UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number - 1-11353
LABORATORY CORPORATION OF AMERICA HOLDINGS
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3757370
(I.R.S. Employer Identification No.)
358 South Main Street,
Burlington, North Carolina
(Address of principal executive offices)
27215
(Zip Code)
(Registrant's telephone number, including area code) 336-229-1127
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.10 par value
Name of exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[X] No [ ].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X].
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ].
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Emerging growth company [ ]
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X].
As of June 30, 2017, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately
$14.9 billion, based on the closing price on such date of the registrant’s common stock on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
101.9 million shares as of February 22, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is
incorporated:
Portions of the Registrant’s Notice of Annual Meeting and Proxy Statement to be filed no later than 120 days following
December 31, 2017, are incorporated by reference into Part III.
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Index
Part I
Item 1.
Business
Business Segments
LabCorp Diagnostics Segment
Covance Drug Development
Customers
Capital Allocation
Seasonality
Investments in Joint Venture Partnerships
Sales, Marketing and Customer Service
Information Systems
Quality
Intellectual Property Rights
Employees
Regulation and Reimbursement
Compliance Program
Information Security
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
Part IV
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PART I
Item 1.
BUSINESS
Laboratory Corporation of America® Holdings (LabCorp® or the Company) is a leading global life sciences company that is
deeply integrated in guiding patient care. Through its two business segments, LabCorp Diagnostics (LCD) and Covance Drug
Development (CDD), the Company provides comprehensive clinical laboratory and end-to-end drug development services.
Employing nearly 60,000 people worldwide, the Company’s mission is to improve health and improve lives by delivering world-
class diagnostic solutions, bringing innovative medicines to patients faster, and using technology to improve the delivery of care.
The Company provides diagnostic, drug development and technology-enabled solutions for more than 115 million patient
encounters per year. Typically processing tests on more than 2.5 million patient specimens per week, the Company believes that
it generated more revenue from laboratory testing than any other Company in the world in 2017. The Company also supports
clinical trial activity in approximately 100 countries through its industry-leading central laboratory business, generating more
safety and efficacy data to support drug approvals than any other company. The Company collaborated on more than 90% of the
novel drugs approved by the U.S. Food and Drug Administration (FDA) in 2017, including more than 90% of the novel rare and
orphan disease drugs and two-thirds of the novel oncology drugs. In addition, CDD has been involved in the development of all
current top 50 drugs on the market as measured by sales revenue.
The Company has been recognized for its focus on innovation, progressive business practices, and delivering value to customers.
Recent accolades include being named to FORTUNE magazine's 2018 List of World's Most Admired Companies, and Forbes’
2017 ranking of “The World’s Most Innovative Companies,” earning the highest achievable score on the Human Rights Campaign
Foundation’s 16th annual scorecard on lesbian, gay, bisexual, transgender, queer (LGBTQ) workplace equality and being designated
as a Best Place to Work for LGBTQ Equality, and seeing its Covance business awarded the 2017 Frost & Sullivan Asia-Pacific
CRO Customer Value Leadership Award.
The Company, headquartered in Burlington, North Carolina, is a Delaware corporation and was incorporated in 1971. Through
a combination of organic growth and disciplined acquisitions, including the 2015 acquisition of Covance Inc. (Covance) and the
2017 acquisition of Chiltern International Group Limited (Chiltern), a specialty contract research organization (CRO), the Company
has continually expanded and diversified its business offerings, technological expertise, geographic reach, revenue base, and
financial growth opportunities.
Today the Company participates in drug discovery from early development to new drug approval and commercialization, offers
a growing portfolio of high-value, high-quality clinical laboratory tests, and increasingly provides guidance to patients and care
providers about how to integrate drugs and diagnostics into optimal patient care.
Combined, Global Capabilities
With the acquisition of Covance, the Company began transforming from a leading national laboratory to an integrated global
life sciences company. The acquisition of Chiltern further enhanced Covance’s offerings as a major partner serving the top 20
biopharmaceutical segment and expanded the Company’s current offering to include a dedicated focus on the high-growth emerging
and mid-market biopharmaceutical segments.
The combination of LabCorp Diagnostics’ patient insights and Covance’s global physician-investigator performance data
creates a powerful competitive advantage that presents significant long-term growth potential. It helps the Company to win studies
and to recruit patients and investigators for trials more efficiently and at lower cost than competitors. The Company has proprietary
data sets with more than 30 billion lab test results, reaching roughly 50% of the United States (U.S.) population and a significant
database of experienced investigators and trial sites.
Similarly, the combined capabilities of the businesses have made the Company the market leader in the development and
commercialization of companion and complementary diagnostics. Companion diagnostics are tests that must be used before a
patient can be treated with a specific therapeutic, to help identify how or if the therapeutic will be effective or if it may cause
adverse events. Complementary diagnostics are not required for determining who should receive the therapeutic, or how it should
be used, but can give physicians valuable information about a patient’s potential response to a specific therapeutic or class of
therapeutics. The Company collaborated with more than 40 clients on more than 165 companion diagnostics projects in 2017 and
has supported approximately 70% of companion diagnostics on the market today. The Company believes that the development
and use of precision medicine tools, such as companion diagnostics, will become more prevalent as medical understanding of the
specific causes of disease increases.
The Company serves a broad range of customers, including managed care organizations (MCOs), biopharmaceutical
companies, governmental agencies, physicians and other healthcare providers (e.g. physician assistants and nurse practitioners,
generally referred to herein as physicians), hospitals and health systems, employers, patients and consumers, CROs, food and
nutritional companies and independent clinical laboratories. The breadth of the Company’s offerings has accelerated revenue and
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profit growth while generating strong returns for shareholders through share price appreciation. The combination also helps to
balance the impact of changes in the U.S. healthcare payment system, such as the recently introduced reductions to the Medicare
fee schedule under the Protecting Access to Medicare Act (PAMA).
Positioning the Company for the Future
The Company believes that it can play a larger role in the rapidly evolving healthcare system by focusing on three key initiatives
to broaden its role: supporting customers’ transition to value-based care, streamlining the drug development process, and creating
a broad consumer engagement platform that integrates diagnostics, devices, and therapeutics. In addition, continued consolidation
in healthcare and the Company’s strong relationships with hospitals and health systems will allow it to provide unique solutions
to help improve patient outcomes and reduce healthcare costs.
Value-Based Care
The healthcare system is in transition to value-based care, with increased use of reimbursement models based on quality of
care and on patient outcomes, and less reliance on traditional fee-for-services based payments. The Company is focused on
improving efficiency in care delivery, reducing the overall cost of patient care, and using the Company's combination of diagnostic
and drug development capabilities to accelerate progress towards more precise and personalized healthcare.
From helping physicians choose the right test for the patient at the right time, to offering innovative molecular and genetic tests,
to delivering the next generation of lifesaving drugs, the Company is a critical player in enabling targeted, tailored, high-value
care. The Company’s leadership in companion diagnostics, investments in real-world evidence capabilities and market access
solutions, along with its long-standing emphasis on quality, standardized test platforms, information technology (IT) expertise,
and payer and provider collaborations support the goal of helping customers successfully transition to value-based care.
Streamlining Drug Development
In today’s healthcare landscape, there is a need to streamline drug development to bring new drugs to market faster. The
number of molecules in the pipeline continues to increase. In addition, the development process itself is increasingly complex
and costly. These trends have led to growing competition for investigators and patients in clinical studies. In this environment,
demand from biopharmaceutical companies for data-driven study designs, scalable tools and relevant biomarkers continues to
rise.
CDD’s unique end-to-end global capabilities and leading data and analytics platforms, underpinned by its deep scientific and
therapeutic expertise, provide biopharmaceutical and medical device companies with differentiated solutions to streamline
development by allowing for more efficient study design, and faster and more targeted identification of eligible patients and
investigators. The Company’s investment in CDD’s tools and technology has strengthened its leadership advantage in areas such
as companion diagnostics and real-world evidence. In addition, LCD’s strategic relationships with hospitals and health systems
create opportunities for those organizations to become research partners to participate in studies and clinical trials with CDD.
The combination of the Company’s unique diagnostic and drug development operating models enables the company to create
distinctive and innovative solutions to streamline drug development. An illustrative example is in virtual trials, in which the
Company can apply its market access call-center capabilities to enroll and engage patients, its patient service centers (PSCs) to
provide blood draws and biometric assessments in locations convenient to patients, and its central laboratory services to perform
the associated testing.
Consumer Engagement
Patients are taking a greater role over their own healthcare, with increased responsibility for the costs of their care, and more
choice in how, when, and where they access healthcare. This change requires healthcare providers to increasingly view patients
as consumers. The Company has made significant investments to engage more directly with patients as consumers, through new
and upgraded tools and technology that provide consumers with greater convenience and control over their interactions with the
Company.
The Company is committed to enhancing the experience in its PSCs through easier self-check-in options, including advanced
check-in and verification of personal information on a mobile device; opportunities to learn more about clinical trials and consent
to be contacted about studies for which the consumer may be eligible. In addition, with most commercial insurance plans, the
Company is supporting greater transparency about costs, providing estimates of anticipated out-of-pocket cost prior to specimen
collection now available at all PSCs and a growing number of in-office phlebotomy sites.
LCD’s online portal offers convenient access to new and historical test results, information about tests, and an option to receive
information about clinical trials. The Company is expanding its access points, including the 2017 launch of its “LabCorp at
Walgreens” collaboration to open PSCs in Walgreens stores. The Company is also investing in and evaluating new technologies
that may enable self-collection of specimens, and it is exploring the potential use of wearable devices for diagnostics and in clinical
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trials.
The Company performs the DNA testing for 23andMe, which has experienced significant test volume growth over the past
several years, indicating increased consumer interest in having direct access to the information that testing provides. The Company
also continues to support telemedicine, and other new care delivery models, that enhance consumer access to healthcare.
Hospital and Health System Partnerships
The established trend of healthcare consolidation continues. Private medical practices are joining larger medical groups or
affiliating with health systems, while health systems are merging and absorbing additional facilities. MCOs are increasingly
becoming not just payers but care providers, and in some markets, large health systems have created their own MCO. These
combined organizations can provide economies of scale and the capital to make substantially greater investments in technology,
and in some cases they can exercise greater control over how and where patients access care. These changes offer the promise of
increased efficiency and reduced costs, while also improving patient outcomes.
The Company supports those goals through its unique combination of diagnostics and drug development. It offers integrated
and optimized lab testing across multiple types of care settings. It can dramatically simplify IT structures and interfaces to
standardize lab testing and data across a disparate network of providers, facilities and systems. That data can also identify patients
that may be eligible for clinical trials and physicians who may be able to serve as trial investigators. The Company believes that
its ability to offer these integrated solutions is a differentiator in the marketplace.
For more than three decades, the Company has developed and maintained a broad range of collaborations with hospitals and
health systems and the Company continues to develop those relationships. In 2017, the Company entered into or extended strategic
relationships with multiple health systems across the country, including Providence Health & Services, Catholic Health Initiatives,
Novant Health, and Mount Sinai Health System, among others. These relationships are foundational in delivering high-quality,
outcomes-driven, and cost-effective care to patients. The Company will continue to invest in its team and capabilities to support
this important strategic initiative.
The Company is uniquely positioned to capitalize on the opportunities of the rapidly changing healthcare system. The
combination of it leading diagnostics and drug development businesses adds new dimensions to the Company’s capabilities,
strengthens its value proposition to key stakeholders and differentiates the Company from its competitors.
Company Reporting
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports are made available free of charge through the Investor Relations section of the Company’s website
at www.labcorp.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities
and Exchange Commission (SEC). Additionally, the SEC maintains a website at http://www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC.
The public may also read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100
F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330.
The matters discussed in this “Business” section should be read in conjunction with the Consolidated Financial Statements
found in Item 8 of Part II of this report, which include additional financial information about the Company, such as financial
information about geographic areas. This report includes forward-looking statements that involve risks or uncertainties. The
Company’s results could differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including the risk factors described in Item 1A of Part I of this report and elsewhere. For more information about forward-looking
statements, see “Forward-Looking Statements” in Item 7.
Business Segments
The Company reports its business in two segments, LCD and CDD. In 2017, LCD and CDD contributed 70.3% and 29.7%,
respectively, of net revenues to the Company, and in 2016 contributed 69.9% and 30.1%, respectively. For further financial
information about these segments, including information for each of the last three fiscal years regarding revenue, operating income
and other important information, see Note 20 to the Consolidated Financial Statements.
LCD Segment
LCD is an independent clinical laboratory business. It offers a comprehensive menu of frequently requested and specialty
testing through an integrated network of primary and specialty laboratories across the U.S. This network is supported by a
sophisticated information technology system, with more than 65,000 electronic interfaces to deliver test results, nimble and efficient
logistics, and local labs offering rapid response testing. The Company also provides patient access points, strategically and
conveniently located throughout the U.S., including more than 1,900 PSCs operated by the Company and more than 5,000 in-
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office phlebotomists who are located in customer offices and facilities. In addition to diagnostic testing, LCD also offers a range
of other testing services, including forensic DNA analysis, food safety and integrity services, as well as occupational and wellness
testing for employers. LCD offers an expansive test menu including a wide range of clinical, anatomic pathology, genetic and
genomic tests, and regularly adds new tests and improves the methodology of existing tests to enhance patient care.
Through the dedicated effort of approximately 39,000 employees, LCD typically processes tests on more than 2.5 million
patient specimens each week and has laboratory locations throughout the U.S. and other countries, including Canada and the
United Kingdom (U.K.).
Clinical Laboratory Testing Industry
It is estimated that although laboratory services account for less than 3.0% of total U.S. healthcare spending (and less than
2.0% of Medicare expenditures), the results of those tests impact an estimated 70% of all decisions regarding a patient's diagnosis
and treatment.
Laboratory tests and procedures are used generally to assist in the diagnosis, monitoring and treatment of diseases and medical
conditions through the examination of substances in blood, tissues and other specimens. The results of such tests can help in the
evaluation of health, the detection of conditions or pathogens and the selection of appropriate therapies. Clinical laboratory testing
is generally categorized as either clinical pathology testing, which is performed on body fluids including blood, or anatomical
pathology testing, in which a pathologist examines histologic or cytologic samples (i.e., tissue and other samples, including human
cells). Clinical and anatomical pathology procedures are frequently ordered as part of regular healthcare office visits and hospital
admissions in connection with the diagnosis and treatment of illnesses. Certain of these tests and procedures are used in the
diagnosis and management of a wide variety of medical conditions such as cancer, infectious disease, endocrine disorders, cardiac
disorders and genetic disease.
The Company believes that in 2017, the U.S. clinical laboratory testing industry generated revenues of approximately $80.0
billion. The clinical laboratory industry consists primarily of three types of providers: hospital-based laboratories, physician-office
laboratories and independent clinical and anatomical pathology laboratories, such as those operated by LCD. The clinical laboratory
business is intensely competitive. The Centers for Medicare and Medicaid Services (CMS) of the Department of Health and Human
Services (HHS) has estimated that in 2017 there were approximately 9,000 hospital-based laboratories, more than 122,000
physician-office laboratories and more than 6,000 independent clinical laboratories in the U.S. LCD competes with all of those
laboratories.
LCD believes that physicians selecting a laboratory often consider the following factors, among others:
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Quality, timeliness and consistency in reporting test results;
Reputation of the laboratory in the medical community or field of specialty;
Contractual relationships with MCOs;
Service capability and convenience;
Number and type of tests performed;
Connectivity solutions offered; and
Pricing of the laboratory’s services.
LCD believes that it competes favorably in all of these areas.
LCD believes that consolidation in the clinical laboratory testing business will continue. In addition, LCD believes that it and
other large, independent clinical laboratory testing companies will be able to increase their share of the overall clinical laboratory
testing market due to a number of factors, including cost efficiencies afforded by large-scale automated testing; mergers and
acquisitions of complementary businesses; changes in payment models to performance and value-based reimbursement to deliver
better outcomes at lower cost; and large, integrated service networks. In addition, legal restrictions on physician referrals and
physician ownership of laboratories, as well as ongoing regulation of laboratories, are expected to continue to contribute to the
ongoing consolidation of the industry.
Although testing for healthcare purposes and customers who provide healthcare services represents the most significant portion
of the clinical laboratory industry, clinical laboratories also perform testing for other purposes and customers, including
employment and occupational testing, DNA testing to determine parentage and to assist in forensic investigations, environmental
testing, wellness testing, toxicology testing, pain management testing, medical drug monitoring and nutritional analysis and food
safety testing.
LCD Testing Operations and Productivity
LCD has a network of PSCs, phlebotomists placed at a customer location, branches, rapid response (STAT) laboratories,
primary testing laboratories and specialty testing laboratories, including 19 ISO 15189-certified laboratories that provide customers
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with the assurance that comes with this rigorous global standard. Generally, a PSC is a facility maintained by LCD to serve the
patients of physicians in a medical professional building or other strategic location. The PSC staff collects specimens for testing
as requested by the physician. However, most patient specimens are collected by the customer's staff at their office or facility, or
in some cases, by an LCD phlebotomist who has been placed in a physician office, hospital or other healthcare facility for the
specific purpose of collecting specimens to be tested by LCD. These specimens are collected from PSCs and customer locations
and sent principally through LCD's in-house courier system (and to a lesser extent, through independent couriers), to a branch or
directly to one of LCD's laboratories for testing. A branch is a central facility that collects specimens in a region for shipment to
one of LCD’s laboratories for testing. A branch is also frequently used as a base for sales and distribution staff. STAT laboratories,
which are often co-located with a branch or a PSC, perform critical testing for nearby customers, with results typically delivered
within 2-3 hours of receipt of the specimen. Primary testing laboratories perform frequently requested testing on a large scale.
Specialty testing laboratories perform one or more types of specialty and esoteric testing.
Each specimen and related request form is checked for completeness and given a unique identification number. The unique
identification number assigned to each specimen associates the results to the appropriate patient. Once the necessary testing and
billing information is entered into the software system, either electronically through an interface with the ordering physician or
manually by a data entry operator, the tests are performed and the results are entered through an electronic data interface or
manually, depending upon the tests and the type of instrumentation involved. Most of LCD's automated testing equipment is
connected to its information systems. Most specimens are picked up from the customer's location by late afternoon or early evening
and delivered to the testing laboratory by late evening on the day of collection or overnight. Test results are in most cases
electronically delivered to the physician via electronic interfaces, the LabCorp LinkTM (formerly LabCorp Beacon) platform, smart
printers or personal computer-based products.
LCD remains focused on improving quality and productivity while lowering costs throughout all phases of its operations,
supported by LCD's technology, automation and facility rationalization initiatives. As part of an ongoing commitment to remain
the most efficient and highest-value provider of laboratory services, several years ago LCD began a comprehensive business
process improvement initiative, referred to as LaunchPad, to reengineer its systems and processes to create a sustainable and more
efficient business model, and to improve the experience of all stakeholders. In 2017, the Company achieved its three-year-goal to
deliver net LaunchPad savings of $150.0 million, and expects that the system and process improvements implemented through
LaunchPad will yield continuing benefits for the foreseeable future.
LCD Testing Services
LCD offers a growing menu of nearly 5,000 tests. Several hundred of those tests are used in general patient care by physicians
to establish or support a diagnosis, to monitor treatment or to search for an otherwise undiagnosed condition. The most frequently
requested include blood chemistry analyses, urinalyses, blood cell counts, thyroid tests, Pap tests, hemoglobin A1C, prostate-
specific antigen (PSA), tests for sexually-transmitted diseases [e.g. chlamydia, gonorrhea, trichomoniasis and human
immunodeficiency virus (HIV)], hepatitis C (HCV) tests, vitamin D, microbiology cultures and procedures, and alcohol and other
substance-abuse tests. LCD performs this core group of tests in its major laboratories using sophisticated instruments, with most
results reported within 24 hours or less.
In addition, LCD provides a comprehensive range of specialty testing services in the areas of women's health, allergy, diagnostic
genetics, cardiovascular disease, infectious disease, endocrinology, oncology, coagulation, pharmacogenetics, toxicology and
medical drug monitoring.
LCD also performs a range of other testing services, including DNA testing to determine parentage and to assist in forensic
investigations, and occupational testing and wellness testing for employers. In addition, LCD provides testing services to the food,
beverage, nutraceutical, animal feed, chemical and agrochemical industries, which include nutritional analysis and equivalency,
nutritional content fact labels, microbiological and chemical contaminant safety analysis, product development expertise, sensory
testing, pesticide screening and stability testing.
LCD’s Specialty Testing Group performs esoteric testing, cancer diagnostics, and other complex procedures. LCD's specialty
testing businesses and their areas of expertise are summarized in the chart below.
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The Specialty Testing Group offers advanced methods and access to scientific expertise in the following disciplines:
Anatomic Pathology/Oncology. LCD offers advanced comprehensive tumor tissue analysis, including immunohistochemistry
(IHC), cancer cytogenetics and fluorescence in situ hybridization (FISH) through its Dianon Pathology and Integrated
Oncology specialty testing laboratories. Applications for molecular diagnostics continue to increase in oncology for leukemia
analysis and solid tumor assessment. In cancers such as colon and lung cancer, assays that analyze genetic mutations can help
guide appropriate therapy choices for a given patient. Through the combined expertise of LCD and CDD, the Company is a
recognized leader in the development and introduction of companion and complementary diagnostics, which are becoming
increasingly important in the treatment of cancer with new, targeted therapies for which only certain patients may be eligible,
or which may provide greater or lesser benefits to certain patients, based on their individual genetic makeup.
Cardiovascular Disease. LCD’s cardiovascular menu includes cholesterol tests, expanded lipid profiles, a metabolic syndrome
profile and tests for thrombosis and stroke. LCD also offers complete testing for monitoring disease progression and therapy
response, including the clinical decision support (CDS) reports available through Litholink.
Coagulation. LCD offers an extensive menu of tests for hemostasis and thrombosis, including bleeding profiles and screening
tests, profiles for reproductive health, factor analysis, thrombin generation markers, and thrombotic risk evaluation. In 2017,
LCD introduced a new, internally developed method to test for ADAMTS13, a rare, life-threatening blood clot disorder; the
new method offers clinically significant improvements to previously available tests. LCD also performs testing in support of
clinical trials for therapies to treat hemophilia.
