UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
--------------------------------
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
---------------------------
LABORATORY CORPORATION OF AMERICA HOLDINGS
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
- -------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(336) 229-1127
----------------------------------------------------
(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
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act. Yes X No
---- ----
The number of shares outstanding of the issuer's common stock is
141,366,619 shares, net of treasury stock as of April 30, 2004.
INDEX
PART I. Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
March 31, 2004 and December 31, 2003
Condensed Consolidated Statements of Operations (unaudited)
Three-months ended March 31, 2004 and 2003
Condensed Consolidated Statements of Changes in
Shareholders' Equity (unaudited)
Three months ended March 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows
(unaudited) Three months ended March 31, 2004 and 2003
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about
Market Risk
Item 4 Controls and Procedures
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
Item 6 Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
March 31, December 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 169.0 $ 123.0
Accounts receivable, net 451.5 432.5
Supplies inventories 47.6 47.0
Prepaid expenses and other 26.0 36.3
Deferred income taxes 13.7 19.1
--------- ---------
Total current assets 707.8 657.9
Property, plant and equipment, net 356.9 361.3
Goodwill 1,286.8 1,285.9
Intangible assets, net 560.1 571.4
Investments in equity affiliates 504.2 505.3
Other assets, net 63.5 33.1
--------- ---------
$ 3,479.3 $ 3,414.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 84.4 $ 73.0
Accrued expenses and other 167.8 161.1
Zero coupon-subordinated notes 525.8 523.2
Current portion of long-term debt 0.1 0.3
--------- ---------
Total current liabilities 778.1 757.6
5 1/2% senior notes 353.7 353.8
Long-term debt, less current portion 2.5 2.5
Capital lease obligations 4.0 4.4
Deferred income taxes 283.5 273.4
Other liabilities 127.6 127.3
Commitments and contingent liabilities -- --
Shareholders' equity:
Preferred stock, $0.10 par value; 30,000,000
shares authorized; shares issued: none -- --
Common stock, $0.10 par value; 265,000,000
shares authorized;149,406,895 and
148,855,110 shares issued and outstanding
at March 31, 2004 and December 31,
2003, respectively 14.9 14.9
Additional paid-in capital 1,457.7 1,440.9
Retained earnings 674.4 587.1
Treasury stock, at cost; 7,422,853 shares
and 5,521,620 shares at March 31, 2004 and
December 31, 2003, respectively (232.6) (159.3)
Unearned restricted stock compensation (16.3) (22.4)
Accumulated other comprehensive loss 31.8 34.7
--------- ---------
Total shareholders' equity 1,929.9 1,895.9
--------- ---------
$ 3,479.3 $ 3,414.9
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
------------------------
2004 2003
------------------------
Net sales $ 752.5 $ 712.2
Cost of sales 434.9 415.7
-------- --------
Gross profit 317.6 296.5
Selling, general and
administrative expenses 163.0 163.3
Amortization of intangibles
and other assets 10.3 8.5
-------- --------
Operating income 144.3 124.7
Other income (expenses):
Interest expense (9.3) (11.4)
Income from equity investments, net 12.6 9.8
Investment income 0.5 2.3
Other, net (0.1) (0.1)
-------- --------
Earnings before income taxes 148.0 125.3
Provision for income taxes 60.7 51.4
-------- --------
Net earnings $ 87.3 $ 73.9
======== ========
Basic earnings per
common share $ 0.62 $ 0.51
========= =========
Diluted earnings per
common share $ 0.61 $ 0.51
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN MILLIONS)
(Unaudited)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
-------------- -------- --------
PERIOD ENDED MARCH 31, 2003
Balance at beginning of year 148.0 $ 14.8 $1,406.5 $ 266.1
Comprehensive earnings:
Net earnings -- -- -- 73.9
Other comprehensive loss:
Foreign currency translation
adjustments -- -- -- --
Comprehensive earnings
Issuance of common stock -- -- 3.7 --
Issuance of restricted stock
