LABORATORY CORPORATION OF AMERICA HOLDINGS FORWARD-LOOKING STATEMENTSLaboratory Corporation of America® Holdings together with its subsidiaries (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 relate to future events and expectations and 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 speak only as of the time they are made and are subject to various risks and uncertainties. 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, including in the "Risk Factors" section of the Annual Report on Form 10-K, and in the Company's other public filings, press releases, and discussions with Company management, including: 1. changes in government and third-party payer regulations, reimbursement, or coverage policies or other future reforms in the healthcare system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (e.g., health insurance exchanges) affecting governmental and third-party coverage or reimbursement for commercial laboratory testing, including the impact of theU.S. Protecting Access to Medicare Act of 2014 (PAMA); 2. significant monetary damages, fines, penalties, assessments, refunds, repayments, damage to the Company's reputation, unanticipated compliance expenditures, and/or exclusion or debarment from or ineligibility to participate in government programs, among other adverse consequences, arising from enforcement of anti-fraud and abuse laws and other laws applicable to the Company in jurisdictions in which the Company conducts business; 3. significant fines, penalties, costs, unanticipated compliance expenditures and/or damage to the Company's reputation arising from the failure to comply with applicable privacy and security laws and regulations, including theU.S. Health Insurance Portability and Accountability Act of 1996, theU.S. Health Information Technology for Economic and Clinical Health Act, theEuropean Union's General Data Protection Regulation and similar laws and regulations in jurisdictions in which the Company conducts business; 4. loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of applicable licensing laws or regulations regarding the operation of clinical laboratories and the delivery of clinical laboratory test results, including, but not limited to, theU.S. Clinical Laboratory Improvement Act of 1967 and theU.S. Clinical Laboratory Improvement Amendments of 1988 and similar laws and regulations in jurisdictions in which the Company conducts business; 5. penalties or loss of license arising from the failure to comply with applicable occupational and workplace safety laws and regulations, including theU.S. Occupational Safety and Health Administration requirements and theU.S. Needlestick Safety and Prevention Act and similar laws and regulations in jurisdictions in which the Company conducts business; 6. fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, damage to the Company's reputation, injunctions, or criminal prosecution arising from failure to maintain compliance with current good manufacturing practice regulations and similar requirements of various regulatory agencies in jurisdictions in which the Company conducts business; 7. sanctions or other remedies, including fines, unanticipated compliance expenditures, enforcement actions, injunctions or criminal prosecution arising from failure to comply with the Animal Welfare Act or applicable national, state and local laws and regulations in jurisdictions in which the Company conducts business; 8. changes in testing guidelines or recommendations by government agencies, medical specialty societies and other authoritative bodies affecting the utilization of laboratory tests; 9. changes in applicable government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests, drug development, or the conduct of drug development and medical device and diagnostic studies and trials, including regulations and policies of theU.S. Food and Drug Administration , theU.S. Department of Agriculture , the Medicine and Healthcare products Regulatory Agency in theUnited Kingdom (U.K. ), theNational Medical Products Administration inChina , thePharmaceutical and Medical Devices Agency inJapan , the 27
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European Medicines Agency and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business; 10. changes in government regulations or reimbursement pertaining to the biopharmaceutical and medical device and diagnostic industries, changes in reimbursement of biopharmaceutical products or reduced spending on research and development by biopharmaceutical customers; 11. liabilities that result from the failure to comply with corporate governance requirements; 12. increased competition, including price competition, potential reduction in rates in response to price transparency and consumerism, competitive bidding and/or changes or reductions to fee schedules and competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry; 13. changes in payer mix or payment structure, including insurance carrier participation in health insurance exchanges, an increase in capitated reimbursement mechanisms, the impact of a shift to consumer-driven health plans or plans carrying an increased level of member cost-sharing, and adverse changes in payer reimbursement or payer coverage policies (implemented directly or through a third-party utilization management organization) related to specific diagnostic tests, categories of testing or testing methodologies; 14. failure to retain or attract managed care organization (MCO) business as a result of changes in business models, including new risk-based or network approaches, out-sourced laboratory network management or utilization management companies, or other changes in strategy or business models by MCOs; 15. failure to obtain and retain new customers, an unfavorable change in the mix of testing services ordered, or a reduction in tests ordered, specimens submitted or services requested by existing customers, and delays in payment from customers; 16. difficulty in maintaining relationships with customers or retaining key employees as a result of uncertainty surrounding the integration of acquisitions and the resulting negative effects on the business of the Company; 17. consolidation and convergence of MCOs, biopharmaceutical companies, health systems, large physician organizations and other customers, potentially causing material shifts in insourcing, utilization, pricing and reimbursement, including full and partial risk-based models; 18. failure to effectively develop and deploy new systems, system modifications or enhancements required in response to evolving market and business needs; 19. customers choosing to insource services that are or could be purchased from the Company; 20. failure to identify, successfully close, and effectively integrate and/or manage acquisitions of new businesses; 21. inability to achieve