulted in a net reduction of revenue of approximately $70.0 in 2018 from all payers affected by the Clinical Lab Fee Schedule. A reduction of approximately $54.0 has been incurred through the first half of 2019. Unless further implementation of PAMA is delayed or changed, an additional reduction of approximately $61.0 is expected for 2019.
RESULTS OF OPERATIONS (dollars in millions)
Three months ended June 30, 2019, compared with three months ended June 30, 2018
Revenues
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
LCD | $ | 1,760.9 | $ | 1,814.0 | (2.9 | )% | ||||
CDD | 1,126.3 | 1,054.2 | 6.8 | % | ||||||
Intercompany eliminations | (5.5 | ) | (1.9 | ) | 189.5 | % | ||||
Total | $ | 2,881.7 | $ | 2,866.3 | 0.5 | % | ||||
The increase in revenues for the three months ended June 30, 2019, as compared with the corresponding period in 2018 was 0.5%. The increase in revenues was primarily due to acquisitions of 1.4% and organic growth of 1.7% (which includes the negative impact from PAMA of (0.9%)), partially offset by the disposition of businesses of 1.9% and negative foreign currency translation of 0.7%.
LCD revenues for the quarter were $1,760.9, a decrease of 2.9% compared to revenues of $1,814.0 in the second quarter of 2018. The decrease in revenues was due to the negative impact from disposition of businesses of 2.8%, negative foreign currency translation of 0.2% and a decline in organic revenues versus prior year of 0.3%, partially offset by acquisitions of 0.4%. Organic revenue growth in constant currency of negative 0.3% includes the impact from PAMA of 1.5% and fewer revenue days of 0.6%.
Total LCD volume (measured by requisitions) excluding the disposition of businesses, decreased by 0.9%, as acquisition volume contributed 0.2% and organic volume declined by 1.2%. Organic volume was negatively impacted by approximately 2.5% from the combination of lower consumer genetics, managed care contract changes, and fewer revenue days. Excluding the disposition of businesses, revenue per requisition increased by 1.0%, despite the negative impact from PAMA of 1.5%.
CDD revenues for the second quarter were $1,126.3, an increase of 6.8% over revenues of $1,054.2 in the second quarter of 2018. The increase was primarily due to organic growth of 5.5% and acquisitions of 3.3%, partially offset by negative foreign currency translation of 1.6% and a business disposition of 0.3%.
32
Cost of Revenues
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Cost of revenues | $ | 2,056.9 | $ | 2,031.2 | 1.3 | % | ||||
Cost of revenues as a % of revenues | 71.4 | % | 70.9 | % | ||||||
Cost of revenues increased 1.3% during the three months ended June 30, 2019, as compared with the corresponding period in 2018. Cost of revenues as a percentage of revenues during the three months ended June 30, 2019, increased to 71.4% as compared to 70.9% in the corresponding period in 2018. The increase is primarily due to higher personnel costs and rent expense to support the Company's global growth initiatives.
Selling, General and Administrative Expenses
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Selling, general and administrative expenses | $ | 415.3 | $ | 395.2 | 5.1 | % | ||||
Selling, general and administrative expenses as a % of revenues | 14.4 | % | 13.8 | % | ||||||
During the three months ended June 30, 2019, the Company incurred $33.2 of acquisition and divestiture related costs, $1.5 in management transition cost and $0.1 in costs related to the previous ransomware attack. In addition, the Company recorded $2.6 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by $37.4.
During the three months ended June 30, 2018, the Company incurred integration and other related costs of $19.6 primarily relating to the Chiltern acquisition and the planned sale of the Covance Food Solutions business. In addition, the Company incurred $1.4 in consulting expenses relating to fees incurred as part of its integration and management transition costs, $0.1 in costs related to a ransomware attack and $2.5 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by $23.6.
Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.1% and 13.0% during the three months ended June 30, 2019, and 2018, respectively, due to the decreased revenue from the implementation of PAMA.
Amortization of Intangibles and Other Assets
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
LCD | $ | 25.6 | $ | 26.2 | (2.3 | )% | ||||
CDD | 34.6 | 32.3 | 7.1 | % | ||||||
Total amortization of intangibles and other assets | $ | 60.2 | $ | 58.5 | 2.9 | % | ||||
The decrease in amortization of intangibles and other assets within the LCD segment primarily reflects the impact of acquisitions occurring after June 30, 2018, offset by the reduction of amortizable intangible assets pursuant to the divestiture of three LCD businesses in 2018. Amortization of intangible assets within the CDD segment increased primarily due to the impact of acquisitions occurring after June 30, 2018, offset by the reduction of amortizable intangible assets pursuant to the divestiture of one CDD business during the second quarter of 2019.
Restructuring and Other Special Charges
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Restructuring and other special charges | $ | 13.6 | $ | 12.2 | 11.5 | % | ||||
During the three months ended June 30, 2019, the Company recorded net restructuring and other special charges of $13.6: $3.0 within LCD and $10.6 within CDD. The charges were comprised of $3.5 related to severance and other personnel costs along with $10.2 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were offset by the reversal of previously established reserves of $0.1 in unused facility reserves.
During the three months ended June 30, 2018, the Company recorded net restructuring and other special charges of $12.2: $5.5 within LCD and $6.7 within CDD. The charges were comprised of $11.8 related to severance and other personnel costs along with $1.3 in costs associated with facility closures and general integration initiatives. The charges were offset by the reversal of previously established reserves of $0.7 and $0.2 in unused facility reserves and unused severance reserves, respectively.
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Interest Expense
Three Months Ended June 30, | |||||||||
2019 | 2018 | Change | |||||||
Interest expense | $ | (59.1 | ) | (63.1 | ) | (6.3 | )% | ||
The decrease in interest expense for the three months ended June 30, 2019, as compared with the corresponding period in 2018, is primarily due to the repayment of the 2.50% senior notes in 2018, the repayment of the 2014 term loan and partial repayment of the 2017 term loan, partially offset by an increased level of borrowing on the revolving credit facility and the new 2019 term loan.
Equity Method Income
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Equity method income | $ | 2.5 | $ | 3.0 | (16.7 | )% | ||||
Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. The decrease in income for the three months ended June 30, 2019, as compared with the corresponding period in 2018, was primarily due to decreased profitability of the Company's joint ventures.
Other, net
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Other, net | $ | (10.5 | ) | $ | 2.8 | (475.0 | )% | |||
The change in other, net for the three months ended June 30, 2019, is primarily due to the $8.8 loss on disposition of a business incurred during the three months ended June 30, 2019 and the $5.3 write-off of two of the Company's cost method investments, partially offset by a net increase in other investment gains of $3.1. In addition, foreign currency transaction losses of $3.2 were recognized for the three months ended June 30, 2019 and gains of $0.9 in the corresponding period of 2018.
Income Tax Expense
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Income tax expense | $ | 79.3 | $ | 78.6 | 0.9 | % | ||||
Income tax expense as a % of earnings before income taxes | 29.4 | % | 25.1 | % | ||||||
The 2019 tax rate was unfavorable to 2018 primarily due to acquisitions and divestitures. While both 2019 and 2018 were favorably impacted by foreign earnings taxed at lower rates than the U.S. statutory rate, the benefit was greater in 2018 than 2019.
Operating Income by Segment
Three Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
LCD operating income | $ | 312.5 | $ | 336.3 | (7.1 | )% | ||||
LCD operating margin | 17.7 | % | 18.3 | % | (0.6 | )% | ||||
CDD operating income | 65.8 | 68.8 | (4.4 | )% | ||||||
CDD operating margin | 5.9 | % | 6.5 | % | (0.6 | )% | ||||
General corporate expenses | (42.6 | ) | (35.9 | ) | 18.7 | % | ||||
Total operating income | $ | 335.7 | $ | 369.2 | (9.1 | )% | ||||
LCD operating income was $312.5 for the three months ended June 30, 2019, a decrease of 7.1% over operating income of $336.3 in the corresponding period of 2018, and LCD operating margin decreased 60 basis points year-over-year. The decrease in operating income and margin were primarily due to the impact from PAMA of approximately $27.0, disposition of businesses, personnel costs, and cybersecurity expenses, partially offset by LaunchPad initiatives. The Company remains on track to deliver approximately $200.0 of net savings from its three-year, phase II of LabCorp Diagnostics’ LaunchPad initiative by the end of 2021.
CDD operating income was $65.8 for the three months ended June 30, 2019, a decrease of 4.4% over operating income of $68.8 in the corresponding period of 2018, and CDD operating margin decreased 60 basis points year-over-year. The decrease in operating income and margin was primarily due to acquisition-related expenses, higher personnel costs, cybersecurity investments
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and rent expense to support the Company's global growth initiatives, partially offset by organic demand, LaunchPad savings, acquisitions and currency translation. The Company is on track to deliver $150.0 of net savings from its three-year CDD LaunchPad initiative by the end of 2020, and $30.0 of cost synergies from the integration of Chiltern by the end of 2019.