awards -- -- -- --
Amortization of unearned
restricted stock compensation -- -- -- --
Income tax benefit from stock
options exercised -- -- 2.4 --
Surrender of restricted stock
awards -- -- -- --
Assumption of vested stock
options in connection with
acquisition -- -- 8.5 --
Purchase of common stock -- -- -- --
----- ------ -------- -------
BALANCE AT MARCH 31, 2003 148.0 $ 14.8 $1,421.1 $ 340.0
===== ====== ======== =======
PERIOD ENDED MARCH 31, 2004
Balance at beginning of year 148.9 $ 14.9 $1,440.9 $ 587.1
Comprehensive earnings:
Net earnings -- -- -- 87.3
Other comprehensive loss:
Foreign currency translation
adjustments -- -- -- --
Tax effect of other
comprehensive loss
adjustments -- -- -- --
Comprehensive earnings
Issuance of common stock 0.5 -- 13.7 --
Issuance of restricted stock
awards -- -- 0.4 --
Amortization of unearned
restricted stock compensation -- -- -- --
Income tax benefit from stock
options exercised -- -- 2.7 --
Surrender of restricted stock
awards -- -- -- --
Assumption of vested stock
options in connection with
acquisition -- -- -- --
Purchase of common stock -- -- -- --
----- ------ -------- --------
BALANCE AT MARCH 31, 2004 149.4 $ 14.9 $1,457.7 $ 674.4
===== ====== ======== ========
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
(DOLLARS AND SHARES IN MILLIONS)
(Unaudited)
Unearned Accumulated
Restricted Other Total
Treasury Stock Comprehensive Shareholders'
Stock Compensation Loss Equity
-------- ------------ ------------- -----------
PERIOD ENDED MARCH 31, 2003
Balance at beginning of year $ (4.4) $ (41.4) $ (29.9) $1,611.7
Comprehensive earnings:
Net earnings -- -- -- 73.9
Other comprehensive loss:
Foreign currency
translation adjustments -- -- 32.2 32.2
Tax effect of other
comprehensive loss
adjustments -- -- (12.9) (12.9)
-------
Comprehensive earnings 93.2
Issuance of common stock -- -- -- 3.7
Issuance of restricted stock
awards -- -- -- --
Amortization of unearned
restricted stock compensation -- 4.5 -- 4.5
Income tax benefit from stock
options exercised -- -- -- 2.4
Surrender of restricted stock
awards (4.8) -- -- (4.8)
Assumption of vested stock
options in connection with
acquisition -- -- -- 8.5
Purchase of common stock (34.0) -- -- (34.0)
------- ------- -------- --------
BALANCE AT MARCH 31, 2003 $ (43.2) $ (36.9) $ (10.6) $1,685.2
======= ======= ======== ========
PERIOD ENDED MARCH 31, 2004
Balance at beginning of year $(159.3) $ (22.4) $ 34.7 $1,895.9
Comprehensive earnings:
Net earnings -- -- -- 87.3
Other comprehensive loss:
Foreign currency
translation adjustments -- -- (4.9) (4.9)
Tax effect of other
comprehensive loss
adjustments -- -- 2.0 2.0
-------
Comprehensive earnings 84.4
Issuance of common stock -- -- -- 13.7
Issuance of restricted stock
awards -- (0.4) -- --
Amortization of unearned
restricted stock compensation -- 6.5 -- 6.5
Income tax benefit from stock
options exercised -- -- -- 2.7
Surrender of restricted stock
awards (6.7) -- -- (6.7)
Purchase of common stock (66.6) -- -- (66.6)
------- -------- -------- --------
BALANCE AT MARCH 31, 2004 $(232.6) $ (16.3) $ 31.8 $1,929.9
======= ======== ======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
--------------------------
2004 2003
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 87.3 $ 73.9
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 34.5 33.1
Stock compensation 6.5 4.5
Accreted interest on zero coupon-
subordinated notes 2.6 2.6
Cumulative earnings in excess of
distributions from equity affiliates (1.9) --
Deferred income taxes 19.8 3.6
Change in assets and liabilities (net of
effects of acquisitions):
Increase in accounts receivable, net (19.0) (17.2)
Increase in inventories (0.6) (2.1)
Decrease in prepaid expenses and other 10.2 1.5
Increase in accounts payable 11.5 7.4
(Decrease)increase in accrued
expenses and other (3.3) 27.7
-------- --------
Net cash provided by operating activities 147.6 135.0
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20.2) (16.2)
Proceeds from sale of assets 1.3 0.5
Deferred payments on acquisitions (2.7) (5.8)
Proceeds from sale of marketable securities -- 50.4
Distributions from equity affiliates in
excess of cumulative earnings -- 1.9
Acquisition of businesses, net of