the expected benefits and synergies of newly-acquired businesses, including due to items not discovered in the due-diligence process, and the impact on the Company's cash position, levels of indebtedness and stock price; 22. termination, loss, delay, reduction in scope or increased costs of contracts, including large contracts and multiple contracts; 23. liability arising from errors or omissions in the performance of testing services, contract research services, or other contractual arrangements; 24. changes or disruption in the provision or transportation of services or supplies provided by third parties; or their termination for failure to follow the Company's performance standards and requirements; 25. damage or disruption to the Company's facilities; 26. damage to the Company's reputation, loss of business, or other harm from acts of animal rights activists or potential harm and/or liability arising from animal research activities; 27. adverse results in litigation matters; 28. inability to attract and retain experienced and qualified personnel or the loss of significant personnel as a result of illness or otherwise; 29. failure to develop or acquire licenses for new or improved technologies, such as point-of-care testing, mobile health technologies, and digital pathology, or potential use of new technologies by customers and/or consumers to perform their own tests; 28
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30. substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests; 31. failure to obtain, maintain and enforce intellectual property rights for protection of the Company's products and services and defend against challenges to those rights; 32. scope, validity and enforceability of patents and other proprietary rights held by third parties that may impact the Company's ability to develop, perform, or market the Company's products or services or operate its business; 33. business interruption, receivable impairment, delays in cash collection impacting days sales outstanding, supply chain disruptions, increases in operating costs, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes, political crises, including terrorism and war, public health crises and disease epidemics and pandemics, and other events outside of the Company's control; 34. discontinuation or recalls of existing testing products; 35. a failure in the Company's information technology systems, including with respect to testing turnaround time and billing processes, or the failure of the Company or its third-party suppliers and vendors to maintain the security of business information or systems or to protect against cybersecurity attacks such as denial of service attacks, malware, ransomware and computer viruses, or delays or failures in the development and implementation of the Company's automation platforms, any of which could result in a negative effect on the Company's performance of services, a loss of business or increased costs, damages to the Company's reputation, significant litigation exposure, an inability to meet required financial reporting deadlines, or the failure to meet future regulatory or customer information technology, data security and connectivity requirements; 36. business interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, general labor unrest or failure to comply with labor or employment laws; 37. failure to maintain the Company's days sales outstanding levels, cash collections (in light of increasing levels of patient responsibility), profitability and/or reimbursement arising from unfavorable changes in third-party payer policies, payment delays introduced by third party utilization management organizations and increasing levels of patient payment responsibility; 38. impact on the Company's revenues, cash collections and the availability of credit for general liquidity or other financing needs arising from a significant deterioration in the economy or financial markets or in the Company's credit ratings byStandard & Poor's and/or Moody's; 39. failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment grade rating, or leverage ratio covenants under its term loan facility and revolving credit facility; 40. changes in reimbursement by foreign governments and foreign currency fluctuations; 41. inability to obtain certain billing information from physicians, resulting in increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and revenues; 42. expenses and risks associated with international operations, including, but not limited to, compliance with theU.S. Foreign Corrupt Practices Act, theU.K. Bribery Act, other applicable anti-corruption laws and regulations, trade sanction laws and regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions; 43. failure to achieve expected efficiencies and savings in connection with the Company's business process improvement initiatives; 44. changes in tax laws and regulations or changes in their interpretation, including theU.S. Tax Cuts and Jobs Act (TCJA); 45. global economic conditions and government and regulatory changes, including, but not limited to theU.K.'s exit from theEuropean Union ; and 46. effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, liquidity, and collections, and the actions the Company, or governments, have taken or may take in response, and damage to the Company's reputation or loss of business resulting from the perception of the Company's response to the COVID-19 pandemic, including the availability and accuracy and timeliness of delivery of any tests that the Company develops, collaborates on or provides for the detection of COVID-19. 29
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Except as may be required by applicable law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Given these uncertainties, one should not put undue reliance on any forward-looking statements. GENERAL (dollars in millions, except per share data) Revenues for the nine months endedSeptember 30, 2020 , were$9,488.7 , an increase of 10.3% from$8,601.4 during the nine months endedSeptember 30, 2019 . The increase in revenues was due to organic growth of 8.3%, acquisitions of 2.1%, and favorable foreign currency translation 0.1%, partially offset by the disposition of a business of 0.2%. The 8.3% increase in organic revenue includes the 16.4% contribution from COVID-19 Testing, partially offset by the 8.1% reduction in the Company's organic Base Business due to the pandemic. Base Business includes the Company's business operations except for PCR and antibody COVID-19 testing (COVID-19 Testing). The decline in the organic Base Business includes the negative impact of PAMA of 0.6%. InMarch 2020 , COVID-19 was declared a pandemic. COVID-19 has had and continues to have an extensive impact on the global health and economic environments. Given the continued unpredictability of