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 $42.6 for the three months ended June 30, 2019, an increase of 18.7% over corporate expenses of $35.9 in the corresponding period of 2018. The increase in corporate expenses in 2019 is primarily due to the benefit of a favorable legal settlement in 2018 offsetting normal corporate expenses.
Six months ended June 30, 2019, compared with six months ended June 30, 2018
Revenues
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
LCD | $ | 3,482.9 | $ | 3,584.2 | (2.8 | )% | ||||
CDD | 2,201.0 | 2,132.6 | 3.2 | % | ||||||
Intercompany eliminations | (11.0 | ) | (2.2 | ) | 400.0 | % | ||||
Total | $ | 5,672.9 | $ | 5,714.6 | (0.7 | )% | ||||
The decrease in revenues for the six months ended June 30, 2019, as compared with the corresponding period in 2018 was 0.7%. The decline in revenues was primarily due to the disposition of businesses of 1.9% and negative foreign currency translation of 0.8%, partially offset by acquisitions of 1.0% and organic growth of 1.0% (which includes the negative impact from PAMA of 1.0%).
LCD revenues for the six months ended June 30, 2019, were $3.48 billion, a decrease of 2.8% over revenues of $3.58 billion for the six months ended June 30, 2018. The decline in revenues was primarily due to the negative impact from the disposition of businesses of 2.9% and negative currency translation of 0.2%, partially offset by acquisitions of 0.2%. Organic revenues growth was flat and included the negative impact of 1.5% from PAMA and 0.8% due to fewer revenue days.
Total volume (measured by requisitions) excluding the disposition of businesses was flat as acquisition volume contributed 0.1% and organic volume declined by 0.2%. Organic volume was negatively impacted by approximately 2.0% from the combination of lower consumer genetics, managed care contract changes, and fewer revenue days. Excluding the disposition of businesses, revenue per requisition increased by 0.3%, including the negative impact from PAMA of 1.5%.
CDD revenues for the six months ended June 30, 2019 were $2,201.0, an increase of 3.2% over revenues of $2,132.6 in the six months ended June 30, 2018. The increase was primarily due to organic growth of 3.0% and acquisitions of 2.3%, partially offset by negative foreign currency translation of 1.8% and a business disposition of 0.1%.
Cost of Revenues
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Cost of revenues | $ | 4,058.4 | $ | 4,100.5 | (1.0 | )% | ||||
Cost of revenues as a % of revenues | 71.5 | % | 71.8 | % | ||||||
Cost of revenues decreased 1.0% during the six months ended June 30, 2019, as compared with the corresponding period in 2018. Cost of revenues as a percentage of revenues remained relatively consistent during the six months ended June 30, 2019, decreasing slightly to 71.5% as compared to 71.8% in the corresponding period in 2018.
Selling, General and Administrative Expenses
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Selling, general and administrative expenses | $ | 809.1 | $ | 792.2 | 2.1 | % | ||||
Selling, general and administrative expenses as a % of revenues | 14.3 | % | 13.9 | % | ||||||
During the six months ended June 30, 2019, the Company incurred $44.3 of acquisition and divestiture related costs, $2.9 in consulting expenses relating to fees incurred as part of its integration and management transition cost and $0.7 in costs related to a ransomware attack. In addition, the Company recorded $5.0 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by $52.9.
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During the six months ended June 30, 2018, the Company incurred integration and other related costs of $37.6 primarily relating to the Chiltern acquisition and planned sale of the Company's Covance Food Solutions business. In addition, the Company incurred $4.5 in consulting expenses relating to fees incurred as part of its integration and management transition costs. During the quarter, the Company paid a special one-time bonus of $31.1 ($6.3 of which was recorded in selling, general and administrative expenses) to non-bonus eligible employees in recognition of the benefits the Company received from the passage of the TCJA. In addition, the Company incurred $4.2 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by $50.4 and cost of sales by $26.9.
Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.3% and 13.0% during the six months ended June 30, 2019, and 2018, respectively, primarily due to due to the decreased revenue from the implementation of PAMA.
Amortization of Intangibles and Other Assets
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
LCD | $ | 50.3 | $ | 56.4 | (10.8 | )% | ||||
CDD | 67.0 | 64.4 | 4.0 | % | ||||||
Total amortization of intangibles and other assets | $ | 117.3 | $ | 120.8 | (2.9 | )% | ||||
The decrease in amortization of intangibles and other assets primarily reflects the impact of acquisitions occurring after June 30, 2018, offset by the reduction of amortizable intangible assets pursuant to the divestiture of three LCD businesses in 2018.
Restructuring and Other Special Charges
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Restructuring and other special charges | $ | 34.2 | $ | 26.5 | 29.1 | % | ||||
During the six months ended June 30, 2019, the Company recorded net restructuring and other special charges of $34.2: $16.1 within LCD and $18.1 within CDD. The charges were comprised of $20.3 related to severance and other personnel costs along with $13.5 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were increased by the adjustment of previously established reserves of $0.4 in facility reserves.
During the six months ended June 30, 2018, the Company recorded net restructuring and other special charges of $26.5: $9.1 within LCD and $17.4 within CDD. The charges were comprised of $23.1 related to severance and other personnel costs, $2.5 in costs associated with facility closures and general integration initiatives, and $2.3 in impairment to land held for sale. The Company reversed previously established reserves of $0.9 and $0.5 in unused facility reserves and unused severance reserves, respectively.
Interest Expense
Six Months Ended June 30, | |||||||||
2019 | 2018 | Change | |||||||
Interest expense | $ | (115.8 | ) | (126.6 | ) | (8.5 | )% | ||
The decrease in interest expense for the six months ended June 30, 2019, as compared with the corresponding period in 2018, is primarily due to the repayment of the 2.50% senior notes in 2018, the repayment of the 2014 term loan, partial repayment of the 2017 term loan and a reduced level of borrowing on the revolving credit facility, partially offset by the new 2019 term loan.
Equity Method Income
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Equity method income | $ | 5.5 | $ | 5.5 | — | % | ||||
Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. Equity income for the six months ended June 30, 2019, was consistent with the corresponding period in 2018.
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Other, net
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Other, net | $ | (20.9 | ) | $ | (0.7 | ) | 2,885.7 | % | ||
The change in other, net for the six months ended June 30, 2019, is primarily due to the $8.8 loss on disposition of a business, the $5.3 write-off of two of the Company's cost method investments (as compared to $3.5 of investment write-offs during the six months ended June 30, 2018) and net investment losses of $2.8. Foreign currency transaction losses were $7.8 and $1.0, respectively for the 2019 and 2018 periods presented.
Income Tax Expense
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
Income tax expense | $ | 148.1 | $ | 147.6 | 0.3 | % | ||||
Income tax expense as a % of earnings before income taxes | 28.2 | % | 26.6 | % | ||||||
The 2019 tax rate was unfavorable to 2018 primarily due to acquisitions, divestitures and a lower stock-based compensation benefit. This was partially offset by TCJA taxes for the repatriation tax that only impacted 2018. While both 2019 and 2018 were favorably impacted by foreign earnings taxed at lower rates than the U.S. statutory rate, the benefit was greater in 2018 than 2019.
Operating Income by Segment
Six Months Ended June 30, | ||||||||||
2019 | 2018 | Change | ||||||||
LCD operating income | $ | 580.8 | $ | 639.8 | (9.2 | )% | ||||
LCD operating margin | 16.7 | % | 17.9 | % | (1.2 | )% | ||||
CDD operating income | 153.8 | 107.3 | 43.3 | % | ||||||
CDD operating margin | 7.0 | % | 5.0 | % | 2.0 | % | ||||
General corporate expenses | (80.7 | ) | (72.5 | ) | 11.3 | % | ||||
Total operating income | $ | 653.9 | $ | 674.6 | (3.1 | )% | ||||
LCD operating income was $580.8 for the six months ended June 30, 2019, a decrease of 9.2% over operating income of $639.8 in the corresponding period of 2018, and LCD operating margin decreased 120 basis points year-over-year. The decline in operating income and margin were primarily due to the impact from PAMA of approximately $54.0, disposition of businesses, personnel costs, and cybersecurity expenses, partially offset by LaunchPad initiatives. The Company remains on track to deliver approximately $200.0 of net savings from its three-year, phase II of LabCorp Diagnostics’ LaunchPad initiative by the end of 2021.
CDD operating income was $153.8 for the six months ended June 30, 2019, an increase of 43.3% over operating income of $107.3 in the corresponding period of 2018, and CDD operating margin increased 200 basis points year-over-year. The increase in operating income and margin were primarily due to organic demand, LaunchPad savings, acquisitions and currency translation, partially offset by personnel costs, cybersecurity investments, and rent expense to support the Company's global expansion. The Company is on track to deliver $150.0 of net savings from its three-year CDD LaunchPad initiative by the end of 2020, and $30.0 of cost synergies from the integration of Chiltern by the end of 2019.