Diagnostic Genetics. LCD offers cytogenetic, molecular cytogenetic, biochemical and molecular genetic tests. The
biochemical genetics offerings include a variety of prenatal screening options, including integrated and sequential prenatal
assays and non-invasive prenatal testing (NIPT) for more sensitive and earlier assessment of risk for multiple fetal chromosomal
aneuploidies, such as Down syndrome. LCD has expanded its cytogenetics offerings through the use of whole genome single-
nucleotide polymorphism (SNP) microarray technology, which provides enhanced detection of subtle chromosomal changes
associated with the etiology of mental retardation, developmental delay and autism. The molecular genetics services include
multiplex analyses of a variety of disorders, gene sequencing applications for both somatic and germ-line alterations and
whole exome sequencing. Through Integrated Genetics, LCD provides the most comprehensive genetic test menu in the
industry, as well as approximately 130 genetic counselors and six medical geneticists to provide patients and their physicians
with analysis, assessment and interpretation of genetic test results to help optimize patient decisions and outcomes.
Endocrinology. LCD is a leading provider of advanced hormone/steroid testing, including comprehensive services for the
endocrine specialist. LCD has expanded its menu in esoteric endocrine testing and has launched an initiative to develop steroid
testing utilizing mass spectrometry technology. Mass spectrometry is used for detection of low levels of small molecule
steroids, including testosterone in women, children and hypogonadal men. Additionally, LCD offers endocrine-related tests
for genetic conditions including congenital adrenal hyperplasia, short stature, and thyroid cancer, along with extensive age-
and gender-related reference intervals for those tests.
Infectious Disease. LCD provides complete HIV testing services, including viral load measurements, genotyping and
phenotyping, and host genetic factors that are important tools in managing and treating HIV infections. The addition of
resistance tests, including PhenoSense®, PhenoSenseGT®, Trofile®, and GenoSure PRIme® complements the existing HIV
GenoSure® assay and provides LCD with an industry-leading, comprehensive portfolio of HIV resistance testing services.
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LCD also provides extensive testing services for HCV infections, including both viral load determinations and strain genotyping
and host genetic factors. LCD continues to develop molecular assays for infectious disease.
Women's Health. LCD offers a comprehensive menu of women's health testing. A key feature of this menu is the industry's
leading suite of NIPT tests, including MaterniT® GENOME, a fully validated genome-wide NIPT test, reflecting the Company's
deep prenatal genetics capabilities. Other LCD testing options for women's health include the NuSwab® portfolio, featuring
high-quality, convenient single-swab tests for common infections of the genital tract; an innovative age-based test protocol
for cervical cancer and sexually-transmitted disease screening; liquid-based Pap testing with image-guided cervical cytology
for improved cervical cancer detection; and out-of-the-vial Pap testing with options for human papillomavirus (HPV). LCD
also offers tests that utilize the latest technical innovations for the full range of reproductive care, including maternal serum
screening, prenatal diagnostics, ethnicity carrier screening, testing for causes of infertility or miscarriage as well as postnatal
testing services.
Pharmacogenetics. LCD provides access to the latest tests in the emerging field of pharmacogenetics. These tests can help
physicians understand how a patient metabolizes certain drugs, allowing them to select the most appropriate therapies or
adjust dosing.
Forensics and Donor Testing. LCD provides forensic identity testing used in connection with criminal proceedings. LCD
continues to be a leading provider of DNA analysis for sexual assault cases for jurisdictions across the U.S. LCD also provides
forensic testing used in connection with parentage evaluation services that assist in determining parentage for child support
enforcement proceedings and determining genetic relationships for immigration purposes. Parentage testing involves the
evaluation of immunological and genetic markers in specimens obtained from the child, the mother and the alleged father.
LCD also provides testing services in reconstruction cases, which assist in determining parentage without the presence of the
parent in question. Additionally, LCD provides human leukocyte antigen testing to match organ and tissue transplant recipients
with compatible donors.
Occupational Testing Services. LCD provides testing services for the detection of drug and alcohol use for private and
government customers. These testing services are designed to produce forensic quality test results that satisfy the rigorous
requirements of regulated and non-regulated workplace drug testing programs. Additionally, LCD provides employee wellness
screenings comprised of biometric measurements and diagnostic tests to assist in the detection of health risks including
cardiovascular disease and diabetes. LCD also provides medical drug monitoring tests that detect common pain medications
and illicit drugs to assist physicians with assessing the full scope of a patient’s drug use.
Medical Drug Monitoring Services. Medical drug monitoring is laboratory testing that monitors patients for the use of
prescription pain medications or other controlled substances. These testing services are designed to provide physicians with
information relevant to the treatment of patients who are prescribed controlled substances, including opioid pain medications,
antianxiety medications, and stimulants. This testing can help physicians identify patients who are not taking their prescribed
doses, which could be an indication that the drugs are being diverted elsewhere, and also to identify patients who may be
supplementing their prescribed medication with other, non-prescribed substances. LCD offers broad choice in medical drug
monitoring test options, including LabCorp MedWatch® monitor, customizable drug monitoring test options focused on the
most commonly prescribed pain medications and illicit drugs, and LabCorp MedWatch ToxAssure®, a broad-spectrum drug
analysis that analyzes as many as 180 compounds to assess a full range of medication use. LCD testing may assist in identifying
patients who may benefit from greater caution and increased monitoring or interventions when risk factors are identified.
Chronic Disease Programs. Through Litholink, LCD uses a programmatic approach to the comprehensive treatment of
chronic diseases, including kidney disease, cardiovascular disease, metabolic bone disease and diabetes, and offers CDS
reports to both physicians and patients. LCD believes these chronic disease programs represent potential significant savings
to the healthcare system by increasing the detection of early-stage diseases and effectively managing chronic disease conditions.
Development of New Tests
Advances in medicine continue to fundamentally change diagnostic testing. New tests are allowing clinical laboratories to
provide unprecedented amounts of health-related information to physicians and patients. New molecular diagnostic tests that have
been introduced over the past several years, including a gene-based test for HPV, HIV drug resistance assays, and molecular genetic
testing for cystic fibrosis, have now become part of standard clinical practice. LCD continued its industry leadership in gene-based
and esoteric testing in 2017, generating more than $2.0 billion in revenue from these testing services. As science continues to
advance, LCD expects new testing technologies to emerge and, therefore, intends to continue to invest in advanced testing
capabilities so that it can remain on the forefront of diagnostic laboratory testing. The Company has added, and expects to continue
to add, new testing technologies and capabilities through a combination of internal development initiatives, technology licensing
and partnership transactions, and selected business acquisitions. Through its sales force, LCD rapidly introduces new testing
technologies to customers. This differentiation is important in the retention and growth of business.
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In 2017, LCD continued its emphasis on scientific innovation and leadership with the introduction of significant test menu
and automation enhancements and by launching more than 70 new tests. LCD is focused on the expansion of existing programs
in molecular diagnostics as well as the introduction of new assays and assay platforms through licensing partnerships, acquisitions
and internal development. The Company's commitment to the scientific advancement in the development and assessment of new
diagnostics and therapeutics is evidenced by producing nearly 600 peer-reviewed publications and presentations at scientific
meetings, along with regular presentations in academic medical center grand rounds and seminars, in 2017.
Examples of new tests and services introduced in 2017 include:
Infectious Diseases. LCD now offers a series of BioFire® test panels, produced by bioMerieux, with application across four
clinical areas: respiratory, blood culture, gastrointestinal, and meningitis/encephalitis. These panels identify more than a
hundred pathogens, including viruses, bacteria, yeast, parasites, and antimicrobial resistance genes, with faster turnaround
times to help physicians more quickly and precisely diagnose and begin treatment in often-critical cases.
Oncology. LCD continued its leadership in oncology by offering a significant number of new tests focused on the diagnosis
and treatment of cancer. LCD was one of the first labs to offer Thermo Fisher Scientific’s Oncomine Dx Target Test, the first
next-generation sequencing-based (NGS) test approved by the FDA as a companion diagnostic to aid in the selection of specific
targeted therapies for treatment of non-small cell lung cancer patients. LCD was also one of the first laboratories to join Thermo
Fisher’s Next-Generation Sequencing Companion Dx Center of Excellence Program, offering enhanced participation in clinical
trials and early access to novel testing platforms and assays. With the Omniseq Immune Report CardSM test and the OmniSeq
Comprehensive® panel, LCD became the exclusive laboratory to provide U.S. physicians with unique insights to help guide
treatment decisions for cancer patients who may be appropriate candidates for immunotherapy and other targeted treatments.
LCD extended its offering of proprietary NGS VistaSeqSM Cancer panels. The VistaSeq tests screen for elevated risk of hereditary
cancer, and the expanded offering includes tests for multiple additional types of cancer.
Women's Health. LCD maintained its leading position in women's health testing, including a robust menu of NIPT testing
options, ranging from screening for the common autosomal trisomies, to detection of select microdeletions, to a genome-wide
assessment of large copy number variants. These offerings provide the most comprehensive menu of noninvasive fetal
aneuploidy screening. LCD began to offer ReproSURE™, a blood test designed to provide information about ovarian reserve,
which is an indication of a woman's reproductive potential to help physicians and patients in selecting the most appropriate
fertility treatment to increase chances of becoming pregnant.
Medical Drug Monitoring and Toxicology. LCD’s existing expertise in medical drug monitoring and toxicology, through
MedTox Laboratories and LabCorp Occupational Testing Services, was enhanced through the acquisition of Pathology
Associates Medical Laboratory (PAML) which had particular strength in medical drug monitoring. The combination will
allow LCD to provide expanded access and capacity for medical drug monitoring and toxicology services.
LCD continues its collaborations with university, hospital and academic institutions, such as Boston University, Columbia
University, Duke University, Johns Hopkins University, The Mount Sinai Hospital, the University of Tennessee and Yale University,
to license and commercialize new diagnostic tests.
LCD Technology-Enabled Solutions
LCD’s technology-enabled solutions include innovative decision support programs for chronic diseases, population health
analytics tools, and a proprietary set of tools to provide customers and patients with convenient and secure access to LCD’s services.
These industry-leading solutions are designed to improve health and improve lives by providing a better laboratory experience
for physicians and patients, and ultimately improving the delivery of care.
During 2017, LCD delivered more than 6.0 million enhanced CDS reports for chronic health conditions, including kidney
disease, cardiovascular disease, metabolic bone disease and diabetes. LCD’s proprietary CDS reports integrate patient-specific
diagnostic information and evidence-based healthcare content to help physicians and patients better manage health. In addition,
these decision-support programs promote physician adherence to evidence-based treatment guidelines.
LCD continues to develop new population health analytics programs that provide healthcare business intelligence tools to
health systems, physician practices, and accountable care organizations (ACOs). These tools are intended to assist customers in
their compliance and reporting requirements with respect to efficient management of their productivity, quality and patient outcome
metrics. LCD's robust rules engine maintains a large number of clinical quality measures that are highly customizable and support
compliance with meaningful use and quality reporting requirements such as ACO standards, Joint Commission standards and the
CMS Physician Quality Reporting System (PQRS). Real-time clinical alerts highlight gaps in care for patients and patient
populations.
LCD's centralized and proprietary LabCorp | LinkTM, which focuses on physicians, is a series of assets and functionalities that
enhance the customer experience and provide an end-to-end lab solution. These assets and functionalities include:
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A physician portal optimized for web and mobile devices;
Express electronic ordering for essentially all of LCD's brands and services;
Integrated results viewing and enhanced reports;
Lab analytics that provide one-click trending of patient, test and population data;
CDS tools at the point of testing and resulting;
AccuDraw, which provides graphical, step-by-step guidance to help improve accuracy, workflow and turnaround
time in the collection and processing of specimens at the point of collection; and
Services-oriented architecture with rules-based engines, content aggregation and seamless integration with practice
workflow.
LCD’s centralized and proprietary LabCorp | PatientTM is a series of assets and functionalities that enhance the patience
experience. These assets and functionalities include:
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A patient portal optimized for web and market-leading mobile devices;
Integrated results viewing and patient education materials;
Online appointment scheduling and bill payment;
An online patient cost estimator for select genetic tests; and
An option to receive information about clinical trials.
LCD introduced two new patient self-service products in 2017, LabCorp | PreCheckTM and LabCorp | ExpressTM, that improve
the patient experience across the PSC network. LabCorp | PreCheck is a mobile optimized online application that allows patients
to easily schedule a PSC visit in advance. LabCorp | Express uses tablets located in PSCs, allowing patients with or without an
appointment to check into the PSC and, if they do not already have an appointment, find the next available one at that or a
nearby PSC. Both systems support confirmation and manual entry of demographic and insurance information designed to
expedite the intake process and improve patient flow at the PSC, and also provide options to receive testing and appointment
notifications via email or text message. LabCorp | PreCheck also offers an image-capture option for driver’s licenses or other
state-issued identification and insurance cards. LabCorp | Express supports bar-code scanning of those cards. These systems
have demonstrably increased patient and staff satisfaction. In addition, the notifications may help increase test compliance, and
the patient data collected will help accelerate enrollment in LabCorp | Patient and further increase the growing population of
patients who may receive information about clinical study opportunities with CDD.
LCD’s centralized and proprietary LabCorp | PayerTM enables healthcare organizations to obtain test results and quality data
through a web-based interface. Results and quality data are increasingly important as the healthcare system focuses on new
payment models and the need to deliver better patient outcomes and reduce cost. Over time, this new portal will be expanded
to deliver a wide variety of data and analytic value.
LCD's BeaconLBS business provides a technology-enabled solution that provides point-of-care decision support through
interfaces with test ordering systems to assist physicians in selecting a lab and the right test for the patient at the right time.
Physicians, patients, healthcare delivery systems and payers are expected to benefit from this innovation, which supports the
selection of labs that are designed to improve quality, supports evidence-based guidelines for patient care, and more effectively
manages laboratory testing utilization trends without disrupting physician work flow. The BeaconLBS rules engine interfaces with
payer policies for ordering, utilization, adjudication and payment.
In 2013, BeaconLBS signed an agreement with UnitedHealthcare® to implement a laboratory benefit management program
in Florida utilizing BeaconLBS. UnitedHealthcare launched the laboratory benefit management program with BeaconLBS in
Florida on October 1, 2014. In April 2015, BeaconLBS achieved its targeted implementation for UnitedHealthcare in Florida, and
LCD began recognizing revenue for providing this service. Results from the Florida program continue to demonstrate improvements
in physician use of Labs of Choice (a network of quality, cost-effective labs); improvement in physician test selection based on
evidence-based guidelines; reduction in patient out-of-pocket costs; and a reduction in patient use of non-par laboratories.
UnitedHealthcare has not yet expanded the laboratory benefit management program beyond Florida. In 2017, BeaconLBS signed
an additional agreement with UnitedHealthcare to implement a national molecular testing management program covering
approximately 4.2 million fully insured customers across the U.S., which uses a new BeaconLBS molecular test management
and decision support platform for test prior authorizations and notifications. The program became effective November 1, 2017.
Billing for Laboratory Services
Billing for laboratory services is a complicated process involving many payers such as MCOs, Medicare, Medicaid, physicians
and physician groups, hospitals, patients and employer groups, all of which have different billing requirements. In addition, billing
arrangements with third-party administrators may further complicate the billing process. Tests ordered by a physician may be
billed to different payers depending on the medical benefits of a particular patient. Most testing services are billed to a party other
than the physician or other authorized person who ordered the test. A growing portion of revenue is derived from patients in the
form of deductibles, coinsurance, copayments, and charges for non-covered tests.
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LCD utilizes a centralized billing system in the collection of approximately 89.7% of its domestic revenue (85.2% of
consolidated LCD revenue). This system generates bills to LCD customers based on payer type. Customer billing is typically
generated monthly, whereas patient and third-party billing are typically generated daily. Accounts receivable are then monitored
by billing personnel, and follow-up activities are conducted as necessary. Bad debt expense is recorded within selling, general and
administrative expenses as a percentage of sales considered necessary to maintain the allowance for doubtful accounts at an
appropriate level, based on LCD's experience. LCD writes off accounts against the allowance for doubtful accounts when accounts
receivable are deemed to be uncollectible. For customer billing, third-party and managed care, accounts are written off when all
reasonable collection efforts prove to be unsuccessful. Patient accounts are written off after the normal dunning cycle has occurred
and the account has been transferred to a third-party collection agency.
A significant portion of LCD's bad debt expense is related to accounts receivable from patients who are unwilling or unable
to pay. In 2017, LCD continued its focus on process and account management initiatives to reduce the negative impact of bad debt
expense related to patient accounts receivable.
Another component of LCD’s bad debt expense is the result of non-credit-related issues that slow the billing process, such as
missing or incorrect billing information on test requisitions. LCD vigorously attempts to obtain any missing information or rectify
any incorrect billing information received from the ordering physician. However, LCD typically performs the requested tests and
returns the test results regardless of whether billing information is correct or complete. LCD believes that this experience is similar
to that of its primary competitors. LCD continues to focus on process initiatives aimed at reducing the impact of these non-credit-
related issues. This is accomplished through ongoing identification of root-cause issues, deploying technology-enabled solutions,
training provided to internal and external resources involved in the patient data capture process, and an emphasis on the use of
electronic test ordering. Specific to technology-enabled solutions, in 2016 LCD deployed insurance eligibility verification and
address validation at the time of service in all PSCs. In 2017, the Company implemented system enhancements that provide patients
with an estimate of their out-of-pocket costs. In 2018, the Company plans to deploy a self-serve platform for physicians to resolve
claim issues related to diagnosis and coverage denials.
For the Company's operations in Ontario, Canada, the Ontario Ministry of Health and Long-Term Care (Ministry) determines
who can establish a licensed community medical laboratory and caps the amount that each of these licensed laboratories can bill
the government-sponsored healthcare plan. The Ontario government-sponsored healthcare plan covers the cost of clinical laboratory
testing performed by the licensed laboratories. The provincial government discounts the annual testing volumes based on certain
utilization discounts and establishes an annual maximum it will pay for all community laboratory tests. The agreed-upon
reimbursement rates are subject to Ministry review at the end of each year and can be adjusted at the government's discretion
based upon the actual volume and mix of testing services performed by the licensed healthcare providers in the province during
the year. In 2017, the amount of the Company's capitated revenue derived from the Ontario government-sponsored healthcare plan
was CAD $189.3 million.
Effect of U.S. Market Changes on the Clinical Laboratory Business
The delivery of, and reimbursement for, healthcare continues to change in the U.S., impacting all stakeholders, including the
clinical laboratory business. Medicare (which principally serves patients who are 65 and older), Medicaid (which principally serves
low-income patients) and insurers have increased their efforts to control the cost, utilization and delivery of healthcare services.
Measures to regulate healthcare delivery in general and clinical laboratories in particular have resulted in reduced prices, added
costs and decreased test utilization for the clinical laboratory industry by imposing new, increasingly complex regulatory and
administrative requirements. From time to time, the government also has considered changes to the Medicare and Medicaid fee
schedules, and LCD believes that pressure to reduce government reimbursement will continue.
Fees for most laboratory services reimbursed by Medicare are established in the Clinical Laboratory Fee Schedule (CLFS),
and fees for other testing reimbursed by Medicare, primarily related to pathology, are covered by the Physician Fee Schedule
(PFS). During 2017, approximately 12.1% of LCD’s revenue was reimbursed under the CLFS (12.3% in 2016), and approximately
0.7% was reimbursed under the PFS (0.8% in 2016). Over the past several years, LCD has experienced governmental reimbursement
reductions as a direct result of the Patient Protection and Affordable Care Act (ACA), the Medicare Access and CHIP
Reauthorization Act of 2015 (MACRA) and the Achieving a Better Life Experience Act of 2014 (ABLE Act). In addition, payer
policy changes have impacted the reimbursement for LCD. Further, PAMA, which became law on April 1, 2014, and went into
effect on January 1, 2018, is expected to result in a future net reduction in reimbursement revenue under the CLFS. These laws
include provisions designed to control healthcare expenses reimbursed by government programs through a combination of
reductions to fee schedules, incentives to physicians to participate in alternative payment models such as risk-sharing, and new
methods to establish and adjust fees.
In 2017, LCD received a 1.2% payment increase under the CLFS representing approximately $15.6 million. During this same
period, LCD experienced a $3.6 million reduction in payments under the PFS.
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Beginning in 2018, under PAMA, CMS is setting the CLFS using the weighted median of reported private payer prices paid
to certain laboratories that receive a majority of their Medicare revenue from the CLFS and PFS and that bill Medicare under their
own National Provider Identifier (NPI). On June 23, 2016, CMS issued a final rule to implement PAMA that required applicable
laboratories, including LCD, to begin reporting their test-specific private payer payment amounts to CMS during the first quarter
of 2017. CMS exercised enforcement discretion to permit reporting for an additional 60 days, through May 30, 2017. CMS used
that private market data to calculate weighted median prices for each test (based on applicable current procedural technology
(CPT) codes) to represent the new CLFS rates beginning in 2018, subject to certain phase-in limits. For 2018-2020, a test price
cannot be reduced by more than 10.0% per year; for 2021-2023, a test price cannot be reduced by more than 15.0% per year. The
process of data reporting and repricing will be repeated every three years for Clinical Diagnostic Laboratory Tests (CDLTs). The
second data reporting period for CDLTs will occur during the first quarter of 2020, and new CLFS rates for CDLTs will be
established based on that data beginning in 2021, subject to the previously described phase-in limits for 2021-2023. The third data
reporting period for CDLTs will occur during the first quarter of 2023, and new CLFS rates for CDLTs will be established based
on that data beginning in 2024. CLFS rates for 2024 and subsequent periods will not be subject to phase-in limits. CLFS rates
for Advanced Diagnostic Laboratory Tests (ADLTs) will be updated annually.
CMS published its initial proposed CLFS rates under PAMA for 2018-2020 on September 22, 2017. Following a public
comment period, CMS made adjustments and published final CLFS rates for 2018-2020 on November 17, 2017, with additional
adjustments published on December 1, 2017. For 2018, the Company estimates that the CLFS rates will reduce LCD revenue from
all payers affected by the CLFS by a total of approximately 8% ($70.0 million).
