UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11353
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LABORATORY CORPORATION OF AMERICA HOLDINGS
- -------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of principal executive offices) (Zip code)
(910) 229-1127
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's common stock is
122,921,605 shares as of August 13, 1996, of which 61,329,256 shares
are held by indirect wholly owned subsidiaries of Roche Holding Ltd.
The number of warrants outstanding to purchase shares of the
issuer's common stock is 22,151,308 as of August 13, 1996, of which
8,325,000 are held by an indirect wholly owned subsidiary of Roche
Holding Ltd.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, except per share data)
June 30, December 31,
1996 1995
----------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 24.6 $ 16.4
Accounts receivable, net 470.3 425.6
Inventories 53.9 51.3
Prepaid expenses and other 20.0 21.4
Deferred income taxes 64.0 63.3
Income taxes receivable -- 21.9
-------- -------
Total current assets 632.8 599.9
Property, plant and equipment, net 297.3 304.8
Intangible assets, net 890.7 916.7
Other assets, net 15.6 15.8
-------- --------
$1,836.4 $1,837.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72.3 $ 106.2
Accrued expenses and other 163.2 173.5
Current portion of long-term debt 75.0 70.8
Revolving credit facility classified
as current 323.0 --
Long-term debt classified as current 675.0 --
-------- --------
Total current liabilities 1,308.5 350.5
Revolving credit facility -- 218.0
Long-term debt, less current portion -- 712.5
Capital lease obligation 9.5 9.6
Other liabilities 115.1 135.0
Stockholders' equity:
Preferred stock, $0.10 par value;
10,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $0.01 par value;
220,000,000 shares authorized;
122,921,605 shares and 122,908,722
shares issued and outstanding at
June 30, 1996 and December 31,
1995, respectively 1.2 1.2
Additional paid-in capital 411.0 411.0
Accumulated deficit (8.9) (0.6)
-------- --------
Total stockholders' equity 403.3 411.6
-------- --------
$1,836.4 $1,837.2
======== ========
<FN>
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions, except per share data)
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
----------------- -------------------
1996 1995 1996 1995
------- ------- ------- --------
Net sales $ 813.9 $ 611.1 $ 410.0 $ 367.3
Cost of sales 603.8 422.7 300.5 258.4
Gross profit 210.1 188.4 109.5 108.9
Selling, general and
administrative expenses 147.4 95.4 81.9 57.4
Amortization of intangibles
and other assets 14.8 11.5 7.5 6.7
Restructuring and non-
recurring charges 23.0 65.0 23.0 65.0
Provision for settlements -- 10.0 -- 10.0
------- ------- ------ ------
Operating income (loss) 24.9 6.5 (2.9) (30.2)
Other income (expense):
Investment income 0.9 0.7 0.2 0.3
Interest expense (33.7) (31.1) (17.0) (17.4)
------- ------- ------ ------
Loss before income
taxes and extraordinary item (7.9) (23.9) (19.7) (47.3)
Provision for income taxes 0.4 (5.1) (5.5) (15.7)
------- ------- ------- ------
Loss before extraordinary item (8.3) (18.8) (14.2) (31.6)
Extraordinary item -
Loss on early extinguishment
of debt, net of income tax
benefit of $5.2 -- (8.3) -- (8.3)
-------- ------- ------- ------
Net loss $ (8.3) $ (27.1) $(14.2) $(39.9)
======== ======= ======= ======
Net loss per common share:
Loss per common share
before extra-
ordinary loss $ (0.07) $(0.20) $(0.12) $(0.28)
Extraordinary loss per
common share $ -- $(0.08) $ -- $(0.08)
-------- ------- ------- -------
Net loss per common share $ (0.07) $(0.28) $(0.12) $(0.36)
======== ======= ======= =======
Dividends per common share $ -- $ -- $ -- $ --
======== ======= ======= =======
<FN>
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30,
-------------------
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8.3) $ (27.1)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Restructuring and non-recurring
charges 23.0 65.0
Provision for settlements -- 10.0
Extraordinary loss, net of
income tax benefits -- 8.3
Depreciation and amortization 42.4 32.7
Deferred income taxes,net (6.0) (22.8)
Provision for doubtful accounts,
net 11.4 0.4
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (56.1) (29.0)
Decrease (increase) in inventories (1.5) 5.5
Decrease (increase)in prepaid
expenses and other (1.5) 1.2
Change in income taxes
receivable/payable, net 22.5 3.7
Decrease in accounts payable
and other (33.7) (11.4)
Payments for restructuring charges (9.3) (4.9)
Payments for settlement and
related expenses (0.3) (27.3)
Other, net (3.6) (4.1)