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 $80.7 for the six months ended June 30, 2019, an increase of 11.3% over corporate expenses of $72.5 in the corresponding period of 2018. The increase in corporate expenses in 2019 is primarily due to higher personnel costs, including executive transition costs and the benefit of a favorable legal settlement in 2018 offsetting normal corporate expenses.
LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)
The Company's ability to generate cash and its 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 and availability under its senior unsecured revolving credit facility. The Company's senior unsecured revolving credit facility is further discussed in Note 8 (Debt) to the Company's Unaudited Condensed Consolidated Financial Statements.
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During the six months ended June 30, 2019, and 2018, respectively, the Company's cash flows were as follows:
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Net cash provided by operating activities | $ | 419.3 | $ | 567.1 | |||
Net cash used for investing activities | (891.3 | ) | (196.3 | ) | |||
Net cash provided by (used for) financing activities | 311.7 | (458.1 | ) | ||||
Effect of exchange rate on changes in cash and cash equivalents | (1.1 | ) | (7.9 | ) | |||
Net change in cash and cash equivalents | $ | (161.4 | ) | $ | (95.2 | ) | |
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2019 and 2018, totaled $265.4 and $221.4, respectively. Cash and cash equivalents consist of highly liquid instruments, such as time deposits, commercial paper, and other money market investments, substantially all of which have original maturities of three months or less.
Operating Activities
During the six months ended June 30, 2019, the Company's operations provided $419.3 of cash as compared to $567.1 during the same period in 2018. The $147.8 decrease in cash provided from operations in 2019 as compared with the corresponding 2018 period is primarily due to lower cash earnings and increased working capital needs.
Investing Activities
Net cash used for investing activities for the six months ended June 30, 2019, was $891.3 as compared to net cash used for investing activities of $196.3 for the six months ended June 30, 2018. The change in cash used for investing activities was primarily due to more business acquisitions during the six months ended June 30, 2019. Capital expenditures were $179.4 and $159.7 for the six months ended June 30, 2019, and 2018, respectively. The Company expects capital expenditures in 2019 to be approximately 4.0% of revenues primarily in connection with projects to support growth in the Company's core businesses, including projects related to LaunchPad. The Company intends to continue to pursue acquisitions to fund growth and make important investments in its business, including in information technology, to improve efficiency and enable the execution of the Company's strategic vision. Such expenditures are expected to be funded by cash flow from operations, as well as borrowings under the Company's revolving credit facility or any successor facility, as needed.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2019, was $311.7 compared to net cash used for financing activities of $458.1 for the six months ended June 30, 2018. The change in cash from financing activities for six months ended June 30, 2019, as compared to 2018, was primarily the result of debt proceeds greater than payments during the period partially offset by increased share repurchases during the first half of 2019.
On June 3, 2019, the Company entered into a new $850.0 term loan facility in addition to its $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.
The 2019 term facility accrues interest at a per annum rate equal to at the Company's election, either a LIBOR rate plus a margin ranging from 0.55% to 1.175%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0% to 0.175%. The 2019 term loan balance at June 30, 2019, was $850.0. As of June 30, 2019, the effective interest rate on the 2019 term loan was 3.24%.
On September 15, 2017, the Company entered into a $750.0 term loan. The 2017 term loan facility will mature on September 15, 2022. The 2017 term loan balance was $277.0 and $527.0 at June 30, 2019, and December 31, 2018, respectively.
As of June 30, 2019, the effective interest rate on the 2017 term loan was 3.56%.
On September 15, 2017, the Company also entered into an amendment and restatement of its existing senior unsecured revolving credit facility, which was originally entered into on December 21, 2011, amended and restated December 19, 2014, and further amended on July 13, 2016. The senior revolving credit facility consists of a five-year revolving facility in the principal amount of up to $1,000.0, with the option of increasing the facility by up to an additional $350.0, subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. The revolving credit facility also provides for a subfacility of up to $100.0 for swing line borrowings and a subfacility of up to $150.0 for issuances of letters of credit. The revolving credit facility is permitted to be used for general corporate purposes, including working capital, capital expenditures, funding of share repurchases and certain other payments, and acquisitions and other investments.The Company had $35.0 outstanding on its revolving credit facility at June 30, 2019, and no outstanding balance on December 31, 2018.
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Under the Company's term loan credit facilities and the revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios. The Company was in compliance with all covenants under the term loan credit facilities and the revolving credit facility at June 30, 2019. As of June 30, 2019, the ratio of total debt to consolidated proforma trailing 12 month EBITDA was 3.4 to 1.0.
As of June 30, 2019, the Company provided letters of credit aggregating $72.2, primarily in connection with certain insurance programs. Letters of credit provided by the Company are issued under the Company's revolving credit facility and are renewed annually.
At the end of 2018, the Company had outstanding authorization from the board of directors to purchase up to $443.5 of Company common stock. During January 2019, the Company purchased 0.8 shares of its common stock at an average price of $131.71 for a total cost of $100.1 under this plan. On February 6, 2019, the board of directors replaced the Company's existing share repurchase plan with a new plan authorizing repurchase of up to $1.25 billion of the Company's common stock. The repurchase authorization has no expiration. During the three months ended June 30, 2019, the Company purchased 1.3 shares of its common stock at an average price of $159.13 for a total cost of $199.9. As of June 30, 2019, the Company had outstanding authorization from the board of directors to purchase up to $1.05 billion of the Company's common stock.
The Company had a $35.9 and $26.7 reserve for unrecognized income tax benefits, including interest and penalties, as of June 30, 2019, and December 31, 2018, respectively. Approximately $5.1 and $6.0 is classified in accrued expenses and other, and approximately $30.8 and $20.7 is classified in deferred income taxes and other tax liabilities in the Company's Condensed Consolidated Balance Sheets.
Zero-coupon Subordinated Notes
On March 11, 2019, the Company announced that for the period from March 11, 2019, to September 10, 2019, the zero-coupon subordinated notes will accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a zero-coupon subordinated note for the five trading days ended August 27, 2019, in addition to the continued accrual of the original issue discount.
During the six months ended June 30, 2019, the Company settled notices to convert $7.7 aggregate principal amount of its zero-coupon subordinated notes with a conversion value of $14.5. The total cash used for these settlements was $7.3. As a result of these conversions, the Company also reversed deferred tax liabilities of $1.7.
On July 1, 2019, the Company announced that its zero-coupon subordinated notes may be converted into cash and common stock at the conversion rate of 13.4108 per $1,000.0 principal amount at maturity of the notes, subject to the terms of the zero-coupon subordinated notes and the Indenture, dated as of October 24, 2006, between the Company and The Bank of New York Mellon, as trustee and the conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter beginning July 1, 2019, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New York City time, on Monday, September 30, 2019. If notices of conversion are received, the Company plans to settle the cash portion of the conversion obligation with cash on hand and/or borrowings under its revolving credit facility.
Credit Ratings
The Company’s investment grade debt ratings from Moody’s and Standard and Poor’s contribute to its ability to access capital markets.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange and interest rates, and the Company regularly evaluates its exposure to such changes. The Company addresses its exposure to market risks, principally the market risks associated with changes in foreign currency exchange rates and interest rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such as foreign currency forward contracts and interest rate and cross currency swap agreements. Although, as set forth below, the Company’s zero-coupon subordinated notes contain features that are considered to be embedded derivative instruments, the Company does not hold or issue derivative financial instruments for trading purposes.
Foreign Currency Exchange Rates
Approximately 12.5% of the Company's revenues for the six months ended June 30, 2019, and approximately 15.3% of those for the six months ended June 30, 2018, were denominated in currencies other than the U.S. dollar. The Company's financial
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statements are reported in U.S. dollars and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into U.S. dollars for purposes of reporting the Company's consolidated financial results. In the first quarter of 2019 and the year ended December 31, 2018, the most significant currency exchange rate exposures were to the Canadian dollar, Swiss Franc, Euro and British Pound. Excluding the impacts from any outstanding or future hedging transactions, a hypothetical change of 10% in average exchange rates used to translate all foreign currencies to U.S. dollars would have impacted income before income taxes for the six months ended June 30, 2019, by approximately $2.2. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $47.2 and $(82.6) at June 30, 2019, and 2018, respectively. The Company does not have significant operations in countries in which the economy is considered to be highly-inflationary.
The Company earns revenue from service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company's profitability with respect to such contracts. The Company is also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in some of its contracts with customers, or it may hedge transaction risk with foreign currency forward contracts. At June 30, 2019, the Company had 27 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly through July 2019 with a notional value totaling approximately $328.1. At December 31, 2018, the Company had 34 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly through January 2019 with a notional value totaling approximately $487.9.
The Company is party to six U.S. Dollar to Swiss Franc cross currency swap agreements with an aggregate notional amount of $600.0, maturing in 2022 and 2025, as a hedge against the impact of foreign exchange movements on its net investment in a Swiss Franc functional currency subsidiary.
