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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 SEPTEMBER 30, 1997
-----------------------------------
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
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(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 123,542,614
shares as of October 27, 1997, 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 October 27, 1997, 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)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 21.1 $ 29.3
Accounts receivable, net 513.4 505.6
Inventories 38.6 44.3
Prepaid expenses and other 22.0 21.8
Deferred income taxes 60.1 66.2
Income taxes receivable -- 54.3
-------- --------
Total current assets 655.2 721.5
Property, plant and equipment, net 253.9 282.9
Intangible assets, net 867.5 891.1
Other assets, net 25.5 21.5
-------- --------
$1,802.1 $1,917.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42.8 $ 65.7
Accrued expenses and other 151.0 168.4
Current portion of long-term debt -- 18.7
-------- --------
Total current liabilities 193.8 252.8
Loan from affiliate -- 187.0
Revolving credit facility 60.0 371.0
Long-term debt, less current portion 643.7 693.8
Capital lease obligation 9.8 9.8
Other liabilities 141.3 144.5
Redeemable preferred stock, 30,000,000 shares
authorized:
Series A 8 1/2% convertible exchangeable
preferred stock, $0.10 par value, 4,363,202
shares issued and outstanding at September 30,
1997, none issued and outstanding at
December 31, 1996 (aggregate preference
value of $218.2) 212.6 --
Series B 8 1/2% convertible pay-in-kind
preferred stock, $0.10 par value, 5,769,892
shares issued and outstanding at September 30,
1997, none issued and outstanding at
December 31, 1996(aggregate preference
value of $288.5) 282.6 --
Stockholders' equity:
Common stock, $0.01 par value;
520,000,000 shares authorized;
123,541,076 shares and 122,935,080
shares issued and outstanding at
September 30, 1997 and December 31,
1996, respectively 1.2 1.2
Additional paid-in capital 412.8 411.0
Accumulated deficit (155.7) (154.1)
-------- --------
Total stockholders' equity 258.3 258.1
-------- --------
$1,802.1 $1,917.0
======== ========
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)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
-------- -------- ------- --------
Net sales $ 376.5 $ 402.6 $1,157.6 $1,216.5
Cost of sales 262.7 300.1 811.6 903.9
------- -------- -------- --------
Gross profit 113.8 102.5 346.0 312.6
Selling, general and
administrative expenses 79.4 75.6 237.7 223.0
Amortization of intangibles
and other assets 7.7 7.3 23.0 22.1
Restructuring and non-
recurring charges -- -- -- 23.0
Provision for settlements and
related expenses -- 185.0 -- 185.0
------- ------- ------- --------
Operating income (loss) 26.7 (165.4) 85.3 (140.5)
Other income (expense):
Investment income 0.5 0.6 1.9 1.5
Interest expense (13.8) (17.7) (57.7) (51.4)
------- ------- ------- --------
Earnings (loss) before income
taxes 13.4 (182.5) 29.5 (190.4)
Provision for income taxes 8.0 (36.1) 17.7 (35.7)
------- ------- ------- --------
Net earnings (loss) $ 5.4 $(146.4) $ 11.8 $ (154.7)
======= ======= ======= ========
Preferred stock dividends 12.0 -- 13.2 --
Accretion of preferred stock
issuance costs 0.2 -- 0.2 --
------- ------- ------- --------
Net loss attributable
to common stockholders $ (6.8) $(146.4) $ (1.6) $ (154.7)
======= ======= ======= ========
Primary loss per common share $ (0.05) $ (1.19) $ (0.01) $ (1.26)
======= ======= ======= ========
Fully diluted loss per common
share $ (0.05) $ (1.19) $ (0.01) $ (1.26)
======= ======= ======= ========
Dividends per common share $ -- $ -- $ -- $ --
======= ======= ======= ========
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 11.8 $(154.7)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used for)
operating activities:
Restructuring and non-recurring
charges, net of cash payments (12.5) 8.6
Provision for settlements and
related expenses -- 185.0
Depreciation and amortization 64.9 63.3
Deferred income taxes, net 9.8 (27.4)
Provision for doubtful accounts,
net (6.3) 9.9
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (1.6) (78.7)