cash acquired (32.6) (618.8)
-------- --------
Net cash used for investing activities (54.2) (588.0)
-------- --------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
--------------------------
2004 2003
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan $ -- $ 350.0
Payments on bridge loan -- (350.0)
Proceeds from revolving credit
facilities -- 250.0
Payments on revolving credit
facilities -- (115.0)
Proceeds from senior note offering -- 350.0
Payments on other long-term debt (0.2) (0.2)
Termination of interest rate swap
agreements -- (0.2)
Debt issuance costs -- (7.3)
Payments on long-term lease obligations (0.3) (0.4)
Purchase of common stock (60.7) (34.0)
Net proceeds from issuance of stock to
employees 13.8 3.7
-------- -------
Net cash (used)provided by financing
activities (47.4) 446.6
-------- -------
Effect of exchange rate changes on cash
and cash equivalents -- --
-------- -------
Net (decrease) increase in cash and
cash equivalents 46.0 (6.4)
Cash and cash equivalents at
beginning of period 123.0 56.4
-------- --------
Cash and cash equivalents at
end of period $ 169.0 $ 50.0
======== ========
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 9.6 $ 1.9
Income taxes, net of refunds 11.9 10.2
Disclosure of non-cash financing
and investing activities:
Issuance of restricted stock awards 0.4 --
Surrender of restricted stock awards 6.7 4.8
Assumption of vested stock options -- 8.5
Accrued repurchases of common stock 5.9 --
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements include the
accounts of Laboratory Corporation of America Holdings and its
wholly owned subsidiaries (the "Company") after elimination of all
material intercompany accounts and transactions. On January 17,
2003, the Company completed the acquisition of DIANON Systems, Inc.,
(DIANON) a leading U.S. provider of anatomic pathology and oncology
testing services. Disclosure of certain business combination
transactions is included in Note 7 - Business Acquisitions. The
Company operates in one business segment.
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 2003 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.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings,
less preferred stock dividends and accretion, by the weighted
average number of common shares outstanding. Dilutive earnings per
share is computed by dividing net earnings 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 restricted stock awards and outstanding stock options.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The following represents a reconciliation of the weighted
average shares used in the calculation of basic and diluted earnings
per share:
Three Months
Ended March 31,
-------------------------
2004 2003
-------------------------
Basic 141,793,120 145,864,065
Assumed conversion/exercise
of:
Stock options 833,382 303,968
Restricted stock awards 755,390 207,970
----------- -----------
Diluted 143,381,892 146,376,003
=========== ===========
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:
March 31,
2004 2003
----------------------
Stock Options 1,513,201 4,933,210
The Company's zero coupon-subordinated notes are
contingently convertible into 9,977,634 shares of common stock
and are not currently included in the diluted earnings per share
calculation because these notes were not convertible according
to their terms at March 31, 2004. Holders of the zero coupon-
subordinated notes may require the Company to purchase all or a
portion of their notes on September 11, 2004, 2006 and 2011 at
prices ranging from $712.97 to $819.54 per note. The Company may
choose to pay the purchase price in cash or common stock or a
combination of cash and common stock. If the holders elect to
require the Company to purchase their notes, it is the Company's
current intention to retire the notes by a cash payment. However,
future market conditions are subject to change. Should the
holders put the notes to the Company on any of the dates above,
the Company believes that it will be able to obtain alternate
financing to satisfy this contingent obligation.
3. STOCK COMPENSATION PLANS
During February 2004, the Company granted 1,738,800 options at
a price of $39.00 under its 2000 Stock Incentive Plan.