Interest Rates
Some of the Company's debt is subject to interest at variable rates. As a result, fluctuations in interest rates affect the business. The Company attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of fixed and variable rate debt including by the utilization of derivative financial instruments, primarily interest rate swaps.
Borrowings under the Company's term loan credit facility and revolving credit facility are subject to variable interest rates, unless fixed through interest rate swaps or other agreements. As of June 30, 2019, the Company had $277.0 of unhedged variable rate debt from the 2017 term loan credit facility, $850.0 of unhedged variable debt from the 2019 term loan credit facility and $35.0 outstanding on its revolving credit facility. As of December 31, 2018, the Company had $527.0 of unhedged variable rate debt from the 2017 term loan credit facility and $0.0 outstanding on its revolving credit facility.
To hedge against changes in the fair value of a portion of the Company's long-term debt, the Company is party to two fixed-to-variable interest rate swap agreements for the 4.625% senior notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus 2.298%.
The Company’s zero-coupon subordinated notes contain the following two features that are considered to be embedded derivative instruments under authoritative guidance in connection with accounting for derivative instruments and hedging activities:
1) | The Company will pay contingent cash interest on the zero-coupon subordinated notes after September 11, 2006, if the average market price of the notes equals 120% or more of the sum of the issue price, accrued original issue discount and contingent additional principal, if any, for a specified measurement period. |
2) | Holders may surrender zero-coupon subordinated notes for conversion during any period in which the rating assigned to the zero-coupon subordinated notes by Standard & Poor’s Ratings Services is BB- or lower. |
Each quarter-point increase or decrease in the variable rate would result in the Company's interest expense changing by approximately $2.9 per year for the Company's unhedged variable rate debt.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.
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Changes in Internal Control Over Financial Reporting
On June 3, 2019, the Company completed the acquisition of Envigo's nonclinical contract research services business. The Company’s management has extended its oversight and monitoring processes that support internal control over financial reporting to include the acquired Envigo operations. The Company’s management is continuing to integrate the acquired operations of Envigo's nonclinical contract research services business into the Company’s overall internal control over financial reporting process. However, management plans to exclude these operations from its annual assessment of internal controls over financial reporting for the year ending December 31, 2019.
There were no other changes in the Company’s internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 (Commitments and Contingencies) to the Company’s unaudited condensed consolidated financial statements, above, which is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes in the risk factors that appear in Part I - Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (dollars in millions)
The following table sets forth information with respect to purchases of shares of the Company’s common stock based on settled trades made during the three months ended June 30, 2019, by or on behalf of the Company:
Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Program | Maximum Dollar Value of Shares that May Yet Be Repurchased Under the Program | ||||||||||
April 1 - April 30 | 0.7 | $ | 154.49 | 0.7 | $ | 1,151.0 | |||||||
May 1 - May 31 | 0.6 | 163.95 | 0.6 | 1,050.0 | |||||||||
June 1 - June 30 | — | — | — | 1,050.0 | |||||||||
1.3 | $ | 159.13 | 1.3 | $ | 1,050.0 | ||||||||
On February 6, 2019, the board of directors replaced the Company's existing share repurchase plan with a new plan authorizing repurchase of up to $1.25 billion of the Company's common stock. The repurchase authorization has no expiration. During the three months ended June 30, 2019, the Company purchased 1.3 shares of its common stock at at an average price of $159.13 for a total cost of $199.9. As of June 30, 2019, the Company had outstanding authorization from the board of directors to purchase up to $1.05 billion of the Company's common stock.
Item 5. Other Information
On August 6, 2019, the Company and David P. King, Chairman, President and Chief Executive Officer of the Company, entered into a Transition Agreement effective June 30, 2019 (the Transition Agreement), as contemplated by the Term Sheet dated June 4, 2019 (the Term Sheet), which was previously described in the Company’s Form 8-K filed on June 5, 2019. The Transition Agreement supersedes the Term Sheet and confirms that Mr. King will (i) transition from the positions of President and Chief Executive Officer effective November 1, 2019 (the Transition Date); (ii) continue to serve on the Board as Chairman of the Board from the Transition Date until a date mutually agreed with the Board and no later than December 31, 2020; and (iii) serve as Senior Advisor to the Company’s Chief Executive Officer (Senior Advisor) from the Transition Date through at least December 31, 2020.
Pursuant to the Transition Agreement, Mr. King’s current annual base salary of $1,200,000, subject to any ordinary course increases by the Compensation Committee of the Board, will continue until December 31, 2019, after which he will be entitled to a base salary of $1,000,000 per year for the period beginning January 1, 2020 until he ceases serving as Chairman of the Board or as a Senior Advisor to the CEO. Mr. King will continue to be eligible to receive an annual bonus pursuant to LabCorp’s Management Incentive Bonus Plan (the MIB Plan) for fiscal year 2019 reflective of his full 2019 MIB Plan opportunity, with achievement to be based on specific performance objectives determined by the Compensation Committee of the Board. For fiscal year 2020, Mr. King will not be eligible to receive an annual bonus pursuant to the MIB Plan.
In accordance with the terms of the Transition Agreement, all of Mr. King’s equity awards outstanding as of the date of the Transition Agreement will be subject to the Company’s Senior Executive Transition Policy and will continue to be eligible for vesting and continue to become exercisable, payable or eligible for the termination of restrictions, as applicable, on the same terms and conditions as if Mr. King were to remain employed by the Company during the original exercise or vesting period, subject to modifications if necessary to comply with applicable law. On January 1, 2020, Mr. King will receive a grant of restricted stock units with an aggregate grant date fair value of $6,500,000 and a one-year vesting period, which shall be subject to LabCorp’s
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Senior Executive Transition Policy and the terms of the Company’s 2016 Omnibus Incentive Plan (the 2020 Grant). The 2020 Grant will continue to be eligible for vesting and continue to become payable on the same terms and conditions as if Mr. King were to have remained employed by the Company during the one-year vesting period.
Mr. King will continue to receive the perquisites he currently receives and will remain eligible to participate generally in the employee benefit plans in which he currently participates through the period he serves as Senior Advisor. Mr. King will be subject to indefinite confidentiality and non-disparagement restrictions, two-year post-termination non-competition and non-solicitation covenants, and three-year standstill covenants under the Transition Agreement.
The foregoing description does not purport to be complete and is qualified by reference to the full text of the Transition Agreement, a copy of which is filed as Exhibit 10.1 hereto.
Item 6. Exhibits
(a) | Exhibits |
10.1* | |
10..2 | Executive Employment Agreement, dated June 4, 2019, by and between Laboratory Corporation of America Holdings and Adam H. Schechter (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 5, 2019) |
10.3 | Term Loan Credit Agreement, dated June 3, 2019, by and among Laboratory Corporation of America Holdings, Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 3, 2019). |
31.1* | |
31.2* | |
32** | |
101.INS* | Inline XBRL Instance Document |
101.SCH* | Inline XBRL Taxonomy Extension Schema |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase |
* | filed herewith | |
** | furnished herewith | |
43
SIGNATURES
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/ DAVID P. KING | |
David P. King | ||
Chairman of the Board, President | ||
and Chief Executive Officer | ||
By: | /s/ GLENN A. EISENBERG | |
Glenn A. Eisenberg | ||
Executive Vice President and | ||
Chief Financial Officer | ||
August 8, 2019
44
TRANSITION AGREEMENT
This Transition Agreement (the “Agreement”) is made between Laboratory Corporation of America Holdings, a Delaware corporation (the “Company”), and David P. King (the “Executive”). The Company and the Executive are collectively referred to as the “Parties.”
WHEREAS, the Board of Directors of the Company (the “Board”) approved the Senior Executive Transition Policy (the “Transition Policy”) to support a strong succession planning process, which Transition Policy provides for continued eligibility for vesting, exercisability, payment or termination of restrictions, as the case may be, with respect to long-term incentive awards under certain circumstances, subject to approval by the Compensation Committee of the Board;
WHEREAS, the Board appreciates the Executive’s past and anticipated contributions to the Company;
WHEREAS, effective as of November 1, 2019 (the “CEO Transition Date”), the Executive shall transition from the position of Chairman of the Board, President and Chief Executive Officer (“CEO”) of the Company to the position of Chairman of the Board and a Senior Advisor to the new President and Chief Executive Officer of the Company (the “Successor CEO”);
WHEREAS, the Executive shall continue to serve as the Chairman of the Board until such time as agreed upon by the Board and the Executive and no later than December 31, 2020 (such date, the “Chairman Transition Date”);
WHEREAS, the Executive shall continue to serve as a Senior Advisor to the Successor CEO through at least December 31, 2020;
WHEREAS, in exchange for, among other things, the Executive entering into and not revoking this Agreement and complying with the terms hereof, the Company shall provide the Executive with the payments and benefits set forth in this Agreement, including providing that the Executive’s long-term incentive awards be subject to the Transition Policy;
WHEREAS, the payments and benefits set forth in this Agreement are the exclusive payments and benefits to the Executive in connection with the transitions described herein and the ending of the Executive’s employment. By entering into this Agreement, the Executive acknowledges and agrees that he is not entitled to any other severance pay, benefits or equity rights including without limitation pursuant to any severance plan, program or arrangement; and
WHEREAS, the terms and conditions described herein are part of a comprehensive agreement, each element of which is consideration for the other elements and is an integral aspect of the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:
1. | Transition from Employment |
(a)Transition Period. The Executive shall remain the Chairman of the Board, President and CEO of the Company through the CEO Transition Date, at which time the Executive shall transition from the position of Chairman of the Board, President and CEO of the Company to the position of Chairman of the Board and Senior Advisor to the Successor CEO. The Executive shall continue to serve as the Chairman of the Board through the Chairman Transition Date. After the Chairman Transition Date, the Executive shall continue to serve as a Senior Advisor to the Successor CEO through at least December 31, 2020 (such period during which the Executive so serves, the “Transition Period”).