The final rates published by CMS were based on data reported by only 1% of all laboratories paid by Medicare in 2015, and
only 1% of the reported data was from hospital laboratories. Consequently, the American Clinical Laboratory Association (ACLA)
filed a federal civil action against HHS for declaratory and injunctive relief on December 11, 2017, arguing that CMS violated
the PAMA statute by excluding most of the laboratory market from reporting data on which the rates were based, resulting in
rates that do not fairly reflect the private market as the clear language of PAMA requires. While that lawsuit is proceeding, ACLA
continues to work with Congress on potential legislative reform of PAMA, which if enacted could reduce the negative impact
of PAMA as implemented by CMS. The Company supports the ongoing efforts to prevent or lessen the negative impact of the
changes to the CLFS pursuant to PAMA, and the full impact of those efforts, and what the long-term effect will be on the CLFS
rates is not yet known.
On November 4, 2016, CMS noted in a final rule implementing MACRA that it intended to apply Merit Based Incentive
Payment System (MIPS) requirements to pathologists practicing in independent laboratories, including LCD. Under this
requirement, LCD pathologists would have been required to begin reporting certain quality metrics in 2017 for LCD to avoid
negative PFS payment adjustments or to qualify for positive PFS payment adjustments beginning in 2019. ACLA met with CMS
on March 9, 2017, regarding implementation of this requirement, which was not proposed in the MACRA proposed rule. CMS
clarified that it would not apply MIPS requirements to pathologists practicing in independent laboratories.
In 2018, LCD anticipates it will realize an estimated $1.6 million reduction in PFS net revenue, driven by combined reductions
in reimbursement for flow cytometry procedures.
Further, healthcare reform could occur in 2018, including changes to the ACA and Medicare reform, as well as administrative
requirements that may continue to affect coverage, reimbursement, and utilization of laboratory services in ways that are currently
unpredictable.
In addition, market-based changes have affected and will continue to affect the clinical laboratory business. Reimbursement
from commercial payers for diagnostic testing has shifted and will continue to shift away from traditional, fee-for-service models
to alternatives, including value-based, bundled pay-for-performance, and other risk-sharing payment models. The growth of the
managed care sector and consolidation of MCOs present various challenges and opportunities to LCD and other clinical laboratories.
In 2006, the Company signed a 10-year agreement with UnitedHealthcare to become its exclusive national laboratory in the
U.S. In September 2011, the Company extended this agreement for an additional two years through the end of 2018. The Company
also serves many other MCOs. These organizations have different contracting philosophies, which are influenced by the design
of their products. Some MCOs contract with a limited number of clinical laboratories and engage in direct negotiation of rates.
Other MCOs adopt broader networks with generally uniform fee structures for participating clinical laboratories. In some cases,
those fee structures are specific to independent clinical laboratories, while the fees paid to hospital-based and physician-office
laboratories may be different, and are typically higher. MCOs may also offer Managed Medicare or Managed Medicaid plans. In
addition, some MCOs use capitation rates to fix the cost of laboratory testing services for their enrollees. Under a capitated
reimbursement arrangement, the clinical laboratory receives a per-member, per-month payment for an agreed upon menu of
laboratory tests provided to MCO members during the month, regardless of the number of tests performed. For the year ended
December 31, 2017, capitated contracts with MCOs accounted for approximately $259.1 million, or 3.6%, of LCD's net revenues.
LCD's ability to attract and retain MCO customers has become even more important as the impact of various healthcare reform
initiatives continues, including expanded health insurance exchanges and ACOs.
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In addition to reductions in test reimbursement, the Company also anticipates potential declines in test volumes as a result of
increased controls over the utilization of laboratory services by Medicare, Medicaid, and other third-party payers, particularly
MCOs. MCOs are implementing, directly or through third parties, various types of laboratory benefit management programs,
which may include lab networks, utilization management tools (such as prior authorization and/or prior notification), and claims
edits, which impact coverage and reimbursement of clinical laboratory tests. Some of these programs address clinical laboratory
testing broadly, while others are focused on molecular and genetic testing. In addition, continued movement by patients into
consumer-driven health plans may have an impact on the utilization of laboratory testing.
Despite the overall negative market changes regarding reimbursement discussed above, LCD believes that the volume of
clinical laboratory testing is positively influenced by several factors, including the expansion of Medicaid, managed care, and
private insurance exchanges. In addition, LCD believes that increased knowledge of the human genome and continued innovation
in laboratory medicine will continue to foster greater appreciation of the value of gene-based diagnostic assays. Additional factors
that may lead to future volume growth include an increase in the number and types of tests that are readily available (due to
advances in technology and increased cost efficiencies) for the diagnosis of disease, and the general aging of the U.S. population.
As previously discussed, LCD also believes that it and other large, independent clinical laboratory testing companies will be able
to increase their share of the overall clinical laboratory testing market due to a number of market factors, primarily related to a
continued drive to improve outcomes and reduce costs across the healthcare system. LCD believes that its enhanced and growing
esoteric menu of tests, leading position with companion diagnostics, broad geographic footprint, and operating efficiency provide
a strong platform for growth.
CDD Segment
CDD provides end-to-end drug development, medical device and diagnostic services from early-stage research to clinical trial
management and commercial market access. CDD provides a wide range of drug research and development (R&D) and market
access services to biopharmaceutical companies and medical device companies across the world. With the acquisition of Chiltern,
CDD now has more than 20,000 employees worldwide and a global network of operations. It has deep expertise in clinical trials,
supporting clinical trial activity in approximately 100 countries through its industry-leading central laboratory business, generating
more safety and efficacy data to support drug approvals than any other company. CDD collaborated on more than 90% of the
novel drugs approved by the FDA in 2017, including more than 90% of the novel rare and orphan disease drugs and two-thirds
of the novel oncology drugs. In addition, CDD has been involved in the development of all current top 50 drugs on the market as
measured by sales revenue.
Drug Development Industry
Drug development services companies like CDD are also referred to as CROs and typically derive substantially all of their
revenue from R&D as well as marketing expenditures of the biopharmaceutical industry. CDD offers comprehensive global drug,
medical device and diagnostic development services from preclinical research through all phases of clinical development and into
commercialization. Outsourcing of R&D services from biopharmaceutical companies to CROs has increased in the past, and is
expected to continue increasing in the future, because of several factors, including: pressures to improve return on investment,
limitations on internal R&D capacity, the need to reduce drug development timelines, stringent government regulation, as well as
therapeutic, scientific and other expertise that customers lack internally. The investment and amount of time required to develop
new drugs are significant and have been increasing, and these trends create opportunities for CDD and other CROs that can help
make the drug development process more efficient.
The drug development industry has many participants ranging from hundreds of small providers to a limited number of large
CROs with global capabilities. CDD competes against these small and large CROs, as well as in-house departments of
biopharmaceutical, medical device and diagnostic companies, and to a lesser extent, selected universities and teaching hospitals.
CDD believes that customers selecting a CRO often consider the following factors, among others:
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Reputation for quality, efficient, timely performance and regulatory compliance;
Expertise and experience in operations, and the use of technology;
Specific therapeutic and scientific expertise;
Market access services;
Scope of service offerings;
Strengths in various geographic markets;
Price;
Quality of facilities;
Ability to acquire, process, analyze and report data in a rapid and accurate manner;
Quality of relationships;
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Ability to manage large-scale clinical trials both domestically and internationally, including the recruitment of appropriate
and sufficient clinical-trial subjects; and
Size and scale.
CDD believes that it competes favorably in all of these areas.
Preclinical Services
CDD’s preclinical service offerings include research models, lead optimization, analytical services, safety assessment, and
chemistry manufacturing and control (CMC) services for drug development. CDD offers solution-based approaches by leveraging
highly experienced program development directors and project managers to help guide strategic decisions and manage molecule
development in an integrated, streamlined manner across CDD's eight analytical laboratories and preclinical laboratories in the
U.S., the U.K., Germany and China. CDD's historical innovations in the preclinical area include technologies such as MarketPlace
and StudyTracker®. Covance MarketPlace is a private, secure web portal providing potential investors or partners access to
information about new drugs in development. StudyTracker® is an internet-based customer access product, allowing customers
of toxicology, bioanalytical, metabolism, and reproductive and developmental toxicology services to review study schedules and
data on a near real-time basis.
Research Models. CDD is an American Association for Accreditation of Laboratory Animal Care (AAALAC) International
accredited provider of purpose-bred research models globally. Due to regulation by the FDA and other foreign regulatory
bodies, safety and efficacy testing on research models is required as part of the drug development process prior to testing in
humans. CDD has a strong commitment to animal welfare, and has instituted progressive enrichment practices and rigorous
health testing standards that exceed industry standards to protect the health of CDD's models. CDD is also committed to seeking
out alternatives to, or the reduction of, the use of research models when possible. CDD's research models include standard
lines as well as disease state and genetically altered models to accommodate customers’ needs. CDD offers purpose-bred-
specific, pathogen free rabbits, canines, nonhuman primates, and other species, as well as blood and tissue products and surgical/
technical services, including telemetry. The purpose-bred research animals are sold to biopharmaceutical companies, university
research centers and CROs.
Lead Optimization. Lead optimization services are designed to connect early discovery activities to regulated pre-clinical
studies. These services include non-good laboratory practice (GLP) toxicology, in vivo pharmacology with model development
and integrated safety and efficacy capabilities, nonclinical imaging, nonclinical pathology services, pharmacokinetic/
toxicokinetic (PK/TK) analysis reporting and immunology services.
Analytical Services. Bioanalytical testing services help determine the appropriate dose and frequency of drug application from
late discovery evaluation through Phase III clinical testing on a full-scale, globally integrated basis. CDD’s analytical services
offering includes liquid chromatography-mass spectroscopy immunoanalytical solutions and specialty support, translational
biomarker solutions, discovery bioanalysis, vaccine analysis, PK/TK analysis and reporting, and organic synthesis. In addition,
CDD offers a growing menu of validated, nonproprietary assays for hundreds of compounds, eliminating method development
and validation time, and reducing program cost. CDD has dedicated lab facilities across three continents providing in vitro
drug metabolism, in vivo radiolabeled absorption, distribution, metabolism and excretion studies; metabolite identification/
profiling and nonclinical PK screening; and radiosynthesis services. CDD also provides pharmaceutical chemistry services
that determine the metabolic profile and bioavailability of drug candidates.
Safety Assessment. Safety assessment services include general, genetic, and immunotoxicology services; nonclinical pathology
services; safety pharmacology services; and developmental and reproductive toxicology (DART) studies. CDD’s drug
development services employ state-of-the-art technology and an integrated program for both large and small molecules with
facilities across three continents. CDD's nonclinical pathology group is comprised of certified veterinary pathologists who
provide critical insights and recommendations to help customers navigate the drug development process. CDD’s safety
pharmacology services utilize the Value Added Safety Pharmacology & Toxicology approach to economically assess
pharmacology endpoints during toxicology studies to minimize safety issues during the clinical phases. DART services help
customers assess the birth defect risk for potential drug candidates.
Biopharm CMC Manufacturing Solutions. CMC offers packages supporting FDA Investigational New Drug Application and
New Drug Application/Biologic License Application submissions, as well as programs to help CDD's customers meet
acceptance criteria for the release of drug products for both biologics and small molecules. CMC provides well-coordinated
capabilities and expertise operating within a global quality system framework to deliver robust, cost-effective solutions.
Capabilities include safety, identity, strength, quality and purity assessments for biologics.
Early Phase Development Solutions. Early Phase Development Solutions (EPDS) offers customers access to a focused,
multidisciplinary team of experts that crafts integrated solutions to rapidly identify and develop lead drug candidates and reduce
development challenges. EPDS provides customers with seamless integration of the complete array of CDD nonclinical and
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early clinical services, with a focus on scientific integrity and human subject safety. EPDS also offers an innovative parallel
study approach for shorter proof-of-concept studies. This approach can increase clinical return on investment through the
application of medical, scientific and therapeutic expertise, along with patient stratification strategies.
Central Laboratory Services
CDD provides central laboratory and specialty testing services to biopharmaceutical customers through its global network of
central laboratories in the U.S., Switzerland, Singapore and China as well as its strategic agreement for central laboratory services
testing in Japan with BML, Inc., a leading Japanese laboratory testing company.
CDD’s capabilities provide customers the flexibility to conduct studies on a global basis. Because CDD uses consistent
laboratory equipment, methods, reagents and calibrators for studies, data can be combined with clinical trials in different regions
to produce global trial reference ranges. Combinable data eliminates the cumbersome process of harmonizing results generated
using different methods in different laboratories on different equipment. CDD also offers external-facing tools such as
LabLink+ and Xcellerate® Investigator Portal, which are internet-based customer programs that allow customers to review and
query clinical trial lab data on a near real-time basis, that provide an opportunity for enhanced collaboration between the investigator
sites, CROs and sponsors.
CDD operates the world’s largest automated clinical trial sample collection kit production line, located in Indianapolis, Indiana.
This facility provides kits and supplies to investigator sites around the world, promoting global consistency in sample collection.
Extensive automation in the kit production process enables kits to be produced with 5.5 sigma precision, while maintaining the
scalability needed to meet increasing global demand. CDD's biorepository facility in Greenfield, Indiana, is dedicated to long-
term storage of clinical trial specimens. CDD has additional sample storage facilities in Indianapolis, Indiana; Geneva, Switzerland;
Singapore; and Shanghai, China. These actively monitored facilities are able to store a wide range of specimens, including plasma,
serum, whole blood, peripheral blood, DNA and tissue.
CDD has five ISO 15189-certified central laboratories that provide customers with the assurance that comes with this rigorous
global standard. In addition to utilizing the broad scientific expertise of the LCD Specialty Testing Group, CDD has implemented
a novel model for external lab selection and management that provides rigor and reduces internal resource drain for trial sponsors.
The extended laboratory management solutions team focuses on managing all aspects of referral laboratory services, including
vendor negotiations, governance, quality management, data services and contract services.
CDD, in conjunction with LCD’s expertise in a wide range of specialty and esoteric testing disciplines, offers a scientifically
rich and diverse menu of specialty testing capabilities, spanning the clinical development continuum. These include applied
genomics, next-generation sequencing, anatomic and molecular pathology, flow cytometry, clinical immunoassays as well as
preclinical and exploratory biomarker development. The combination of CDD and LCD differentiated capabilities and unparalleled
experience in companion and complementary diagnostic services support the parallel development of a new medicine and its
associated diagnostic assay. The Company's dedicated companion diagnostics team has helped develop more than 70% of all
currently available FDA-approved companion and complementary diagnostics, and worked on more than 165 global programs in
this area in 2017. CDD can support the development of in-vitro diagnostic, companion diagnostics and laboratory-developed tests
(LDT). By combining CDD’s strength in central laboratory and early-stage clinical development with LCD’s strength in test
commercialization, the Company is well positioned to offer comprehensive, end-to-end support for companion diagnostic
development.
Clinical Development and Commercialization Services
CDD offers a comprehensive range of clinical trial services, including the full management of Phase I through IV clinical
studies, along with a wide offering of functional service provider (FSP) solutions. CDD has extensive experience in all major
therapeutic areas, and provides the following core services either on an individual or aggregated basis to meet its customers’
needs: study design and modeling; coordination of study activities; trial logistics; monitoring of study site performance; clinical
data management and biostatistical analysis; pharmacovigilance/safety assessments; and medical writing and regulatory services.
CDD also has a dedicated group with extensive experience in the conduct of trials for medical devices, to provide services for
the expanding market in medical devices, including wearable diagnostics.
CDD has extensive experience in designing and managing global clinical trials and regional clinical trial activities in North
America, Europe, Latin America and the Asia-Pacific region. These trials may be conducted separately or simultaneously as part
of a multinational or global development plan. CDD can manage every aspect of a clinical trial, from clinical development plans
and protocol design to new drug applications and other supporting services.
CDD provides clinical pharmacology services at its four clinics in the U.S. and Europe, including first-in-human trials, and
early clinical trial subject proof-of-concept studies of new pharmaceuticals.
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CDD offers a range of commercialization solutions, including life cycle management and post-approval studies, which are
typically conducted after a drug has successfully undergone clinical efficacy and safety testing and the New Drug Application has
been submitted to the FDA and/or other regulatory bodies. CDD also offers market access solutions, including reimbursement
consulting and hotlines, patient assistance programs, health economic and outcomes research services, observational studies, real
world evidence and analytics services, and value communication services. Biopharmaceutical companies purchase these services
to serve patients in need of therapy and to help optimize their return on R&D investments.
CDD Technology-Enabled Solutions
CDD’s technology-enabled solutions are designed to improve the drug development process, providing its biopharmaceutical
customers with greater access to key data and improved management of trials. These proprietary tools include the award-winning
Xcellerate informatics platform, the PharmAcuity suite of software applications, and the endpoint trial management solution.
Xcellerate integrates multiple sources of data to deliver unique and timely information throughout the course of customer
studies. Xcellerate helps to reduce the cost, time, complexity and risk associated with clinical trials. These solutions leverage a
highly innovative data integration and visualization technology that provides timely, secure, integrated and contextualized access
to all clinical trial data to enable proactive risk management and informed decision making. Key Xcellerate modules include
Forecasting & Site Selection, Clinical Trial Management, Monitoring, and Insights:
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Xcellerate Forecasting & Site Selection enables customers to identify the optimal sites and investigators by drawing on
the world’s largest proprietary clinical trial knowledge base.
Xcellerate Clinical Trial Management provides the foundational operating systems to enable frictionless execution of
clinical trials.
Xcellerate Monitoring enables customers to improve data quality, clinical trial subject safety and protocol compliance
in the execution of clinical trials by proactively identifying and mitigating risks at the study site and clinical trial subject
level.
Xcellerate Insights enables effective operational oversight by providing interactive, up-to-date views of a broad range of
operational metrics and key performance indicators at the study and portfolio levels through a secure collaboration portal.
PharmAcuity is a cloud-based suite of software applications that helps biopharmaceutical companies fine-tune their clinical
trial strategy, planning, and design months before a given trial begins. The performance data available via PharmAcuity is derived
from past trials and public data sources covering more than 130 countries, reflecting the worldwide nature of clinical trials. Key
PharmAcuity modules include Metrics and Benchmarking, and Trial Forecasting:
PharmAcuity Metrics and Benchmarking enables a client to assess the performance of past trials relative to the current targets
as well as set accurate and feasible targets for a variety of future trial milestones. Utilizing the rest of the pharmaceutical industry’s
performance data as a benchmark allows the client to evaluate its own clinical trial performance against the industry, thus leading
to better trial, enrollment, and country planning.
PharmAcuity Trial Forecasting empowers a client to forecast its own clinical trial performance and build different forecasting
scenarios across multiple dimensions, all based on proprietary inputs and historical, contextual industry performances.
CDD’s endpoint trial management solutions offer interactive response technology (IRT) to provide visibility across a customer’s
clinical development portfolio, allowing for optimization of study management and reduced trial supply costs while helping to
bring novel therapies to market faster. Key endpoint modules include:
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endpoint’s proprietary PULSE® platform is made up of pre-validated, configurable study components that enable rapid
development and quicker modification to a customer’s existing IRT system. PULSE can help to streamline complex trial
randomization methods, improve drug supply management, and simplify site, study, and subject management. The fully
digital, mobile-ready system allows access to patient data and outcomes in real time.
endpoint’s DRIVE platform provides visibility into supplies management for an entire clinical development portfolio.
This enables automated supply functionality to help minimize costs, reduce waste, and manage regulatory compliance
across multiple trial sites.
CDD’s other proprietary technology assets include an investigator database and analytic methodologies that are utilized to
design and manage site selection and clinical trial subject enrollment, and MarketPlace, a private, secure web portal providing
potential investors or partners access to information about new drugs in development.
Together, CDD's technology-enabled solutions improve the quality and speed of clinical trials, resulting in reduced costs and
increased market potential for biopharmaceutical company customers.
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Customers
The Company provides its services to a broad range of customers. The primary customer groups serviced by the Company
include:
MCOs. The Company serves many MCOs, each of which operate on a national, regional or local basis.
Biopharmaceutical Companies. The Company serves hundreds of biopharmaceutical companies, ranging from the world’s
largest biopharmaceutical companies to emerging to mid-market organizations. Contracts with these institutions generally
take the form of fee-for-service or fixed-price arrangements.
Physicians and Other Healthcare Providers. Physicians who require clinical laboratory testing for their patients are a primary
source of requests for LCD's testing services. Physicians may practice individually, or as part of small or large physician
groups, including those operated as part of a broader health system. Fees for clinical laboratory testing services rendered for
physicians are billed either to the physician, the physician group, the patient or the patient’s third-party payer, such as an
MCO, Medicare or Medicaid. Billings are typically on a fee-for-service basis. If the billings are to the physician, they are
based on a customer-specific fee schedule and are subject to negotiation. Otherwise, the patient or third-party payer is billed
at the Company's patient fee schedule, subject to third-party payer contract terms and negotiation by physicians on behalf of
their patients. Patient sales are recorded at the Company’s patient fee schedule, net of any discounts negotiated with physicians
on behalf of their patients, or made available through charity care or an uninsured or underinsured patient program. Revenues
received from Medicare and Medicaid billings are based on government-set fee schedules and reimbursement rules.
Hospitals and Health Systems. The Company provides hospitals and health systems with services ranging from core and
specialty testing to supply chain and technical support services, and the opportunity to be a research partner for participation
in studies and clinical trials with CDD. Individual hospitals generally maintain on-site laboratories to perform immediately
needed testing for patients receiving care. However, they also refer less time-sensitive procedures, less frequently needed
procedures and highly specialized procedures to outside facilities, including independent clinical laboratories such as the
Company and laboratories operated by larger hospitals or health systems. In some cases, a hospital’s on-site laboratory may
be operated or managed by an outside contractor or independent laboratory, including the Company. The Company typically
charges hospitals for any such tests on a fee-for-service basis that is derived from the Company’s client fee schedule. Fees
for laboratory management services are typically billed monthly at contractual rates.
Other Customers. The Company serves a broad range of other customers, governmental agencies, employers, patients and
consumers, CROs, academic institutions, food and nutritional companies and independent clinical laboratories. These
customers typically pay on a negotiated fee-for-service basis or based on a set fee schedule.
Capital Allocation
The Company believes it has a strong track record of deploying capital to investments that enhance the Company's business
and returning capital to shareholders.