The tax benefits associated with the exercise of non-qualified
stock options reduced taxes currently payable by $2.7 and $2.4 for
the three months ended March 31, 2004 and 2003, respectively. Such
benefits are credited to additional paid-in-capital.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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 based on the fair value method as
defined in SFAS No. 123, the impact on the Company's net
earnings on a pro forma basis is indicated below:
Three Months Ended
March 31,
------------------
2004 2003
------------------
Net earnings, as reported $ 87.3 $ 73.9
Add: Stock-based compensation
under APB 25 -- --
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (6.1) (6.5)
------- -------
Pro forma net income $ 81.2 $ 67.4
======= =======
Basic earnings per
common share As reported $ 0.62 $ 0.51
Pro forma 0.57 0.46
Diluted earnings per
common share As reported $ 0.61 $ 0.51
Pro forma 0.57 0.46
4. STOCK REPURCHASE PROGRAM
On December 17, 2003, 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, beginning in the first quarter of 2004. During the first
quarter of 2004, the Company purchased approximately 1.7 million
shares of its common stock totaling $66.6 with cash flow from
operations. It is the Company's intention to fund future purchases
of its common stock with cash flow from operations.
5. SENIOR CREDIT FACILITIES
On January 13, 2004, the Company entered into a new $150.0 364-
day revolving credit facility with Credit Suisse First Boston,
acting as Administrative Agent, and a group of financial
institutions to replace the existing $150.0 364-day revolving credit
facility, which had terminated. The $200.0 three-year revolving
credit facility was amended on January 14, 2003 and expires on
February 18, 2005. These credit facilities bear 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, 2004.
The senior credit facilities are available for general
corporate purposes, including working capital, capital
expenditures, funding of share repurchases and other payments,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
and acquisitions. The agreements contain 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, 2004.
6. DERIVATIVE FINANCIAL INSTRUMENTS
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 three features that are considered to be embedded
derivative instruments under Statement of Financial Accounting
Standards ("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) Contingent additional principal will accrue on the zero
coupon-subordinated notes during the two-year period from
September 11, 2004 to September 11, 2006, if the Company's
stock price is at or below specified thresholds.
3) 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.
Based upon independent appraisals, these embedded derivatives
had no fair market value at March 31, 2004 and 2003.
7. BUSINESS ACQUISITION - DIANON SYSTEMS, INC.
On January 17, 2003, the Company completed the acquisition of
all of the outstanding shares of DIANON Systems, Inc. (DIANON) for
$47.50 per share in cash, or approximately $595.6 including
transaction fees and expenses, and converted approximately 390,000
vested DIANON employee stock options into approximately 690,000
vested Company options valued at $8.5. The transaction total of
approximately $604.5 was funded by a combination of cash on hand,
borrowings under the Company's senior credit facilities and a bridge
loan facility.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The following unaudited pro forma combined financial information for
the three months ended March 31, 2003 assumes that the DIANON
acquisition which was closed by the Company on January 17, 2003, was
acquired on January 1, 2003:
Three Months Ended
March 31,
2003
------------------
Net sales $ 720.2
Net earnings 74.0
Diluted earnings per common share 0.51
8. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill (net of
accumulated amortization) for the period ended March 31, 2004 and
for the year ended December 31, 2003 are as follows:
March 31, 2004 December 31, 2003
---------------- -----------------
Balance as of January 1 $ 1,285.9 $ 910.1
Goodwill acquired during
the period 0.9 388.7
Adjustments to goodwill -- (12.9)
--------- ---------
Balance at end of period $ 1,286.8 $ 1,285.9
========= =========
The components of identifiable intangible assets are as follows:
March 31, 2004 December 31, 2003
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------- -----------------------
Customer lists $ 581.5 $ 125.3 $ 582.5 $ 118.1
Patents, licenses
and technology 67.2 12.8 67.2 11.1
Non-compete
agreements 23.0 18.6 23.0 18.1
Trade name 49.5 4.4 49.6 3.6
-------- -------- -------- --------
$ 721.2 $ 161.1 $ 722.3 $ 150.9
======== ======== ======== ========
Amortization of intangible assets was $10.3 and $8.5 for the
three-month periods ended March 31, 2004 and 2003, respectively.
Amortization expense for the net carrying amount of intangible
assets is estimated to be $30.7 for the remainder of fiscal 2004,
$40.3 in fiscal 2005, $38.9 in fiscal 2006, $37.4 in fiscal 2007,
and $35.4 in fiscal 2008.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
9. RESTRUCTURING CHARGES
The following represents the Company's restructuring activities
for the period indicated:
Lease and
Severance Other Facility
Costs Costs Total
--------- -------------- -------
Balance at December 31, 2003 $ 4.0 $26.8 $30.8
Cash payments (0.7) (1.9) (2.6)
----- ----- -----
Balance at March 31, 2004 $ 3.3 $24.9 $28.2
===== ===== =====
Current $12.4
Non-current 15.8
-----
$28.2
=====
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation purporting to be a
nation-wide class action involving the alleged overbilling of
patients who are covered by private insurance. The Company has
reached a settlement with the class that will not materially
differ from accruals previously established or have a material
adverse effect on the Company. The Company has now
substantially implemented its obligations under the settlement.