(b)Transition Services. During the Transition Period, the Executive shall remain an employee of the Company and shall continue to devote his full business time, attention, skill, and best efforts to the performance of his duties and responsibilities with respect to such positions, as determined by the Board and, as applicable, the Successor CEO, and he shall also cooperate fully in transitioning duties and responsibilities to the Successor CEO as requested by the Board. The Executive agrees to work cooperatively with the Board, the Successor CEO and other members of the Company’s management team during the Transition Period.
2.Compensation and Benefits. Subject to, among other things, the Executive (i) signing, not revoking and complying with the terms of this Agreement, and (ii) after the Transition Period, executing and not revoking the Certificate Updating Release of Claims in the form attached as Exhibit A (the “Certificate”) within the time periods set forth in the Certificate (collectively, the “Conditions”):
(a)Base Salary. For calendar year 2019, the Executive’s base salary shall remain $1,200,000 per year, subject to ordinary course increase in July 2019, and shall be payable in accordance with the Company’s normal payroll practices. For
calendar year 2020, the Executive’s base salary shall be reduced to $1,000,000 per year and shall be payable in accordance with the Company’s normal payroll practices. The Executive shall continue to receive his 2020 base salary during the period beginning January 1, 2020 and ending when he ceases serving as Chairman of the Board or as a Senior Advisor to the Successor CEO.
(b)Annual Bonus. For calendar year 2019, the Executive shall continue to be eligible to receive an amount equal to the Management Incentive Bonus (“MIB”) that he would have received under the LabCorp Management Incentive Bonus Plan (the “MIB Plan”) reflective of his full 2019 MIB opportunity and based on actual performance results. The Executive’s 2019 MIB shall be paid at the time that all bonuses are normally paid under the MIB Plan but no later than March 15, 2020. The Executive shall not be eligible to participate in the MIB Plan for calendar year 2020.
(c)Long-Term Incentive Awards. All of the Executive’s long-term incentive awards outstanding as of the date of this Agreement as reflected in the schedule attached hereto as Exhibit B shall be subject to the Transition Policy and shall continue to be eligible for vesting and continue to be or become exercisable, payable or eligible for the termination of restrictions (as the case may be) on the same terms and conditions as if the Executive were to have remained employed by the Company during the original exercise period (or if the Executive dies, as if the Executive had remained so employed through his death). On January 1, 2020, the Executive shall receive an award with a grant date fair value of $6,500,000 and a one-year vesting period (the “2020 Grant”). The 2020 Grant award shall be comprised of restricted stock units which shall be subject to the Transition Policy and shall continue to be eligible for vesting and continue to become payable on the same terms and conditions as if the Executive were to have remained employed by the Company during the one-year vesting period (or if the Executive dies, as if the Executive had remained so employed through his death) regardless of Executive’s employment status with the Company through the one-year vesting period. The Executive understands that his long-term incentive awards and the grant contemplated by this Section 2(c) are and shall be governed by the terms and conditions of the Company’s 2016 Omnibus Incentive Plan and applicable grant agreements and that, except as contemplated by this Section 2(c), this Agreement does not in any way modify, change, alter or amend the terms and conditions of those awards.
(d)Perquisites. Throughout 2019 and during the Transition Period, the Executive shall continue to receive and be eligible for the perquisites he currently receives, including an annual personal travel allowance of $150,000 for use of the Company’s aircraft (calculated in the identical fashion as it was calculated for the Executive in 2018 and 2019), financial planning services, a wellness exam allowance, the use of a specified company vehicle for security reasons and reimbursement of the monthly cost associated with the Executive’s security system at his personal residence. Additionally, the Executive shall be provided, at the Company’s expense, corporate office space and an executive assistant during the period in which he is employed as Chairman of the Board or as a Senior Advisor to the Successor CEO. The corporate office space provided to the Executive shall be his office located at the Perimeter Park building.
(e)Retirement Plans and Group Health and Welfare Plans. The Executive shall continue to be eligible for such benefits under the Company’s existing qualified and nonqualified retirement plans, including the 401(k) Plan, the Cash Balance Retirement Plan, the Amended and Restated New Pension Equalization Plan, and the Deferred Compensation Plan, and under the Company’s group health and welfare plans, in each case, as amended and as are provided under the circumstances (to the same extent as though he has continued his employment on a full-time basis and taking into account the Executive’s date of separation of employment, currently anticipated to be on or about December 31, 2020) pursuant to the plan documents governing each of such plans. Following the Executive’s separation of employment from the Company, if the Executive timely and properly elects to continue his group health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act, as amended (“COBRA”), the Company shall reimburse the Executive for all of the Executive’s monthly COBRA premiums until the earliest of (a) the date the Executive ceases to be eligible for COBRA coverage, (b) the date on which the Executive becomes eligible to receive group health coverage from another employer, or (c) 12 months following the Executive’s separation of employment from the Company. In the event the Executive becomes eligible to receive coverage under another employer’s group health plan or otherwise ceases to be eligible for COBRA continuation coverage, the Executive shall immediately notify the Company in writing. Except as otherwise provided herein or in the terms of any documents governing any of the Company’s existing qualified and nonqualified retirement plans and group health and welfare plans maintained by the Company, the Executive shall cease to be a participant in and shall no longer have any coverage or entitlement to benefits, accruals, or contributions under any of the Company’s employee benefit plans effective upon the separation of the Executive’s employment.
(f)Directors and Officers Liability Insurance. During the Transition Period, the Company shall maintain director and officer liability insurance covering the Executive on terms that are no less favorable than the coverage provided to other senior executives, officers or directors of the Company, as such coverage may be in effect from time to time. The Executive will be provided continued tail coverage following the termination of his employment with the Company on terms no less beneficial than those offered to other executives of the Company.
3.Resignations; Board Service. Effective as of the Chairman Transition Date, the Executive hereby resigns as an officer of the Company, as well as from any other officer positions he holds with any of the Company’s subsidiaries or entities affiliated
with the Company. The Executive agrees to execute any documents reasonably requested by the Company or any controlled entities in order to effectuate such resignations. Unless the Executive sooner resigns as a member of the Board and subject to Board dismissal procedures, the Executive shall continue to serve as Chairman of the Board through the Chairman Transition Date.
4.No Other Benefits. The Executive is not entitled to any other compensation or benefits (including, without limitation, under the Amended and Restated Master Senior Executive Severance Plan or the Master Senior Executive Change-in-Control Severance Plan), other than the compensation and benefits described herein. Effective as of the date hereof, the Executive is no longer a participant in, nor is the Executive eligible to receive benefits under, (a) the Amended and Restated Master Senior Executive Severance Plan and (b) the Master Senior Executive Change-in-Control Severance Plan.
5.General Mutual Release.
(a)The Executive, on behalf of himself and his heirs, assigns, transferees and representatives, hereby releases and forever discharges the Company, and its predecessors, successors, parents, subsidiaries, affiliates, assigns, representatives and agents, as well as all of their present and former directors, officers, employees, agents, shareholders, representatives, attorneys and insurers (collectively, the “Releasees”), from any and all claims, causes of actions, demands, damages or liability of any nature whatsoever, known or unknown, which the Executive has or may have which arise out of his employment or cessation of employment with the Company, or which concern or relate in any way to any acts or omissions done or occurring prior to and including the date of this Agreement (the claims released in this Agreement are collectively referred to as the “Released Claims”). The Released Claims include, but are not limited to, claims arising under the Fair Labor Standards Act, 29 U.S.C. §201 et seq.; the Equal Pay Act, 29 U.S.C. §206(a) and interpretive regulations; Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. §2000e et seq.; 42 U.S.C. §1981 et seq.; the Americans with Disabilities Act, 42 U.S.C. § 12101 et seq.; the Family and Medical Leave Act, 29 U.S.C. §2601 et seq.; the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §1001 et seq.; the Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§2101 et seq.; the Age Discrimination in Employment Act, as amended, 29 U.S.C. §§621 et seq.; any and all claims for wrongful termination and/or retaliation; claims for breach of contract, express or implied; claims for breach of the covenant of good faith and fair dealing; claims for compensation, including but not limited to wages, bonuses or long-term incentive awards, in each case, except as otherwise contained herein; claims for benefits or fringe benefits, including, but not limited to, claims for severance pay and/or termination pay, except as otherwise contained herein; claims for unaccrued vacation pay; claims arising in tort, including, but not limited to, claims for invasion of privacy, intentional infliction of emotional distress and defamation; claims for quantum meruit and/or unjust enrichment; and any and all other claims arising under any other federal, state, local or foreign laws, as well as any and all other common law legal or equitable claims.