From 2013, the Company has invested net cash of approximately $6.5 billion and equity of $1.8 billion in strategic business
acquisitions. These acquisitions have significantly expanded the Company’s service offerings, expanded its customer and revenue
mix, as well as strengthened and broadened the scope of its geographic presence. The Company continues to evaluate acquisition
opportunities that leverage the Company’s core competencies, complement existing scientific and technological capabilities,
increase the Company’s presence in key geographic, therapeutic and strategic areas, and meet or exceed the Company’s financial
criteria.
From 2013, the Company repurchased approximately $1.7 billion in shares at an average price of approximately $115.02 per
share. Following the November 2014 announcement of the Covance acquisition, the Company temporarily suspended its share
repurchases, but the Company subsequently resumed the repurchase program in the fourth quarter of 2016. During 2017, the
Company purchased 2.5 million shares of its common stock at a total cost of $338.1 million. At the end of 2017, the Company
had outstanding authorization from the board of directors to purchase an additional $401.4 million of Company common stock.
The repurchase authorization has no expiration date.
During 2017, the Company repaid $500.1 million of its Senior Notes, $493.0 million of its term loan, and $33.9 million of its
zero coupon subordinated notes. In addition, the Company borrowed and repaid $1,392.2 million of debt through its revolving
credit facility within 2017. The Company will continue to evaluate all opportunities for strategic deployment of capital in light of
market conditions.
From 2013, capital expenditures other than acquisitions have been $1.3 billion, representing approximately 3.0% of the
Company’s total net revenues during the same period. The Company expects such capital expenditures in 2018 to be approximately
3.5% of net revenues, primarily in connection with projects to support growth in the Company's core businesses, facility expansion
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and updates, ongoing projects related to LaunchPad within the LCD business, LaunchPad's expansion within the CDD business,
and further acquisition integration initiatives.
Seasonality and External Factors
The Company experiences seasonality in both segments of its business. For example, testing volume generally declines during
the year-end holiday period and other major holidays and can also decline due to inclement weather or natural disasters. Declines
in testing volume reduce net revenues, operating margins and cash flows. Operations are also impacted by changes in the global
economy, exchange rate fluctuations, political and regulatory changes, the progress of ongoing studies and the startup of new
studies, as well as the level of expenditures made by the biopharmaceutical industry in R&D. The results of both segments are
impacted by exchange rate fluctuations. Approximately 21.4% of the Company's net revenues are billed in currencies other than
the U.S. dollar, with the Swiss franc, British pound, Canadian dollar and the euro representing the largest components of its
currency exposure. The Company expects the inclusion of Chiltern for a full twelve months in 2018 will increase the Company's
percentage of revenues billed in currencies other than the U.S. dollar. Given the seasonality and changing economic factors
impacting the business, comparison of the results for successive quarters may not accurately reflect trends or results for the full
year.
Investments in Joint Venture Partnerships
The Company holds investments in joint venture partnerships, with two located in Alberta, Canada, one located in Florence,
South Carolina and several that were acquired through the Company's acquisition of PAML. These businesses are primarily
represented by partnership agreements between the Company and other independent diagnostic laboratory investors. Under these
agreements, all partners share in the profits and losses of the businesses in proportion to their respective ownership percentages.
All partners are actively involved in the major business decisions made by each joint venture. The Company does not consolidate
the results of these joint ventures. Effective June 30, 2015, the Company liquidated its interest in a joint venture partnership that
had been located in Milwaukee, Wisconsin.
The first Canadian partnership is a leader in occupational testing across Canada similar to LCD's U.S. occupational testing
services. The second Canadian partnership has a license to conduct diagnostic testing services in the province of Alberta.
Substantially all of its revenue is received as reimbursement from the Alberta government's healthcare programs (AHS). In August
2016, AHS and the Canadian partnership reached an agreement to extend the contract for five additional years through March
2022, with the intent to have the services provided pursuant to the contract transferred to AHS at the end of the five-year period.
In consideration of AHS acquiring the assets and assuming liabilities in accordance with the parties’ agreement, AHS will pay
CAD $50.0 million to the partnership when the transfer is effective, subject to a working capital adjustment.
As a result of the acquisition of PAML, the Company acquired PAML’s ownership interests in six joint ventures. During 2017,
the Company further acquired the ownership interests of the other members of two of the six joint ventures, and the Company’s
ownership interest in one of the six joint ventures was acquired by the other member. During 2018, the Company intends to acquire
the membership interests of the other members of an additional two of these six joint ventures and will continue to evaluate future
options for the membership interests in the sixth joint venture. The Company will continue to record minority interests in the
consolidated joint ventures for which final transactions have not yet been completed.
Sales, Marketing and Customer Service
LCD offers its diagnostic services through a sales force focused on serving the specific needs of customers in different market
segments. These market segments generally include primary care, women's health, specialty medicine (e.g., infectious disease,
endocrinology, gastroenterology and rheumatology), oncology, ACOs, and hospitals and health systems. LCD's general sales force
is also supported by a team of clinical specialists that focuses on selling esoteric testing and meeting the unique needs of the
specialty medicine markets.
CDD’s global sales activities are conducted by sales personnel in North America, Europe and the Asia-Pacific region. The
sales force provides customer coverage across the biopharmaceutical industry for services including lead optimization, preclinical
safety assessment, analytical services, clinical trials, central laboratories, biomarkers and companion diagnostics, market access
and technology solutions. Customer segments called upon include global and regional biopharmaceutical companies, other CROs
and academic institutions.
The sales force is responsible for both new sales and for customer retention and relationship building and is compensated
through a combination of salaries, commissions and bonuses at levels commensurate with each individual’s qualifications,
performance and responsibilities.
Information Systems
The Company is committed to developing and commercializing technology-enabled solutions to support its operations and
provide better care. LCD and CDD each operate standard platforms for their core business services, and the Company operates
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standard platforms for its financial and reporting systems. These standard systems provide consistency within workflows and
information as well as a high level of system availability, security, and stability. LCD’s and CDD's primary laboratory systems,
including standardized support for molecular diagnostics, digital pathology and enhanced specialty laboratory solutions, facilitate
the processing of tests that generate the vast majority of LCD revenue and virtually all of CDD's central laboratory services revenue.
The Company's centralized information systems are responsible for tremendous operational efficiencies, enabling the Company
to achieve consistent, structured, and standardized operating results and superior patient care.
In addition, LCD and CDD each offer proprietary and industry-leading information systems, which are discussed in more detail
in the sections dedicated to each of those segments.
Quality
LCD and CDD have comprehensive quality systems and processes that the Company believes are appropriate for their
respective businesses. This includes licensing, credentialing, training and competency of professional and technical staff, and
internal auditing. In addition to the Company's own quality assurance programs, many of the Company’s laboratories, facilities
and processes are subject to on-site regulatory and accreditation evaluations, external proficiency testing programs, and surveys,
as applicable, by local or national government agencies.
Virtually all facets of the Company’s services are subject to quality assurance programs and procedures, including sensitivity,
specificity and reproducibility of tests; turnaround time; customer service; data integrity; patient satisfaction; and billing. The
Company’s quality assurance program includes measures that compare current performance against desired performance goals
to monitor critical aspects of service to its customers and patients.
The Company has procedures for monitoring its internal performance, as well as that of its vendors, suppliers and other key
stakeholders. In addition, various groups and departments within the Company, including the Company's supply chain management
department, CDD's clinical trial services global vendor management department, CDD's central laboratory services expanded
laboratory management services department, LCD's National Office of Quality, and project management staff supporting LCD
and CDD, provide oversight to monitor and control vendor products and performance, and play an essential role in the Company’s
approach to quality through improvements in processes and automation.
Customer Interaction. Continual improvement in the customers’ experience with the Company is essential. Use of technology
and workflow improvements within are helping to improve patient experience by: reducing patient wait times at PSCs by offering
advance appointment scheduling and patient check-in through through LabCorp | PreCheck; expediting the patient registration
process at the PSC through LabCorp | Express; enhancing the specimen collection process through LabCorp Touch and AccuDraw;
and allowing patients to access their test results, obtain educational materials, schedule appointments and pay bills directly through
LabCorp | PatientTM. LabCorp | Payer provides healthcare organizations with a centralized location to access test results and
quality data. CDD processes permit faster clinical trial study start-up and subject enrollment along with timely delivery of
established deliverables to enhance and improve customer interaction.
Specimen Management. The Company's standardized logistics and specimen tracking technologies allow the timely
transportation, monitoring, and storage of specimens. The Company is continually working to maintain and improve its ability
to timely collect, transport and track specimens from collection points to all Company or designated external locations. In December
2017, CDD acquired Global Specimen Solutions, Inc. (GSS), which has expertise in streamlined global specimen tracking, as
well as tracking for informed consent, and live data analytics that deliver actionable insights from specimens across development
programs. CDD had previously entered into a strategic alliance with GSS.
Quality Control. The Company regularly performs quality control testing. These may include in-process and post-process
quality control checks; use of applicable control materials and reference standards, peer reviews, and data review meetings;
programmed data edit checks to detect variances and unusual data patterns; dual programming; and mock runs.
LCD Internal Proficiency Testing. LCD has an extensive internal proficiency testing program to assess LCD's analytical and
post-analytical phases of laboratory testing, accuracy, precision of its testing protocols, and technologist/technician performance.
This program supplements the external proficiency programs required by the laboratory accrediting agencies.
Accreditation. The Company participates in numerous externally administered quality surveillance programs, including the
College of American Pathologists (CAP) program. CAP is an independent non-governmental organization of board-certified
pathologists that offers an accreditation program to which laboratories voluntarily subscribe. CAP has been granted deemed status
authority by CMS to inspect clinical laboratories to determine adherence to the Clinical Laboratory Improvement Amendments
(CLIA) requirements. The CAP program involves both on-site inspections of the laboratory and participation in CAP's proficiency
testing program for all categories in which the laboratory is accredited. A laboratory's receipt of accreditation by CAP satisfies
the CMS requirement for CLIA certification. LCD's major diagnostic laboratories, CDD's major central laboratory facilities, and
CDD's Phase I clinical research unit in Dallas, Texas, are accredited by CAP.
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The Company's forensic crime laboratory, located in Lorton, Virginia, is accredited to ISO/IEC 17025:2005 by the American
Society of Crime Laboratory Directors/Laboratory Accreditation Board (ASCLD/LAB) in the discipline of biology and categories
of nuclear DNA, mitochondrial DNA, body fluid identification and individual characteristic database testing. Under the
accreditation program managed by the ASCLD/LAB, a crime laboratory undergoes a comprehensive and in-depth inspection to
demonstrate that its management, operations, employees, procedures and instruments, physical plant, and security and personnel
safety procedures meet stringent quality standards.
The Company's full-service forensic facilities in the U.K. are accredited to ISO/IEC 17025:2005 by the U.K. Accreditation
Service (UKAS) in many areas of forensic analysis. These facilities provide crime scene investigative services, collecting samples
for DNA analysis, mitochondrial DNA testing, microscopic analysis of tool marks and paint, and other forms of forensic testing.
The Company has multiple labs that have received ISO 15189 accreditation. ISO 15189 is an international standard that
recognizes the quality and technical competence of medical laboratories. The Company has 18 laboratories in the U.S. and five
laboratories outside of the U.S. accredited to this standard, in addition to the laboratory operated for CDD pursuant to a strategic
agreement with BML, Inc. that also has this accreditation. The list below reflects the Company's labs that have achieved this
accreditation and the year in which it was achieved.
LCD
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CDD
Regional Testing Facility, Raritan, New Jersey - January 2017
Regional Testing Facility, Knoxville, Tennessee - November 2016
Regional Testing Facility, San Antonio, Texas - July 2016
Colorado Coagulation, Denver, Colorado - January 2016
Dynacare, Laval, Québec - March 2015
Regional Testing Facility, Dublin, Ohio - March 2015
Endocrine Sciences, Calabasas, California - January 2015
Regional Testing Facility, Dallas, Texas - April 2014
Regional Testing Facility, Denver, Colorado - March 2014
Integrated Genetics, Santa Fe, New Mexico - October 2013
Integrated Genetics, Westborough, Massachusetts - September 2013
Dynacare, Montreal, Québec - June 2013
Regional Testing Facility, Phoenix, Arizona - April 2013
Regional Testing Facility, Birmingham, Alabama - February 2013
Integrated Oncology, Brentwood, Tennessee - February 2012
ViroMed, Burlington, North Carolina - January 2012
Center for Molecular Biology and Pathology (CMBP), Research Triangle Park, North Carolina - February 2011
Regional Testing Facility, Tampa, Florida - January 2010
Integrated Oncology, Phoenix, Arizona - September 2009
• Covance Central Laboratory Services Inc., Indianapolis, Indiana - August 2015
• BML Covance Central Laboratory, Tokyo, Japan - March 2015 (Operated for CDD pursuant to a strategic agreement
with BML, Inc.)
Covance Pharmaceutical Research and Development (Shanghai) Co. Ltd., Shanghai, China - March 2015
Covance (Asia) Pte. Ltd., Singapore - June 2014
Covance Central Laboratory Services SARL, Geneva, Switzerland - October 2013
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Intellectual Property Rights
The Company relies on a combination of patents, trademarks, copyrights, trade secrets, and nondisclosure and non-competition
agreements to establish and protect its proprietary technology. The Company has filed and obtained numerous patents in the U.S.
and abroad, and regularly files patent applications, when appropriate, to establish and protect its proprietary technology.
Occasionally, the Company also licenses U.S. and non-U.S. patents, patent applications, technology, trade secrets, know-how,
copyrights or trademarks owned by others. The Company believes, however, that no single patent, technology, trademark,
intellectual property asset or license is material to its business as a whole.
Patents covering the Company's technologies are subject to challenges. Issued patents may be successfully challenged,
invalidated, circumvented, or declared unenforceable so that patent rights would not create an effective competitive barrier. In
addition, the laws of some countries may not protect proprietary rights to the same extent as do the laws of the U.S.
Parties may file claims asserting that the Company's technologies infringe on their intellectual property. The Company cannot
predict whether parties will assert such claims against it, or whether those claims will harm its business. If the Company is forced
to defend against such claims, the Company could face costly litigation and diversion of management’s attention and resources.
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As result of such disputes, the Company may have to develop costly non-infringing technology or enter into licensing agreements.
These agreements, if necessary, may require financial or other terms that could have an adverse effect on the Company's business
and financial condition.
Employees
As of December 31, 2017, the Company had nearly 60,000 employees worldwide, approximately 22.0% of whom were
employed outside of the U.S. The Company's U.S. based subsidiaries have four collective bargaining agreements, which cover
approximately 750 employees. Non-U.S. based subsidiaries have 52 collective bargaining agreements, which cover approximately
1,800 employees.
The Company’s success is highly dependent on its ability to attract and retain qualified employees, and the Company believes
that it has good working relationships with its employees.
Regulation and Reimbursement
General
Because the Company operates in a number of distinct operating environments and in a variety of locations worldwide, it is
subject to numerous, and sometimes overlapping, regulatory environments. Both the clinical laboratory industry and the drug
development business are subject to significant governmental regulation at the national, state and local levels. As described below,
these regulations concern licensure and operation of clinical laboratories, claim submission and reimbursement for laboratory
services, healthcare fraud and abuse, drug development services, security and confidentiality of health information, quality, and
environmental and occupational safety.
Regulation of Clinical Laboratories
Virtually all clinical laboratories operating in the U.S. must be certified by the federal government or by a federally approved
accreditation agency. In most cases, that certification is regulated by CMS through CLIA. CLIA requires that applicable clinical
laboratories meet quality assurance, quality control and personnel standards. Laboratories also must undergo proficiency testing
and are subject to inspections. Clinical laboratories in locations other than the U.S. are generally subject to comparable regulation
in their respective jurisdictions.
Standards for testing under CLIA are based on the complexity of the tests performed by the laboratory, with tests classified as
“high complexity,” “moderate complexity,” or “waived.” Laboratories performing high-complexity testing are required to meet
more stringent requirements than moderate-complexity laboratories. Laboratories performing only waived tests, which are tests
determined by the FDA to have a low potential for error and requiring little oversight, may apply for a certificate of waiver
exempting them from most CLIA requirements. All major and many smaller Company facilities hold CLIA certificates to perform
high-complexity testing. The Company's remaining smaller testing sites hold CLIA certificates to perform moderate-complexity
testing or a certificate of waiver. The sanctions for failure to comply with CLIA requirements include suspension, revocation or
limitation of a laboratory's CLIA certificate, which is necessary to conduct business; cancellation or suspension of the laboratory's
approval to receive Medicare and/or Medicaid reimbursement; as well as significant fines and/or criminal penalties. The loss or
suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or
interpretation of the law or regulations) could have a material adverse effect on the Company.
The Company is also subject to state and local laboratory regulation. CLIA provides that a state may adopt laboratory regulations
different from or more stringent than those under federal law, and a number of states have implemented their own laboratory
regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality
controls, or require maintenance of certain records.
The Company believes that it is in compliance with all laboratory requirements applicable to its laboratories operated both
within the U.S. and in other countries. The Company's laboratories have continuing programs to maintain operations in compliance
with all such regulatory requirements, but no assurances can be given that the Company's laboratories will pass all future licensure
or certification inspections.
FDA and Other Regulatory Agency Laws and Regulations
Various regulatory agencies, including the FDA in the U.S., have regulatory responsibility over the development, testing,
manufacturing, labeling, advertising, marketing, distribution, and surveillance of diagnostic and therapeutic products and services,
including certain products and services offered by the Company, and the development of therapeutic products that comprise the
majority of CDD’s business. The FDA and other regulatory agencies periodically inspect and review the manufacturing processes
and product performance of diagnostic and therapeutic products. These agencies have the authority to take various administrative
and legal actions for noncompliance, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and
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criminal sanctions. There are similar national and regional regulatory agencies in the jurisdictions outside the U.S. in which the
Company operates.
On October 3, 2014, the FDA issued draft guidance regarding FDA regulation of LDTs. On November 18, 2016, the FDA
announced that it would not release final guidance at this time and instead would continue to work with stakeholders, the new
administration, and Congress to determine the right approach, and on January 13, 2017, the FDA released a discussion paper
outlining a possible risk-based approach for FDA and CMS oversight of LDTs. Later in 2017, the FDA indicated that Congress
should enact legislation to address improved oversight of diagnostics including LDTs, rather than the FDA addressing the issue
through administrative policy proposals. There are other regulatory and legislative proposals that would increase general FDA
oversight of clinical laboratories and LDTs. The outcome and ultimate impact of such proposals on the Company is difficult to
predict at this time.
CDD’s laboratory facilities and LCD's clinical laboratory facilities that perform testing in support of clinical trials, must
conform to a range of standards and regulations, including GLP and good clinical practice (GCP), good manufacturing practice
(GMP), human subject protection and investigational product exemption regulations, and quality system regulation (QSR)
requirements, as applicable. The preclinical and clinical studies that the Company conducts are subject to periodic inspections
by the FDA as well as other regulatory agencies in the jurisdictions outside the U.S. in which the Company operates, which may
include, without limitation, the Medicines and Healthcare products Regulatory Agency (MHRA) in the U.K., the European
Medicines Agency, the China Food and Drug Administration, and the Pharmaceuticals and Medical Devices Agency in Japan,
to determine compliance with GLP and GCP as well as other applicable standards and regulations. If a regulatory agency determines
during an inspection that the Company’s equipment, facilities, laboratories, operations, or processes do not comply with applicable
regulations and conditions of GLP and/or GCP, the regulatory agency may issue a formal notice, which may be followed by a
warning letter if observations are not addressed satisfactorily. Noncompliance may result in the regulatory agency seeking civil,
criminal or administrative sanctions and/or remedies against the Company, including suspension of its operations.
Additionally, certain CDD services and activities, such as CMC services and manufacturing of investigational medicinal
products for use in certain Phase I studies managed by CDD, must conform to current good manufacturing practice (cGMP).
CDD is subject to periodic inspections by the FDA and the MHRA, as well as other regulatory agencies in the jurisdictions
outside the U.S. in which the Company operates, in order to assess, among other things, cGMP compliance. If a regulatory agency
identifies deficiencies during an inspection, it may issue a formal notice, which may be followed by a warning letter if observations
are not addressed satisfactorily. Failure to maintain compliance with cGMP regulations and other applicable requirements of
various regulatory agencies could result in fines, unanticipated compliance expenditures, suspension of manufacturing,
enforcement actions, injunctions, or criminal prosecution.
The U.S Animal Welfare Act (AWA)
The conduct of animal research at CDD’s facilities in the U.S. must be in compliance with the AWA, which governs the care
and use of warm-blooded animals for research in the U.S. other than laboratory rats, mice and chickens, and is enforced through
periodic inspections by the U.S. Department of Agriculture (USDA). The AWA establishes facility standards regarding several
aspects of animal welfare, including housing, ventilation, lighting, feeding and watering, handling, veterinary care, and
recordkeeping. CDD complies with licensing and registration requirement standards set by the USDA and similar agencies in
foreign jurisdictions such as the European Union and China for the care and use of regulated species. If the USDA determines
that CDD’s equipment, facilities, laboratories or processes do not comply with applicable AWA standards, it may issue an
inspection report documenting the deficiencies and setting deadlines for any required corrective actions. The USDA may impose
fines, suspend and/or revoke animal research licenses or confiscate research animals. Other countries where the Company conducts
business have similar laws and regulations with which the Company must also comply.
Payment for Clinical Laboratory Services
In 2017, LCD derived approximately 15.1% of its net revenue directly from the Medicare and Medicaid programs. In addition,
LCD's other commercial laboratory testing business that is not directly related to Medicare or Medicaid nevertheless depends
significantly on continued participation in these programs and in other government healthcare programs, in part because customers
often want a single laboratory to perform all of their testing services. In recent years, both governmental and private sector payers
have made efforts to contain or reduce healthcare costs, including reducing reimbursement for clinical laboratory services.
Reimbursement under the Medicare PFS is capped at different rates in each Medicare Administrative Contractor's jurisdiction.
Pursuant to PAMA, reimbursement under the CLFS is set at a national rate that is updated every three years for most tests. State
Medicaid programs are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished
to Medicaid recipients. Laboratories primarily bill and are reimbursed by Medicare and Medicaid directly for covered tests
performed on behalf of Medicare and Medicaid beneficiaries; for beneficiaries that participate in Managed Medicare and Managed
Medicaid plans, laboratory bills are submitted to and paid by MCOs that manage those plans. Approximately 12.1% of LCD's
revenue is reimbursed under the CLFS.