On January 9, 2001, the Company was served with a complaint in
North Carolina which purported to be a class action and made
claims similar to those referred to above. That claim has now
been dismissed with prejudice.
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 recently filed a consolidated
amended complaint. The defendants are preparing to file a motion to
dismiss this complaint and 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company is the appellant in a patent case originally filed
in the United States District Court for the District of Colorado.
The Company has disputed liability and contested the case
vigorously. After a jury trial, the district court entered judgment
against the Company for patent infringement. The Company appealed
the case to the United States Court of Appeals for the Federal
Circuit. The Company has received a letter from its counsel dated
February 6, 2004, stating "it remains our opinion that the amended
judgment and order will be reversed on appeal."
The Company is a party to two lawsuits involving Chiron Inc.
relating to Hepatitis C and HIV testing. Chiron asserts that the
Company has infringed on Chiron's patents in each of these areas.
The Company denies liability and intends to contest the suits
vigorously. It is premature at this juncture to assess the likely
outcome of these matters, or to determine whether they will have a
material effect on the Company.
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 payors and managed
care payors 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 many of these statutes and regulations have not been
interpreted by the courts. There can be no assurance therefore that
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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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,
2004 and 2003, the Company had provided letters of credit
aggregating approximately $55.5 and $48.6 respectively,
primarily in connection with certain insurance programs.
11. PENSION AND POSTRETIREMENT PLANS
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:
Three Months Ended
March 31,
------------------
2004 2003
------------------
Components of net periodic benefit cost
Service Cost $ 3.2 $ 3.1
Interest Cost 3.1 3.2
Expected return on plan assets (3.7) (3.2)
Net amortization and deferral 0.4 0.9
----- -----
Net periodic pension cost $ 3.0 $ 4.0
===== =====
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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:
Three Months Ended
March 31,
-------------------
2004 2003
-------------------
Components of postretirement benefit expense
Service Cost $ 0.2 $ 0.2
Interest Cost 1.0 0.8
Net amortization and deferral (0.5) (0.5)
Amortization of actuarial loss 0.4 0.2
----- -----
Postretirement benefit expense $ 1.1 $ 0.7
===== =====
The Company previously disclosed in its financial
statements for the year ended December 31, 2003, that it
expected to contribute $34.6 to its defined pension plan in
2004. As of March 31, 2004, $13.6 of contributions have been
made. The Company presently anticipates contributing an
additional $21.0 to fund its pension plan in 2004 for a total of
$34.6.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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:
1. changes in federal, state, local and third party payor
regulations or policies (or in the interpretation of current
regulations) affecting governmental and third-party
reimbursement for clinical laboratory testing;
2. adverse results from investigations of clinical laboratories
by the government, which may include significant monetary
damages and/or exclusion from the Medicare and Medicaid
programs;
3. loss or suspension of a license or imposition of a fine or
penalties under, or future changes in, the law or regulations of
the Clinical Laboratory Improvement Act of 1967, and the Clinical
Laboratory Improvement Amendments of 1988, or those of Medicare,
Medicaid or other federal, state or local agencies;
4. failure to comply with the Federal Occupational Safety and
Health Administration requirements and the Needlestick Safety
and Prevention Act which may result in penalties and loss of
licensure;
5. failure to comply with HIPAA, which could result in
significant fines;
6. failure of third party payors to complete testing with the
Company, or accept or remit transactions in HIPAA-required
standard transaction and code set format, could result in an
interruption in the Company's cash flow;
7. increased competition, including price competition;
8. changes in payor mix, including an increase in capitated
managed-cost health care;
9. failure to obtain and retain new customers and alliance
partners, or a reduction in tests ordered or specimens
submitted by existing customers;
10.failure to integrate newly acquired businesses and the cost
related to such integration;
11.adverse results in litigation matters;
12.inability to attract and retain experienced and qualified
personnel;
13.failure to maintain the Company's days sales outstanding