Decrease in inventories 5.7 6.5
Increase in prepaid expenses
and other (0.2) (2.4)
Change in income taxes receivable 54.3 12.0
Decrease in accounts payable (22.9) (32.0)
Decrease in accrued expenses and
other (2.0) (4.6)
Other, net (6.6) (3.1)
------- -------
Net cash provided by (used for)operating
activities 94.4 (17.6)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14.8) (46.3)
Acquisitions of businesses -- (3.3)
Investment in joint venture -- (2.5)
------- -------
Net cash used for investing
activities (14.8) (52.1)
------- -------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities $ 35.0 $ 23.0
Payments on revolving credit facilities (346.0) (80.0)
Payments on loan from affiliate (187.0) --
Payments on long-term debt (68.7) (52.1)
Deferred payments on acquisitions (4.5) (9.4)
Net proceeds from sale of redeemable
preferred stock 487.0 --
Payment of preferred dividends (5.2) --
Net proceeds from issuance of stock to
employee stock plan 1.6 --
-------- --------
Net cash provided by (used for)financing
activities (87.8) 81.5
-------- --------
Net increase (decrease) in cash and
cash equivalents (8.2) 11.8
Cash and cash equivalents at
beginning of year 29.3 16.4
-------- --------
Cash and cash equivalents at
end of period $ 21.1 $ 28.2
======== ========
Supplemental schedule of cash
flow information:
Cash paid(received)during the period for:
Interest $ 53.9 $ 55.1
Income taxes (55.5) (15.6)
Disclosure of non-cash financing
and investing activities:
Dividends declared or unpaid on
Series A Preferred Stock $ 0.1 $ --
Dividends Series B Preferred Stock $ 7.9 $ --
Accretion of preferred stock
issuance costs $ 0.2 $ --
In connection with business acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired $ -- $ 9.6
Cash paid -- (3.3)
-------- --------
Liabilities assumed $ -- $ 6.3
======== ========
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 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
Primary earnings per share are based upon the weighted
average number of shares outstanding during the three- and nine-
months ended September 30, 1997 of 123,541,076 and 123,139,298
shares, respectively, and the weighted average number of shares
outstanding during the three- and nine-months ended September 30,
1996 of 122,922,495 and 122,917,281 shares, respectively.
Fully diluted earnings per share are based on the weighted
average number of shares outstanding during the three- and nine-
month periods ended September 30, 1997 of 305,385,964 shares and
233,465,977 shares, respectively, and the weighted average number
of shares outstanding during the three- and nine-month periods
ended September 30, 1996 of 122,922,495 and 122,917,281 shares,
respectively.
Supplementary primary earnings per share represents what
primary earnings per share would have been if the Company's
issuance of redeemable preferred stock and related retirement of
debt had taken place at the beginning of the period.
Supplementary primary loss per share is $(0.10) for the nine-month
period ending September 30, 1997. Supplementary primary loss per
share was calculated for the nine-month period ended September 30,
1997, by adjusting net loss attributable to common shareholders by
adding back interest, net of tax ($8.9), and deducting additional
dividends ($20.1).
On March 3, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," replacing Accounting Principles Board
("APB") Opinion No. 15, "Earnings Per Share." SFAS No. 128
replaces "primary" and "fully diluted" earnings per share ("EPS")
under APB Opinion No. 15 with "basic" and "diluted" EPS. Unlike
primary EPS, basic EPS excludes the dilutive effects of options,
warrants and other convertible securities. Dilutive EPS reflects
the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted EPS. SFAS No. 128
is effective for periods ending after December 15, 1997 and
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2. EARNINGS PER SHARE - Continued
will require the restatement of prior year and quarter earnings
per share calculations. The implementation of SFAS No. 128 would
have had no significant impact on the calculation of earnings per
share for the three- and nine-month periods ended September 30,
1997 and 1996.