-------- -------
Net cash provided by (used for)operating
activities (21.0) 0.2
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (33.9) (27.1)
Acquisitions of businesses (3.2) (10.4)
-------- -------
Net cash used for investing
activities (37.1) (37.5)
-------- -------
<FN>
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30,
-----------------
1996 1995
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities $ 185.0 $ 236.0
Payments on revolving credit facilities (80.0) (255.0)
Proceeds from long-term debt -- 800.0
Payments on long-term debt (33.3) (430.0)
Deferred payments on acquisitions (5.4) (7.1)
Proceeds from exercise of stock options -- 0.3
Dividends paid on common stock -- (474.8)
Cash received for issuance of
common stock -- 135.7
Cash received for warrants -- 51.0
------- -------
Net cash provided by financing
activities 66.3 56.1
------- -------
Net increase in cash and
cash equivalents 8.2 18.8
Cash and cash equivalents at
beginning of year 16.4 26.8
------- -------
Cash and cash equivalents at
end of period $ 24.6 $ 45.6
======= =======
Supplemental schedule of cash
flow information:
Cash paid(received)during the period for:
Interest $ 35.7 $ 23.8
Income taxes (16.2) 6.9
Disclosure of non-cash financing
and investing activities:
Common stock issued in connection
with an acquisition $ -- $ 539.6
Common stock issued in connection
with the cancellation of employee
stock options $ -- $ 6.9
In connection with business acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired $ 7.9 $ 742.2
Cash paid (3.2) (10.4)
Stock issued -- (539.6)
------ -------
Liabilities assumed $ 4.7 $ 192.2
====== =======
<FN>
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, except per share data)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its wholly owned
subsidiaries (the "Company") after elimination of all material
intercompany accounts and transactions.
The accompanying consolidated condensed financial statements
of the Company and its subsidiaries are unaudited. In the opinion
of management, all adjustments (which include only normal
recurring accruals) necessary for a fair statement of the results
of operations have been made.
2. EARNINGS PER SHARE
Earnings per share are based upon the weighted average number
of shares outstanding during the three and six months ended June
30, 1996 of 122,920,200 shares and 122,914,474 shares,
respectively, and the weighted average number of shares
outstanding during the three and six months ended June 30, 1995 of
111,177,517 and 98,045,102 shares respectively.
3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC.
On April 28, 1995, the Company completed its merger (the
"Merger") with Roche Biomedical Laboratories, Inc ("RBL").
The following table provides unaudited pro forma operating
results as if the Merger had been completed at the beginning of
1995. The pro forma information does not include the restructuring
charges and extraordinary item related to the Merger. The pro
forma information has been prepared for comparative purposes only
and does not purport to be indicative of future operating results.
Six Months Ended
June 30, 1995
----------------
Net sales $ 857.7
Net earnings 35.1
Net earnings per common share 0.29
4. LONG-TERM DEBT
As a result of the Company's second quarter performance and
its higher than projected debt levels, the Company obtained
waivers for the quarter ended June 30, 1996 of certain covenants
contained in its existing credit agreement, as amended ("Credit
Agreement"). Because of the limited period covered by the waivers,
approximately $998 million of the Company's debt that otherwise
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, except per share data)
4. LONG-TERM DEBT - Continued
would have been classified as long-term has been classified as
current in the June 30, 1996 consolidated balance sheet.
Therefore, the Company has commenced a comprehensive analysis of
its capital structure and is considering a range of alternatives
for recapitalizing its balance sheet. Because of the time frame
necessary to complete any recapitalization, additional waivers may
be necessary although there can be no assurance that such waivers
can be obtained.
As of June 30, 1996 the Company has available, under the
Credit Agreement, a revolving credit facility of $450.0 (the
"Revolving Credit Facility"). Borrowings under the Revolving
Credit Facility were $323.0 as of June 30, 1996. The waivers
discussed above do not preclude the Company from increasing its
borrowings under the Revolving Credit Facility subject to the
conditions of borrowing under the Credit Agreement.