the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial results for 2020. Throughout the year, the Company's COVID-19 Testing has helped to offset the pressure experienced in the Base Business. To date, the Company has performed more than 18 million PCR and 3.0 million antibody COVID-19 tests and has a current capacity of 210,000 PCR and 300,000 antibody tests per day. The Company continues to increase capacity across multiple platforms for its COVID-19 Testing subject to the availability of equipment and testing supplies and key personnel. During the nine months endedSeptember 30, 2020 , the Company recorded goodwill and other asset impairment charges of$437.4 , as a result of the negative financial impact of COVID-19 during the first quarter of 2020. See Note 6Goodwill and Intangible Assets for a discussion of goodwill and intangible asset impairment and Note 2 Revenues for a discussion of credit losses and additional price concessions. The Company also impaired certain of the Company's investments by a total of$25.4 during the nine months endedSeptember 30, 2020 , due to the impact of COVID-19;$7.1 was included in Equity method earnings (loss), net during the three months endedMarch 31, 2020 , and$13.1 and$5.2 were included in Other, net during the three months endedMarch 31, 2020 , andJune 30, 2020 , respectively. InApril 2020 , the Company received cash payments of approximately$55.9 from thePublic Health andSocial Services Emergency Fund for provider relief that was appropriated byCongress to theDepartment of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act Provider Relief Funds). Upon receiving and satisfying the terms and conditions associated with the distributed funds, the Company accounted for the transaction by applying the guidance in ASC 450-30 Gain Contingencies, and recorded these funds in Other, net non-operating income in the Consolidated Statement of Operations as ofJune 30, 2020 . InAugust 2020 , the Company received an additional$76.2 in CARES Act Provider Relief Funds. As the Company's Diagnostic business demonstrated recovery and demand for COVID-19 testing increased, the Company determined that the negative financial impact of COVID-19 which the CARES Act Provider Relief Funds were designed to address no longer applied to the Company. As a result, the Company derecognized the income associated with the$55.9 received during the second quarter as a change in estimate and did not recognize any income related to the cash payment of$76.2 received in the third quarter. The Company plans to return the CARES Act Provider Relief Funds to the government in the fourth quarter of 2020 and has recorded a liability of$132.1 in Accrued expenses and other as ofSeptember 30, 2020 . There remains significant uncertainty regarding the duration and severity of the pandemic and its impact on the Company's business, results of operations and financial position for the balance of 2020 and beyond. For more information regarding the risks associated with COVID-19 and its impact on the Company's business, see Risk Factors in Part II - Item 1A.
RESULTS OF OPERATIONS (dollars in millions)
Three months endedSeptember 30, 2020 , compared with three months endedSeptember 30, 2019 Revenues Three Months Ended September 30, 2020 2019 Change LCD$ 2,704.2 $ 1,759.2 53.7 % CDD 1,241.9 1,175.4 5.7 % Intercompany eliminations and other (50.0) (6.2) 705.1 % Total$ 3,896.1 $ 2,928.5 33.0 % 30
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The increase in revenues for the three months endedSeptember 30, 2020 , as compared with the corresponding period in 2019 was 33.0%. The increase in revenue was due to organic growth of 31.5%, acquisitions of 1.0%, and favorable foreign currency translation of 0.5%. The 31.5% increase in organic revenue includes the 32.6% contribution from COVID-19 Testing, partially offset by the 1.1% reduction in the Company's organic Base Business due to the pandemic. The decline in organic Base Business includes the lower Medicare and Medicaid pricing as a result of PAMA of 0.7%. LCD revenues for the quarter were$2,704.2 , an increase of 53.7% compared to revenues of$1,759.2 in the third quarter of 2019. The increase in revenues was primarily due to organic growth of 52.3% and acquisitions of 1.4%. The 52.3% increase in organic revenue was due to a 54.2% contribution from COVID-19 Testing, partially offset by a 1.9% decline in the organic Base Business, which includes the negative impact from PAMA of 1.1%. Total volume, measured by requisitions, increased by 21.8% as organic volume increased by 20.0% and acquisition volume contributed 1.8%. The organic volume growth includes increased demand for COVID-19 Testing of 28.8%, partially offset by an 8.9% reduction of organic Base Business due to the pandemic. Price/mix increased by 31.9% due to COVID-19 Testing of 25.4% and organic Base Business of 7.0%, which includes the negative impact from PAMA of 1.1%. CDD revenues for the third quarter were$1,241.9 , an increase of 5.7% over revenues of$1,175.4 in the third quarter of 2019. The increase in revenues was primarily due to organic growth of 3.8%, acquisitions of 0.5%, and favorable foreign currency translation of 1.4%. The increase in organic revenue was due to COVID-19 testing through itsCentral Laboratories business. Excluding COVID-19 Testing, organic revenue was flat compared to the third quarter of 2019. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit. Cost of Revenues Three Months Ended September 30, 2020 2019 Change Cost of revenues$ 2,336.7 $ 2,111.2 10.7 % Cost of revenues as a % of revenues 60.0 %
72.1 %
Cost of revenues decreased 10.7% during the three months endedSeptember 30, 2020 , as compared with the corresponding period in 2019. Cost of revenues as a percentage of revenues during the three months endedSeptember 30, 2020 , decreased to 60.0% as compared to 72.1% in the corresponding period in 2019. This decrease was primarily due to the impact of COVID-19 testing and LaunchPad savings, partially offset by the reduction in Base Business as a result of the pandemic and PAMA and higher personnel costs primarily driven by merit increases. Selling, General and Administrative Expenses Three Months
Ended
2020 2019 Change
Selling, general and administrative expenses $ 419.5 $ 401.5 4.5 %
Selling, general and administrative expenses as a % of revenues
10.8 % 13.7 %
During the three months ended September 30, 2020 , the Company incurred $2.4 of
acquisition and divestiture related costs, $1.9 in COVID-related costs and $1.8
in management transition costs. In addition, the Company recorded $0.2 of
non-capitalized costs associated with the implementation of a major system as
part of its LaunchPad business process improvement initiative and $0.7 related
to miscellaneous other items. These items increased selling, general and
administrative expenses by $7.0 .