3. RESTRUCTURING CHARGES
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, 1996 $ 8.3 $ 9.4 $ 16.9 $ 34.6
Non cash items -- (2.5) -- (2.5)
Cash payments (8.2) (0.3) (2.1) (10.6)
Excess reserves (1.7) (5.6) (5.3) (12.6)
Winston-Salem
closure 2.7 2.6 7.3 12.6
------ ------ ------ ------
Balance at
September 30,
1997 $ 1.1 $ 3.6 $ 16.8 $ 21.5
====== ====== ====== ======
Current $ 12.4
Non-current 9.1
------
$ 21.5
======
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130 Reporting Comprehensive Income and SFAS No. 131
Disclosures about Segments of an Enterprise and Related
Information. Both statements are effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and
its components in financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. SFAS No 131 requires presentation of
segment information under the "management approach", which aligns
segments disclosure with the way that management organizes the
segments within the enterprise for making operation decisions and
assessing performance. Management has not yet completed its
assessment of how these standards will impact existing
disclosures. The Company intends to comply with these standards
in 1998.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
This quarterly report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. In addition, from time to time, the
Company or its representatives have made or may make forward-
looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various
filings made by the Company with the Securities and Exchange
Commission, press releases or oral statements made by or with the
approval of an authorized executive officer of the Company.
Actual results could differ materially from those projected or
suggested in any forward-looking statements as a result of a wide
variety of factors and conditions, which have been described in
the section of the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, entitled, "Cautionary Statement for
Purposes of the `Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995" and other documents the Company
files from time to time with the Securities and Exchange
Commission including the Company's quarterly reports on Form 10-Q
and current reports on Form 8-K, and shareholders are specifically
referred to these documents with regard to factors and conditions
that may affect future results.
In the last several years, the Company's business has been
affected by significant government regulation, price competition
and increased influence of managed care organizations resulting
from payors' efforts to control the cost, utilization and delivery
of health care services. As a result of these factors, the
Company's profitability has been impacted by changes in the volume
of testing, the prices and costs of its services, the mix of
payors and the level of bad debt expense.
Management expects that the competitive pricing environment
and utilization declines will continue to negatively impact net
sales and results of operations for the foreseeable future,
particularly as a result of anticipated growth in managed care.
Since the third quarter of 1996, the Company has expanded its
efforts to improve the profitability of new and existing business
in an attempt to counter the effects of such price erosion. These
efforts are based upon continued price management and the
implementation of a new strategic plan. The Company's customer
account strategy includes selectively repricing or discontinuing
business with existing accounts that perform below Company
expectations, as well as growing focused market areas such as
infectious disease testing and profitable managed care. The
Company's strategic plan refocuses on protecting and developing
core customer segments such as key physician accounts and on
creating alliances with hospitals in order to establish new
management contracts. In addition, the strategic plan includes
expansion of targeted growth opportunities such as full range
occupational services, clinical trials testing laboratories and
genetics and molecular biology.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
The average price per accession has increased 1.5% for the
nine months ended September 30, 1997 in comparison to the same
period in 1996. The Company is also targeting price increases in
certain areas, such as specialty and niche testing, which have not
seen price increases since 1995. Although such increases have
adversely affected volumes, the Company believes that such
measures along with other cost reduction programs, will improve
its overall profitability. There can be no assurance, however, of
the timing or success of such measures or that the Company will
not lose market share as a result of these measures. Also, the
Company is reviewing its sales organization and is modifying its
commission structure so that compensation is tied more directly to
the profitability of retained and new business instead of the
current practice of basing commissions primarily on revenue
generated. Finally, it is the objective of management to
partially offset any increases in cost of sales as a percentage of
net sales and selling, general and administrative expenses as a
percentage of net sales through cost savings the Company expects
to realize through comprehensive cost reduction programs. The
Company continues to review alternatives relating to regions of
the country and certain businesses where profitability is not
reaching internal goals and may consolidate operations or enter
into joint ventures, alliances, or asset swaps with interested
parties in order to maximize regional operating efficiencies.
Many market-based changes in the clinical laboratory business
have occurred, most involving the shift away from traditional, fee-
for-service medicine to managed-cost health care. The growth of
the managed care sector presents various challenges to the Company
and other independent clinical laboratories. Managed care
providers typically contract with a limited number of clinical
laboratories and negotiate discounts to the fees charged by such
laboratories in an effort to control costs. Such discounts have
resulted in price erosion and have negatively impacted the
Company's operating margins. In addition, managed care providers
have used capitated payment contracts in an attempt to promote
more efficient use of laboratory testing services. Under a
capitated payment contract, the clinical laboratory and the
managed care provider agree to a per month payment to cover all
laboratory tests during the month, regardless of the number or
cost of the tests actually performed. Such contracts also shift
the risks of additional testing beyond that covered by the
capitated payment to the clinical laboratory. The increase in
managed-cost health care has also resulted in declines in the
utilization of laboratory testing services.