5. RESTRUCTURING AND NON-RECURRING CHARGES
In the second quarter of 1996, the Company recorded certain
charges of a non-recurring nature including additional charges
related to the restructuring of operations. The Company recorded
a restructuring charge totaling $13.0 for the shutdown of its La
Jolla, California administrative facility and other workforce
reductions. This amount includes approximately $8.1 for
severance, $3.5 for the future lease obligation of the La Jolla
facility and $1.4 for the write down of leasehold improvements and
fixed assets that will be abandoned or disposed of. The La Jolla
facility is expected to be substantially closed by the end of
1996. The remaining workforce reductions will take place in
various other areas of the Company and are expected to be
completed by the end of 1996.
In addition, the Company recorded certain non-recurring
charges in the second quarter of 1996. The Company decided to
abandon certain data processing systems and therefore wrote off
approximately $6.7 in capitalized software costs. In addition,
the Company relocated its principal drug testing facility to
accommodate consolidation of the RBL and the Company operations
and will incur approximately $1.3 in costs primarily related to
the write off of leasehold improvements and building clean up.
Finally, the Company recorded a charge of $2.0 for various other
items including the write-off of certain supplies related to
changes in testing methodologies to increase efficiency. As a
result of these changes, some supplies were not compatible with
the new testing methods and were disposed of.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
5. RESTRUCTURING AND NON-RECURRING CHARGES - Continued
Following the Merger in 1995, the Company determined that it
would be beneficial to close Company laboratory facilities in
certain geographic regions where duplicate Company and RBL
facilities existed at the time of the Merger. As part of the
Company's evaluation of its future obligations under these restructuring
activities, certain changes in the estimates were made during the
quarter ended June 30, 1996. These resulted in the reclassification
of certain accruals in the categories listed below although the total
liability did not change.
The following represents the Company's restructuring
activities for the period indicated:
Asset Lease and
Severance revaluations other facility
Costs and write-offs
obligations Total
--------- ------------ -------------- --------
Balance at
December 31, 1995 $ 12.8 $ 18.6 $ 18.9 $ 50.3
Additional restructuring
charges 8.1 1.4 3.5 13.0
Reclassifications 1.6 0.7 (2.3) --
Non cash items -- (5.5) -- (5.5)
Cash payments (8.4) -- (0.9) (9.3)
------- -------- ------- -------
Balance at
June 30, 1996 $ 14.1 $ 15.2 $ 19.2 $ 48.5
======= ======== ======= =======
Current $ 34.4
Non-current 14.1
-------
$ 48.5
=======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
RESULTS OF OPERATIONS
- ---------------------
Six Months Ended June 30, 1996 compared with Six Months Ended June
- -------------------------------------------------------------------
30, 1995.
- ---------
Net sales for the six months ended June 30, 1996 were $813.9,
an increase of 33.2% from $611.1 reported in the comparable 1995
period. Net sales from the inclusion of RBL increased net sales
by approximately $243.5 or 39.8%. Acquisitions of small clinical
laboratory companies increased net sales by approximately 3.1%.
Severe weather in January and February of 1996 decreased net sales
by approximately $11.5 or 1.9%. A reduction in Medicare fee
schedules from 80% to 76% of the national limitation amounts on
January 1, 1996, reduced net sales by approximately 1.5%. Price
erosion in the industry as a whole, lower utilization of
laboratory testing and lost accounts, net of growth in new
accounts and price increases in selective markets, comprised the
remaining reduction in net sales. Lower utilization of laboratory
testing and price erosion primarily resulted from continued
changes in payor mix brought on by the increase in managed care.
Cost of sales, which includes primarily laboratory and
distribution costs, was $603.8 for the six months ended June 30,
1996 compared to $422.7 in the corresponding 1995 period, an
increase of $181.1. Cost of sales increased approximately $181.9
due to the inclusion of the cost of sales of RBL, approximately
$5.0 due to an increase in overtime and temporary employee
expenses related to acceleration of the Company's synergy plan and
other operational factors and approximately $9.1 in several other
expense categories. These increases were partially offset by
decreases in volume related expenses, primarily related to weather
in the first quarter of 1996 of $1.9, and decreases in salaries of
$6.3, supplies of $3.9 and insurance of $2.8 primarily as a result
of the Company's synergy and cost reduction programs. Cost of
sales as a percentage of net sales was 74.2% for the six months
ended June 30, 1996 and 69.2% in the corresponding 1995 period.
