The Company recognizes the strategic value of managed care in the industry and continues to have strong relationships with national managed care organizations. On October 3, 2006, the Company announced that it had entered into a new, ten-year agreement with United HealthCare Insurance Company (UnitedHealthcare), effective January 1, 2007. Under the terms of the Agreement, the Company has become UnitedHealthcare’s exclusive national laboratory, offering a comprehensive suite of services, and will also work with other regional and local laboratory providers to selectively develop, implement and manage for UnitedHealthcare a series of laboratory networks in selected regions across the United States. As part of this network development and oversight process, the Company assumed contractual responsibility for managing the Oxford Health Plans laboratory network located in the greater New York metropolitan region effective January 1, 2007. Also effective January 1, 2007, the Company became the exclusive national capitated UnitedHealthcare laboratory provider for the HMO benefit plans of PacifiCare of Colorado, Neighborhood Health Partnership in Florida, and Mid Atlantic Medical Services, L.L.C. (MAMSI) in Maryland and Virginia, and will remain the exclusive provider for HMO benefit plans for PacifiCare of Arizona. Over a period of several years, the Company will continue to perform more of UnitedHealthcare’s testing. During the first three years of the ten-year agreement, the Company has committed to reimburse UnitedHealthcare up to $200 million for transition costs related to developing an expanded network in the Oxford, MAMSI and Neighborhood Health Partnership markets, as well as in California and Colorado. During the first six months of 2007, approximately $16.7 of such transition payments were billed to the Company by UnitedHealthcare and approximately $5.4 had been remitted by the Company.
During the fourth quarter of 2006, and the first two quarters of 2007, the Company opened approximately 480 new patient service centers and hired over 1,800 new service positions to provide increased accessibility to the clients and patients of UnitedHealthcare as well as all of the Company’s customer base. By increasing its customer service access points and by working with UnitedHealthcare to convert its members’ business over to LabCorp, the Company believes that it has been able to reduce the amount of UnitedHealthcare’s transition costs. Based on the preliminary trend rates of the transition payment amounts billed by UnitedHealthcare during the first seven months of 2007, the Company believes that its total reimbursement commitment under this agreement will be approximately 25% less than the contractual limit. The Company is amortizing the total estimated transition costs over the life of the contract.
On March 1, 2007, the Company announced that it had received notice that it would no longer be a contracted laboratory provider for Aetna Inc. (Aetna) effective July 1, 2007. As a result of this decision, the Company’s direct Aetna revenue and some associated business will be at risk. The Company has expanded its geographic reach into the markets where Aetna has the most covered lives and will make every effort to continue to be of service to Aetna and its customers.
During the second quarter of 2007, the Company executed a multi-year clinical laboratory services contract renewal with CIGNA HealthCare (CIGNA), whereby the Company will continue to be a contracted laboratory provider in all CIGNA markets. Additionally, effective January 1, 2008, the Company will no longer be contractually restricted from marketing that it is a fully participating, in-network provider to CIGNA for all services in all major markets.
With the Company’s expanding geographic base of customer service locations, it will continue to focus on all of its other managed care partners in order to achieve superior patient care at competitive prices. Wellpoint, Inc. (Wellpoint) continues to be a valued partner and the Company continues to work with Wellpoint on ways to expand the Company’s national strategic relationship, including the Company’s commitment to maximize the value of Wellpoint’s laboratory testing spend. In addition, Humana Inc. (Humana) is currently evaluating its laboratory network and the Company has responded to Humana’s request for proposal. The Company is in discussions with Humana and hopes to achieve a satisfactory outcome.
Net sales for the three months ended June 30, 2007 were $1,043.1, an increase of $139.4, or approximately 15.4%, from $903.7 for the comparable 2006 period. The sales increase is a result of an increase of approximately 14.2% in accession volume (primarily volume growth in the Company’s
Managed Care business) and 1.2% in price. The improvement in pricing is primarily due to continued shifts in the Company’s test mix in core, genomic and esoteric testing.
