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 þ No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨ .
The number of shares outstanding of the issuer's common stock is 134,614,227 shares, net of treasury stock as of April 29, 2005.
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Item 1. Financial Information
The accompanying notes are an integral part of these consolidated financial statements.
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The consolidated financial statements include the accounts of Laboratory Corporation of America Holdings and its majority-owned subsidiaries for which it exercises control. Long-term investments in affiliated companies in which the Company owns greater than 20%, and therefore 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% and no representation on the Company’s Board of Directors) are accounted for using the cost method. All significant inter-company transactions and accounts have been eliminated. The Company does not have any variable interest entities or special purpose entities whose financial results are not included in the consolidated financial statements.
The financial statements of the Company’s 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 earnings(loss)".
The accompanying condensed consolidated financial statements of the Company are unaudited. In the opinion of management, all adjustments (which include only normal recurring accruals) necessary for a fair presentation of such financial statements have been included. Interim results are not necessarily indicative of results for a full year.
The financial statements and notes are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in the Company’s 2004 annual report on Form 10-K. Therefore, the interim statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report.
Basic earnings per share is computed by dividing net earnings 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 beginning of the period presented. Potentially dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, 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: (shares in millions)
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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:
During March 2005, the Company granted 1,281,500 options at a price of $47.89 under its 2000 Stock Incentive Plan.
During March 2005, the Company granted aggregate awards of 142,375 shares of restricted stock and 424,425 performance share awards at a weighted average price of $47.89 under its 2000 Stock Incentive Plan. The restricted stock becomes vested annually in equal one third increments beginning on the first anniversary of the grant. The performance share awards represent a three year award opportunity for the period 2005-2007 and become vested in 2008. Performance share awards are subject to certain earnings per share and revenue targets, the achievement of which may increase or decrease the number of shares which the grantee receives upon vesting.
The tax benefits associated with the exercise of non-qualified stock options reduced taxes currently payable by $3.9 and $2.7 for the three months ended March 31, 2005 and 2004, respectively. Such benefits are credited to additional paid-in-capital.
The Company applies the provisions of APB Opinion No. 25 in accounting for its employee stock option and stock purchase plans and, accordingly, no compensation cost has been recognized for these plans in the financial statements. Had the Company determined compensation cost for these two plans based on the fair value method as defined in Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation”, the impact on the Company’s net earnings on a pro forma basis is indicated below:
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On October 20, 2004, the Company’s Board of Directors authorized a stock repurchase program under which the Company may purchase up to an aggregate of $250.0 of its common stock from time-to-time. During the first three months of 2005, the Company purchased 2.3 million shares of its common stock totaling $112.0 with cash flow from operations.
On April 21, 2005, the Company’s Board of Directors authorized a new stock repurchase program under which the Company may purchase up to an aggregate of $250.0 of its common stock from time-to-time.
On January 13, 2005, the Company entered into a $350.0 senior credit facility with Credit Suisse First Boston and UBS Securities LLC, acting as Co-Lead Arrangers, and a group of financial institutions. This new five year credit facility replaced the existing $150.0 364-day revolving credit facility and the $200.0 three-year revolving credit facility which was amended on January 14, 2003 and was scheduled to expire on February 18, 2005. The new facility also provides for an accordion feature to increase the facility up to an additional $150 million, with the consent of the lenders, if needed to support the Company’s growth. The credit facility bears interest at varying rates based upon the Company’s credit rating with Standard & Poor’s Ratings Services. There were no balances outstanding on the Company’s senior credit facilities at March 31, 2005 and 2004.
The senior credit facility is available for general corporate purposes, including working capital, capital expenditures, funding of share repurchases and other payments, and acquisitions. The agreement contains certain debt covenants which require that the Company maintain leverage and interest coverage ratios of 2.5 to 1.0 and 5.0 to 1.0, respectively. Both ratios are calculated in relation to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The covenants also limit the payment of dividends. The Company is in compliance with all covenants at March 31, 2005.
Interest rate swap agreements, which have been used by the Company from time to time in the management of interest rate exposure, are accounted for at fair value. Amounts to be paid or received under such agreements are recognized as interest income or expense in the periods in which they accrue.
The Company’s zero coupon-subordinated notes contain the following two features that are considered to be embedded derivative instruments under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”:
Based upon independent appraisals, these embedded derivatives had no fair market value at March 31, 2005 and 2004.
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On February 3, 2005, the Company acquired all of the outstanding shares of US Pathology Labs (“US LABS”) for approximately $155 in cash. US LABS, based in Irvine, California, is a national, anatomic pathology reference laboratory devoted to comprehensive, high-quality, rapid-response cancer testing. The company provides diagnostic, prognostic, and predictive cancer testing services to hospitals, physician offices and surgery centers.