The increase in the cost of sales percentage of net sales
primarily resulted from a reduction in net sales due to severe
weather in January and February of 1996, a reduction in Medicare
fee schedules, price erosion and utilization declines, each of
which provided little corresponding reduction in costs.
Selling, general and administrative expenses increased to
$147.4 for the six months ended June 30, 1996 from $95.4 in the
same period in 1995. The inclusion of the selling, general and
administrative expenses of RBL since April 28, 1995 increased
expenses by approximately $36.5. Increases in other expenses,
primarily salaries, overtime and temporary employee expenses
related to billing issues and related telephone and
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ----------------------------------
Six Months Ended June 30, 1996 compared with Six Months Ended June
- ------------------------------------------------------------------
30, 1995.
- ---------
data processing costs, aggregated $10.3. These increases were
partially offset by decreases in several expense categories,
including selling expenses, as a result of the Company's on-going
synergy and cost-reduction programs. The Company recorded $10.0 of
additional provision for doubtful accounts in the second quarter
of 1996 which primarily relates to increased medical necessity and
related diagnosis code requirements of third-party payors placed
on the Company at the beginning of 1996 and reflects the lower
collection rates experienced in the second quarter as a result of
the more stringent requirements. As a result of these lower
collection rates, the Company has also increased the monthly
provision for doubtful accounts. Before the increase to the
provision for doubtful accounts, selling, general and
administrative expenses were 16.9% and 15.6% of net sales for the
six months ended June 30, 1996 and 1995, respectively. The
increase in the selling, general and administrative percentage
primarily resulted from the factors noted above and in the
preceding paragraph.
Management expects that price erosion and utilization
declines will continue to negatively impact net sales and the
results of operations for the foreseeable future. It is the
objective of management to partially offset the increases in cost
of sales as a percentage of net sales and selling, general and
administrative expenses as a percentage of net sales through the
synergy program, as discussed below, and through comprehensive
cost reduction programs including, but not limited to, a six month
defferal on increasing wages and adding new positions implemented
on July 1, 1996. In addition, the Company has targeted price
increases and business development efforts in an attempt to become
more judicious in pricing new business and is selectively
repricing or removing existing business not meeting Company
requirements. There can be no assurance, however, of the timing
or success of such measures. Congress is also considering changes
to the Medicare fee schedules in conjunction with certain
budgetary bills pending in Congress. The ultimate outcome of
these deliberations on pending legislation cannot be predicted at
this time and management, therefore, cannot predict the impact, if
any, such proposals, if enacted, would have on the results of
operations of the Company.
The increase in amortization of intangibles and other assets
to $14.8 for the six months ended June 30, 1996 from $11.5 in the
corresponding period in 1995 primarily resulted from the Merger in
April 1995.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ----------------------------------
Interest expense was $33.7 for the six months ended June 30,
1996 compared with $31.1 for the same period in 1995. The change
resulted primarily from increased borrowings used to finance the
Merger partially offset by a lower effective borrowing rate.
The provision for income taxes as a percentage of earnings
before taxes was 4.7% for the six months ended June 30, 1996
compared to a benefit of 21.2% for the six months ended June 30,
1995 due to the charges taken in the second quarter of 1995. The
increased effective rate primarily resulted from an increase in
non-deductible amortization resulting from the Merger and from
lower earnings before income taxes.
Three Months Ended June 30, 1996 compared with Three Months Ended
- ------------------------------------------------------------------
June 30, 1995.
- --------------
Net sales for the three months ended June 30, 1996 were
$410.0, an increase of 11.6% from $367.3 reported in the
comparable 1995 period. Net sales from the inclusion of RBL
increased net sales by approximately $63.6 or 17.3%. Acquisitions
of small clinical laboratory companies increased net sales by
approximately 2.8%. A reduction in Medicare fee schedules from 80%
to 76% of the national limitation amounts on January 1, 1996,
reduced net sales by approximately 1.2%. Price erosion in the
industry as a whole, lower utilization of laboratory testing and
lost accounts, net of growth in new accounts and price increases
in selective markets, comprised the remaining reduction in net
sales. Lower utilization of laboratory testing and price erosion
primarily resulted from continued changes in payor mix brought on
by the increase in managed care.