24
Many pathology services performed by LCD are reimbursed by Medicare under the PFS. The PFS assigns relative value units
to each procedure or service, and a conversion factor is applied to calculate the reimbursement. The PFS is also subject to adjustment
on an annual basis. Such adjustments can impact both the conversion factor and relative value units. The Sustainable Growth Rate
(SGR), the formula previously used to calculate the fee schedule conversion factor, would have resulted in significant decreases
in payment for most physician services for each year since 2003. However, Congress intervened repeatedly to prevent these
payment reductions, and the conversion factor was increased or frozen for the subsequent year. MACRA permanently replaced
the SGR formula and transitioned PFS reimbursement to a value-based payment system. MACRA retroactively avoided a 21.2%
reduction in PFS reimbursement that had been scheduled for April 1, 2015, and provided for PFS conversion factor increases of
0.5% from July 1, 2015 to December 31, 2015, and 0.5% in each of years 2016-2019, followed by 0.0% updates for 2020-2025,
and updates that vary based on participation in alternative payment models in subsequent years. These changes to the conversion
factor may be offset by reductions to the relative value units, as was the case with the 2016 PFS reductions. In addition, rates will
be adjusted under the new Merit-Based Incentive Payment System beginning in 2019. Approximately 0.7% of LCD's revenue is
reimbursed under the PFS.
In addition to changes in reimbursement rates, LCD is also impacted by changes in coverage policies for laboratory tests and
annual CPT coding. Medicare, Medicaid and private payer diagnosis code requirements and payment policies negatively impact
LCD's ability to be paid for some of the tests it performs. Further, some payers require additional information to process claims
or have implemented prior authorization policies which delays or prohibits payment. CLFS coding and billing changes related to
toxicology and other procedures were implemented in 2016 and 2017. The Company experienced delays in the pricing and
implementation of the new toxicology codes; however, the Company largely overcame issues related to price and margins through
direct negotiation with the associated payers. Limited coding and billing changes related to other procedure types are expected to
be implemented in 2018. The Company expects some delays in pricing and implementation of these new codes.
Future changes in national, state and local laws and regulations (or in the interpretation of current regulations) affecting
government payment for clinical laboratory testing could have a material adverse effect on the Company. Based on currently
available information, the Company is unable to predict what type of changes in legislation or regulations, if any, will occur.
Privacy, Security and Confidentiality of Health Information and Other Personal Information
In the U.S., the Health Insurance Portability and Accountability Act of 1996 (HIPAA) was designed to address issues related
to the security and confidentiality of health information and to improve the efficiency and effectiveness of the healthcare system
by facilitating the electronic exchange of information in certain financial and administrative transactions. These regulations apply
to health plans and healthcare providers that conduct standard transactions electronically and healthcare clearinghouses (covered
entities). Six such regulations include: (i) the Transactions and Code Sets Rule; (ii) the Privacy Rule; (iii) the Security Rule; (iv)
the Standard Unique Employer Identifier Rule, which requires the use of a unique employer identifier in connection with certain
electronic transactions; (v) the National Provider Identifier Rule, which requires the use of a unique healthcare provider identifier
in connection with certain electronic transactions; and (vi) the Health Plan Identifier Rule, which requires the use of a unique
health plan identifier in connection with certain electronic transactions.
The Company believes that it is in compliance in all material respects with the current Transactions and Code Sets Rule. The
Company implemented Version 5010 of the HIPAA Transaction Standards and believes it has fully adopted the ICD-10-CM code
set. While to date the Company has not experienced any sustained disruption in receipts or indications of substantive reductions
to reimbursement and net revenues related to the implementation of the ICD-10-CM code set, further future application of restrictive
clinical or payment policies could negatively impact the Company. The Company believes it is in compliance in all material
respects with applicable laws and regulations for electronic funds transfers and remittance advice transactions.
The Privacy Rule regulates the use and disclosure of protected health information (PHI) by covered entities. It also sets forth
certain rights that an individual has with respect to his or her PHI maintained by a covered entity, such as the right to access or
amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The Privacy Rule requires covered
entities to contractually bind third parties, known as business associates, in the event that they perform an activity or service for
or on behalf of the covered entity that involves the creation, receipt, maintenance, or transmission of PHI. The Company believes
that it is in compliance in all material respects with the requirements of the HIPAA Privacy Rule.
The Security Rule establishes requirements for safeguarding patient information that is electronically transmitted or
electronically stored. The Company believes that it is in compliance in all material respects with the requirements of the HIPAA
Security Rule.
The U.S. Health Information Technology for Economic and Clinical Health Act (HITECH), which was enacted in February
2009, with regulations effective on September 23, 2013, strengthened and expanded the HIPAA Privacy and Security Rules and
their restrictions on use and disclosure of PHI. HITECH includes, but is not limited to, prohibitions on exchanging PHI for
remuneration and additional restrictions on the use of PHI for marketing. HITECH also fundamentally changes a business associate’s
obligations by imposing a number of Privacy Rule requirements and a majority of Security Rule provisions directly on business
25
associates that were previously only directly applicable to covered entities. Moreover, HITECH requires covered entities to provide
notice to individuals, HHS, and, as applicable, the media when unsecured PHI is breached, as that term is defined by HITECH.
Business associates are similarly required to notify covered entities of a breach. The Company believes its policies and procedures
are fully compliant with the HITECH requirements.
On February 6, 2014, CMS and HHS published final regulations that amended the HIPAA Privacy Rule to provide individuals
(or their personal representatives) with the right to receive copies of their test reports from laboratories subject to HIPAA, or to
request that copies of their test reports be transmitted to designated third parties. The Company revised its policies and procedures
to comply with these new access requirements and updated its privacy notice to reflect individuals’ new access rights under this
final rule.
The Standard Unique Employer Identifier Rule requires that employers have standard national numbers that identify them on
standard transactions. The Employer Identification Number (also known as a Federal Tax Identification Number) issued by the
Internal Revenue Service was selected as the identifier for employers and was adopted effective July 30, 2002. The Company
believes it is in compliance with these requirements.
The administrative simplification provisions of HIPAA mandate the adoption of standard unique identifiers for healthcare
providers. The intent of these provisions is to improve the efficiency and effectiveness of the electronic transmission of health
information. The National Provider Identifier Rule requires that all HIPAA-covered healthcare providers, whether they are
individuals or organizations, must obtain a National Provider Identifier (NPI) to identify themselves in standard HIPAA transactions.
NPI replaces the unique provider identification number and other provider numbers previously assigned by payers and other entities
for the purpose of identifying healthcare providers in standard electronic transactions. The Company believes that it is in compliance
with the HIPAA National Provider Identifier Rule in all material respects.
The Health Plan Identifier (HPID) is a unique identifier designed to furnish a standard way to identify health plans in electronic
transactions. CMS published the final rule adopting the HPID for health plans required by HIPAA on September 12, 2012.
Effective October 31, 2014, CMS announced a delay, until further notice, in enforcement of regulations pertaining to health plan
enumeration and use of the HPID in HIPAA transactions adopted in the HPID final rule. This delay remains in effect. The Company
will continue to monitor future developments related to the HPID and respond accordingly.
Violations of the HIPAA provisions could result in civil and/or criminal penalties, including significant fines and up to 10 years
in prison. HITECH also significantly strengthened HIPAA enforcement by increasing the civil penalty amounts that may be
imposed, requiring HHS to conduct periodic audits to confirm compliance and authorizing state attorneys general to bring civil
actions seeking either injunctions or damages in response to violations of the HIPAA privacy and security regulations that affect
the privacy of state residents.
The total cost associated with meeting the ongoing requirements of HIPAA and HITECH is not expected to be material to the
Company’s operations or cash flows. However, future regulations and interpretations of HIPAA and HITECH could impose
significant costs on the Company.
In addition to the HIPAA regulations described above, numerous other data protection, privacy and similar laws govern the
confidentiality, security, use and disclosure of personal information. These laws vary by jurisdiction, but they most commonly
regulate or restrict the collection, use and disclosure of medical and financial information and other personal information. In the
U.S., some state laws are more restrictive and, therefore, are not preempted by HIPAA. Penalties for violation of these laws may
include sanctions against a laboratory's licensure, as well as civil and/or criminal penalties. Outside the U.S., numerous other
countries have laws governing the collection, use, disclosure and transmission (including cross-border transfer) of personal
information, including medical information. The legislative and regulatory landscape for privacy and data protection is complex
and continually evolving. For example, in December 2015, the European Union approved a General Data Protection Regulation
(GDPR) to replace Directive 95/46/EC, which will take effect May 25, 2018, governing use and transfer of personal data and
imposing significant penalties for noncompliance. Additionally, data protection regulations have been enacted or updated in
countries where the Company does business, including in Asia, Latin America, and Europe. Failure to comply with these regulations
may result in, among other things, civil, criminal and contractual liability, fines, regulatory sanctions and damage to the Company’s
reputation. The Company has established processes and frameworks to manage compliance with privacy and data protection
requirements and is executing on its GDPR readiness project to support compliance with the GDPR.
On January 2, 2018, the Substance Abuse and Mental Health Services Administration (SAMHSA) announced the finalization
of proposed changes to the Confidentiality of Substance Use Disorder Patient Records regulation, 42 CFR Part 2. This regulation
protects the confidentiality of patient records relating to the identity, diagnosis, prognosis, or treatment that are maintained in
connection with the performance of any federally assisted program or activity relating to substance use disorder education,
prevention, training, treatment, rehabilitation, or research. Under the regulation, patient identifying information may only be
released with the individual’s written consent, subject to certain limited exceptions. The latest changes to this regulation seek to
align to its requirements more closely with HIPAA, while maintaining more stringent confidentiality of substance use disorder
26
information. The Company will adopt such changes to its policies and procedures as may be necessary for compliance.
Fraud and Abuse Laws and Regulations
Existing U.S. laws governing federal healthcare programs, including Medicare and Medicaid, as well as similar state laws,
impose a variety of broadly described fraud and abuse prohibitions on healthcare providers, including clinical laboratories. These
laws are interpreted liberally and enforced aggressively by multiple government agencies, including the U.S. Department of Justice,
HHS’ Office of Inspector General (OIG), and various state agencies. Historically, the clinical laboratory industry has been the
focus of major governmental enforcement initiatives. The U.S. government's enforcement efforts have been increasing over the
past decade, in part as a result of the enactment of HIPAA, which included several provisions related to fraud and abuse enforcement,
including the establishment of a program to coordinate and fund U.S., state and local law enforcement efforts. The Deficit Reduction
Act of 2005 also included new requirements directed at Medicaid fraud, including increased spending on enforcement and financial
incentives for states to adopt false claims act provisions similar to the U.S. False Claims Act. Amendments to the False Claims
Act, and other enhancements to the U.S. fraud and abuse laws enacted as part of the ACA, have further increased fraud and abuse
enforcement efforts and compliance risks. For example, the ACA established an obligation to report and refund overpayments
from Medicare or Medicaid within 60 days of identification (whether or not paid through any fault of the recipient); failure to
comply with this new requirement can give rise to additional liability under the False Claims Act and Civil Monetary Penalties
statute.
The U.S. Anti-Kickback Statute prohibits knowingly providing anything of value in return for, or to induce the referral of,
Medicare, Medicaid or other U.S. healthcare program business. Violations can result in imprisonment, fines, penalties, and/or
exclusion from participation in U.S. healthcare programs. The OIG has published “safe harbor” regulations that specify certain
arrangements that are protected from prosecution under the Anti-Kickback Statute if all conditions of the relevant safe harbor are
met. Failure to fit within a safe harbor does not necessarily constitute a violation of the Anti-Kickback Statute; rather, the arrangement
would be subject to scrutiny by regulators and prosecutors and would be evaluated on a case-by-case basis. Many states have their
own Medicaid anti-kickback laws, and several states also have anti-kickback laws that apply to all payers (i.e., not just government
healthcare programs).
From time to time, the OIG issues alerts and other guidance on certain practices in the healthcare industry that implicate the
Anti-Kickback Statute or other fraud and abuse laws. Examples of such guidance documents particularly relevant to the Company
and its operations follow.
In October 1994, the OIG issued a Special Fraud Alert on arrangements for the provision of clinical laboratory services. The
Fraud Alert set forth a number of practices allegedly engaged in by some clinical laboratories and healthcare providers that raise
issues under the U.S. fraud and abuse laws, including the Anti-Kickback Statute. These practices include: (i) providing employees
to furnish valuable services for physicians (other than collecting patient specimens for testing) that are typically the responsibility
of the physicians’ staff; (ii) offering certain laboratory services at prices below fair market value in return for referrals of other
tests that are billed to Medicare at higher rates; (iii) providing free testing to physicians’ managed care patients in situations where
the referring physicians benefit from such reduced laboratory utilization; (iv) providing free pickup and disposal of biohazardous
waste for physicians for items unrelated to a laboratory’s testing services; (v) providing general-use facsimile machines or computers
to physicians that are not exclusively used in connection with the laboratory services; and (vi) providing free testing for healthcare
providers, their families and their employees (i.e., so-called “professional courtesy” testing). The OIG emphasized in the Special
Fraud Alert that when one purpose of such arrangements is to induce referrals of program-reimbursed laboratory testing, both the
clinical laboratory and the healthcare provider (e.g., physician) may be liable under the Anti-Kickback Statute, and may be subject
to criminal prosecution and exclusion from participation in the Medicare and Medicaid programs. More recently, in June 2014,
the OIG issued another Special Fraud Alert addressing compensation paid by laboratories to referring physicians for blood specimen
processing and for submitting patient data to registries. This Special Fraud Alert reiterates the OIG's long-standing concerns about
payments from laboratories to physicians in excess of the fair market value of the physician's services and payments that reflect
the volume or value of referrals of federal U.S. program business.
The OIG has expressed additional concern about the provision of discounts on laboratory services billed to customers in return
for the referral of U.S. healthcare program business. In a 1999 Advisory Opinion, the OIG concluded that a laboratory's offer to
a physician of significant discounts on non-U.S. healthcare program laboratory tests might violate the Anti-Kickback Statute on
the basis that such discounts could be viewed as in exchange for referrals by the physician of business to be billed by the laboratory
to Medicare at non-discounted rates. In a 1999 correspondence, the OIG stated that a discount that a laboratory offers to a skilled
nursing facility for tests billed to the skilled nursing facility to induce the referral of tests for which the laboratory is reimbursed
by Medicare would implicate the Anti-Kickback Statute.
The OIG has also issued guidance in 1989 and 2003 regarding joint venture arrangements that may be viewed as suspect
under the Anti-Kickback Statute. These documents have relevance to clinical laboratories that are part of (or are considering
establishing) joint ventures with potential sources of U.S. healthcare program business. Some of the elements of joint ventures
that the OIG identified as “suspect” include: arrangements in which the capital invested by referring providers is disproportionately
27
small and the return on investment is disproportionately large when compared to a typical investment; specific selection of investors
who are in a position to make referrals to the venture; and arrangements in which one of the parties to the joint venture expands
into a line of business that is dependent on referrals from the other party (sometimes called “shell” joint ventures). In a 2004
advisory opinion, the OIG expressed concern about a proposed joint venture in which a laboratory company would assist physician
groups in establishing off-site pathology laboratories where the physicians' financial and business risk in the venture was minimal
and the physicians would contract out substantially all laboratory operations, committing very little in the way of financial, capital,
or human resources.
Violations of other fraud and abuse laws can also result in exclusion from participation in U.S. healthcare programs, including
Medicare and Medicaid. One basis for such exclusion is an individual or entity’s submission of claims to Medicare or Medicaid
that are substantially in excess of that individual or entity’s usual charges for like items or services. In a June 18, 2007, withdrawal
of proposed rulemaking, the OIG stated that it would continue evaluating billing patterns on a case-by-case basis, noting that it is
“concerned about disparities in the amounts charged to Medicare and Medicaid when compared to private payers,” that it continues
to believe its exclusion authority for excess charges “provides useful backstop protection for the public from providers that routinely
charge Medicare or Medicaid substantially more than their other customers” and that it will use “all tools available … to address
instances where Medicare or Medicaid are charged substantially more than other payers.” An enforcement action by the OIG under
this statutory exclusion basis or an enforcement action by Medicaid officials of similar state law restrictions could have an adverse
effect on the Company.
Under another U.S. statute, known as the Stark Law or “self-referral” prohibition, physicians who have a financial or a
compensation relationship with a commercial laboratory may not, unless an exception applies, refer Medicare patients for testing
to the laboratory, regardless of the intent of the parties. Similarly, laboratories may not bill Medicare for services furnished pursuant
to a prohibited self-referral. There are several Stark Law exceptions that are relevant to arrangements involving clinical laboratories,
including: i) fair market value compensation for the provision of items or services; ii) payments by physicians to a laboratory for
commercial laboratory services; iii) ancillary services (including laboratory services) provided within the referring physician's
own office, if certain criteria are satisfied; iv) physician investment in a company whose stock is traded on a public exchange and
has stockholder equity exceeding $75.0 million; and v) certain space and equipment rental arrangements that are set at a fair market
value rate and satisfy other requirements. Many states have their own self-referral laws as well, which in some cases apply to all
patient referrals, not just government reimbursement programs.
There are a variety of other types of U.S. and state fraud and abuse laws, including laws prohibiting submission of false or
fraudulent claims. The Company seeks to conduct its business in compliance with all U.S. and state fraud and abuse laws. The
Company is unable to predict how these laws will be applied in the future, and no assurances can be given that its arrangements
will not be subject to scrutiny under such laws. Sanctions for violations of these laws may include exclusion from participation
in Medicare, Medicaid and other U.S. or state healthcare programs, significant criminal and civil fines and penalties, and loss of
licensure. Any exclusion from participation in a U.S. healthcare program, or material loss of licensure, arising from any action by
any federal or state regulatory or enforcement authority, would likely have a material adverse effect on the Company's business.
In addition, any significant criminal or civil penalty resulting from such proceedings could have a material adverse effect on the
Company's business.
Environmental, Health and Safety
The Company is subject to licensing and regulation under national, state and local laws and regulations relating to the protection
of the environment, and human health and safety laws and regulations relating to the handling, transportation and disposal of
medical specimens, infectious and hazardous waste and radioactive materials. All Company laboratories are subject to applicable
laws and regulations relating to biohazard disposal of all laboratory specimens, and the Company generally utilizes outside vendors
for disposal of such specimens. In addition, the U.S. Occupational Safety and Health Administration (OSHA) has established
extensive requirements relating to workplace safety for healthcare employers, including clinical laboratories, whose workers may
be exposed to blood-borne pathogens such as HIV, HCV and hepatitis B virus (HCB). These regulations, among other things,
require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures
designed to minimize exposure to, and transmission of, blood-borne pathogens. Other countries where the Company conducts
business have similar laws and regulations concerning the environment and human health and safety with which the Company
must also comply.
In 2012, the OSHA Hazard Communication Standard was revised based on the adoption of the Globally Harmonized System
that provides criteria for the classification of chemical hazards. Updated copies of Safety Data Sheets for chemical products used
across the Company were obtained prior to the effective date of June 1, 2015.
The Company seeks to comply with all relevant environmental and human health and safety laws and regulations. Failure to
comply could subject the Company to various administrative and/or other enforcement actions.
28
Drug Testing
Drug testing for public sector employees is regulated by the SAMHSA, which has established detailed performance and quality
standards that laboratories must meet to be approved to perform drug testing on employees of U.S. government contractors and
certain other entities. To the extent that the Company’s laboratories perform such testing, each must be certified as meeting
SAMHSA standards. The Company’s laboratories in Research Triangle Park, North Carolina; Raritan, New Jersey; Houston, Texas;
Southaven, Mississippi; Spokane, Washington; and St. Paul, Minnesota are all SAMHSA certified.
Controlled Substances
CDD handles controlled substances as part of the services it provides in preclinical testing and clinical trials. The use of
controlled substances in testing for drugs of abuse is regulated by the U.S. Drug Enforcement Administration. The Company
believes that it is in compliance with these regulations as applicable.
Compliance Program
The Company maintains a comprehensive, global compliance program that includes ongoing evaluation and monitoring of its
compliance with the laws and regulations of the U.S. and the other countries in which it has operations. The objective of the
Company’s compliance program is to develop, implement and update compliance safeguards, as appropriate. Emphasis is placed
on developing and implementing compliance policies and guidelines, personnel training programs and monitoring and auditing
activities. The compliance program demonstrates the Company's commitment to conducting business at the highest standards of
ethical conduct and integrity.
The Company seeks to conduct its business in compliance with all statutes, regulations, and other requirements applicable to
its clinical laboratory operations and drug development business. The clinical laboratory industry and drug development industries
are, however, subject to extensive regulation, and many of these statutes and regulations have not been interpreted by the courts.
In addition, the applicability or interpretation of statutes and regulations may not be clear in light of emerging changes in clinical
testing science, healthcare technology, and healthcare organizations. Applicable statutes and regulations may be interpreted or
applied by a prosecutorial, regulatory or judicial authority in a manner that would materially adversely affect the Company. Potential
sanctions for violation of these statutes and regulations include significant civil and criminal penalties, fines, exclusion from
participation in governmental healthcare programs, and the loss of various licenses, certificates, and authorizations necessary to
operate, as well as potential liabilities from third-party claims, all of which could have a material adverse effect on the Company’s
business.
Information Security
The Company's success depends on the efficient and uninterrupted operation of its computer and communications systems,
and secure maintenance of personal and health information is critical to the Company’s business operations. The Company has
experienced and expects to continue to experience attempts by computer programmers and hackers to attack and penetrate the
Company’s layered security controls. Disruptions or breaches of security could have a material adverse effect on the Company’s
business, regulatory compliance, financial condition and results of operations. The Company maintains information security
procedures and has other safeguards in place intended to protect against such disruptions and breaches. These procedures and
safeguards are monitored and routinely tested internally and by external parties. The Company has also implemented policies
and procedures designed to comply with the HIPAA privacy and security requirements and other laws and regulations related to
the privacy and security of personal or health information. In addition, the Company carries property and business interruption
insurance. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to
enhance the Company’s information security measures or to investigate and remediate any information security vulnerabilities.