In addition, Medicare (which principally serves patients 65
and older) Medicaid (which principally serves indigent patients),
and insurers have increased their efforts to control the cost,
utilization and delivery of health care services. Measures to
regulate health care delivery in general and clinical laboratories
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
in particular have resulted in reduced prices and added costs and
deceasing test utilization for the clinical laboratory industry by
increasing complexity and adding new regulatory and administrative
requirements. In 1984, Congress established a Medicare fee
schedule for clinical laboratory services performed for patients
covered under Part B of the Medicare program. Subsequently,
Congress imposed a national ceiling on the amount that can be paid
under the fee schedule. Since the 1984 establishment of Medicare
fee schedules, Congress has periodically reduced the ceilings on
Medicare reimbursement to clinical laboratories from previously
authorized levels. In early August, Congress passed and the
President signed the Balanced Budget Act of 1997 ("BBA"), which
includes a provision that reduces, effective January 1, 1998, the
Medicare national limitations from 76% of the 1984 national median
to 74% of the national median. An additional provision in the BBA
freezes the Consumer Price Index update for five years.
As part of an examination of industry wide clinical
laboratory billing practices begun in 1993 by the Office of the
Inspector General of the Department of Health and Human Services
("OIG"), the United States Department of Justice ("DOJ"), and
other federal and state investigators, certain billings for tests
performed by LabCorp predecessor companies were also reviewed.
These investigations were part of a broad based federal inquiry
into Medicare and related billings that have resulted in financial
settlements with a number of other clinical laboratories. On
November 21, 1996, the Company reached a settlement with OIG and
the DOJ regarding the prior billing practices of various of its
predecessor companies. The Company settled this matter without an
admission of fault. Consistent with this overall settlement the
Company paid $187 to the Federal Government (the "Settlement
Payment") in December 1996 with proceeds from a loan from Roche
Holdings, Inc. ("Roche").
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS
ENDED SEPTEMBER 30, 1996.
Net sales for the three months ended September 30, 1997 were
$376.5, a decrease of approximately 6.5% from $402.6 reported in
the comparable 1996 period. Sales declined approximately 7.2% as
a result of lower testing volume, which is a result of industry-
wide trends as well as the Company's program of selectively
eliminating unprofitable accounts and carefully evaluating the
acceptability of new business. The decline in sales resulting
from volume declines was partially offset by an increase in price
per accession of approximately 0.7% from the comparable 1996
period. The increase in the price per accession was a direct
result of the Company's effort to negotiate better pricing on new
contracts, raising prices on existing contracts that do not meet
Company profitability targets and other pricing initiatives
discussed in the Overview Section above.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Cost of sales, which includes primarily laboratory and
distribution costs, was $262.7 for the three months ended
September 30, 1997 compared to $300.1 in the corresponding 1996
period, a decrease of $37.4. Cost of sales decreased
approximately $21.4 due to the decrease in volume, approximately
$5.9 due to a decrease in salaries and benefits and approximately
$12.2 primarily relating to data processing supplies, testing
supplies, freight and consulting fees expense categories as a
result of the Company's cost reduction programs. These decreases
were partially offset by an increase in salaries due to scheduled
salary increases and an increase in outside reference testing
expenses and supply costs resulting primarily from an increase in
volume in the Company's specialty and niche testing areas. Cost
of sales as a percentage of net sales was 69.8% for the three
months ended September 30, 1997 and 74.5% in the corresponding
1996 period. The decrease in the cost of sales percentage of net
sales primarily resulted from the cost reduction efforts mentioned
above.
Selling, general and administrative expenses increased to
$79.4 for the three months ended September 30, 1997 from $75.6 in
the same period in 1996. The primary reason for the increase in
these expenses is due to additional costs, primarily salaries,
consulting fees and bad debt expense, incurred to address billing
issues. Total bad debt expense, increased approximately $4.7 or
1.2% of net sales, from the comparable 1996 period. The increase
is primarily a result of the growth in accounts receivable
resulting from increased medical necessity and related diagnosis
code requirements of the Medicare program and various third-party
payors and integration issues following the merger with Roche
Biomedical Laboratories, Inc. ("RBL") primarily resulting from
maintaining and consolidating multiple billing systems. See
"Liquidity and Capital Resources". These increases were partially
offset by decreases in selling expenses resulting from the
decrease in net sales. As a percentage of net sales, selling,
general and administrative expenses were 21.1% and 18.8% for the
three months ended September 30, 1997 and 1996, respectively. The
increase in the selling, general and administrative percentage
primarily resulted from the factors noted above.