The changes in the carrying amount of goodwill (net of accumulated amortization) for the three-month period ended March 31, 2005 and for the year ended December 31, 2004 are as follows:
The components of identifiable intangible assets are as follows:
Amortization of intangible assets for the three month periods ended March 31, 2005 and 2004 was $12.1 and $10.3, respectively. Amortization expense for the net carrying amount of intangible assets is estimated to be $36.6 for the remainder of fiscal 2005, $48.9 in fiscal 2006, $47.2 in fiscal 2007, $44.5 in fiscal 2008, $43.6 in fiscal 2009 and $387.3 thereafter.
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The following represents the Company’s restructuring activities for the period indicated:
In December 2004 the Financial Standards Accounting Board (FASB) issued SFAS 123(R),Share-Based Payment (revised 2004). This Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123(R) is effective for annual periods beginning after June 15, 2005. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans. The Company has not finalized what, if any, changes may be made to its equity compensation plans in light of the accounting change, and therefore is not yet in a position to quantify its impact. The Company expects to announce the impact in connection with reporting its fourth quarter and full year 2005 financial results. The impact on cash from operations of adopting the new accounting standard cannot be estimated at this time. See “Note 3 to Condensed Consolidated Financial Statements” for proforma impact of expensing all equity-based compensation, which the Company believes would approximate the annual effect of adopting the new accounting standard.
On June 24, 2003, the Company and certain of its executive officers were sued in the United States District Court for the Middle District of North Carolina in the first of a series of putative shareholder class actions alleging securities fraud. Since that date, at least five other complaints containing substantially identical allegations have been filed against the Company and certain of the Company’s executive officers. Each of the complaints alleges that the defendants violated the federal securities laws by making material misstatements and/or omissions that caused the price of the Company’s stock to be artificially inflated between February 13 and October 3, 2002. The plaintiffs seek certification of a class of substantially all persons who purchased shares of the Company’s stock during that time period and unspecified monetary damages. These six cases have been consolidated and will proceed as a single case. The defendants deny any liability and intend to defend the case vigorously. The plaintiffs have filed a consolidated amended complaint. On July 16, 2004, the defendants filed a motion to dismiss the consolidated complaint and
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continue to defend the case vigorously. At this time, it is premature to make any assessment of the potential outcome of the cases or whether they could have a material adverse effect on the Company’s financial condition.
The Company is the appellant in a patent case originally filed by Competitive Technologies, Inc. and Metabolite Laboratories, Inc. in the United States District Court for the District of Colorado. After a jury trial, the district court entered judgment against the Company for patent infringement, with total damages and attorney’s fees payable by the Company of approximately $7.8 million. The underlying judgment has
been paid. The Company vigorously contested the judgment and appealed the case to the United States Court of Appeals for the Federal Circuit. On June 8, 2004, that court affirmed the judgment against the Company and, on August 5, 2004, the Company’s request for rehearing was denied. On November 3, 2004, the Company filed a petition for a writ of certiorari with the United States Supreme Court. In connection with the Company’s petition for review, on February 28, 2005 the Court invited the United States Solicitor General to express the views of the United States relating to validity of certain method patents, such as the patent at issue in this case. The Company plans to continue to vigorously contest the Judgment until it exhausts all reasonable appellate rights.
The Company is also involved in various claims and legal actions arising in the ordinary course of business. These matters include, but are not limited to, intellectual property disputes, professional liability, employee related matters, and inquiries from governmental agencies and Medicare or Medicaid payers and managed care payers requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or third parties. In the opinion of management, based upon the advice of counsel and consideration of all facts available at this time, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company. The Company is also named from time to time in suits brought under the qui tam provisions of the False Claims Act. These suits typically allege that the Company has made false statements and/or certifications in connection with claims for payment from federal health care programs. They 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 health care field today and, in the opinion of management, based upon the advice of counsel and consideration of all facts available at this time, the ultimate disposition of those qui tam matters presently known to the Company is not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company.
The Company believes that it is in compliance in all material respects with all statutes, regulations and other requirements applicable to its clinical laboratory operations. The clinical laboratory testing industry is, however, subject to extensive regulation, and the courts have not interpreted many of these statutes and regulations. There can be no assurance therefore that those applicable statutes and regulations might not 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 fines and the loss of various licenses, certificates and authorizations.
Under the Company’s present insurance programs, coverage is obtained for catastrophic exposures 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. At March 31, 2005 and 2004, the Company had provided letters of credit aggregating approximately $63.4 and $55.5 respectively, primarily in connection with certain insurance programs.
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Substantially all employees of the Company are covered by a defined benefit retirement plan (the “Company Plan”). The benefits to be paid under the Company Plan are based on years of credited service and average final compensation. The Company’s policy is to fund the Company Plan with at least the minimum amount required by applicable regulations.
The Company has a second defined benefit plan which covers its senior management group that provides for the payment of the difference, if any, between the amount of any maximum limitation on annual benefit payments under the Employee Retirement Income Security Act of 1974 and the annual benefit that would be payable under the Company Plan but for such limitation. This plan is an unfunded plan.