levels;
14.decrease in credit ratings by Standard & Poor's and/or
Moody's;
15.failure to develop or acquire licenses for new or improved
technologies, or if customers use new technologies to perform
their own tests;
16.inability to commercialize newly licensed tests or
technologies or to obtain appropriate reimbursements for such
tests, which could result in impairment in the value of
certain capitalized licensing costs;
17.inability to obtain and maintain adequate patent and other
proprietary rights protection of the Company's products and
services and successfully enforce the Company's proprietary
rights;
18.the scope, validity and enforceability of patents and other
proprietary rights held by third parties which might have an
impact on the Company's ability to develop, perform, or
market the Company's tests or operate its business;
19.failure in the Company's information technology systems
resulting in an increase in testing turnaround time or
billing processes;
20.liabilities that result from the inability to comply with new
Corporate governance requirements; and
21.compliance by the Company with the Sarbanes-Oxley Act of
2002, including Section 404 of that Act which requires
management to report on, and our independent auditors to
attest to and report on, our internal controls, will require
management to devote substantial time and attention, which
could prove to be disruptive to product development and
licensing, marketing and other business activities and will
require additional legal, accounting and other expenses to
implement the requirements of these new rules.
RESULTS OF OPERATIONS
As discussed in the Company's Annual Report for the year
ended December 31, 2003, the Company acquired DIANON Systems, Inc.
on January 17, 2003. All dollar amounts are in millions.
Three Months ended March 31, 2004 compared with Three Months ended
March 31, 2003.
Net sales for the three months ended March 31, 2004 were
$752.5, an increase of $40.3, or approximately 5.7%, from $712.2
for the comparable 2003 period. The sales increase is a result of
an increase of approximately 5.7% in volume (primarily volume
growth in genomic and esoteric testing of approximately 10% as
well as volume growth of approximately 5% in the base business).
Price was essentially flat for the quarter.
Cost of sales, which includes primarily laboratory and
distribution costs, was $434.9 for the three months ended March
31, 2004 compared to $415.7 in the corresponding 2003 period, an
increase of $19.2. The increase in cost of sales is primarily the
result of increases in volume discussed above. Cost of sales as a
percentage of net sales was 57.8% for the three months ended March
31, 2004 and 58.4% in the corresponding 2003 period. Cost of
sales as a percentage of sales was impacted by the Company's
ongoing cost reduction programs.
Selling, general and administrative expenses decreased to
$163.0 for the three months ended March 31, 2004 from $163.3 in
the same period in 2003. As a percentage of net sales, selling,
general and administrative expenses were 21.7% and 22.9% for the
three months ended March 31, 2004 and 2003, respectively. This
decrease in selling, general and administrative expenses as a
percentage of net sales is a result of realized synergies from the
Dynacare and DIANON acquisitions, as well as a reduced effective
bad debt expense rate, resulting from improved billing
performance.
The amortization of intangibles and other assets was $10.3
and $8.5 for the three months ended March 31, 2004 and 2003. The
increase in the amortization expense for the three months ended
March 31, 2004 is a result of the acquisition of DIANON.
Interest expense was $9.3 for the three months ended March
31, 2004 compared with $11.4 for the same period in 2003. This
decrease was a direct result of the Company's financing of the
DIANON acquisition in 2003.
Income from equity investments was $12.6 for the three months
ended March 31, 2004 compared with $9.8 for the same period in
2003. This income represents the Company's ownership share in
equity affiliates acquired as part of the Dynacare acquisition on
July 25, 2002. 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 41.0% for the three months ended March 31, 2004
compared to 41.0% for the three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $147.6 and $135.0
for the three months ended March 31, 2004 and March 31, 2003,
respectively. The increase in cash flows from operations primarily
resulted from improved earnings, the expansion of the business
through acquisitions, and the improvement of the Company's accounts
receivable days' sales oustanding ("DSO") to 54 days at March 31,
2004 from 55 days at March 31, 2003.
Capital expenditures were $20.2 and $16.2 at March 31, 2004 and
2003, respectively. The Company expects total capital expenditures
of approximately $90.0 to $100.0 in 2004. These expenditures are
intended to continue to improve information systems and further
automate laboratory processes. Such expenditures are expected to be
funded by cash flow from operations.