During the three months ended September 30, 2019 , the Company incurred $9.6 in
acquisition and divestiture costs, $5.3 in management transition costs and $11.3
in costs related to the AMCA data breach. In addition, the Company recorded $2.4
of non-capitalized costs associated with the implementation of a major system as
part of its LaunchPad business process improvement initiative and reversed $13.9
related to the settlement of a contingent purchase price related to a 2016
acquisition. These items increased selling, general and administrative expenses
by $14.7 .
Excluding these charges, selling, general and administrative expenses as a
percentage of revenues were 10.6% and 13.2% during the three months ended
September 30, 2020 , and 2019, respectively, primarily due to leveraging the
Company's infrastructure on higher revenue, partially offset by a $15.0 initial
contribution to establish the LabCorp Charitable Foundation which supports the
Company's strategic mission to improve health and improve lives with
contributions focused on health and welfare, education and community.
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Three Months Ended
2020 2019 Change
Goodwill and other asset impairments $ 23.5 $ - N/A
During the three months ended September 30, 2020 , the Company recorded goodwill
and other asset impairment charges of $10.1 and $17.7 for customer relationships
and technology intangible assets, respectively, due to the loss of a contract
from a CDD prior acquisition. The Company reversed the $5.0 charge for the
estimated loss related to the CDD floating rate secured note receivable due 2022
from Envigo. The Company also recorded an impairment for a note receivable
related to an LCD investment of $0.7 during the three months ended September 30,
2020 .
Amortization of Intangibles and Other Assets
Three Months Ended September 30,
2020 2019 Change
LCD $ 25.9 $ 24.9 3.8 %
CDD 36.3 36.8 (1.2) %
Total amortization of intangibles and other assets $ 62.2 $ 61.7 0.8 %
The increase in amortization of intangibles and other assets primarily reflects
the impact of acquisitions occurring after September 30, 2019 , partially offset
by the of impairment of intangible assets in fiscal 2020.
Restructuring and Other Special Charges
Three Months
Ended
2020 2019 Change
Restructuring and other charges $ 7.1 $ 14.2 (49.8) %
During the three months ended September 30, 2020 , the Company recorded net
restructuring and other charges of $7 .1: $1.6 within LCD and $5.5 within CDD.
The charges were comprised of $2.3 related to severance and other personnel
costs, $3.0 for a CDD lab facility and equipment impairment, and $4.0 in
facility closures, impairment of operating lease right-of use assets and general
integration activities. The charges were offset by the reversal of previously
established liability of $0.1 and $2.1 in unused severance costs and
facility-related costs, respectively.
During the three months ended September 30, 2019 , the Company recorded net
restructuring and other special charges of $14 .2: $6.7 within LCD and $7.5
within CDD. The charges were comprised of $5.9 related to severance and other
personnel costs along with $8.5 in costs associated with facility closures,
impairment of operating lease right-of-use assets and general integration
initiatives. The charges were offset by the reversal of previously established
reserves of $0.2 in unused facility reserves.
Interest Expense
Three Months Ended September 30,
2020 2019 Change
Interest expense $ (51.4) $ (60.5) (15.0) %
The decrease in interest expense for the three months ended September 30, 2020 ,
as compared with the corresponding period in 2019, is primarily due to a lower
outstanding balance on term loans, lower variable interest rates, the repayment
of the 2.625% senior notes and the 4.625% senior notes, partially offset by the
issuance of $1,050.0 in debt securities in November 2019 .
Equity Method Income
Three Months Ended September 30,
2020 2019 Change
Equity method income, net $ 3.0 $ 2.4 26.0 %
Equity method income represents the Company's ownership share in joint venture
partnerships along with equity investments in other companies in the health care
industry. All of these partnerships and investments reside within LCD. The
increase in income for the three months ended September 30, 2020 , as compared
with the corresponding period in 2019, was primarily due to increased
profitability of the Company's joint ventures.
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Other, net
Three Months Ended September 30,
2020 2019 Change
Other, net $ (54.2) $ 2.7 (2,096.1) %
The change in other, net for the three months ended September 30, 2020 , as
compared to the three months ended September 30, 2019 , is primarily due to the
derecognition of the income associated with the $55.9 from the CARES Act
Provider Relief Funds received during the second quarter as the Company plans to
return the funding. The Company recorded investment gains of $4.6 , including a
gain of $1.6 on the extinguishment of the interest rate swap arrangement. In
addition, foreign currency transaction losses of $1.9 were recognized for the
three months ended September 30, 2020 , and losses of $2.9 were recognized in the
corresponding period of 2019.