(b)The Executive represents that he has not initiated any action or charge against any of the Releasees with any Federal, State or local court or administrative agency. If such an action or charge has been filed by the Executive or on the Executive’s behalf, he shall use his best efforts to cause it immediately to be withdrawn and dismissed with prejudice. Failure to cause the withdrawal and dismissal with prejudice of any action or charge shall render this Agreement null and void.
(c)The Executive further agrees that he shall not institute any lawsuits, either individually or as a class representative or member, against any of the Releasees as to any matter based upon, arising from or relating to his employment relationship with the Company, from the beginning of time to the date of execution of this Agreement. The Executive knowingly and intentionally waives any rights to any additional recovery that might be sought on his behalf by any other person, entity, local, state or federal government or agency thereof, including specifically and without limitation, the North Carolina Department of Labor, the United States Department of Labor, or the Equal Employment Opportunity Commission. However, this release does not affect Executive’s right to receive an award for information provided to the Securities and Exchange Commission.
(d)The Executive is hereby advised that: (i) he is waiving, among other things, any age discrimination claims under the Age Discrimination in Employment Act, provided, however, he is not waiving any claims that may arise after the date this Agreement is executed; (ii) he has had twenty-one (21) days within which to consider the execution of this Agreement, before signing it; and (iii) for a period of seven (7) days following the execution of this Agreement, he may revoke this Agreement by delivering written notice (by the close of business on the seventh day) to the Company.
(e)Notwithstanding the provisions of Section 5(a), said release does not apply to any and all statutory or other claims (i) that are prohibited from waiver by Federal, State or local law, (ii) for enforcement of any covenant under this Agreement, (iii) for unemployment insurance benefits, (iv) for workers’ compensation benefits, (v) for vested rights in any retirement plan or pursuant to COBRA, or (vi) for indemnification under applicable statutory or common law or any insurance, charter, or bylaws of the Company or any of its affiliates, it being understood and agreed that this Agreement does not create or expand upon any such rights, (if any) to indemnification.
(f)The Parties agree that the Company has no prior legal obligation to provide the 2020 Grant described in Section 2(c) and that it has been exchanged for the promises of the Executive stated in this Agreement. It is specifically understood and agreed that the 2020 Grant is good and adequate consideration to support the Conditions and the restrictions contained herein, and
that the 2020 Grant set forth in Section 2(c) is of value in addition to anything to which the Executive already was entitled prior to the execution of this Agreement.
(g)In consideration of the benefits provided to the Company under this Agreement, the Company, on behalf of itself and all of its predecessors, successors, transferees, assignors, and assigns, and anyone claiming by, through, or on behalf of them, hereby fully and completely releases, acquits and forever discharges the Executive, his heirs, executors and assigns, of and from any and all claims, demands, damages, causes of action, debts, liabilities, controversies, judgments, and suits of every kind and nature whatsoever which the Company has had, now has, or may have against the Executive which arise out of his employment or cessation of employment with the Company, or which concern or relate in any way to any acts or omissions done or occurring prior to and including the date of this Agreement; provided, however, that nothing contained in this Agreement shall limit the Company’s or the Board’s authority to enforce the Company’s Incentive Compensation Recoupment Policy in accordance with its terms.
6. | Confidentiality. |
(a)The Parties acknowledge that during the course of the Executive’s employment with the Company, he was and shall be given access, on a confidential basis, to Confidential Information which the Company has for years collected, developed, and/or discovered through a significant amount of effort and at great expense. The Parties acknowledge that the Confidential Information of the Company is not generally known or easily obtained in the Company’s trade, industry, business, or otherwise and that maintaining the secrecy of the Confidential Information is extremely important to the Company’s ability to compete with its competitors.
(b)The Executive agrees that following this Agreement, the Executive shall not, without the prior written consent of the Company, divulge to any third party or use for his own benefit, or for any purpose other than the exclusive benefit of the Company, any Confidential Information of the Company; provided however, that nothing herein contained shall restrict the Executive’s ability to make such disclosures as such disclosures may be required by law; and further providing that nothing herein contained shall restrict the Executive from divulging information that is readily available to the general public as long as such information did not become available to the general public as a direct or indirect result of the Executive’s breach of this section of this Agreement.
(c)The term “Confidential Information” in this Agreement shall mean information that is not readily and easily available to the public or to the persons in the same business, trade, or industry of the Company, and that concerns the Company’s prices, pricing methods, costs, profits, profit margins, suppliers, methods, procedures, processes or combinations or applications thereof developed in, by, or for the Company’s business, research and development projects, data, business strategies, marketing strategies, sales techniques, customer lists, customer information, or any other information concerning the Company or its business that is not readily and easily available to the public or to those persons in the same business, trade or industry of the Company. The term “customer information” as used in this Agreement shall mean information that is not readily and easily available to the public or to those persons in the same business, trade, or industry and that concerns the course of dealing between the Company and its customers or potential customers solicited by the Company, customer preferences, particular contracts or locations of customers, negotiations with customers, and any other information concerning customers obtained by the Company that is not readily and easily available to the public or to those in the business, trade, or industry of the company.
(d)The Executive acknowledges that all information, the disclosure of which is prohibited hereby, is of a confidential and proprietary character and of value to the Company, and upon the termination of Executive’s employment with the Company (or as soon thereafter as is reasonably practicable), the Executive shall forthwith deliver up to the Company all records, memoranda, data, and documents of any description that refer to or relate in any way to such information and shall return to the Company any of its equipment and property which may then be in the Executive’s possession or under the Executive’s personal control except that Executive may retain the equipment and property described in Section 8 below.
(e)Notwithstanding the restrictions set forth in this Section 6, the Executive may disclose information protected under this Section 6 if and only if such is (i) lawfully required by any government agency; (ii) otherwise required to be disclosed by law (including legally required financial reporting) and/or by court order; (iii) necessary in any legal proceeding in order to enforce any provision of this Agreement, (iv) made to the Securities and Exchange Commission regarding securities law issues or (v) necessary to refute derogatory or defamatory statements made by the Releasees about Executive. The Executive further agrees that he shall notify the Company in writing within five (5) calendar days of the receipt of any subpoena, court order, administrative order or other legal process requiring disclosure of information subject to this Section 6.
7. | Non-Solicitation/Non-Compete. |
(a)For a period of twenty-four (24) months following the separation of the Executive’s employment for any reason (the “Restriction Period”), the Executive shall not become an owner in, shareholder with more than a 2% equity interest in, investor
in, or an employee, contractor, consultant, advisor, representative, officer, director, or agent of, a trade or business that offers products and services that are the same or substantially similar to the products and services provided by the Company in any geographic market in which the Company conducts business (“Competitor”); provided, however, that the duties and responsibilities of said employment or engagement as an owner in, shareholder with more than 2% equity interest in, investor in, contractor, consultant, advisor, representative, officer, director or agent are (i) the same, similar, or substantially related to the Executive’s current duties and responsibilities as CEO or his duties and responsibilities as Chairman of the Board and a Senior Advisor to the Successor CEO and (ii) related to or concerning the Competitor’s business activities in the Restricted Territory. For purposes of this Section 7(a), the term “Restricted Territory” means the United States and all foreign countries in which the Company through its business segments Covance drug development and LabCorp diagnostics conducted business during the two-year period prior to the termination of the Executive’s employment with the Company. If a court of competent jurisdiction determines that the Restricted Territory as defined herein is too restrictive, then the Parties agree that said court may reduce or limit the Restricted Territory to the largest acceptable area so as to enable the enforcement of Section 7(a).
(b)For a period of twenty-four (24) months following the separation of the Executive’s employment for any reason, the Executive shall not, either directly or indirectly, or on behalf of any person, business, partnership, or other entity, call upon, contact, or solicit any customer or customer prospect of the Company, or any representative of the same, with a view toward the sale or providing of any service or product competitive with the products and services provided by the Company through its business segments Covance drug development and LabCorp diagnostics; provided, however, the restrictions set forth in this Section shall apply only to customers or prospects of the Company, or representatives of the same, with which the Executive had contact or about whom the Executive received Confidential Information as part of his duties and responsibilities while employed with the Company within a period of 24 calendar months prior to the termination of Executive’s employment with the Company. The Parties agree and affirm that their intention with respect to Section 7(b) of this Agreement is that the Executive’s activities be limited only for a twenty-four (24) month period after the termination of Executive’s employment for any reason. The provision calling for a “look back” of 24 calendar months prior to the date of the Executive’s termination of employment is intended solely as a means of identifying the clients to which such restrictions apply and is not intended to nor shall it, under any circumstances, be construed to define the length or term of any such restriction.