Cost of sales, which includes primarily laboratory and distribution costs, was $601.1 for the three months ended June 30, 2007 compared to $510.9 in the corresponding 2006 period, an increase of $90.2, or 17.7%. Cost of sales as a percentage of net sales was 57.6% for the three months ended June 30, 2007 and 56.5% in the corresponding 2006 period. As a percentage of sales, the increase in cost of sales was driven by the Company’s roll-out of patient service centers and other customer service infrastructure, along with increases in cost of materials due to shifts in the Company’s test mix, coupled with providing new clients with specimen collection supplies.
Selling, general and administrative expenses increased to $209.1 for the three months ended June 30, 2007 from $190.2 in the same period in 2006. As a percentage of net sales, selling, general and administrative expenses were 20.0% and 21.0% for the three months ended June 30, 2007 and 2006, respectively. This decrease in selling, general and administrative expenses as a percentage of net sales is the result of a continued focus on controlling costs.
The amortization of intangibles and other assets was $13.4 and $13.0 for the three months ended June 30, 2007 and 2006, respectively.
During the three months ended June 30, 2007, the Company recorded restructuring charges of $7.0 primarily related to the closure of redundant facilities. The majority of these costs related to employee severance and contractual obligations associated with leased facilities and equipment. Of this amount, $2.4 related to employee severance benefits for approximately 170 employees primarily in technical, service and management functions, $3.7 related to contractual obligations associated with leased facilities and equipment, and $0.9 related to settlement of a preacquisition liability.
Interest expense was $12.6 for the three months ended June 30, 2007 compared with $11.6 for the same period in 2006.
Income from investments in joint venture partnerships was $19.3 for the three months ended June 30, 2007 compared with $17.9 for the same period in 2006. 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 41.3% for the three months ended June 30, 2007 compared to 40.6% for the three months ended June 30, 2006 driven by the Company’s adoption of FIN 48.
Six months ended June 30, 2007 compared with six months ended June 30, 2006
Net sales for the six months ended June 30, 2007 were $2,041.8, an increase of $259.6, or approximately 14.6%, from $1,782.2 for the comparable 2006 period. The sales increase is a result of an increase of approximately 13.3% in accession volume (primarily volume growth in the Company’s Managed Care business) and 1.3% in price. The improvement in pricing is primarily due to continued shifts in the Company’s test mix in core, genomic and esoteric testing.
Cost of sales, which includes primarily laboratory and distribution costs, was $1,178.1 for the six months ended June 30, 2007 compared to $1,016.7 in the corresponding 2006 period, an increase of $161.4, or 15.9%. Cost of sales as a percentage of net sales was 57.7% for the six months ended June 30, 2007 and 57.0% in the corresponding 2006 period. As a percentage of sales, the increase in cost of sales was driven by the Company’s roll-out of patient service centers and other customer service infrastructure, along with increases in cost of materials due to shifts in the Company’s test mix, coupled with providing new clients with specimen collection supplies.
Selling, general and administrative expenses increased to $414.1 for the six months ended June 30, 2007 from $381.1 in the same period in 2006. As a percentage of net sales, selling, general and administrative expenses were 20.3% and 21.4% for the six months ended June 30, 2007 and 2006, respectively. This decrease in selling, general and administrative expenses as a percentage of net sales is the result of a continued focus on controlling costs as well as reduction in the Company’s bad debt rate.
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The amortization of intangibles and other assets was $26.7 and $26.0 for the six months ended June 30, 2007 and 2006, respectively.
Interest expense was $25.2 for the six months ended June 30, 2007 compared with $23.5 for the same period in 2006.
Income from investments in joint venture partnerships was $35.7 for the six months ended June 30, 2007 compared with $33.3 for the same period in 2006. 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 41.3% for the six months ended June 30, 2007 compared to 40.7% for the six months ended June 30, 2006 driven by the Company’s adoption of FIN 48.
LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)
Net cash provided by operating activities was $338.9 and $307.1 for the six months ended June 30, 2007 and 2006, respectively. The increase in cash flows primarily resulted from cash collections relative to the increase in net earnings.
Capital expenditures were $73.0 and $42.4 at June 30, 2007 and 2006, respectively. The Company expects capital expenditures of approximately $130 to $140 in 2007, including anticipated capital expenditures related to the UnitedHealthcare contract. These expenditures are intended to support the Company’s strategic initiatives centered around managed care, scientific differentiation, customer service and quality. 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 as well as borrowings under the Company’s revolving credit facilities.
At June 30, 2007, the Company provided letters of credit aggregating approximately $111.1, primarily in connection with certain insurance programs and contractual guarantees on obligations under the Company’s new contract with UnitedHealthcare. The UnitedHealthcare contract requires that the Company provide a $50.0 letter of credit, as security for the Company’s contingent obligation to reimburse up to $200.0 in transitional costs during the first three years of the contract. Letters of credit provided by the Company are secured by the Company’s senior credit facilities and are renewed annually, around mid-year.
During the six months ended June 30, 2007, the Company repurchased $409.5 of stock representing 5.8 shares. As of June 30, 2007, the Company had outstanding authorization to purchase approximately $440.5 of Company common stock.
In addition to the Company’s contractual obligations disclosed in Form 10-K for the year ended December 31, 2006, the Company had a $67.5 and $56.8 reserve for unrecognized tax benefits at June 30, 2007 and December 31, 2006, respectively. Substantially all of these tax reserves are classified in other long-term liabilities and current taxes payable in the Company’s Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006, respectively.
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; however, the Company continually reassesses its liquidity position in light of market conditions and other relevant factors.
Zero-coupon Subordinated Notes
On July 24, 2007, the Company announced that its zero coupon subordinated Liquid Yield Option™ Notes due 2021 (“LYONs”) and Zero Coupon Convertible Subordinated Notes due 2021 (“Zero Coupon Notes”) may be converted as follows. LYONs are convertible into Common Stock of LabCorp at the conversion rate of 13.4108 per $1,000 principal amount at maturity of the LYONs, subject to the terms of the LYONs and the Indenture, dated as of September 11, 2001 between LabCorp and The Bank of New York, as trustee (“Trustee”) and conversion agent. The Zero Coupon Notes are convertible into cash and
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Common Stock of the Company, if any, subject to the terms of the Zero Coupon Notes and the Indenture, dated as of October 24, 2006 between the Company, the Trustee and the conversion agent.
On March 19, 2007, the Company announced that for the period of March 12, 2007 to September 11, 2007, the LYONs will, subject to the terms of the LYONs, accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a LYON for the five trading days ended March 7, 2007, in addition to the continued accrual of the original issue discount. Similarly, the Zero Coupon Notes will also accrue contingent cash interest over that period using the same calculation method as described for the LYONs. Contingent cash interest, which the Company has determined to be approximately $1.22 per Note, will be payable to holders of the LYONs or Zero Coupon Notes as of the record date, which is August 27, 2007. The payment of contingent cash interest is expected to be made on September 11, 2007.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
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 “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. |
The Company believes these embedded derivatives had no fair value at June 30, 2007.