On December 17, 2003, 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, beginning in the first quarter of 2004. During the first
quarter of 2004, the Company purchased approximately 1.7 million
shares of its common stock totaling $66.6 with cash flow from
operations. It is the Company's intention to fund future purchases
of its common stock with cash flow from operations.
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
Payments Due by Period
--------------------------------------
< 1 Yr 1-3 Yrs 3-5 Yrs > 5 Yrs
--------------------------------------
Capital lease
obligations $ 3.5 $ 5.7 $ 1.2 $ --
Operating leases 55.4 72.1 34.1 25.3
Restructuring
obligations 3.1 6.7 6.2 6.8
Contingent future
Licensing payments 24.6(b) 15.6 19.0 0.5
Royalty payments 0.3 1.8 2.0 --
5 1/2% Senior Notes -- -- -- 350.0
Zero Coupon-
Subordinated Notes 530.5(a) -- -- --
------ ------ ------ ------
Total contractual
Cash obligations $617.4 $101.9 $ 62.5 $382.6
====== ====== ====== ======
(a) Holders of the zero coupon-subordinated notes may require the
Company to purchase all or a portion of their notes on
September 11, 2004, 2006 and 2011 at prices ranging from
$712.97 to $819.54 per note. The Company may choose to pay
the purchase price in cash or common stock or a combination
of cash and common stock. If the holders elect to require
the Company to purchase their notes, it is the Company's
current intention to retire the notes by a cash payment.
However, future market conditions are subject to change.
Should the holders put the notes to the Company on any of
the dates above, the Company believes that it will be able
to obtain alternate financing to satisfy this contingent
obligation.
(b) Contingent future licensing payments will be made in the
event that certain events take place, such as the launch of
a specific test, the transfer of certain technology, and
when specified revenue milestones are met.
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. The Company had an interest rate swap agreement
with a major financial institution, solely to manage its interest
rate exposure on $175.0 million of its 5 1/2% senior notes. This
swap agreement was terminated during June 2003 and the Company
received net proceeds of $5.3 million. 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 three features that are considered to be embedded
derivative instruments under SFAS No. 133:
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) Contingent additional principal will accrue on the zero
coupon-subordinated notes during the two-year period from
September 11, 2004 to September 11, 2006, if the Company's
stock price is at or below specified thresholds.
3) 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.
Based upon independent appraisals, these embedded derivatives
had no fair value at March 31, 2004.
ITEM 4. Controls and Procedures
As of the end of the period covered by this 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 in timely alerting them to
material information which is required to be included in the
periodic reports that the Company must file with the Securities
and Exchange Commission.
There were no significant changes in the Company's internal
controls or in other factors that could adversely affect the
internal controls as of the end of the first fiscal quarter.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 10 to the Company's Unaudited Condensed
Consolidated Financial Statements" for the three
months ended March 31, 2004, which is incorporated
by reference.
Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
(e) Issuer Purchases of Equity Securities (Dollars and Shares in
millions except per share amounts)
Total Number
Of Shares Maximum
Average Repurchased Dollar Value
Total Price as Part of of Shares
Number Paid Publicly that May Yet Be
of Shares Per Announced Repurchased Under
Repurchased Share Program the Program
----------- ------- ----------- ----------------
January 1-January 31 0.3 $38.317 0.3 $239.5
February 1-February 29 0.4 38.872 0.7 223.2
March 1-March 31 1.0 38.562 1.7 183.4
----- ------- ----- ------
Total 1.7 38.599 1.7 183.4
===== ======= ===== ======
On December 17, 2003, the Company's Board of Directors
authorized and announced stock repurchase program under which the
Company may purchase up to an aggregate of $250.0 of its common
stock from time-to-time, beginning in the first quarter of 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer
32 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer and the Chief Financial
Officer
(b) Reports on Form 8-K
N/A
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
By:/s/THOMAS P. MAC MAHON
---------------------------
Thomas P. Mac Mahon
Chairman, President and
Chief Executive Officer
By:/S/WESLEY R. ELINGBURG
---------------------------
Wesley R. Elingburg
Executive Vice President,
Chief Financial Officer and
Treasurer
May 5, 2004