The increase in amortization of intangibles and other assets
to $7.7 for the three months ended September 30, 1997 from $7.3 in
the corresponding period in 1996 primarily resulted from small
acquisitions completed in 1996.
Net interest expense was $13.3 for the three months ended
September 30, 1997 compared with $17.1 for the same period in
1996. The change resulted primarily from decreased borrowings
resulting from the Company's recapitalization in June, 1997.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
The provision for income taxes as a percentage of earnings
before taxes for the three months ended September 30, 1997 is not
comparable to the three months ended September 30, 1996 due to non-
recurring charges in 1996. The Company's effective tax rate is
significantly impacted by non-deductible amortization of
intangible assets. As earnings before income taxes decreases, this
non-deductible amortization increases in proportion to such
earnings resulting in an increase in the effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS
ENDED SEPTEMBER 30, 1996.
Net sales for the nine months ended September 30, 1997 were
$1,157.6, a decrease of approximately 4.8% from $1,216.5 reported
in the comparable 1996 period. Sales declined approximately 6.3%
as a result of lower testing volume, which is a result of industry-
wide trends as well as the Company's program of selectively
eliminating unprofitable accounts and carefully evaluating the
acceptability of new business. The decline in sales resulting
from volume declines was partially offset by an increase in price
per accession of approximately 1.5% from the comparable 1996
period. The increase in the price per accession was a direct
result of the Company's effort to negotiate better pricing on new
contracts, raising prices on existing contracts that do not meet
Company profitability targets and other pricing initiatives
discussed in the Overview Section above.
Cost of sales, which includes primarily laboratory and
distribution costs, was $811.6 for the nine months ended September
30, 1997 compared to $903.9 in the corresponding 1996 period, a
decrease of $92.3. Cost of sales decreased approximately $56.2 due
to the decrease in volume, approximately $19.9 due to a decrease
in salaries and benefits and approximately $24.4 primarily
relating to data processing supplies, request forms, freight
expense and outside reference testing categories as a result of
the Company's cost reduction programs and lower volume. These
decreases were partially offset by an increase in salaries due to
scheduled salary increases and supply costs resulting primarily
from an increase in volume in the Company's specialty and niche
testing areas. Cost of sales as a percentage of net sales was
70.1% for the nine months ended September 30, 1997 and 74.3% in
the corresponding 1996 period. The decrease in the cost of sales
percentage of net sales primarily resulted from the cost reduction
efforts mentioned above.
Selling, general and administrative expenses increased to
$237.7 for the nine months ended September 30, 1997 from $223.0 in
the same period in 1996. The primary reason for the increase in
these expenses is due to additional costs, primarily salaries,
consulting fees and bad debt expense, incurred to address billing
issues. Total bad debt expense increased approximately $9.9 or 0.8%
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
of net sales, from the comparable 1996 period. The increase is
primarily a result of the growth in accounts receivable resulting
from increased medical necessity and related diagnosis code
requirements of the Medicare program and various third-party
payors and integration issues following the merger with RBL
primarily resulting from maintaining and consolidating multiple
billing systems. See "Liquidity and Capital Resources". These
increases were partially offset by decreases in selling expenses
resulting from the decrease in net sales. As a percentage of net
sales, selling, general and administrative expenses were 20.5% and
18.3% for the nine months ended September 30, 1997 and 1996,
respectively. The increase in the selling, general and
administrative percentage primarily resulted from the factors
noted above.
The increase in amortization of intangibles and other assets
to $23.0 for the nine months ended September 30, 1997 from $22.1
in the corresponding period in 1996 primarily resulted from small
acquisitions completed in 1996.
Net interest expense was $55.8 for the nine months ended
September 30, 1997 compared with $49.9 for the same period in
1996. The change resulted primarily from increased borrowings
resulting from lower collection rates on accounts receivable and
the loan from Roche, which was used to pay the Settlement Payment.
See "Overview". The increase in net interest expense was
partially offset by decreased borrowings resulting from the
Company's recapitalization in June, 1997.