Cost of sales, which includes primarily laboratory and
distribution costs, was $300.5 for the three months ended June 30,
1996 compared to $258.4 in the corresponding 1995 period, an
increase of $42.1. Cost of sales increased approximately $43.0
due to the inclusion of the cost of sales of RBL, approximately
$2.5 due to an increase in overtime and temporary employee
expenses related to acceleration of the Company's synergy plan and
other operational factors and approximately $4.1 in several other
expense categories. These increases were partially offset by
decreases in salaries of approximately $3.3, supplies of $0.3 and
insurance of $1.3 and a decrease of $2.4 in several other expense
categories primarily as a result of the Company's synergy and cost-
reduction programs. Cost of sales as a percentage of net sales
was 73.3% for the three months ended June 30, 1996 and 70.4% in
the corresponding 1995 period. The increase in the cost of sales
percentage of net sales primarily resulted from a reduction in
Medicare fee schedules and price erosion and utilization declines,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------------------
Three Months Ended June 30, 1996 compared with Three Months Ended
- ------------------------------------------------------------------
June 30, 1995.
- --------------
each of which provided little corresponding reduction in costs.
Selling, general and administrative expenses increased to
$81.9 for the three months ended June 30, 1996 from $57.4 in the
same period in 1995. The inclusion of the selling, general and
administrativeexpenses of RBL since April 28, 1995 increased
expenses by approximately $9.5 Increases in other expenses,
primarily overtime and temporary employee expenses related to
billing issues and related telephone and data processing costs,
aggregated $6.5. These increases were partially offset by
decreases in several expense categories, including selling
expenses, as a result of the Company's on-going synergy and cost-
reduction programs. The Company recorded $10.0 of additional
provision for doubtful accounts in the second quarter of 1996
which primarily relates to increased medical necessity and related
diagnosis code requirements of third-party payors placed on the
Company at the beginning of 1996 and reflects the lower collection
rates experienced in the second quarter as a result of the more
stringent requirements. As a result of these lower collection
rates, the Company has also increased the monthly provision for
doubtful accounts. Before the increase to the provision for
doubtful accounts, selling, general and administrative expenses
were 17.5% and 15.6% of net sales for the three months ended June
30, 1996 and 1995, respectively. The increase in the selling,
general and administrative percentage primarily resulted from the
factors noted above and in the preceding paragraph.
Management expects that price erosion and utilization
declines will continue to negatively impact net sales and the
results of operations for the foreseeable future. It is the
objective of management to partially offset the increases in cost
of sales as a percentage of net sales and selling, general and
administrative expenses as a percentage of net sales through the
synergy program, as discussed below, and through comprehensive
cost reduction programs including, but not limited to, a six month
defferal on increasing wages and adding new positions implemented
on July 1, 1996. In addition, the Company has targeted price
increases and business development efforts in an attempt to become
more judicious in pricing new business and is selectively
repricing or removing existing business not meeting Company
requirements. There can be no assurance, however, of the timing
or success of such measures. Congress is also considering changes
to the Medicare fee schedules in conjunction with certain
budgetary bills pending in Congress. The ultimate outcome of these
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------------------
Three Months Ended June 30, 1996 compared with Three Months Ended
- ------------------------------------------------------------------
June 30, 1995.
- --------------
deliberations on pending legislation cannot be predicted at this time and
management, therefore, cannot predict the impact, if any, such
proposals, if enacted, would have on the results of operations of
the Company.
The increase in amortization of intangibles and other assets
to $7.5 for the three months ended June 30, 1996 from $6.7 in the
corresponding period in 1995 primarily resulted from the Merger in
April 1995.
Interest expense was $17.0 for the three months ended June
30, 1996 compared with $17.4 for the same period in 1995. The
change resulted primarily from a lower effective borrowing rate
partially offset by increased borrowings used to finance the
Merger.
The provision for income taxes as a percentage of earnings
before taxes was a benefit of 27.9% for the three months ended
June 30, 1996 compared to 33.1% for the three months ended June
30, 1995. The increased effective rate primarily resulted from an
increase in non-deductible amortization resulting from the Merger
and from lower earnings before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by (used for) operating activities (after
payment of settlement and related expenses of $0.3 and $27.3 in
1996 and 1995, respectively) was $(21.0) and $0.2, respectively.