Item 1A.
Risk Factors
Investors should carefully consider all of the information set forth in this report, including the following risk factors, before
deciding to invest in any of the Company’s securities. The risks below are not the only ones that the Company faces. Additional
risks not presently known to the Company, or that it presently deems immaterial, may also negatively impact the Company. The
Company’s business, consolidated financial condition, revenues, results of operations, profitability, reputation or cash flows could
be materially impacted by any of these factors.
This report also includes forward-looking statements that involve risks or uncertainties. The Company’s results could differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described
below and elsewhere. See “Forward-Looking Statements” in Item 7.
Changes in payer regulations or policies (or in the interpretation of current regulations or policies), insurance regulations
or approvals, or changes in other laws, regulations or policies in the United States (U.S.) may adversely affect U.S.
29
governmental and third-party coverage or reimbursement for clinical laboratory testing and may have a material adverse
effect upon the Company.
U.S. and state government payers, such as Medicare and Medicaid, as well as insurers, including managed care organizations
(MCOs), have increased their efforts to control the cost, utilization and delivery of healthcare services. From time to time, Congress
has considered and implemented changes in Medicare fee schedules in conjunction with budgetary legislation. The first phase of
reductions pursuant to Protecting Access to Medicare Act (PAMA) came into effect on January 1, 2018, and will continue annually
subject to certain phase-in limits through 2023, and without limitations for subsequent periods. Further reductions due to changes
in policy regarding coverage of tests or other requirements for payment, such as prior authorization, diagnosis code and other
claims edits, or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time.
Reimbursement for pathology services performed by LabCorp Diagnostics (LCD) is also subject to statutory and regulatory
reduction. Reductions in the reimbursement rates and changes in payment policies of other third-party payers may occur as well.
Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the
commercial laboratory industry by adding more complex new regulatory and administrative requirements. Further changes in
third-party payer regulations, policies, or laboratory benefit or utilization management programs may have a material adverse
effect on LCD's business. Actions by federal and state agencies regulating insurance, including healthcare exchanges, or changes
in other laws, regulations, or policies may also have a material adverse effect upon LCD's business.
The Company could face significant monetary damages and penalties and/or exclusion from government programs if it
violates federal, state, local or international laws including, but not limited to, anti-fraud and abuse laws.
The Company is subject to extensive government regulation at the federal, state, and local levels in the U.S. and other countries
where it operates. The Company’s failure to meet governmental requirements under these regulations, including those relating to
billing practices and financial relationships with physicians, hospitals, and health systems could lead to civil and criminal penalties,
exclusion from participation in Medicare and Medicaid and possible prohibitions or restrictions on the use of its laboratories.
While the Company believes that it is in material compliance with all statutory and regulatory requirements, there is a risk that
government authorities might take a contrary position. Such occurrences, regardless of their outcome, could damage the Company’s
reputation and adversely affect important business relationships it has with third parties.
The Company’s business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under,
or future changes in, or interpretations of, the law or regulations of the Clinical Laboratory Improvement Act of 1967, and
the Clinical Laboratory Improvement Amendments of 1988 (CLIA), or those of Medicare, Medicaid or other national,
state or local agencies in the U.S. and other countries where the Company operates laboratories.
The commercial laboratory testing industry is subject to extensive U.S. regulation, and many of these statutes and regulations
have not been interpreted by the courts. CLIA extends federal oversight to virtually all clinical laboratories operating in the U.S.
by requiring that they be certified by the federal government or by a federally approved accreditation agency. The sanction for
failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which
is necessary to conduct business, as well as significant fines and/or criminal penalties. In addition, the Company is subject to
regulation under state law. State laws may require that laboratories and/or laboratory personnel meet certain qualifications, specify
certain quality controls or require maintenance of certain records. The Company also operates laboratories outside of the U.S. and
is subject to laws governing its laboratory operations in the other countries where it operates.
Applicable statutes and regulations could be interpreted or applied by a prosecutorial, regulatory or judicial authority in a
manner that would adversely affect the Company's business. Potential sanctions for violation of these statutes and regulations
include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material
adverse effect on the Company’s business. In addition, compliance with future legislation could impose additional requirements
on the Company, which may be costly.
U.S. Food and Drug Administration (FDA) regulation of diagnostic products and increased FDA regulation of laboratory-
developed tests (LDTs) could result in increased costs and the imposition of fines or penalties, and could have a material
adverse effect upon the Company’s business.
The FDA has regulatory responsibility for instruments, test kits, reagents and other devices used by clinical laboratories. The
FDA enforces laws and regulations that govern the development, testing, manufacturing, performance, labeling, advertising,
marketing, distribution and surveillance of diagnostic products, and it regularly inspects and reviews the manufacturing processes
and product performance of diagnostic products. LCD’s point-of-care testing devices are subject to regulation by the FDA.
There are other regulatory and legislative proposals that would increase general FDA oversight of clinical laboratories and
LDTs. On July 26, 2007, the FDA issued Draft Guidance for Industry, Clinical Laboratories, and FDA Staff: In Vitro Diagnostic
Multivariate Index Assays. The guidance proposed certain changes to the agency's general past practice regarding the regulation
of certain LDTs and announced that most devices deemed to be In Vitro Diagnostic Multivariate Index Assays (IVDMIAs) would
30
either be Class II or Class III devices, although it is possible that an IVDMIA for a low-risk indication could be Class I. Class II
medical devices typically require FDA clearance or a premarket notification submission. Class III devices require the submission
of an application for Premarket Approval. On October 3, 2014, the FDA published two additional draft guidance documents:
Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs), which provides an overview of how the FDA would
regulate LDTs through a risk-based approach, and FDA Notification and Medical Device Reporting for Laboratory Developed
Tests, which describes the process for clinical laboratories to notify the FDA of the LDTs they "manufacture" and describes the
Medical Device Reporting requirements for LDTs. On May 28, 2015, and October 22, 2015, the House Energy and Commerce
Health Subcommittee released discussion drafts of a bill that would reform oversight of in vitro clinical tests (IVCTs), including
both LDTs and test kits. The bill would establish a new regulatory framework in which the FDA would regulate IVCTs under a
new category separate from medical devices, and the Centers for Medicare and Medicaid Services (CMS) regulation of laboratories
under CLIA would be modernized. On November 16, 2015, the FDA issued a report titled, The Public Health Evidence for FDA
Oversight of Laboratory Developed Tests: 20 Case Studies (LDT Report). The LDT Report compiles 20 case studies involving
LDTs where the FDA alleges that noncompliance with the FDA regulations led to serious issues, such as false-positive or false-
negative results, causing potential or actual harm to patients. On December 29, 2015, the FDA published notice of its intent to
finalize guidance on its policy for regulatory oversight of LDTs in 2016. However, on November 18, 2016, the FDA announced
it would not release final guidance and instead would continue to work with stakeholders, the new administration and Congress
to determine the right approach, and on January 13, 2017, the FDA released a discussion paper outlining a possible risk-based
approach for FDA and CMS oversight of LDTs. Later in 2017, the Commissioner of the FDA indicated that Congress should enact
legislation to address improved oversight of diagnostics including LDTs, rather than the FDA addressing the issue through
administrative policy proposals. There are other regulatory and legislative proposals that would increase general FDA oversight
of clinical laboratories and LDTs. The outcome and ultimate impact of such proposals on the business is difficult to predict at this
time.
Current FDA regulation of the Company’s diagnostic products and potential future increased regulation of the Company’s
LDTs could result in increased costs and administrative and legal actions for noncompliance, including warning letters, fines,
penalties, product suspensions, product recalls, injunctions and other civil and criminal sanctions, which could have a material
adverse effect upon the Company.
Failure to comply with U.S., state, local or international environmental, health and safety laws and regulations, including
the U.S. Occupational Safety and Health Administration Act and the U.S. Needlestick Safety and Prevention Act, could
result in fines and penalties and loss of licensure, and have a material adverse effect upon the Company’s business.
As previously discussed in Item 1 of Part I of this report, the Company is subject to licensing and regulation under laws and
regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to
the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well
as regulations relating to the safety and health of laboratory employees. Failure to comply with these laws and regulations could
subject the Company to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions that
would have a material adverse effect on its business. In addition, compliance with future legislation could impose additional
requirements on the Company that may be costly.
Failure to comply with privacy and security laws and regulations could result in fines, penalties and damage to the
Company’s reputation with customers and have a material adverse effect upon the Company’s business.
If the Company does not comply with existing or new laws and regulations related to protecting the privacy and security of
personal or health information, it could be subject to monetary fines, civil penalties or criminal sanctions.
In the U.S., the Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy and security regulations, including
the expanded requirements under U.S. Health Information Technology for Economic and Clinical Health Act (HITECH), establish
comprehensive standards with respect to the use and disclosure of protected health information (PHI) by covered entities, in
addition to setting standards to protect the confidentiality, integrity and security of PHI.
HIPAA restricts the Company’s ability to use or disclose PHI, without patient authorization, for purposes other than payment,
treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. HIPAA and HITECH provide for significant fines and other penalties for
wrongful use or disclosure of PHI in violation of the privacy and security regulations, including potential civil and criminal fines
and penalties. The regulations establish a complex regulatory framework on a variety of subjects, including:
•
•
•
The circumstances under which the use and disclosure of PHI are permitted or required without a specific authorization
by the patient, including, but not limited to, treatment purposes, activities to obtain payments for the Company’s
services, and its healthcare operations activities;
A patient’s rights to access, amend and receive an accounting of certain disclosures of PHI;
The content of notices of privacy practices for PHI;
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•
•
Administrative, technical and physical safeguards required of entities that use or receive PHI; and
The protection of computing systems maintaining electronic PHI.
The Company has implemented policies and procedures designed to comply with the HIPAA privacy and security requirements
as applicable. The privacy and security regulations establish a “floor” and do not supersede state laws that are more stringent.
Therefore, the Company is required to comply with both additional federal privacy and security regulations and varying state
privacy and security laws. In addition, federal and state laws that protect the privacy and security of patient information may be
subject to enforcement and interpretations by various governmental authorities and courts, resulting in complex compliance issues.
For example, the Company could incur damages under state laws pursuant to an action brought by a private party for the wrongful
use or disclosure of health information or other personal information.
The Company may also be required to comply with the data privacy and security laws of other countries in which it operates
or with which it transfers and receives data. For example, in Europe both criminal and administrative sanctions are possible for
violation of European Union (EU) member state implementations of the general data protection Directive 95/46/EC. In December
2015, the EU enacted a General Data Protection Regulation (GDPR) to replace Directive 95/46/EC, which will take effect May
25, 2018, and which has a broader application and enhanced penalties for noncompliance. The Company is executing on its GDPR
readiness project to support compliance with the GDPR. The GDPR creates a range of new compliance obligations for subject
companies and substantially increases financial penalties for non-compliance. The costs of compliance with the GDPR and the
potential for fines and penalties in the event of a violation of the GDPR may have a significant adverse effect on the Company's
business and operations. In addition, similar data protection regulations addressing access, use, disclosure and transfer of personal
data have been enacted or updated in countries where the Company does business in Asia, Latin America, Canada and Europe.
The Company expects to make changes to its business practices and to incur additional costs associated with compliance with
these evolving and complex regulations.
Regulations requiring the use of standard transactions for healthcare services issued under HIPAA may negatively impact
the Company’s profitability and cash flows.
Pursuant to HIPAA, the U.S. Department of Health and Human Services (HHS) has issued regulations designed to improve
the efficiency and effectiveness of the healthcare system by facilitating the electronic exchange of information in certain financial
and administrative transactions while protecting the privacy and security of the information exchanged. The HIPAA transaction
standards are complex and subject to differences in interpretation by payers. For instance, some payers may interpret the standards
to require the Company to provide certain types of information, including demographic information, not usually provided to the
Company by physicians. In addition, requirements for additional standard transactions, such as claims attachments, could prove
technically difficult, time-consuming or expensive to implement. As a result of inconsistent application of other transaction
standards by payers or the Company’s inability to obtain certain billing information not usually provided to the Company by
physicians, the Company could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions
in reimbursements and net revenues. While the Company is working closely with its payers to establish acceptable protocols for
claim submission and with its trade association and an industry coalition to present issues and problems as they arise to the
appropriate regulators and standards-setting organizations, it may not be successful in these efforts.
Failure to maintain the security of customer-related information or compliance with security requirements could damage
the Company’s reputation with customers, cause it to incur substantial additional costs and become subject to litigation.
The Company receives certain personal and financial information about its customers. In addition, the Company depends upon
the secure transmission of confidential information over public networks, including information permitting cashless payments. A
compromise in the Company’s security systems that results in customer personal information being obtained by unauthorized
persons or the Company’s failure to comply with security requirements for financial transactions could adversely affect the
Company’s reputation with its customers and others, as well as the Company’s results of operations, financial condition and
liquidity. It could also result in litigation against the Company and the imposition of fines and penalties.
Discontinuation or recalls of existing testing products; failure to develop or acquire licenses for new or improved testing
technologies; or the Company’s customers using new technologies to perform their own tests could adversely affect the
Company’s business.
From time to time, manufacturers discontinue or recall reagents, test kits or instruments used by the Company to perform
laboratory testing. Such discontinuations or recalls could adversely affect the Company’s costs, testing volume and revenue.
The commercial laboratory industry is subject to changing technology and new product introductions. The Company’s success
in maintaining a leadership position in genomic and other advanced testing technologies will depend, in part, on its ability to
develop, acquire or license new and improved technologies on favorable terms and to obtain appropriate coverage and
reimbursement for these technologies. The Company may not be able to negotiate acceptable licensing arrangements, and it cannot
be certain that such arrangements will yield commercially successful diagnostic tests. If the Company is unable to license these
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testing methods at competitive rates, its research and development (R&D) costs may increase as a result. In addition, if the Company
is unable to license new or improved technologies to expand its esoteric testing operations, its testing methods may become outdated
when compared with the Company’s competition, and testing volume and revenue may be materially and adversely affected.
In addition, advances in technology may lead to the development of more cost-effective technologies such as point-of-care
testing equipment that can be operated by physicians or other healthcare providers (including physician assistants, nurse
practitioners and certified nurse midwives, generally referred to herein as physicians) in their offices or by patients themselves
without requiring the services of freestanding clinical laboratories. Development of such technology and its use by the Company’s
customers could reduce the demand for its laboratory testing services and the utilization of certain tests offered by the Company
and negatively impact its revenues.
Currently, most commercial laboratory testing is categorized as high or moderate complexity, and thereby is subject to extensive
and costly regulation under CLIA. The cost of compliance with CLIA makes it impractical for most physicians to operate clinical
laboratories in their offices, and other laws limit the ability of physicians to have ownership in a laboratory and to refer tests to
such a laboratory. Manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-
care laboratory equipment to physicians and by selling test kits approved for home or physician office use to both physicians and
patients. Diagnostic tests approved for home use are automatically deemed to be “waived” tests under CLIA and may be performed
in physician office laboratories as well as by patients in their homes with minimal regulatory oversight. Other tests meeting certain
FDA criteria also may be classified as “waived” for CLIA purposes. The FDA has regulatory responsibility over instruments, test
kits, reagents and other devices used by clinical laboratories, and it has taken responsibility from the U.S. Centers for Disease
Control and Prevention for classifying the complexity of tests for CLIA purposes. Increased approval of “waived” test kits could
lead to increased testing by physicians in their offices or by patients at home, which could affect the Company’s market for
laboratory testing services and negatively impact its revenues.
Healthcare reform and changes to related products (e.g., health insurance exchanges), changes in government payment
and reimbursement systems, or changes in payer mix, including an increase in capitated reimbursement mechanisms and
evolving delivery models, could have a material adverse effect on the Company's net revenues, profitability and cash flow.
LCD's testing services are billed to MCOs, Medicare, Medicaid, physicians and physician groups, hospitals, patients and
employer groups. Tests ordered by a physician may be billed to different payers depending on the medical insurance benefits of
a particular patient. Most testing services are billed to a party other than the physician or other authorized person who ordered the
test. Increases in the percentage of services billed to government and MCOs could have an adverse effect on the Company’s net
revenues.
The Company serves many MCOs. These organizations have different contracting philosophies, which are influenced by the
design of their products. Some MCOs contract with a limited number of clinical laboratories and engage in direct negotiation of
rates. Other MCOs adopt broader networks with generally uniform fee structures for participating clinical laboratories. In some
cases, those fee structures are specific to independent clinical laboratories, while the fees paid to hospital-based and physician-
office laboratories may be different, and are typically higher. MCOs may also offer Managed Medicare or Managed Medicaid
plans. In addition, some MCOs use capitation rates to fix the cost of laboratory testing services for their enrollees. Under a capitated
reimbursement arrangement, the clinical laboratory receives a per-member, per-month payment for an agreed upon menu of
laboratory tests provided to MCO members during the month, regardless of the number of tests performed.
Capitation shifts the risk of increased test utilization (and the underlying mix of testing services) to the commercial laboratory
provider. The Company makes significant efforts to ensure that its services are adequately compensated in its capitated
arrangements. For the year ended December 31, 2017, such capitated contracts accounted for approximately $259.1 million, or
3.6%, of LCD's net revenues.
The Company's ability to attract and retain MCOs is critical given the impact of healthcare reform, related products and expanded
coverage (e.g. health insurance exchanges and Medicaid expansion) and evolving delivery models (e.g., accountable care
organizations).
A portion of the managed care fee-for-service revenues is collectible from patients in the form of deductibles, coinsurance and
copayments. As patient cost-sharing has been increasing the Company's collections may be adversely impacted.
In addition, Medicare and Medicaid and private insurers have increased their efforts to control the cost, utilization and delivery
of healthcare services, including commercial laboratory services. Measures to regulate healthcare delivery in general, and clinical
laboratories in particular, have resulted in reduced prices, added costs and decreased test utilization for the commercial laboratory
industry by increasing complexity and adding new regulatory and administrative requirements. Pursuant to legislation passed in
late 2003, the percentage of Medicare beneficiaries enrolled in Managed Medicare plans has increased. The percentage of Medicaid
beneficiaries enrolled in Managed Medicaid plans has also increased, and is expected to continue to increase; however, changes
to, or repeal of, the Patient Protection and Affordable Care Act (ACA) may continue to affect coverage, reimbursement, and
33
utilization of laboratory services, as well as administrative requirements, in ways that are currently unpredictable. Further healthcare
reform could adversely affect laboratory reimbursement from Medicare, Medicaid or commercial carriers.
The Company also experienced delays in the pricing and implementation of new molecular pathology codes among various
payers, including Medicaid, Medicare and commercial carriers. While some delays were expected, several non-commercial payers
required an extended period of time to price key molecular codes, and a number of those payers, mostly government entities,
indicated that they would no longer pay for tests that they had previously covered. These issues (particularly payer policy changes)
and changes in coverage had a negative impact on revenue, revenue per requisition, and margins and cash flows in 2014 through
2017, and are expected to have a continuing negative impact. Similarly, the Clinical Laboratory Fee Schedule (CLFS) coding and
billing changes related to toxicology and other procedures were implemented in 2016 and 2017. The Company experienced delays
in the pricing and implementation of the new toxicology codes; however, the Company largely overcame issues related to price
and margins through direct negotiation with the associated payers. Limited coding and billing changes related to other procedure
types are expected to be implemented in 2018. The Company expects some continued delays in the pricing and implementation
of these new codes.
In addition, some MCOs are implementing, directly or through third parties, various types of laboratory benefit management
programs that may include lab networks, utilization management tools (such as prior authorization and/or prior notification), and
claims edits, which may impact coverage or reimbursement for commercial laboratory tests. Some of these programs address
commercial laboratory testing broadly, while others are focused on molecular and genetic testing.
The Company expects the efforts to impose reduced reimbursement, more stringent payment policies, and utilization and cost
controls by government and other payers to continue. If LCD cannot offset additional reductions in the payments it receives for
its services by reducing costs, increasing test volume, and/or introducing new services and procedures, it could have a material
adverse effect on the Company’s net revenues, profitability and cash flows. In 2014, Congress passed PAMA, requiring Medicare
to change the way payment rates are calculated for tests paid under the CLFS, and to base the payment on the weighted median
of rates paid by private payers. On June 23, 2016, CMS issued a final rule to implement PAMA that required applicable laboratories,
including LCD, to begin reporting their test-specific private payer payment amounts to CMS during the first quarter of 2017. CMS
exercised enforcement discretion to permit reporting for an additional 60 days, through May 30, 2017. CMS used that private
market data to calculate weighted median prices for each test (based on applicable CPT codes) to represent the new CLFS rates
beginning in 2018, subject to certain phase-in limits. For 2018-2020, a test price cannot be reduced by more than 10.0% per year;
for 2021-2023, a test price cannot be reduced by more than 15.0% per year. The process of data reporting and repricing will be
repeated every three years for Clinical Diagnostic Laboratory Tests (CDLTs). The second data reporting period for CDLTs will
occur during the first quarter of 2020, and new CLFS rates for CDLTs will be established based on that data beginning in 2021,
subject to the previously described phase-in limits for 2021-2023. The third data reporting period for CDLTs will occur during the
first quarter of 2023, and new CLFS rates for CDLTs will be established based on that data beginning in 2024. CLFS rates for
2024 and subsequent periods will not be subject to phase-in limits. CLFS rates for Advanced Diagnostic Laboratory Tests (ADLTs)
will be updated annually. CMS published its initial proposed CLFS rates under PAMA for 2018-2020 on September 22, 2017.
Following a public comment period, CMS made adjustments and published final CLFS rates for 2018-2020 on November 17,
2017, with additional adjustments published on December 1, 2017. For 2018, the Company estimates that CLFS rates will reduce
LCD revenue from all payers affected by the CLFS by a total of approximately 8% ($70.0 million). The Company supports the
efforts of the American Clinical Laboratory Association (ACLA) to work with Congress on potential legislative reform of PAMA,
which if enacted could reduce the negative impact of PAMA as implemented by CMS.
Healthcare reform legislation also contains numerous regulations that will require the Company, as an employer, to implement
significant process and record-keeping changes to be in compliance. These changes increase the cost of providing healthcare
coverage to employees and their families. Given the limited release of regulations to guide compliance, as well as potential changes
to the ACA, the exact impact to employers, including the Company, is uncertain.