Income Tax Expense
Three Months Ended September 30,
2020 2019 Change
Income tax expense $ 243.4 $ 66.4 266.9 %Income tax expense as a % of earnings before income taxes
25.7 % 23.1 %
The 2020 tax rate was unfavorable to the 2019 tax rate due to the higher mix of earnings inthe United States and the favorable impact of a reduction in tax rates in foreign jurisdictions in 2019. Operating Income by Segment Three Months Ended September 30, 2020 2019 Change LCD operating income $ 964.6$ 262.2 267.8 % LCD operating margin 35.7 % 14.9 % 20.8 % CDD operating income 142.0 123.8 14.7 % CDD operating margin 11.4 % 10.5 % 0.9 % General corporate expenses (59.8) (46.2) 29.3 % Total operating income $ 1,047.1$ 339.9 208.1 % LCD operating income was$964.6 for the three months endedSeptember 30, 2020 , an increase of 267.8% over operating income of$262.2 in the corresponding period of 2019, and LCD operating margin increased 20.8% basis points year-over-year. The increase was primarily due to the increase in COVID-19 Testing and LaunchPad savings, partially offset by the negative impact of PAMA of$20.0 . The Company remains on track to deliver approximately$200.0 of net savings from its three-year LCD LaunchPad initiative by the end of 2021. CDD operating income was$142.0 for the three months endedSeptember 30, 2020 , an increase over operating income of$123.8 in the corresponding period of 2019. The increase was primarily due to COVID Testing and LaunchPad savings, partially offset by higher personnel costs. The Company remains on track to deliver approximately$150.0 of net savings from its three-year CDD LaunchPad initiative by the end of 2020. General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were 59.8 for the three months endedSeptember 30, 2020 , an increase of 29.3% over corporate expenses of 46.2 in the corresponding period of 2019. The increase in corporate expenses in 2020 was primarily due to the funding of theLabCorp Charitable Foundation . Nine months endedSeptember 30, 2020 , compared with nine months endedSeptember 30, 2019 Revenues Nine Months Ended September 30, 2020 2019 Change LCD$ 6,098.8 $ 5,242.1 16.3 % CDD 3,479.4 3,376.4 3.0 % Intercompany eliminations and other (90.0) (17.1) 425.0 % Total$ 9,488.7 $ 8,601.4 10.3 % Revenues for the nine months endedSeptember 30, 2020 , were$9,488.7 , an increase of 10.3% from$8,601.4 during the nine months endedSeptember 30, 2019 . The increase in revenues was due to organic growth of 8.3%, acquisitions of 2.1%, and favorable foreign currency translation of 0.1%, partially offset by the disposition of a business of 0.2%. The 8.3% increase in organic revenue includes the 16.4% contribution from COVID-19 Testing, partially offset by the 8.3% reduction in the 33
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Company's organic Base Business due to the pandemic. The decline in the organic Base Business includes the negative impact from PAMA of 0.6%. LCD revenues for the nine months endedSeptember 30, 2020 , were$6,098.8 , an increase of 16.3% compared to revenues of$5,242.1 for the nine months endedSeptember 30, 2019 . The increase in revenue was due to organic growth of 14.9% and acquisitions of 1.4%. The 14.9% increase in organic revenue, was due to a 26.9% contribution from COVID-19 Testing, partially offset by a 12.0% decline of the organic Base Business due to the pandemic. The 12.0% decline of organic Base Business includes a 1.0% negative impact from PAMA and a 1.0% reduction due to theSeptember 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to theFlorida market. Total volume, measured by requisition, decreased by 0.7% as organic volume decreased by 2.3% and acquisition volume contributed grwoth of 1.6%. The organic volume decline includes increased demand for COVID-19 Testing of 14.7%, more than offset by a 17.0% reduction of organic Base Business due to the pandemic. Price/mix increased by 17.2% due to COVID-19 Testing of 12.3% and Base Business of 4.8%. The Base Business price includes the negative impact from PAMA of 1.0% and the non-renewal of the BeaconLBS contract of 1.0%. CDD revenues for nine months endedSeptember 30, 2020 , were$3,479.4 , an increase of 3.0% over revenues of$3,376.4 for the nine months endedSeptember 30, 2019 . The increase in revenue was primarily due to the benefit of acquisitions of 3.2%, favorable foreign currency translation of 0.4% and organic growth of 0.1%, partially offset by the disposition of a business of 0.6%. The increase in organic revenue was primarily driven by COVID-19 PCR testing through itsCentral Laboratories , partially offset by the negative impact from the pandemic. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit. Cost of Revenues Nine Months Ended September 30, 2020 2019 Change Cost of revenues$ 6,440.8 $ 6,169.6 4.4 % Cost of revenues as a % of revenues 67.9 %
71.7 %
Cost of revenues increased 4.4% during the nine months endedSeptember 30, 2020 , as compared with the corresponding period in 2019. Cost of revenues as a percentage of revenues during the nine months endedSeptember 30, 2020 , decreased to 67.9% as compared to 71.7% in the corresponding period in 2019. This decrease was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases and one additional payroll day that predominantly impacted LCD), and PAMA, partially offset by LaunchPad savings. Selling, General and Administrative Expenses Nine Months
Ended
2020 2019 Change
Selling, general and administrative expenses $ 1,211.3 $ 1,210.6 0.1 %
Selling, general and administrative expenses as a % of revenues
12.8 % 14.3 %
During the nine months ended September 30, 2020 , the Company incurred $15.3 of
acquisition and divestiture related costs, $5.8 in COVID-related costs and $12.4
in management transition costs. In addition, the Company recorded $1.3 of
non-capitalized costs associated with the implementation of a major system as
part of its LaunchPad business process improvement initiative and $1.7 related
to miscellaneous other items. These charges were offset by insurance proceeds of
$10.0 related to the 2018 ransomware attack. These items increased selling,
general and administrative expenses by $26.5 .