(c)For a period of twenty-four (24) months following the separation of the Executive’s employment for any reason, the Executive shall not directly or indirectly through a subordinate, co-worker, peer, or any other person or entity contact, solicit, encourage or induce any officer, director or employee of the Company to work for or provide services to the Executive and/or any other person or entity. The Parties agree the restriction in this Section 7(c) shall not apply to JoAnne Grimes in the event she ceases to serve as Executive Assistant to the Successor CEO.
(d)The Executive acknowledges and agrees that the foregoing restrictions are necessary for the reasonable and proper protection of the Company; are reasonable in respect to subject matter, length of time, geographic scope, customer scope, and scope of activity to be restrained; and are not unduly harsh and oppressive so as to deprive the Executive of his livelihood or to unduly restrict the Executive’s opportunity to earn a living after separation of the Executive’s employment with the Company. The Executive further acknowledges and agrees that if any restrictions set forth in this Section are found by any court of competent jurisdiction to be unenforceable or otherwise against public policy, the restriction shall be interpreted to extend only over the maximum period of time or other restriction as to which it would otherwise be enforceable. Notwithstanding this Section 7, subject to the prior written consent of the Board (which shall not be withheld unless the Board has a reasonable good faith belief that the Executive’s service on such Board of Directors shall materially harm the Company), the Executive shall be permitted to serve on the Board of Directors of any company, organization, or entity that does not compete in a material fashion with the Company.
(e)The Executive acknowledges and agrees that because the violation, breach, or threatened breach of this Section 7 would result in immediate and irreparable injury to the Company, the Company shall be entitled, without limitation of remedy, to (i) temporary and permanent injunctive and other equitable relief restraining the Executive from activities constituting a violation, breach or threatened breach of this Section 7 to the fullest extent allowed by law; (ii) all such other remedies available at law or in equity, including without limitation the recovery of damages, reasonable attorneys’ fees and costs; and (iii) withhold any further rights, payments or benefits under this Agreement which become due and owing after the occurrence of said violation, breach, or threatened breach.
8.Return of Property. On or before the end of the Transition Period (and upon earlier request by the Company), the Executive shall return any and all Company documents and any copies thereof, in any form whatsoever, including computer records or files, containing secret, confidential and/or proprietary information or ideas, and any other Company property in the Executive’s possession or control, except that the Executive may keep possession, custody and control of his then-currently issued Company laptop, iPad, printers, modems, cellphone, and associated accessories provided that the Company has had an opportunity to remove all Confidential Information therefrom.
9.Communications Regarding Transition. The Executive and the Company agree to collaboratively draft statements
describing the Executive’s transitions from President and CEO to the position of Chairman of the Board, from Chairman of the Board to the position of Senior Advisor, and from Senior Advisor to an eventual separation of employment from the Company. The Executive and the Company agree, and the Company agrees to instruct its Section 16 officers and directors, to respond to any questions regarding the Executive’s transitions with nothing more than the agreed upon statement or words to the same effect.
10.Non-Disparagement. To the fullest extent permitted by law, the Executive agrees not to make, publish or communicate to any person or entity or in any public forum (including social media) at any time any defamatory or disparaging remarks, comments, or statements concerning the Company, its affiliates, or its respective officers, directors, employees or products that is intended to cause or that reasonably would be expected to cause any person to whom it is communicated to have (a) a lowered opinion of the Company or any affiliate, including a lowered opinion of any products manufactured, sold, or used by, or any services offered by the Company or any affiliate; and/or (b) a lowered opinion of the creditworthiness or business prospects of the Company or any affiliate. To the fullest extent permitted by law, the Company agrees (i) to instruct its Section 16 officers and directors not to publish or communicate to any person or entity or in any public forum (including social media) at any time any defamatory or disparaging remarks, comments, or statements concerning the Executive and (ii) not to disparage or criticize the Executive in authorized corporate communications.
11.Standstill. The Executive agrees that for a period of three years following the Executive’s separation of employment, neither the Executive nor anyone acting on his behalf, shall, directly or indirectly, (a) attempt to facilitate (i) the acquisition of securities, assets or indebtedness of the Company or any of its affiliates, (ii) any tender offer or business combination involving the Company, its affiliates or any of their respective assets, (iii) any recapitalization, restructuring or other extraordinary transaction with respect to the Company or its affiliates, or (iv) any solicitation of proxies or consents to vote any securities of the Company or its affiliates; (b) form or participate in any group with respect to the Company’s securities or act in concert with any person in respect of the Company’s securities; (c) otherwise act, alone or in concert with others, to seek control over the management, Board or policies of the Company or seek a position on the Board; (d) enter into any discussions or arrangements with any third party regarding any of the above; or (e) request that the Company amend or waive any of the above restrictions. Notwithstanding the foregoing, the Company hereby agrees that this provision shall not apply to the following: (1) the Executive’s acquisition of any security, asset, or indebtedness of the Company pursuant to the terms of his employment, the Company’s benefit plans or this Agreement; (2) the purchase, sale or transfer in the ordinary course by the Executive or anyone acting on his behalf after the date of the Executive’s separation of employment (and not pursuant to this Agreement or the Company’s benefit plans) of voting securities of the Company so long as, immediately after any such purchase, sale or transfer, the Executive and everyone acting on his behalf do not collectively beneficially own more than one percent of any outstanding class of voting securities or securities convertible into voting securities of the Company; provided that, for the avoidance of doubt, any such securities or securities convertible into voting securities of the Company which are beneficially owned by any applicable non-affiliated third-parties described in clause (4) below shall not be taken into account with respect to determining the one percent cap; (3) the exercise by the Executive or anyone acting on his behalf of any voting rights available to the Executive or anyone acting on his behalf that are also available to Company stockholders generally pursuant to any transaction described above, provided that the Executive or anyone acting on his behalf has not then either directly, indirectly, or as a member of a group, made, effected, initiated, solicited proxies on behalf of, or caused such transaction to occur or otherwise violated these provisions; and (4) any actions or transactions taken by a non-affiliated third-party with respect to the following that are maintained by such non-affiliated third party: mutual funds, private equity funds, index funds, RTFs, and similar passive investments for which the Executive has invested in; provided that the Executive has not then either directly, indirectly, or as a member of a group made, effected, initiated or caused such action or transaction to occur, or any actions taken by the Executive or anyone acting on his behalf to invest in, sell or transfer such passive investments maintained by such non-affiliated third-parties.
12.Duty to Cooperate. The Executive agrees to cooperate and make all reasonable and lawful efforts to assist the Company in addressing any issues which may arise concerning any matter with which he was involved during his employment with the Company, including, but not limited to cooperating in any litigation arising therefrom. The Company shall reimburse the Executive at a fair and reasonable rate for services provided by the Executive to the Company in connection with services provided under this provision and for all reasonable expenses incurred by the Executive in connection with services provided under this provision.
13.409A.
(a)Anything in this Agreement to the contrary notwithstanding, if at the time of the Executive’s separation from service within the meaning of Section 409A of the Code, the Company determines that the Executive is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then to the extent any payment or benefit that the Executive becomes entitled to under this Agreement on account of his separation from employment would be considered deferred compensation otherwise subject to the 20 percent additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, such payment shall not be payable and such benefit shall not be provided until the date that is the earlier of (i) six months and one day after the Executive’s separation from service or (ii) the Executive’s death.
(b)The Parties intend that this Agreement shall be administered in accordance with Section 409A of the Code. To the extent that any provision of this Agreement is ambiguous as to its compliance with Section 409A of the Code, the provision shall be read in such a manner so that all payments hereunder comply with Section 409A of the Code. Each payment pursuant to this Agreement is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A-2(b)(2). The Parties agree that this Agreement may be amended, as reasonably requested by any Party, and as may be necessary to fully comply with Section 409A of the Code and all related rules and regulations in order to preserve the payments and benefits provided hereunder without additional cost to any Party.
14.Advice of Counsel. This Agreement is a legally binding document and the Executive’s signature shall commit the Executive to its terms. The Executive acknowledges that he has been advised to discuss all aspects of this Agreement with his attorney and consultant, that he has carefully read and fully understands all of the provisions of this Agreement and that the Executive is voluntarily entering into this Agreement.
15.Attorney and Consultant Fees. Within thirty (30) calendar days of the execution of this Agreement, the Company shall reimburse the Executive for his attorneys’ and consultants’ fees associated with the negotiation of this Agreement in a check made payable to King & Spalding, LLC and The Cheeley Consulting Group, respectively, up to a maximum amount of $70,000 in the aggregate.
16.Effective Date. To accept this Agreement, the Executive must return a signed, unmodified original or PDF copy of this Agreement. This Agreement shall be effective as of June 30, 2019 (the “Effective Date”).
17.Enforceability. The Executive acknowledges that, if any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of the Agreement, other than those portions or provisions as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision shall be valid and enforceable to the fullest extent permitted by law.