Changes in government regulation or in practices relating to the biopharmaceutical industry could decrease the need for
certain services that Covance Drug Development (CDD) provides.
CDD assists biopharmaceutical companies in navigating the regulatory drug approval process. Changes in regulations such
as a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, or an increase in regulatory
requirements that CDD has difficulty satisfying or that make its services less competitive, could eliminate or substantially reduce
the demand for its services. Also, if government efforts to contain drug costs impact biopharmaceutical company profits from
new drugs, or if health insurers were to change their practices with respect to reimbursement for biopharmaceutical products,
some of CDD’s customers may spend less, or reduce their growth in spending on R&D.
On December 13, 2016, the 21st Century Cures Act was signed into law. This Act provides funding designed to increase
government spending on certain drug development initiatives; contains several provisions designed to help make the drug
development process more streamlined and efficient; and allows the FDA to increase staffing to support drug development, review
34
and regulation. These provisions should be helpful to biopharmaceutical companies and contract research organizations (CROs),
including CDD, to the extent that they capitalize on the use of data, adaptive trial designs, real-world evidence, biomarkers and
other development tools that are accepted by the FDA.
In addition, implementation of healthcare reform legislation that adds costs could limit the profits that can be made from the
development of new drugs. This could adversely affect R&D expenditures by biopharmaceutical companies, which could in turn
decrease the business opportunities available to CDD both in the U.S. and other countries. New laws or regulations may create a
risk of liability, increase CDD costs or limit service offerings through CDD.
Failure to comply with the regulations of drug regulatory agencies, such as the FDA, the Medicines and Healthcare
products Regulatory Agency in the United Kingdom (U.K.), the European Medicines Agency, the China Food and Drug
Administration, and the Pharmaceuticals and Medical Devices Agency in Japan, could result in sanctions and/or remedies
against CDD and have a material adverse effect upon the Company.
The operation of CDD's preclinical laboratory facilities and clinical trial operations must conform to good laboratory practice
(GLP) and good clinical practice (GCP), as applicable, as well as all other applicable standards and regulations, as further
described in Item 1 of Part I of this report. The business operations of CDD’s clinical and preclinical laboratories also require
the import and export of medical devices, in vitro diagnostic devices, reagents, and human and animal biological products. Such
activities are subject to numerous applicable local and international regulations with which CDD must comply or be subject to
civil, criminal or administrative sanctions and/or remedies, including suspension of its ability to import or export to or from
certain countries, which could have a material adverse effect upon the Company.
Additionally, certain CDD services and activities must conform to current good manufacturing practice (cGMP) as further
described in Item 1 of Part I of this report. Failure to maintain compliance with GLP, GCP, or cGMP regulations and other
applicable requirements of various regulatory agencies could result in warning letters, fines, unanticipated compliance
expenditures, suspension of manufacturing, and civil, criminal or administrative sanctions and/or remedies against CDD, including
suspension of its laboratory operations, which could have a material adverse effect upon the Company.
Increased competition, including price competition, could have a material adverse effect on the Company’s net revenues
and profitability.
As further described in Item 1 of Part I of this report, both LCD and CDD operate in highly competitive industries. The
commercial laboratory business is intensely competitive both in terms of price and service. Pricing of laboratory testing services
is often one of the most significant factors used by physicians, third-party payers and consumers in selecting a laboratory. As a
result of significant consolidation in the commercial laboratory industry, larger commercial laboratory providers are able to increase
cost efficiencies afforded by large-scale automated testing. This consolidation results in greater price competition. LCD may be
unable to increase cost efficiencies sufficiently, if at all, and as a result, its net earnings and cash flows could be negatively impacted
by such price competition. The Company may also face increased competition from companies that do not comply with existing
laws or regulations or otherwise disregard compliance standards in the industry. Additionally, the Company may also face changes
in fee schedules, competitive bidding for laboratory services, or other actions or pressures reducing payment schedules as a result
of increased or additional competition.
Competitors in the CRO industry range from hundreds of smaller CROs to a limited number of large CROs with global
capabilities. CDD’s main competition consists of these small and large CROs, as well as in-house departments of
biopharmaceutical companies and, to a lesser extent, select universities and teaching hospitals. CDD’s services have from time
to time experienced periods of increased price competition that had an adverse effect on a segment's profitability and consolidated
net revenues and net income. There is competition among CROs for both customers and potential acquisition candidates.
Additionally, few barriers to entering the CRO industry further increases possible new competition.
These competitive pressures may affect the attractiveness or profitability of LCD’s and CDD’s services, and could adversely
affect the financial results of the Company.
Failure to obtain and retain new customers, the loss of existing customers or material contracts, or a reduction in services
or tests ordered or specimens submitted by existing customers, or the inability to retain existing and/or create new
relationships with health systems could impact the Company’s ability to successfully grow its business.
To maintain and grow its business, the Company needs to obtain and retain new customers and business partners. In addition,
a reduction in tests ordered or specimens submitted by existing customers, a decrease in demand for the Company's services from
existing customers, or the loss of existing contracts, without offsetting growth in its customer base, could impact the Company's
ability to successfully grow its business and could have a material adverse effect on the Company’s net revenues and profitability.
The Company competes primarily on the basis of the quality of services, reporting and information systems, reputation in the
medical community and the drug development industry, the pricing of services and ability to employ qualified personnel. The
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Company's failure to successfully compete on any of these factors could result in the loss of existing customers, an inability to
gain new customers and a reduction in the Company's business.
Continued and increased consolidation of MCOs, biopharmaceutical companies, health systems, physicians and other
customers could adversely affect the Company's business.
Many healthcare companies and providers, including MCOs, biopharmaceutical companies, health systems and physician
practices are consolidating through mergers, acquisitions, joint ventures and other types of transactions and collaborations. In
addition to these more traditional horizontal mergers that involve entities that previously competed against each other, the healthcare
industry is experiencing an increase in vertical mergers, which involve entities that previously did not offer competing goods or
services. As the healthcare industry consolidates, competition to provide goods and services may become more intense, and vertical
mergers may give those combined companies greater control over more aspects of healthcare, including increased bargaining
power. This competition and increased customer bargaining power may adversely affect the price and volume of the Company’s
services.
In addition, as the broader healthcare industry trend of consolidation continues, including the acquisition of physician practices
by health systems, relationships with hospital-based health systems and integrated delivery networks are becoming more important.
LCD has a well-established base of relationships with those systems and networks, including collaborative agreements. LCD's
inability to retain its existing relationships with those physicians as they become part of healthcare systems and networks and/or
to create new relationships could impact its ability to successfully grow its business.
LCD’s nutritional chemistry and food safety business exposes the Company to various risks, including liability for errors
and omissions in work conducted for LCD customers.
LCD offers a range of product-development and product-integrity services to food and beverage manufacturers and retailers,
industry organizations and academic institutions. LCD also is exploring the possibility of developing point-of-production testing
for food safety. These business offerings and opportunities expose the Company to many of the same, or similar, risks that are
applicable to other business activities of the Company, including with respect to the operations of its facilities and compliance
with applicable laws and regulations. The agricultural, food, beverage and dietary supplement industries are continuing to gain
the attention of governments and regulators around the world, and regulations and applicable laws have increased in recent years. For
example, many food and beverage manufacturers and retailers will be subject to new nutrition labeling regulations and new food
manufacturing requirements, including regulations issued under the Food Safety Modernization Act (FSMA). With these enhanced
requirements on the Company’s customers, there is an increased risk that errors in or omissions from nutritional analysis and food
safety tests conducted by the Company for its customers could result in liability for the Company under customer contracts. If
LCD determines to further expand its nutritional chemistry and food safety testing business in the future beyond what is currently
anticipated, LCD could become subject to additional standards and regulations, including under the FSMA, and could face additional
liabilities resulting from new and pending regulatory and other legal actions.
Changes or disruption in services or supplies provided by third parties, including transportation, could adversely
affect the Company’s business.
The Company depends on third parties to provide services critical to the Company’s business. Although the Company has a
significant proprietary network of ground and air transport capabilities, certain of the Company's businesses are heavily reliant
on third-party ground and air travel for transport of clinical trial and diagnostic testing supplies and specimens, research products,
and people. A significant disruption to these travel systems, or the Company's access to them, could have a material adverse effect
on the Company's business. The Company is also reliant on an extensive network of third-party suppliers and vendors of certain
services and products, including for certain animal populations. Disruptions to the continued supply of these services, products,
or animal populations may arise from export/import restrictions or embargoes, political or economic instability, pressure from
animal rights activists, adverse weather, natural disasters, transportation disruptions, or other causes. Disruption of supply could
have a material adverse effect on the Company’s business.
Damage or disruption to the Company’s facilities could adversely affect the Company’s business.
Many of the Company’s facilities could be difficult to replace in a short period of time. Any event that causes a disruption of
the operation of these facilities might impact the Company's ability to provide service to customers and, therefore, could have a
material adverse effect on the Company's financial condition, results of operations and cash flows.
The Company bears financial risk for contracts that, for reasons beyond the Company's control, may be underpriced,
subject to cost overruns, delayed, or terminated or reduced in scope.
The Company has many contracts that are structured as fixed-price for fixed-contracted services or fee-for-service with a cap.
The Company bears the financial risk if these contracts are underpriced or if contract costs exceed estimates. Such underpricing
or significant cost overruns could have an adverse effect on the Company's business, results of operations, financial condition
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and cash flows.
Many of CDD’s contracts, in particular, provide for services on a fixed-price or fee-for-service with a cap basis and they may
be terminated or reduced in scope either immediately or upon notice. Cancellations may occur for a variety of reasons, including:
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Failure of products to satisfy safety requirements;
Unexpected or undesired results of the products;
Insufficient clinical trial subject enrollment;
Insufficient investigator recruitment;
A customer's decision to terminate the development of a product or to end a particular study; and
CDD’s failure to perform its duties properly under the contract.
Although its contracts often entitle it to receive the costs of winding down the terminated projects, as well as all fees earned
up to the time of termination, the loss, reduction in scope or delay of a large contract or the loss, delay or conclusion of multiple
contracts could materially adversely affect CDD.
Contract research services in the drug development industry create liability risks.
In contracting to work on drug development trials and studies, CDD faces a range of potential liabilities, including:
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Errors or omissions that create harm to clinical trial subjects during a trial or to consumers of a drug after the trial is
completed and regulatory approval of the drug has been granted;
General risks associated with clinical pharmacology facilities, including negative consequences from the administration
of drugs to clinical trial participants or the professional malpractice of clinical pharmacology physicians;
Risks that animals in CDD’s breeding facilities may be infected with diseases that may be harmful and even lethal to
themselves and humans despite preventive measures contained in CDD's business policies, including those for the
quarantine and handling of imported animals; and
Errors and omissions during a trial that may undermine the usefulness of a trial or data from the trial or study or may
delay the entry of a drug to the market.
CDD contracts with physicians, also referred to as investigators, to conduct the clinical trials to test new drugs on clinical
trial subjects. These tests can create a risk of liability for personal injury or death to clinical trial subjects resulting from negative
reactions to the drugs administered or from professional malpractice by third party investigators.
While CDD endeavors to include in its contracts provisions entitling it to be indemnified and entitling it to a limitation of
liability, these provisions do not uniformly protect CDD against liability arising from certain of its own actions. CDD could be
materially and adversely affected if it were required to pay damages or bear the costs of defending any claim that is not covered
by a contractual indemnification provision, or in the event that a party which must indemnify it does not fulfill its indemnification
obligations, or in the event that CDD is not successful in limiting its liability or in the event that the damages and costs exceed
CDD's insurance coverage. There can be no assurance that CDD will be able to maintain sufficient insurance coverage on
acceptable terms.
Adverse results in material litigation matters could have a material adverse effect upon the Company’s business.
The Company may become subject in the ordinary course of business to material legal action related to, among other things,
intellectual property disputes, contract disputes, data and privacy issues, professional liability and employee-related matters. The
Company may also receive inquiries and requests for information from governmental agencies and bodies, including Medicare or
Medicaid payers, requesting comment and/or information on allegations of billing irregularities, billing and pricing arrangements,
or privacy practices that are brought to their attention through audits or third parties. Legal actions could result in substantial
monetary damages as well as damage to the Company’s reputation with customers, which could have a material adverse effect
upon its business.
The Company's quarterly operating results may vary.
The Company's operating results, particularly for CDD, may vary significantly from quarter to quarter and are influenced by
factors over which the Company has little control, such as:
•
•
•
•
•
•
Changes in the general global economy;
Exchange rate fluctuations;
The commencement, completion, delay or cancellation of large projects or groups of projects;
The progress of ongoing projects;
The timing of and charges associated with completed acquisitions or other events; and
Changes in the mix of the Company's services.
The Company believes that operating results for any particular quarter are not necessarily a meaningful indication of future
results. While fluctuations in the Company's quarterly operating results could negatively or positively affect the market price of
37
the Company's common stock, these fluctuations may not be related to the Company's future overall operating performance.
The failure to successfully obtain, maintain and enforce intellectual property rights and defend against challenges to the
Company’s intellectual property rights could adversely affect the Company.
Many of the Company’s services, products and processes rely on intellectual property, including patents, copyrights, trademarks
and trade secrets. In some cases, that intellectual property is owned by another party and licensed to the Company, sometimes
exclusively. The value of the Company’s intellectual property relies in part on the Company’s ability to maintain its proprietary
rights to such intellectual property. If the Company is unable to obtain or maintain the proprietary rights to its intellectual property,
if it is unable to prevent attempted infringement against its intellectual property, or if it is unable to defend against claims that it
is infringing on another party’s intellectual property, the Company could be adversely affected. These adverse effects could include
the Company having to abandon, alter and/or delay the deployment of products, services or processes that rely on such intellectual
property; having to procure and pay for licenses from the holders of intellectual property rights that the Company seeks to use;
and having to pay damages, fines, court costs and attorney's fees in connection with intellectual property litigation.
CDD’s revenues depend on the biopharmaceutical industry.
CDD’s revenues depend greatly on the expenditures made by the biopharmaceutical industry in R&D. In some instances,
biopharmaceutical companies are reliant on their ability to raise capital in order to fund their R&D projects. Biopharmaceutical
companies are also reliant on reimbursement for their products from government programs and commercial payers. Accordingly,
economic factors and industry trends affecting CDD’s customers in these industries may also affect CDD. If these companies
were to reduce the number of R&D projects they conduct or outsource, whether through the inability to raise capital, reductions
in reimbursement from governmental programs or commercial payers, industry trends, economic conditions or otherwise, CDD
could be materially adversely affected.
Actions of animal rights activists may have an adverse effect on the Company.
CDD's preclinical services utilize animals in preclinical testing of the safety and efficacy of drugs. Such activities are required
for the development of new medicines and medical devices under regulatory regimes in the U.S., Europe, Japan and other countries.
CDD also breeds and sells animals for biomedical research. Acts of vandalism and other acts by animal rights activists who object
to the use of animals in drug development could have an adverse effect on the Company.
Animal populations may suffer diseases that can damage CDD's inventory, harm its reputation, result in decreased
sales of research products or result in other liability.
It is important that research products be free of diseases, including infectious diseases. The presence of diseases can distort
or compromise the quality of research results, cause loss of animals in CDD’s inventory, result in harm to humans or outside
animal populations if the disease is not contained to animals in inventory, or result in other losses. Such results could harm CDD’s
reputation or have an adverse effect on CDD's financial condition, results of operations, and cash flows.
Failure to conduct animal research in compliance with animal welfare laws and regulations could result in sanctions
and/or remedies against CDD and have a material adverse effect upon the Company.
The conduct of animal research at CDD’s facilities must be in compliance with applicable laws and regulations in the
jurisdictions in which those activities are conducted. These laws and regulations include the U.S Animal Welfare Act (AWA),
which governs the care and use of warm-blooded animals for research in the U.S. other than laboratory rats, mice and chickens,
and is enforced through periodic inspections by the U.S. Department of Agriculture (USDA). The AWA establishes facility
standards regarding several aspects of animal welfare, including housing, ventilation, lighting, feeding and watering, handling,
veterinary care and recordkeeping. Similar laws and regulations apply in other jurisdictions in which CDD conducts animal
research, including the European Union and China. CDD complies with licensing and registration requirement standards set by
these laws and regulations in the jurisdictions in which it conducts animal research. If an enforcement agency determines that
CDD’s equipment, facilities, laboratories or processes do not comply with applicable standards, it may issue an inspection report
documenting the deficiencies and setting deadlines for any required corrective actions. For noncompliance, the agency may take
action against CDD that may include fines, suspension and/or revocation of animal research licenses, or confiscation of research
animals.
An inability to attract and retain experienced and qualified personnel could adversely affect the Company’s business.
The loss of key management personnel or the inability to attract and retain experienced and qualified employees at the Company’s
clinical laboratories and drug development facilities could adversely affect the business. The success of the Company is dependent
in part on the efforts of key members of its management team. Success in maintaining the Company’s leadership position in
genomic and other advanced testing technologies and in drug development will depend in part on the Company’s ability to attract
and retain skilled research professionals. In addition, the success of the Company’s clinical laboratories also depends on employing
and retaining qualified and experienced laboratory professionals, including specialists, who perform commercial laboratory testing
38
services. In the future, if competition for the services of these professionals increases, the Company may not be able to continue
to attract and retain individuals in its markets. The Company’s revenues and earnings could be adversely affected if a significant
number of professionals terminate their relationship with the Company or become unable or unwilling to continue their employment.
Unionization of employees, union strikes, work stoppages or failure to comply with labor or employment laws could
adversely affect the Company's operations and have a material adverse effect upon the Company's business.
The Company is a party to a limited number of collective bargaining agreements with various labor unions and is subject to
employment and labor laws and unionization activity in the U.S. and other countries in which it conducts business. Disputes with
regard to the terms of these agreements, potential inability to negotiate acceptable contracts with these unions, unionization activity,
or a failure to comply with labor or employment laws could result in, among other things, labor unrest, strikes, work stoppages,
slowdowns by the affected workers, fines and penalties. If any of these events were to occur, or other employees were to become
unionized, the Company could experience a significant disruption of its operations or higher ongoing labor costs, either of which
could have a material adverse effect upon the Company's business. Additionally, future labor agreements, or renegotiation of labor
agreements or provisions of labor agreements, or changes in labor or employment laws, could compromise its service reliability
and significantly increase its costs, which could have a material adverse effect upon the Company's business.
A significant increase in LCD's or CDD's days sales outstanding could have an adverse effect on the Company’s business,
including its cash flow, by increasing its bad debt or decreasing its cash flow.
Billing for laboratory services is a complex process. Laboratories bill many different payers, including doctors, patients,
hundreds of insurance companies, Medicare, Medicaid and employer groups, all of which have different billing requirements. In
addition to billing complexities, LCD has experienced an increase in patient responsibility as a result of managed care fee-for-
service plans that continue to increase deductibles, coinsurance and patient copayments. LCD expects this trend to continue. A
material increase in LCD’s days sales outstanding level could have an adverse effect on the Company's business, including
potentially increasing its bad debt rate and decreasing its cash flows. Although CDD does not face the same level of complexity
in its billing process, it could also experience delays in billing or collection, and a material increase in CDD’s days sales outstanding
could have an adverse effect on the Company’s business, including potentially decreasing its cash flows.
Failure in the Company’s information technology systems or delays or failures in the development and implementation of
updates or enhancements to those systems could significantly increase testing turnaround time or delay billing processes
and otherwise disrupt the Company’s operations or customer relationships.
The Company’s operations and customer relationships depend, in part, on the continued performance of its information
technology systems. Despite network security measures and other precautions the Company has taken, its information technology
systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. In addition, the
Company is in the process of integrating the information technology systems of its recently acquired subsidiaries, and the Company
may experience system failures or interruptions as a result of this process. Sustained system failures or interruption of the Company’s
systems in one or more of its operations could disrupt the Company’s ability to process laboratory requisitions, perform testing,
provide test results or drug development data in a timely manner and/or bill the appropriate party. Failure of the Company’s
information technology systems could adversely affect the Company’s business, profitability and financial condition.
Hardware and software failures, delays in the operation of computer and communications systems, the failure to implement
new systems or system enhancements to existing systems, and cyber security breaches may harm the Company.
The Company's success depends on the efficient and uninterrupted operation of its computer and communications systems.
A failure of the network or data-gathering procedures could impede the processing of data, delivery of databases and services,
customer orders and day-to-day management of the business and could result in the corruption or loss of data. While certain
operations have appropriate disaster recovery plans in place, there currently are not redundant facilities everywhere in the world
to provide information technology capacity in the event of a system failure. Despite any precautions the Company may take,
damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins, cybersecurity breaches
and similar events at the Company's various computer facilities could result in interruptions in the flow of data to the servers and
from the servers to customers. In addition, any failure by the computer environment to provide required data communications
capacity could result in interruptions in service. In the event of a delay in the delivery of data, the Company could be required to
transfer data collection operations to an alternative provider of server-hosting services. Such a transfer could result in delays in
the ability to deliver products and services to customers. Additionally, significant delays in the planned delivery of system
enhancements, or improvements and inadequate performance of the systems once they are completed could damage the Company's
reputation and harm the business. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters,
the outbreak of war, the escalation of hostilities, acts of terrorism (particularly involving cities in which the Company has offices)
and cybersecurity breaches could adversely affect the business. Although the Company carries property and business interruption
insurance, the coverage may not be adequate to compensate for all losses that may occur.
39
Security breaches and unauthorized access to the Company's or its customers’ data could harm the Company’s reputation
and adversely affect its business.