During the nine months ended September 30, 2019 , the Company incurred $53.9 in
acquisition and divestiture costs, $8.2 in consulting expenses relating to fees
incurred as part of its integration and management transition costs, $0.7 in
costs related to the 2018 ransomware attack and $11.3 in costs related to the
AMCA data breach. In addition, the Company recorded $7.4 of non-capitalized
costs associated with the implementation of a major system as part of its
LaunchPad business process improvement initiative and reversed $13.9 related to
the settlement of a contingent purchase price related to a 2016 acquisition.
These items increased selling, general and administrative expenses by $67.6 .
Excluding these charges, selling, general and administrative expenses as a
percentage of revenues were 12.5% and 13.3% during the nine months ended
September 30, 2020 , and 2019, respectively, primarily due to leveraging the
Company's infrastructure on higher revenue, partially offset by a $15.0 initial
contribution to establish the LabCorp Charitable Foundation which supports the
Company's strategic mission to improve health and improve lives with
contributions focused on health and welfare, education and community.
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Amortization of Intangibles and Other Assets
Nine Months Ended September 30,
2020 2019 Change
LCD $ 77.3 $ 75.3 2.7 %
CDD 107.3 103.7 3.5 %
Total amortization of intangibles and other assets $ 184.6 $ 179.0 3.1 %
The increase in amortization of intangibles and other assets within both
segments primarily reflects the impact of acquisitions occurring after
September 30, 2019 , partially offset by impairment of intangible assets recorded
in fiscal 2020.
Goodwill and Other Asset Impairments
Nine Months Ended
2020 2019 Change
Goodwill and other asset impairments $ 460.9 $ - N/A
During the nine months ended September 30, 2020 , the Company recorded goodwill
and other asset impairment charges of $460.9 , $449.3 within CDD and $11.6 within
LCD, representing 3.9% of the Company's total goodwill and intangible assets.
The Company concluded that the fair value was less than carrying value for two
of its reporting units and recorded goodwill impairment of $418.7 in the CDD
segment and $3.7 in the LCD segment during the three months ended March 31,
2020 . The Company recorded non-cash charges of $31.2 for the impairment of
identifiable intangible assets during the nine months ended September 30, 2020 ,
$30.5 within CDD and $0.7 within LCD. During the three months ended March 31,
2020 , $2.7 and $7.3 impairment charges were recorded for tradename and software,
respectively. During the three months ended September 30, 2020 , additional
impairment charges of $10.1 and $17.7 for customer relationships and technology
intangible assets, respectively were recorded due to the loss of a contract from
a prior acquisition. The Company also recorded an impairment for a note
receivable related to an investment of $0.7 during the three months ended
September 30, 2020 .
Restructuring and Other Special Charges
Nine Months Ended September 30,
2020 2019 Change
Restructuring and other charges $ 38.9 During the nine months endedSeptember 30, 2020 , the Company recorded net restructuring and other charges of$38 .9:$13.4 within LCD and$25.5 within CDD. The charges were comprised of$12.8 related to severance and other personnel costs,$11.0 for a CDD lab facility impairment, and$24.0 in facility closures, impairment of operating lease right-of use assets and general integration activities. The charges were offset by the reversal of previously established liability of$1.1 and$7.8 in unused severance costs and facility-related costs, respectively. During the nine months endedSeptember 30, 2019 , the Company recorded net restructuring and other special charges of$48 .4:$22.8 within LCD and$25.6 within CDD. The charges were comprised of$26.2 related to severance and other personnel costs along with$22.0 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were increased by the adjustment of previously established reserves of$0.4 in facility reserves and decreased by a reversal of$0.2 in unused facility reserves. Interest Expense Nine Months Ended September 30, 2020 2019 Change Interest expense $ (159.1) (176.3) (9.8) % The decrease in interest expense for the nine months endedSeptember 30, 2020 , as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and the 4.625% senior notes, partially offset by the issuance of$1,050.0 in debt securities inNovember 2019 . Equity Method Income Nine Months Ended September 30, 2020 2019 Change Equity method income, net $ (1.8)$ 7.9 (123.0) % Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. The decrease in income for the nine months endedSeptember 30, 2020 , as compared with the corresponding period in 2019, was primarily due to the impairment of an equity method investment and decreased profitability of the Company's joint ventures. 35
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Other, net
Nine Months Ended September 30,
2020 2019 Change
Other, net $ (22.6) $ (18.2) 24.1 %
The change in Other, net for the nine months ended September 30, 2020 , as
compared to the nine months ended September 30, 2019 , was primarily due to an
increase in the write-off or write down of certain of the Company's investments
due to the negative impact of the COVID-19 global pandemic offset by lower
foreign currency transaction losses. Foreign currency transaction losses of $6.4
were recognized for the nine months ended September 30, 2020 , and losses of
$10.7 were recognized in the corresponding period of 2019.