18.Entire Agreement. This Agreement constitutes the complete agreement between, and contains all of the promises and undertakings by the Parties. The Executive agrees that the only consideration for signing this Agreement is the terms stated herein and that no other representations, promises, or assurances of any kind have been made to him by the Company, its attorneys, or any other person as an inducement to sign this Agreement. Any and all prior agreements, representations, negotiations and understandings among the Parties, oral or written, express or implied, with respect to the subject matter hereof are hereby superseded and merged herein. To be clear and to avoid any doubt, the Parties expressly agree that the confidentiality, non-solicitation, and non-competition provisions of this Agreement shall supersede any other confidentiality, non-solicitation, and non-competition provision executed by the Executive during his employment with the Company, including the confidentiality, non-solicitation, and non-competition provisions contained in any long-term incentive award agreement executed by Executive. The Parties expressly agree that if Executive violates the confidentiality, non-solicitation, and non-competition provisions contained herein, the Company shall be entitled to relief as outlined in Section 7(e) of this Agreement and without limiting any of the foregoing, cause an immediate forfeiture of (a) the Executive’s rights to any outstanding long-term incentive awards, and (b) with respect to the period commencing thirty-six (36) months prior to the Executive’s termination of employment with the Company and ending thirty-six (36) months following such termination of Employment (i) a forfeiture of any gain recognized by the Executive upon the sale of any shares of Company stock received as a result of the vesting of any long-term incentive awards, and (ii) a forfeiture of any vested shares of Company stock held by the Executive as a result of the vesting of any long-term incentive awards.
19.Waiver; Amendment. No waiver of any provision of this Agreement shall be effective unless made in writing and signed by the waiving Party. The failure of any Party to require the performance of any term or obligation of this Agreement, or the waiver by any Party of any breach of this Agreement shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. This Agreement may not be modified or amended except in a writing signed by both the Executive and a duly authorized officer of the Company.
20.Taxes. The Company shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement and in connection with other compensation matters to the extent that it reasonably and in good faith determines that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Company to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits made to the Executive in connection with the Executive’s employment with the Company. Notwithstanding the forgoing, no deductions or withholdings shall be taken from the attorneys’ and consultants’ fees reimbursed by the Company pursuant to Section 15 of this Agreement.
21.Governing Law; Jurisdiction; Interpretation. This Agreement shall be construed in accordance with and governed by the laws, except choice of law provisions, of the State of North Carolina and shall govern to the exclusion of the laws of any other forum. The Parties further agree that any action, special proceeding or other proceeding with respect to this Agreement shall be
brought exclusively in the federal or state courts of the State of North Carolina. The Executive and the Company irrevocably consent to the jurisdiction of the Federal and State courts of North Carolina and the Executive hereby consents and submits to personal jurisdiction in the State of North Carolina. The Executive and the Company irrevocably waive any objection, including an objection or defense based on lack of personal jurisdiction, improper venue or forum non-conveniens which either may now or hereafter have to the bringing of any action or proceeding in connection with this Agreement. The Executive acknowledges and recognizes that in the event that he has breached this Agreement, the Company may initiate a lawsuit against him in North Carolina, that the Executive waives his right to have that lawsuit be brought in a court located closer to where he may reside, and that the Executive shall be required to travel to defend himself in North Carolina.
22.Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original, but all of which together shall constitute one and the same document. Facsimile and pdf signatures shall be deemed to be of equal force and effect as originals.
[Remainder of page intentionally left blank.]
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have executed this Agreement on the date(s) indicated below.
COMPANY: | ||
Laboratory Corporation of America Holdings, | ||
a Delaware corporation | ||
By: | /s/ Sandra van der Vaart | |
Name: | Sandra van der Vaart | |
Title: | Senior Vice President, Global General Counsel and Corporate Secretary | |
Date: | August 6, 2019 | |
EXECUTIVE: | ||
By: | /s/ David P. King | |
Name: | David P. King | |
Date: | August 6, 2019 | |
EXHIBIT A
CERTIFICATE UPDATING MUTUAL RELEASE OF CLAIMS
This Certificate Updating Mutual Release of Claims (the “Certificate”) is made between Laboratory Corporation of America Holdings, a Delaware corporation (the “Company”), and David P. King (the “Executive”). The Company and the Executive are collectively referred to as the “Parties.” The Parties entered into a Transition Agreement effective as of June 30, 2019 (the “Agreement”). Capitalized terms used herein and not otherwise defined have the meanings ascribed to such terms in the Agreement. Pursuant to the Agreement, the Parties are required to execute this Certificate, which updates the mutual release of claims set forth in Section 5 of the Agreement. The Executive understands that he may not sign this Certificate until on or after the end of the Transition Period and that he must return it to the Company within twenty-one (21) days after the end of the Transition Period.
The Parties, therefore, agree as follows:
1. | A copy of this Certificate was attached to the Agreement as Exhibit A. | |
2. | In consideration of the benefits contained in the Agreement, the Parties hereby extend the mutual release of claims set forth in Section 5 of the Agreement to any and all claims that arose after the date the Parties signed the Agreement through the date the Parties signed this Certificate, subject to all other exclusions and terms set forth in the Agreement. | |
3. | The Parties have carefully read and fully understand all of the provisions of this Certificate, knowingly and voluntarily agree to all of the terms set forth in this Certificate, and acknowledge that in entering into this Certificate, they are not relying on any representation, promise or inducement made by the other with the exception of those promises contained in this Certificate and the Agreement. The Parties further acknowledge that they have been advised to discuss all aspects of this Certificate with their attorneys. | |
4. | The Parties agree that this Certificate is part of the Agreement. | |
5. | The Executive is hereby advised that: (a) he is waiving, among other things, any age discrimination claims under the Age Discrimination in Employment Act, provided, however, he is not waiving any such claims that may arise after the date this Certificate is executed; (b) he has had twenty-one (21) days within which to consider the execution of this Certificate, before signing it; and (c) for a period of seven (7) days following the execution of this Certificate, he may revoke this Certificate by delivering written notice (by the close of business on the seventh day) to the Company. This Certificate shall become effective on the business day immediately following the expiration of the revocation period, provided that Executive does not revoke this Certificate during the revocation period. | |
[Signature page follows.]
COMPANY: | ||
Laboratory Corporation of America Holdings, | ||
a Delaware corporation | ||
By: | /s/ Sandra van der Vaart | |
Name: | Sandra van der Vaart | |
Title: | Senior Vice President, Global General Counsel and Corporate Secretary | |
Date: | August 6, 2019 | |
EXECUTIVE: | ||
By: | /s/ David P. King | |
Name: | David P. King | |
Date: | August 6, 3019 | |
EXHIBIT B
Grant | Grant Date | Exercise Price | Total Award | Total Outstanding | Vesting 2020 | Vesting 2021 | Vesting 2022 |
RSU | 2/7/2017 | 12,660 | 4,220 | 4,220 | |||
RSU | 2/12/2018 | 10,540 | 7,027 | 3,513 | 3,514 | ||
RSU | 2/12/2019 | 12,710 | 12,710 | 4,236 | 4,237 | 4,237 | |
PA | 2/7/2017 | 37,980* | 37,980* | 37,980* | |||
PA | 2/12/2018 | 31,620* | 31,620* | 31,620* | |||
PA | 2/12/2019 | 38,130* | 38,130* | 38,130* | |||
NQSO | 2/7/2017 | $ 130.60 | 48,300 | 16,100 | 16,100 | ||
NQSO | 2/12/2018 | $ 168.49 | 41,000 | 27,334 | 13,667 | 13,667 | |
NQSO | 2/12/2019 | $ 146.59 | 52,300 | 52,300 | 17,433 | 17,433 | 17,434 |
*Based on target.
Exhibit 31.1
Certification
I, David P. King, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laboratory Corporation of America Holdings;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | August 8, 2019 | ||
By: | /s/ DAVID P. KING | ||
David P. King | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
Exhibit 31.2
Certification
I, Glenn A. Eisenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laboratory Corporation of America Holdings;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | August 8, 2019 | ||
By: | /s/ GLENN A. EISENBERG | ||
Glenn A. Eisenberg | |||
Chief Financial Officer | |||
(Principal Financial Officer) | |||
Exhibit 32
Written Statement of
Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
The undersigned, the Chief Executive Officer and the Chief Financial Officer of Laboratory Corporation of America Holdings (the “Company”), each hereby certifies that, to his knowledge on the date hereof:
(a) the Form 10-Q of the Company for the Period Ended June 30, 2019, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: | /s/ DAVID P. KING | |
David P. King | ||
Chief Executive Officer | ||
August 8, 2019 | ||
By: | /s/ GLENN A. EISENBERG | |
Glenn A. Eisenberg | ||
Chief Financial Officer | ||
August 8, 2019 | ||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Laboratory Corporation of America Holdings and will be retained by Laboratory Corporation of America Holdings and furnished to the Securities and Exchange Commission or its staff upon request.