The decrease in cash flow from operations primarily resulted from
an increase in accounts receivable related to increased medical
necessity and related diagnosis code requirements of third-party
payors placed on the Company at the beginning of 1996 and reflects
the lower collection rates experienced in the second quarter as a
result of the more stringent requirements. In addition, increased
difficulty in collecting amounts due from certain managed care
plans has negatively impacted operating cash flow. The Company
currently has plans in place to improve the collection of accounts
receivable, however, additional changes in requirements of third-
party payors could increase the difficulty in collections and
there can be no assurance of the success of the Company's plans to
improve collections. Such plans include additional billing
personnel as well as the creation of a special task force to
identify effective methods to address the more stringent
requirements. Capital expenditures were $33.9 and $27.1 for 1996 and
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
LIQUIDITY AND CAPITAL RESOURCES - Continued
- -------------------------------------------
1995, respectively. The Company expects capital expenditures to be
approximately $65.0 in 1996 to continue the Merger-related
integration and to further automate laboratory processes and to
improve efficiency. Such expenditures are expected to be funded
by cash flow from operations as well as borrowings under the
Company's revolving credit facility.
As a result of the Company's second quarter performance and
its higher than projected debt levels, the Company obtained
waivers for the quarter ended June 30, 1996 of certain covenants
contained in its existing credit agreement, as amended ("Credit
Agreement"). Because of the limited period covered by the waivers,
approximately $998 million of the Company's debt that otherwise
would have been classified as long-term has been classified as
current in the June 30, 1996 consolidated balance sheet.
Therefore, the Company has commenced a comprehensive analysis of
its capital structure and is considering a range of alternatives
for recapitalizing its balance sheet. Because of the time frame
necessary to complete any recapitalization, additional waivers may
be necessary although there can be no assurance that such waivers
can be obtained.
As of June 30, 1996 the Company has available, under the
Credit Agreement, a revolving credit facility of $450.0 (the
"Revolving Credit Facility"). Borrowings under the Revolving
Credit Facility were $323.0 as of June 30, 1996. The waivers
discussed above do not preclude the Company from increasing its
borrowings under the Revolving Credit Facility subject to the
conditions of borrowing under the Credit Agreement.
The Company is a party to interest rate swap agreements with
certain major financial institutions, rated A or better by Moody's
Investor Service, solely to manage its interest rate exposure with
respect to $600.0 million of its floating rate debt under the Term
Loan Facility. The agreements effectively change the interest
rate exposure on $600.0 of floating rate debt to a weighted
average fixed interest rate of 6.01%, through requiring that the
Company pay a fixed rate amount in exchange for the financial
institutions paying a floating rate amount. Amounts paid by the
Company in the six months ended June 30, 1996 were approximately
$1.0. The notional amounts of the agreements are used to measure
the interest to be paid or received and do not represent the
amount of exposure to credit loss. These agreements mature in
September 1998. The estimated unrealized gain on such agreements
was approximately $4.4 at July 31, 1996.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
LIQUIDITY AND CAPITAL RESOURCES - Continued
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See Note 5 of the Notes to Unaudited Consolidated Financial
Statements which sets forth the Company's restructuring activities
for 1996. Future cash payments under the restructuring plan are
expected to be $19.2 over the next twelve months and $14.1
thereafter.
As a result of the Merger, the Company has realized and is
expected to continue to achieve substantial savings in operating
costs through the consolidation of certain operations and the
elimination of redundant expenses. Such savings are being
realized over time as the consolidation process is completed. The
Company expects to continue to realize incremental savings from
the synergy program in 1996 and expects to achieve an annualized
net savings run-rate of approximately $110.0 to $120.0 million
within two years following the Merger. The synergies expected to
be realized by the Company are being derived from several sources,
including corporate, general and administrative expenses,
including the consolidation of administrative staff. Other
reductions in sales staff where duplicate territories exist,
operational savings, including the closing of overlapping
laboratories and other facilities, and savings to be realized from
the additional buying power of the larger Company, are generating
significant savings. In addition, savings have been realized from
certain changes in employee benefits. These estimated savings are
anticipated to be partially offset by a loss of existing business
during the conversion process. In addition, the acceleration of
certain portions of the Company's plans have resulted in increases
in certain costs, primarily overtime and temporary employee
expenses, as consolidation continues. Realization of improvements
in profitability is dependent, in part, on the extent to which the
revenues of the combined companies are maintained and will be
influenced by many factors, including factors outside the control
of the Company. There can be no assurance that the estimated cost
savings described above will be realized or achieved in a timely
manner or that improvements, if any, in profitability will be
achieved or that such savings will not be offset by increases in
other expenses.