Income Tax Expense
Nine Months Ended September 30,
2020 2019 Change
Income tax expense $ 358.0 $ 214.4 67.0 %Income tax expense as a % of earnings before income taxes
36.7 % 26.4 %
The 2020 tax rate was unfavorable to the 2019 tax rate due to impairment charges
which were not deductible and or generated tax assets which require a valuation
allowance.
Operating Income by Segment
Nine Months Ended September 30,
2020 2019 Change
LCD operating income $ 1,451.5 $ 843.0 72.2 %
LCD operating margin 23.8 % 16.1 % 7.7 %
CDD operating income (131.2) 277.6 (147.3) %
CDD operating margin (3.8) % 8.2 % (12.0) %
General corporate expenses (168.2) (126.8) 32.6 %
Total operating income $ 1,152.2 $ 993.8 15.9 %
LCD operating income was $1,451.5 for the nine months ended September 30, 2020 ,
an increase of 72.2% over operating income of $843.0 in the corresponding period
of 2019, and LCD operating margin increased 7.7% basis points year-over-year.
The increase in operating income and margin were primarily due to the increase
in COVID-19 Testing and LaunchPad savings, partially offset by a reduction in
Base Business (primarily due to the pandemic) and higher personnel costs. The
Company remains on track to deliver approximately $200.0 of net savings from its
three-year, phase II of LCD LaunchPad initiative by the end of 2021.
CDD operating loss was $131.2 for the nine months ended September 30, 2020 , a
decrease over operating income of $277.6 in the corresponding period of 2019 and
CDD operating margin decreased 12.0% basis points year-over-year. The decrease
in operating income and margin was primarily due to the negative impact of
COVID-19, specifically goodwill and other asset impairments of $449.3 , and
higher personnel costs, partially offset by organic demand, acquisitions, and
LaunchPad savings. The Company is on track to deliver $150.0 of net savings from
its three-year CDD LaunchPad initiative by the end of 2020.
General corporate expenses are comprised primarily of administrative services
such as executive management, human resources, legal, finance, corporate
affairs, and information technology. Corporate expenses were $168.2 for the nine
months ended September 30, 2020 , an increase of 32.6% over corporate expenses of
$126.8 in the corresponding period of 2019. The increase in corporate expenses
in 2020 was primarily due to higher personnel costs, including executive
transition costs, COVID-19 related expenses and the funding of the LabCorp
Charitable Foundation .
LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)
The Company's strong cash-generating ability and financial condition typically
have provided ready access to capital markets. The Company's principal source of
liquidity is operating cash flow, supplemented by proceeds from debt offerings.
The Company's senior unsecured revolving credit facility is further discussed in
Note 7 Debt to the Company's Condensed Consolidated Financial Statements.
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In summary, the Company's cash flows were as follows for the nine months ended
Nine
Months Ended
2020 2019
Net cash provided by operating activities $ 1,360.7 $ 874.9
Net cash used for investing activities (515.2) (1,131.0)
Net cash provided by (used for) financing activities (516.4) 196.7
Effect of exchange rate changes on cash and cash equivalents 0.6 (6.3)
Net increase (decrease) in cash and cash equivalents $
329.7
Cash and Cash Equivalents Cash and cash equivalents atSeptember 30, 2020 , and 2019, totaled$667.2 and$361.1 , respectively. Cash and cash equivalents consist of highly liquid instruments, such as time deposits, commercial paper, and other money market investments, substantially all of which have original maturities of three months or less. Operating Activities During the nine months endedSeptember 30, 2020 , the Company's operations provided$1,360.7 of cash as compared to$874.9 during the same period in 2019. The$485.8 increase in cash provided from operations in 2020 as compared with the corresponding 2019 period is primarily due to higher cash earnings partially offset by higher working capital. For the first nine months of 2020, operating cash flow benefited from income and payroll tax deferrals, but was negatively impacted by the increase in COVID-19 Testing related supplies and accounts receivable. In addition, operating cash flow included$132.1 in CARES Act Provider Relief Funds, which the Company plans to return in the fourth quarter of 2020. Based on current expectations of the impact of COVID-19, the Company expects to continue to generate positive cash flows from operating activities, however, should the COVID-19 impact worsen or last longer than anticipated, the Company may see a significant decline in cash flows from operating activities. For more information regarding the risks associated with the COVID-19 and its impact on the Company's business, see Risk Factors in Part II - Item IA. Investing Activities Net cash used for investing activities for the nine months endedSeptember 30, 2020 , was$515.2 as compared to net cash used for investing activities of$1,131.0 for the nine months endedSeptember 30, 2019 . The change in cash used for investing activities was primarily due to a decrease in business acquisitions during the nine months endedSeptember 30, 2020 . Capital expenditures were$282.3 and$272.0 for the nine months endedSeptember 30, 2020 , and 2019, respectively. Financing Activities Net cash used for financing activities for the nine months endedSeptember 30, 2020 , was$516.4 compared to net cash provided by financing activities of$196.7 for the nine months endedSeptember 30, 2019 . The change in cash flows from financing activities for the nine months endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 , were primarily due to net financing proceeds from the term loan and revolving credit facilities in 2019 of$600.0 , compared to the redemption of$412.2 in senior notes in 2020 offset by a$300.0 reduction in share repurchases. The Company's revolving credit facility consists of a five-year revolving facility in the principal amount of up to$1,000.0 , with the option of increasing the facility by up to an additional$350.0 , subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. Under the Company's term loan credit facility and the revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios. The Company was in compliance with all covenants under the term