ITEM 4. Controls and Procedures
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 were effective as of June 30, 2007.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2007 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 9 to the Company’s Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2007, which is incorporated by reference. |
| Item 1A. | Risk Factors
Information regarding risk factors appears in Part I - Item-1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K. |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
(Shares and dollars in millions, except per share data) |
The following table sets forth information with respect to purchases of shares of the Company’s common stock made during the six months ended June 30, 2007, by or on behalf of the Company:
| Total Number of Shares Repurchased | | Average Price Paid Per Share | | Total Number of Shares (Cumulative) Repurchased as Part of Publicly Announced Program | | Maximum Dollar Value of Shares that May Yet Be Repurchased Under the Program |
|---|
|
| |
| |
| |
|
| January 1 - January 31 | | | | -- | | | $ | -- | | | | -- | | | $ | 350.2 | |
| February 1 - February 28 | | | | 0.2 | | | | 79.55 | | | | 0.2 | | �� | | 338.3 | |
| March 1 - March 31 | | | | 5.0 | | | | 69.04 | | | | 5.0 | | | | 492.0 | |
| April 1 - April 30 | | | | 0.2 | | | | 73.74 | | | | 0.2 | | | | 475.3 | |
| May 1 - May 31 | | | | 0.2 | | | | 78.47 | | | | 0.2 | | | | 458.1 | |
| June 1 - June 30 | | | | 0.2 | | | | 78.94 | | | | 0.2 | | | | 440.5 | |
|
| |
| |
| | |
| | | | | 5.8 | | | $ | 70.25 | | | | 5.8 | | | | | |
As of June 30, 2007, the Company had outstanding authorization from the Board of Directors to purchase approximately $440.5 of Company common stock.
Item 4. | Submission of Matters to a Vote of Security Holders |
The following information was provided by American Stock Transfer & Trust Company in their proxy tabulation reports dated May 18, 2007, reflecting voting activity for the Company's Annual Meeting of Stockholders held on May 16, 2007:
Total outstanding shares of Laboratory Corporation of America Holdings (NEW): | 117,845,583 |
(excludes 21,636,957 non-voting Treasury shares)
Total shares voted: | 106,484,026 |
| Votes | Votes | |
| For | Withheld | |
| | | | | | | |
Election of the members
of the Board of Directors:
Thomas P. Mac Mahon | 103,011,606 | 3,472,418 |
Kerrii B. Anderson | 105,465,120 | 1,018,904 |
Jean-Luc Bélingard | 76,461,400 | 30,022,624 |
| | | |
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David P. King | 103,189,172 | 3,294,852 |
Wendy E. Lane | 100,847,054 | 5,636,970 |
Robert E. Mittelstaedt, Jr. | 103,198,948 | 3,285,076 |
Arthur H. Rubenstein, MBBCh | 105,508,601 | 975,423 |
Bradford T. Smith | 103,119,511 | 3,364,513 |
M. Keith Weikel | 105,483,793 | 1,000,231 |
R. Sanders Williams, M.D. | 105,435,180 | 1,048,844 |
| | | |
Votes | Votes | Votes | |
| For | Against | Abstained |
| | | | | | |
Ratification of the appointment of
PricewaterhouseCoopers LLP as the Company’s
independent accountants for the fiscal year
ending December 31, 2007: | 103,351,297 | 2,462,447 | 670,279 |
Total outstanding shares of Laboratory Corporation of America Holdings (OLD): | 3,008 |
Total shares voted: | 324 |
| Votes | Votes | |
| For | Withheld | |
| | | | | | | | |
Election of the members
of the Board of Directors:
Thomas P. Mac Mahon | 324 | 0 |
Kerrii B. Anderson | 324 | 0 |
Jean-Luc Bélingard | 324 | 0 |
David P. King | 324 | 0 |
Wendy E. Lane | 324 | 0 |
Robert E. Mittelstaedt, Jr. | 324 | 0 |
Arthur H. Rubenstein, MBBCh | 324 | 0 |
Bradford T. Smith | 324 | 0 |
M. Keith Weikel | 324 | 0 |
R. Sanders Williams, MD | 324 | 0 |
Votes | Votes | Votes | |
| For | Against | Abstained |
| | | | | | |
Ratification of the appointment of
PricewaterhouseCoopers LLP as the Company’s
independent accountants for the fiscal year
ending December 31, 2007: | 324 | 0 | 0 |
12.1* | - Ratio of earnings to fixed charges |
31.1* | - Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
31.2* | - Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
| 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) |
| | |
* filed herewith
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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 | |
| President and | |
| Chief Executive Officer | |
| | | | |
By: /s/ WILLIAM B. HAYES | |
| William B. Hayes | |
| Executive Vice President, | |
| Chief Financial Officer and |
| Treasurer | |
| | | | | |
August 1, 2007
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