See "Part II - Other Information" for a discussion of legal
proceedings which could have a material adverse impact upon the
Company's financial condition, results of operations or cash flow.
The Company expects that its cash needs for working capital,
capital expenditures and the cash costs of the restructuring and
operations of the Company will be met by its cash flow from
operations and borrowings under a revolving credit facility of up
to $450.0.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
LIQUIDITY AND CAPITAL RESOURCES - Continued
- -------------------------------------------
Each of the above forward-looking statements are subject to
change based on various important factors, including without
limitation, competitive actions in the marketplace and adverse
actions of governmental and other third-party payors. Further
information on potential factors which could affect the Company's
financial results is included in the Company's Form 10-K for the
year ended December 31, 1995.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously discussed in the Company's December 31,
1995 10-K (the "1995 10-K"), the Office of Inspector General
("OIG") of Health and Human Services and the Department of Justice
("DOJ") is investigating certain past laboratory practices of NHL,
RBL, and Allied Clinical Laboratories, Inc. ("Allied), a Company
subsidiary. These investigations and related settlement
discussions have become more active in recent months. If
settlement is not reached, the government is likely to proceed to
trial on civil and possibly criminal claims. If the OIG or DOJ
were to successfully prove a violation of laws related to the
Medicare and Medicaid programs, potential sanctions may include
significant fines, recovery of treble amounts paid to the clinical
laboratory for the tests involved, and in the case of a criminal
conviction, mandatory exclusion from the Medicare and Medicaid
programs for a period of at least five years. A successful
prosecution of a civil fraud or false claims action could also
result in the exercise of the OIG's authority to seek the
permissive exclusion of the offending entity or entities from
participation in the Medicare and Medicaid programs for a set
period of years. Although neither the 1992 Government Settlement
entered into by NHL (as more fully discussed in the 1995 10-K)
nor, based on published reports, any settlement agreements with
the OIG entered into by other major clinical laboratory companies,
provided for the exclusion from participation in the Medicare and
Medicaid programs, there can be no assurance that the Company will
be able to negotiate settlement agreements with similar terms.
Any such exclusion would likely have a material adverse effect on
the Company, including on the Company's non-Medicare and non-
Medicaid testing business. Due to the present nature of the
Company's discussions with the OIG and DOJ, the Company is at this
time unable to predict with certainty the likely results of any
actions the OIG or DOJ may take. The Company has reserved amounts
with respect to the preliminary estimate of the cost of
settlement, but there can be no assurance that any eventual
settlement or other resolution will not result in significantly
larger costs than those reserved amounts or that the ultimate
resolution of these matters will not have a material adverse
effect upon the Company's financial condition, results of
operations or cash flow.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Third Amendment and Second Waiver
to Credit Agreement dated as of July 10, 1996
among the Company, the banks named therein
and Credit Suisse (New York Branch) as
Administrative Agent.(a)
20 Press release of the Registrant
dated June 27, 1996. (b)
20.1 Press release of the Registrant
dated August 1, 1996. (c)
27 Financial Data Schedule
(electronically filed version only).
(b) Reports on Form 8-K
1) A report on Form 8-K dated
June 27, 1996 was filed on June 28, 1996 in
connection with the press release dated June
27, 1996 announcing that Haywood D. Cochrane,
Jr., Executive Vice President, Chief
Financial Officer and Treasurer would resign
from the Company in the third quarter of
1996.
2) A report on Form 8-K dated
August 1, 1996 was filed on August 2, 1996 in
connection with the press release dated
August 1, 1996 announcing operating results
of the Registrant for the three and six month
periods ended June 30, 1996 as well as
certain other information.
- -----------------------------
(a) Filed herewith
(b) Incorporated by reference herein to the
report on Form 8-K filed
with the Securities and Exchange Commission
("SEC") on June 28, 1996.
(c) Incorporated by reference herein to the report
on Form 8-K filed with the SEC on August 2, 1996.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
By:/s/ HAYWOOD D. COCHRANE, JR.
-----------------------------
Haywood D. Cochrane, Jr.
Executive Vice President, Chief
Financial Officer and Treasurer
By:/s/ WESLEY R. ELINGBURG
-----------------------------
Wesley R. Elingburg
Senior Vice President, Finance
(Principal Accounting Officer)
Date: August 14, 1996