loan credit facility and the revolving credit facility atSeptember 30, 2020 , and expects that it will remain in compliance with its existing debt covenants for the next twelve months. OnAugust 17, 2020 , the Company redeemed the remaining$412.2 of its 4.625% Senior Notes dueNovember 15, 2020 , using available cash on hand and borrowings under its revolving credit facility. AtSeptember 30, 2020 , the Company had$667.2 of cash and$997.0 of available borrowings under its revolving credit facility, which does not mature until 2022. InMay 2020 , in order to obtain increased financial covenant flexibility, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to 5.0x debt to last twelve months EBITDA for the three month periods endingJune 30 ,September 30 andDecember 31, 2020 , and 4.5x for period endedMarch 31, 2021 . From and including the period endingJune 30, 2021 the maximum leverage ratio reverts back to 4.0x. The amendments also provide that during any period in which the Company's leverage ratio exceeds 4.5x debt to last twelve months EBITDA (i) the company will be prohibited from consummating share 37
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repurchases, subject to limited exceptions, (ii) borrowings under the revolving credit facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.25% or a base rate plus a margin of 0.25%, (iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be 0.25% per annum, and (iv) borrowings under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.175% or a base rate plus a margin of 0.175%. At the end of 2019, the Company had outstanding authorization from the board of directors to purchase up to$900.0 of Company common stock. As ofSeptember 30, 2020 , the Company had outstanding authorization from the board of directors to purchase up to$800.0 of the Company's common stock. The repurchase authorization has no expiration date. The Company reinstated its share repurchase program inOctober 2020 following the temporary suspension of stock repurchases beginning inMarch 2020 due to the impact of the COVID-19 pandemic. Credit Ratings The Company's investment grade debt ratings from Moody's and from Standard and Poor's (S&P) contribute to its ability to access capital markets. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange and interest rates, and the Company regularly evaluates its exposure to such changes. The Company addresses its exposure to market risks, principally the market risks associated with changes in foreign currency exchange rates and interest rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such as foreign currency forward contracts, and interest rate and cross currency swap agreements. Foreign Currency Exchange Rates Approximately 11.0% of the Company's revenues for the nine months endedSeptember 30, 2020 , and approximately 12.6% of the Company's revenue for the nine months endedSeptember 30, 2019 , were denominated in currencies other than theU.S. dollar. The Company's financial statements are reported inU.S. dollars and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies intoU.S. dollars for purposes of reporting the Company's consolidated financial results. In the third quarter of 2020 and the year endedDecember 31, 2019 , the most significant currency exchange rate exposures were to the Canadian dollar, Swiss Franc, Euro and British Pound. Excluding the impacts from any outstanding or future hedging transactions, a hypothetical change of 10% in average exchange rates used to translate all foreign currencies toU.S. dollars would have impacted income before income taxes for the nine months endedSeptember 30, 2020 , by approximately$2.2 . Gross accumulated currency translation adjustments recorded as a separate component of shareholders' equity were$52.4 and$(45.4) atSeptember 30, 2020 , and 2019, respectively. The Company does not have significant operations in countries in which the economy is considered to be highly-inflationary. The Company earns revenue from service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company's profitability with respect to such contracts. The Company is also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in some of its contracts with customers, or it may hedge transaction risk with foreign currency forward contracts. AtSeptember 30, 2020 , the Company had 38 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly throughOctober 2020 with a notional value totaling approximately$564.6 . AtDecember 31, 2019 , the Company had 34 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly throughJanuary 2020 with a notional value totaling approximately$369.2 . The Company is party toU.S. Dollar to Swiss Franc cross-currency swap agreements with an aggregate notional amount of$600.0 , maturing in 2022 and 2025, as a hedge against the impact of foreign exchange movements on its net investment in a Swiss Franc functional currency subsidiary. Interest Rates Some of the Company's debt is subject to interest at variable rates. As a result, fluctuations in interest rates affect the business. The Company attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of fixed and variable rate debt including by the utilization of derivative financial instruments, primarily interest rate swaps. Borrowings under the Company's term loan credit facility and revolving credit facility are subject to variable interest rates, unless fixed through interest rate swaps or other agreements. As ofSeptember 30, 2020 , andDecember 31, 2019 , the Company 38
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had$375.0 and$375.0 , respectively, of unhedged variable debt from the 2019 term loan credit facility and$0.0 and$0.0 , respectively, outstanding on its revolving credit facility. The Company exited the remaining fixed-to-variable interest rate swap arrangement inAugust 2020 , in connection with the redemption of the 4.625% Senior Notes due 2020. Each quarter-point increase or decrease in the variable rate would result in the Company's interest expense changing by approximately$0.9 per year for the Company's unhedged variable rate debt. ITEM 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as ofSeptember 30, 2020 . Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter endedSeptember 30, 2020 , that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 39
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
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