The provision for income taxes as a percentage of earnings
before taxes for the nine months ended September 30, 1997 is not
comparable to the nine months ended September 30, 1996 due to
restructuring and non-recurring charges in 1996. The Company's
effective tax rate is significantly impacted by non-deductible
amortization of intangible assets. As earnings before income
taxes decreases, this non-deductible amortization increases in
proportion to such earnings resulting in an increase in the
effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used for) operating activities was
$94.4 and $(17.6) for the nine months ended September 30, 1997 and
September 30, 1996, respectively. The increase in cash flow from
operations primarily resulted from an income tax refund and
stabilization of growth in accounts receivable as well as the
provision for settlements and related expenses recorded in the
third quarter of 1996. Capital expenditures were $14.8 and $46.3
for the first nine months of 1997 and 1996, respectively. The
Company expects capital expenditures to be approximately $30.0 in
1997 to further automate laboratory processes to improve
efficiency. Such expenditures are expected to be funded by cash
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
flow from operations as well as borrowings under the Company's
credit facilities.
Increased medical necessity and related diagnosis code
requirements of the Medicare program were placed on the Company by
certain third-party carriers in late 1995 and additional
requirements were placed on the Company at the beginning of 1996.
The Company experienced lower collection rates as a result of
these more stringent requirements. In addition, increased
difficulty in collecting amounts due from private insurance
carriers, including certain managed care plans, has negatively
impacted cash flow from operations. Finally, integration issues
following the merger in 1995 with RBL have also resulted in
increased accounts receivable balances as a result of the Company
maintaining and consolidating multiple billing information
systems. The Company currently has plans in place to stabilize
collection rates and improve the collection of accounts
receivable. In the third quarter of 1997, the Company's
collection rate, as measured by the number of days sales
outstanding, increased by 3 days from the second quarter of
1997. Although the Company continues to work towards reducing
the overall number of days sales outstanding, additional
changes in requirements of third-party payors could increase the
difficulty in collections. There can be no assurance of the
success of the Company's plans to improve collections and,
due to changes in medical necessity requirements, the Company
expects accounts receivable balances to continue to exceed 1995
levels.
For a discussion of legal proceedings which may impact the
Company's liquidity and capital resources see "Part II - Other
Information -- Item 1: Legal Proceedings."
Cash and cash equivalents on hand, cash flow from operations
and additional borrowing capabilities under the Amended Revolving
Credit Facility are expected to be sufficient to meet anticipated
operating requirements and provide funds for capital expenditures
and working capital for the foreseeable future.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain claims and legal
actions arising in the ordinary course of business.
In the opinion of management, based upon the advice of
counsel, the ultimate disposition of these matters will
not have a material adverse effect on the financial
position or results of operations of the Company. In
addition, the Company has recently been contacted by
representatives of certain insurance companies and
individuals in a purported class action, who have
asserted claims for private reimbursement, which are
similar to the Government claims settled on November 21,
1996. The Company is carefully evaluating these claims,
and although there can be no assurance, based upon the
information currently available to it, management does
not believe that the ultimate outcome of these claims
will have a material adverse effect on its financial
condition. However, due to the early stage of such
claims, management cannot make an estimate of loss or
predict whether or not such claims will have a
material adverse effect on the Company's results of
operations in any particular period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(electronically filed version only).
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated July 29,
1997 was filed on August 1, 1997, by the
registrant, in connection with the press
release dated July 29, 1997 announcing
operating results of the Company for the
three and six month periods ended June 30,
1997 as well as certain other information.
(2) A current report on Form 8-K dated August 5,
1997 was filed on August 11, 1997, by the
registrant, in connection with the press
release dated August 5, 1997 announcing that
it has become the first commercial reference
laboratory to offer HIV genotyping using Gene
Chip -Registered Trademark- DNA probe assays
and polymerse chain reaction (PCR) based assays.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
(b) Reports on Form 8-K - Continued
(3) A current report on Form 8-K dated August 25,
1997 was filed on August 26, 1997, by the
registrant, in connection with the press
release dated August 25, 1997 announcing that
its Board of Directors has declared dividends
on the Company's Series A 8 1/2% Convertible
Exchangeable Preferred Stock and the Company's
Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock.
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
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 4, 1997