The components of net periodic pension cost for both of the defined benefit plans are summarized as follows:
The Company assumed obligations under a subsidiary’s postretirement medical plan. Coverage under this plan is restricted to a limited number of existing employees of the subsidiary. This plan is unfunded and the Company’s policy is to fund benefits as claims are incurred. The components of postretirement benefit expense are as follows:
The Medicare Prescription Drug Improvement and Modernization Act of 2003 was signed into law on December 8, 2003. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) which will begin in 2006. Laboratory Corporation of America Holdings has concluded that its post-retirement health care plan provides prescription drug benefits that will qualify for the federal subsidy provided by the Act.
The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $24.0 to its defined pension plan in 2005. As of March 31, 2005, the Company had made no contributions to its defined pension plan. The Company presently anticipates contributing $24.0 to fund its pension plan in 2005.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
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 discussions with Company management, including:
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Net sales for the three months ended March 31, 2005 were $799.1, an increase of $46.6, or approximately 6.2%, from $752.5 for the comparable 2004 period. The sales increase is a result of an increase of approximately 0.4% in volume (primarily volume growth in genomic and esoteric testing of 8.4% as volume decreased 1.2% in the routine testing business). Price increased by 5.8% for the quarter.
Cost of sales, which includes primarily laboratory and distribution costs, was $460.8 for the three months ended March 31, 2005 compared to $434.9 in the corresponding 2004 period, an increase of $25.9, or 5.9%. The increase in cost of sales is primarily the result of increased volume in genomic and esoteric testing discussed above. Cost of sales as a percentage of net sales was 57.6% for the three months ended March 31, 2005 and 57.7% in the corresponding 2004 period.
Selling, general and administrative expenses increased to $168.6 for the three months ended March 31, 2005 from $163.0 in the same period in 2004. As a percentage of net sales, selling, general and administrative expenses were 21.0% and 21.6% for the three months ended March 31, 2005 and 2004, respectively. This decrease in selling, general and administrative expenses as a percentage of net sales is primarily the result of a reduced effective bad debt expense rate, resulting from improved billing and collection performance, and the continued impact of the Company’s cost control initiatives.
The amortization of intangibles and other assets was $12.1 and $10.3 for the three months ended March 31, 2005 and 2004. The increase in the amortization expense for the three months ended March 31, 2005 is a result of business acquisitions.
Interest expense was $8.5 for the three months ended March 31, 2005 compared with $9.3 for the same period in 2004.
Income from equity investments was $13.7 for the three months ended March 31, 2005 compared with $12.6 for the same period in 2004. This income represents the Company’s ownership share in joint venture partnerships. A significant portion of this income is derived from investments in Ontario and Alberta, Canada, and is earned in Canadian dollars.
The provision for income taxes as a percentage of earnings before taxes was 40.7% for the three months ended March 31, 2005 compared to 41.0% for the three months ended March 31, 2004.
Net cash provided by operating activities was $154.5 and $147.6 for the three months ended March 31, 2005 and March 31, 2004, respectively. The increase in cash flows from operations primarily resulted from improved earnings and the expansion of the business through acquisitions.
Capital expenditures were $25.5 and $20.2 at March 31, 2005 and 2004, respectively. The Company expects total capital expenditures of approximately $110.0 to $125.0 in 2005. These expenditures are intended to support the Company’s strategic initiatives centered around customer retention, scientific differentiation and managed care. In addition, the Company continues to make important investments in information technology connectivity with its customers and financial systems. Such expenditures are expected to be funded by cash flow from operations.
On October 20, 2004, the Company’s Board of Directors authorized a stock repurchase program under which the Company may purchase up to an aggregate of $250.0 of its common stock from time-to-time. During the first three months of 2005, the Company purchased approximately 2.3 million shares of its common stock totaling $112.0 with cash flow from operations.
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On March 30, 2005, the Company announced a definitive agreement to acquire all of the outstanding shares of Esoterix, Inc. for approximately $150 in cash. The transaction which is subject to regulatory approval is expected to close in the second quarter.
Based on current and projected levels of operations, coupled with availability under its revolving credit facilities, the Company believes it has sufficient liquidity to meet both its short-term and long-term cash needs.
Contractual Cash Obligations (in millions)
The Company addresses its exposure to market risks, principally the market risk associated with changes in interest rates, through a controlled program of risk management that has included in the past, the use of derivative financial instruments such as interest rate 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. The Company does not believe that its exposure to market risk is material to the Company’s financial position or results of operations.
The Company’s zero coupon-subordinated notes contain the following two features that are considered to be embedded derivative instruments under SFAS No. 133:
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Based upon independent appraisals, these embedded derivatives had no fair value at March 31, 2005.
As of the end of the period covered by the Form 10-Q, the Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2005.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
On October 20, 2004, the Company's Board of Directors authorized a stock repurchase program under which the Company may purchase up to an aggregate of $250.0 of its common stock from time-to-time. (Shares and dollars in millions)
* Does not include the effect of new $250.0 stock repurchase program authorized by the Company's Board of Directors on April 21, 2005.
* filed herewith
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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 CORPORATIONOF AMERICA HOLDINGSRegistrant
May 4, 2005
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