The Company has experienced and expects to continue to experience attempts by computer programmers and hackers to attack
and penetrate the Company’s layered security controls. These attempts, if successful, could result in the misappropriation or
compromise of personal information or proprietary or confidential information stored within the Company's systems, create system
disruptions or cause shutdowns. External actors may be able to develop and deploy viruses, worms and other malicious software
programs that attack the Company’s systems or otherwise exploit any security vulnerabilities. Outside parties may also attempt
to fraudulently induce employees to take actions, including the release of confidential or sensitive information or to make fraudulent
payments through illegal electronic spamming, phishing, spear phishing, or other tactics. Although the Company has robust
information security procedures and other safeguards in place, which are monitored and routinely tested internally and by external
parties, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently
and often are not recognized until launched against a target, the Company may be unable to anticipate all of these techniques or
to implement adequate preventive measures. In addition, as cyber threats continue to evolve, the Company may be required to
expend additional resources to continue to enhance the Company’s information security measures or to investigate and remediate
any information security vulnerabilities. The Company’s remediation efforts may not be successful and could result in interruptions,
delays or cessation of service. Breaches of the Company’s security measures and the unauthorized dissemination of personal,
proprietary or confidential information about the Company or its customers or other third-parties could expose customers’ private
information. Such breaches could expose customers to the risk of financial or medical identity theft or expose the Company or
other third-parties to a risk of loss or misuse of this information, result in litigation and potential liability for the Company, damage
the Company’s brand and reputation or otherwise harm the Company’s business. Any of these disruptions or breaches of security
could have a material adverse effect on the Company’s business, regulatory compliance, financial condition and results of operations.
Operations may be disrupted and adversely impacted by the effects of natural disasters such as adverse weather and
earthquakes, acts of terrorism, or other criminal activities, or disease pandemics.
Natural disasters may result in a temporary decline of volumes in both segments. In addition, such events may temporarily
interrupt the Company’s ability to transport specimens, the Company's ability to efficiently commence studies, the Company’s
information technology systems, the Company’s ability to utilize certain laboratories, and/or the Company’s ability to receive
material from its suppliers.
A significant deterioration in the economy could negatively impact testing volumes, drug development services, cash
collections and the availability of credit.
The Company’s operations are dependent upon ongoing demand for diagnostic testing and drug development services by
patients, physicians, hospitals, MCOs, biopharmaceutical companies and others. A significant downturn in the economy could
negatively impact the demand for diagnostic testing and drug development services, as well as the ability of customers to pay
for services rendered. In addition, uncertainty in the credit markets could reduce the availability of credit and impact the Company’s
ability to meet its financing needs in the future.
Foreign currency exchange fluctuations could have an adverse effect on the Company’s business.
The Company has business and operations outside the U.S., and CDD derives a significant portion of its net revenues from
international operations. Since the Company's consolidated financial statements are denominated in U.S. dollars, fluctuations in
exchange rates from period to period will have an impact on reported results. In addition, CDD may incur costs in one currency
related to its services or products for which it is paid in a different currency. As a result, factors associated with international
operations, including changes in foreign currency exchange rates, could significantly affect CDD's results of operations, financial
condition and cash flows.
The Company's international operations could subject it to additional risks and expenses that could adversely impact the
business or results of operations.
The Company's international operations expose it to risks from failure to comply with foreign laws and regulations that differ
from those under which the Company operates in the U.S. In addition, the Company may be adversely affected by other risks of
expanded operations in foreign countries, including, but not limited to, changes in reimbursement by foreign governments for
services provided by the Company; compliance with export controls and trade regulations; changes in tax policies or other foreign
laws; compliance with foreign labor and employee relations laws and regulations; restrictions on currency repatriation; judicial
systems that less strictly enforce contractual rights; countries that do not have clear or well-established laws and regulations
concerning issues relating to commercial laboratory testing or drug development services; countries that provide less protection
for intellectual property rights; and procedures and actions affecting approval, production, pricing, reimbursement and marketing
of products and services. Further, international operations could subject the Company to additional expenses that the Company
may not fully anticipate, including those related to enhanced time and resources necessary to comply with foreign laws and
40
regulations, difficulty in collecting accounts receivable and longer collection periods, and difficulties and costs of staffing and
managing foreign operations. In some countries, the Company's success will depend in part on its ability to form relationships
with local partners. The Company's inability to identify appropriate partners or reach mutually satisfactory arrangements could
adversely affect the business and operations.
Expanded international operations may increase the Company’s exposure to liabilities under the anti-corruption laws.
Anti-corruption laws in the countries where the Company conducts business, including the FCPA, the Bribery Act, and similar
laws in other jurisdictions, prohibit companies and their intermediaries from engaging in bribery including improperly offering,
promising, paying or authorizing the giving of anything of value to individuals or entities for the purpose of corruptly obtaining
or retaining business. The Company operates in some parts of the world where corruption may be common and where anti-
corruption laws may conflict to some degree with local customs and practices. The Company maintains an anti-corruption program
including policies, procedures and training and safeguards in the engagement and management of third parties acting on the
Company’s behalf. Despite these safeguards, the Company cannot guarantee protection from corrupt acts committed by third
parties associated with the Company. Violations or allegations of violations of anti-corruption laws could have a significant
adverse effect on the business or results of operations.
Changes in tax laws and regulations or the interpretation of such may have a significant impact on the financial position,
results of operations and cash flows of the Company.
U.S. and foreign governments continue to review, reform and modify tax laws, including with respect to the Organisation for
Economic Co-operation and Development’s base erosion and profit shifting initiative. Changes in tax laws and regulations could
result in material changes to the domestic and foreign taxes that the Company is required to provide for and pay.
In addition, the Company is subject to regular audits with respect to its various tax returns and processes in the jurisdictions
in which it operates. Errors or omissions in tax returns, process failures or differences in interpretation of tax laws by tax authorities
and the Company may lead to litigation, payments of additional taxes, penalties and interest.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (TCJA) was passed into law. The TCJA has given rise to significant
one-time and ongoing changes to the taxes recognized and paid by the Company, and the full impact of the changes may only
become fully understood over time.
A failure to identify and successfully close and integrate strategic acquisition targets could have a material adverse
effect on the Company's business objectives and its net revenues and profitability.
Part of the Company's strategy involves deploying capital in investments that enhance the Company's business, which includes
pursuing strategic acquisitions to strengthen the Company's scientific capabilities and enhance therapeutic expertise, enhance
esoteric testing and global drug development capabilities, and increase presence in key geographic areas. Since 2013, the Company
has invested net cash of approximately $6.5 billion and equity of $1.8 billion in strategic business acquisitions. However, the
Company cannot assure that it will be able to identify acquisition targets that are attractive to the Company or that are of a large
enough size to have a meaningful impact on the Company's operating results. Furthermore, the successful closing and integration
of a strategic acquisition entails numerous risks, including, among others:
•
•
•
•
•
•
•
Failure to obtain regulatory clearance, including due to antitrust concerns;
Loss of key customers or employees;
Difficulty in consolidating redundant facilities and infrastructure and in standardizing information and other systems;
Unidentified regulatory problems;
Failure to maintain the quality of services that such companies have historically provided;
Coordination of geographically separated facilities and workforces; and
Diversion of management's attention from the day-to-day business of the Company.
The Company cannot assure that current or future acquisitions, if any, or any related integration efforts will be successful, or
that the Company's business will not be adversely affected by any future acquisitions, including with respect to net revenues and
profitability. Even if the Company is able to successfully integrate the operations of businesses that it may acquire in the future,
the Company may not be able to realize the benefits that it expects from such acquisitions.
The Company’s level of indebtedness could adversely affect the Company’s liquidity, results of operations and business.
At December 31, 2017, indebtedness on the Company's outstanding Senior Notes totaled approximately $5,900.0 million in
aggregate principal. The Company is also a party to credit agreements relating to a $1.0 billion revolving credit facility, a 2014
term loan with a principal balance of $72.0 million, and a 2017 term loan with a balance of $750.0 million as of December 31,
2017. Under the term loan 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
a leverage ratio within certain limits.
41
The Company’s level of indebtedness could adversely affect its business. In particular, it could increase the Company’s
vulnerability to sustained, adverse macroeconomic weakness, limit its ability to obtain further financing, and limit its ability to
pursue certain operational and strategic opportunities, including large acquisitions.
The Company may also enter into additional transactions or credit facilities, including other long-term debt, which may increase
its indebtedness and result in additional restrictions upon the business. In addition, major debt rating agencies regularly evaluate
the Company's debt based on a number of factors. There can be no assurance that the Company will be able to maintain its existing
debt ratings, and failure to do so could adversely affect the Company's cost of funds, liquidity and access to capital markets.
Global economic conditions and government and regulatory changes, including, but not limited to, the U.K.'s pending exit
from the European Union (E.U.), could adversely impact the Company’s business and results of operations.
The Company could be adversely impacted due to the consequences of changes in the economy, governments or regulations
across the globe. In June 2016, a majority of voters in the U.K. elected to withdraw from the E.U. (often referred to as Brexit) in
a national referendum. Although the referendum was advisory, the current U.K. government is abiding by the referendum and is
in negotiations to withdraw from the E.U. in the near future. The terms of any withdrawal and future relations between the E.U.
and the U.K. are not yet determined. While it appears that E.U. laws and regulations will continue to apply in the U.K. until the
withdrawal is completed, it is difficult to anticipate how the clinical trial landscape in the U.K. might change in the next several
years.
This type of development or other government or regulatory change could depress economic activity, which could adversely
impact the Company’s business, financial condition and results of operations. This could include long-term volatility in the currency
markets and long-term detrimental effects on the value of affected currencies.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
42
Item 2.
PROPERTIES
The Company's corporate headquarters are located in Burlington, North Carolina, and include facilities that are both owned
and leased.
LCD operates through a network of patient service centers, branches, rapid response laboratories, primary laboratories, and
specialty laboratories. The table below summarizes certain information as to LCD's principal operating and administrative facilities
as of December 31, 2017.
Location
Primary Facilities:
Birmingham, Alabama
Phoenix, Arizona
Prescott, Arizona
Calabasas, California
Los Angeles, California
Monrovia, California
San Diego, California
San Francisco, California
Tustin, California
Englewood, Colorado
Shelton, Connecticut
Hollywood, Florida
Tampa, Florida
Tucker, Georgia
Chicago, Illinois
Itasca, Illinois
Lenexa, Kansas
Louisville, Kentucky
Lafayette, Louisiana
Westborough, Massachusetts
Battle Creek, Michigan
Roseville, Minnesota
St. Paul, Minnesota
Kansas City, Missouri
Ewing, New Jersey
Raritan, New Jersey
Santa Fe, New Mexico
New York, New York
Burlington, North Carolina (5)
Charlotte, North Carolina
Greensboro, North Carolina
McLeansville, North Carolina
Raleigh, North Carolina
Research Triangle Park, North Carolina (3)
Dublin, Ohio
Oklahoma City, Oklahoma
Brentwood, Tennessee
Knoxville, Tennessee
Austin, Texas
Dallas, Texas
Houston, Texas
San Antonio, Texas
Chesapeake, Virginia
Herndon, Virginia
Lorton, Virginia
Seattle, Washington
Spokane, Washington (2)
Charleston, West Virginia
Abingdon, United Kingdom
43
Nature of Occupancy
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Owned
Owned
Leased
Owned
Owned
Leased
Owned/Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
CDD operates on a global scale. The table below summarizes certain information as to CDD's principal operating and administrative
facilities as of December 31, 2017.
Location
Primary Facilities:
Mechelen, Belgium
Beijing, China (2)
Shanghai, China (3)
Muenster, Germany
Bangalore, India
Singapore
Harrogate, United Kingdom
Leeds, United Kingdom
Maidenhead, United Kingdom
Slough, United Kingdom
San Francisco, California
Indianapolis, Indiana
Alice, Texas
Chantilly, Virginia
Greenfield, Indiana
Gaithersburg, Maryland
Cranford, New Jersey
Princeton, New Jersey
West Trenton, New Jersey
Cary, North Carolina
Denver, Pennsylvania
Cumberland, Virginia
Geneva, Switzerland
Madison, Wisconsin
Nature of Occupancy
Leased
Leased
Owned/Leased
Owned
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Owned
Owned
All of the Company’s primary laboratory and drug development facilities have been built or improved for the purpose of
providing commercial laboratory testing or drug development services. The Company believes that these existing facilities and
plans for expansion are suitable and adequate and will provide sufficient production capacity for the Company's currently
foreseeable level of operations. The Company believes that if it were unable to renew a lease or if a lease were to be terminated
on any of the facilities it presently leases, it could find alternate space at competitive market rates and readily relocate its operations
to such new locations without material disruption to its operations.
Item 3.
LEGAL PROCEEDINGS (dollars in millions)
The Company is involved from time to time in various claims and legal actions, including arbitrations, class actions, and other
litigation (including those described in more detail below), arising in the ordinary course of business. Some of these actions involve
claims that are substantial in amount. These matters include, but are not limited to, intellectual property disputes; commercial and
contract disputes; professional liability; employee-related matters; and inquiries, including subpoenas and other civil investigative
demands, from governmental agencies, Medicare or Medicaid payers, managed care organizations (MCOs) reviewing billing
practices or requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or
third parties. The Company receives civil investigative demands or other inquiries from various governmental bodies in the ordinary
course of its business. Such inquiries can relate to the Company or other parties, including physicians and other healthcare providers
(e.g., physician assistants and nurse practitioners, generally referred to herein as physicians). The Company works cooperatively
to respond to appropriate requests for information.
The Company also is named from time to time in suits brought under the qui tam provisions of the False Claims Act and
comparable state laws. These suits typically allege that the Company has made false statements and/or certifications in connection
with claims for payment from U.S., federal or state healthcare programs. The suits may remain under seal (hence, unknown to the
Company) for some time while the government decides whether to intervene on behalf of the qui tam plaintiff. Such claims are
an inevitable part of doing business in the healthcare field today.
The Company believes that it is in compliance in all material respects with all statutes, regulations and other requirements
applicable to its commercial laboratory operations and drug development support services. The healthcare diagnostics and drug
development industries are, however, subject to extensive regulation, and the courts have not interpreted many of the applicable
statutes and regulations. Therefore, the applicable statutes and regulations could be interpreted or applied by a prosecutorial,
regulatory or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these
statutes and regulations include significant civil and criminal penalties, fines, the loss of various licenses, certificates and
authorizations, additional liabilities from third-party claims, and/or exclusion from participation in government programs.
44
Many of the current claims and legal actions against the Company are in preliminary stages, and many of these cases seek an
indeterminate amount of damages. The Company records an aggregate legal reserve, which is determined using calculations based
on historical loss rates and assessment of trends experienced in settlements and defense costs. In accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification Topic 450 “Contingencies,” the Company establishes
reserves for judicial, regulatory, and arbitration matters outside the aggregate legal reserve if and when those matters present loss
contingencies that are both probable and estimable and would exceed the aggregate legal reserve. When loss contingencies are
not both probable and estimable, the Company does not establish separate reserves.
The Company is unable to estimate a range of reasonably probable loss for the proceedings described in more detail below in
which damages either have not been specified or, in the Company's judgment, are unsupported and/or exaggerated and (i) the
proceedings are in early stages; (ii) there is uncertainty as to the outcome of pending appeals or motions; (iii) there are significant
factual issues to be resolved; and/or (iv) there are novel legal issues to be presented. For these proceedings, however, the Company
does not believe, based on currently available information, that the outcomes will have a material adverse effect on the Company's
financial condition, though the outcomes could be material to the Company's operating results for any particular period, depending,
in part, upon the operating results for such period. The amount of ultimate loss may also differ from the Company’s estimates. It
is possible that an unfavorable outcome that exceeds the Company’s current accrued estimate, if any, for one or more of the matters
below could have a material adverse effect on the Company’s financial condition.
As previously reported, the Company reached a settlement in the previously disclosed lawsuit, California ex rel. Hunter
Laboratories, LLC et al. v. Quest Diagnostics Incorporated, et al. (Hunter Labs Settlement Agreement), to avoid the uncertainty
and costs associated with prolonged litigation. Pursuant to the executed Hunter Labs Settlement Agreement, the Company recorded
a litigation settlement expense of $34.5 in the second quarter of 2011 (net of a previously recorded reserve of $15.0) and paid the
settlement amount of $49.5 in the third quarter of 2011. The Company also agreed to certain reporting obligations regarding its
pricing for a limited time period and, at the option of the Company in lieu of such reporting obligations, to provide Medi-Cal with
a discount from Medi-Cal's otherwise applicable maximum reimbursement rate from November 1, 2011, through October 31,
2012. In 2011, the California legislature enacted Assembly Bill No. 97, which imposed a 10.0% Medi-Cal payment cut on most
providers of healthcare services, including clinical laboratories. In 2012, the California legislature enacted Assembly Bill No.
1494, which directed the Department of Healthcare Services (DHCS) to establish new reimbursement rates for Medi-Cal
commercial laboratory services based on payments made to California clinical laboratories for similar services by other third-
party payers, and provided that until the new rates are set through this process, Medi-Cal payments for commercial laboratory
services will be reduced (in addition to a 10.0% payment reduction imposed by Assembly Bill No. 97 in 2011) by “up to 10 percent”
for tests with dates of service on or after July 1, 2012, with a cap on payments set at 80.0% of the lowest maximum allowance
established under the Medicare program. Under the terms of the Hunter Labs Settlement Agreement, the enactment of this California
legislation terminated the Company's reporting obligations (or obligation to provide a discount in lieu of reporting) under that
agreement. In April 2015, CMS approved a 10.0% payment reduction under Assembly Bill No. 1494. The new rate methodology
established new rates that were effective July 1, 2015, but these new rates were not entered into the state computer system until
February 2016. The 2016 rates have been implemented and recoupments began in 2017. Taken together, these changes are not
expected to have a material impact on the Company's consolidated revenues or results of operations.
As previously reported, the Company responded to an October 2007 subpoena from the U.S. Department of Health & Human
Services Office of Inspector General's regional office in New York. On August 17, 2011, the United States District Court for the
Southern District of New York unsealed a False Claims Act lawsuit, United States of America ex rel. NPT Associates v. Laboratory
Corporation of America Holdings, which alleges that the Company offered UnitedHealthcare kickbacks in the form of discounts
in return for Medicare business. The Plaintiff's Third Amended Complaint further alleges that the Company's billing practices
violated the False Claims Acts of 14 states and the District of Columbia. The lawsuit seeks actual and treble damages and civil
penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. Neither the U.S. government
nor any state government has intervened in the lawsuit. The Company's Motion to Dismiss was granted in October 2014 and
Plaintiff was granted the right to replead. On January 11, 2016, Plaintiff filed a motion requesting leave to file an amended complaint
under seal and to vacate the briefing schedule for the Company's motion to dismiss while the government reviews the amended
complaint. The Court granted the motion and vacated the briefing dates. Plaintiff then filed an amended complaint under seal. The
Company will vigorously defend the lawsuit.
In addition, the Company has received various other subpoenas since 2007 related to Medicaid billing. In October 2009, the
Company received a subpoena from the State of Michigan Department of Attorney General seeking documents related to its billing
to Michigan Medicaid. The Company cooperated with this request. In October 2013, the Company received a civil investigative
demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The
Company is cooperating with this request.
On May 2, 2013, the Company was served with a False Claims Act lawsuit, State of Georgia ex rel. Hunter Laboratories, LLC
and Chris Riedel v. Quest Diagnostics Incorporated, et al., filed in the State Court of Fulton County, Georgia. The lawsuit, filed
by a competitor laboratory, alleges that the Company overcharged Georgia's Medicaid program. The State of Georgia filed a Notice
45
of Declination on August 13, 2012, before the Company was served with the Complaint. The case was removed to the United
States District Court for the Northern District of Georgia. The lawsuit seeks actual and treble damages and civil penalties for each
alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. On March 14, 2014, the Company's Motion
to Dismiss was granted. The Plaintiffs repled their complaint, and the Company filed a Motion to Dismiss the First Amended
Complaint. In May 2015, the Court dismissed the Plaintiffs' anti-kickback claim and remanded the remaining state law claims to
the State Court of Fulton County. In July 2015, the Company filed a Motion to Dismiss these remaining claims. The Plaintiffs
filed an opposition to the Company's Motion to Dismiss in August 2015. Also, the State of Georgia filed a brief as amicus curiae.
The Company will vigorously defend the lawsuit.
On August 24, 2012, the Company was served with a putative class action lawsuit, Sandusky Wellness Center, LLC, et al. v.
MEDTOX Scientific, Inc., et al., filed in the United States District Court for the District of Minnesota. The lawsuit alleges that on
or about February 21, 2012, the defendants violated the U.S. Telephone Consumer Protection Act (TCPA) by sending unsolicited
facsimiles to Plaintiff and more than 39 other recipients without the recipients' prior express invitation or permission. The lawsuit
seeks the greater of actual damages or the sum of $0.0005 for each violation, subject to trebling under the TCPA, and injunctive
relief. In September of 2014, Plaintiff’s Motion for Class Certification was denied. In January of 2015, the Company’s Motion
for Summary Judgment on the remaining individual claim was granted. Plaintiff filed a notice of appeal. On May 3, 2016, the
United States Court of Appeals for the Eighth Circuit issued its decision and order reversing the District Court’s denial of class
certification. The Eighth Circuit remanded the matter for further proceedings. On December 7, 2016, the District Court granted
the Plaintiff's renewed Motion for Class Certification. The Company will vigorously defend the lawsuit.
On August 31, 2015, the Company was served with a putative class action lawsuit, Patty Davis v. Laboratory Corporation of
America, et al., filed in the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The complaint alleges
that the Company violated the Florida Consumer Collection Practices Act by billing patients who were collecting benefits under
the Workers’ Compensation Statutes. The lawsuit seeks injunctive relief and actual and statutory damages, as well as recovery of
attorney's fees and legal expenses. In April 2017, the Circuit Court granted the Company's Motion for Judgment on the Pleadings.
The Plaintiff has appealed the Circuit Court's ruling to the Florida Second District Court of Appeal. The Company will vigorously
defend the lawsuit.
In December 2014, the Company received a Civil Investigative Demand issued pursuant to the U.S. False Claims Act from
the U.S. Attorney’s Office for South Carolina, which requests information regarding remuneration and services provided by the
Company to physicians who also received draw and processing/handling fees from competitor laboratories Health Diagnostic
Laboratory, Inc. and Singulex, Inc. The Company is cooperating with the request.
On August 3, 2016, Covance Inc. was served with a putative class action lawsuit, Daniel L. Bloomquist v. Covance Inc., et al.,
filed in the Superior Court of California, County of San Diego. The complaint alleges that Covance violated the California Labor
Code and California Business & Professions Code by failing to provide overtime wages, failing to provide meal and rest periods,
failing to pay for all hours worked, failing to pay for all wages owed upon termination, and failing to provide accurate itemized
wage statements to clinical research associates and senior clinical research associates employed by Covance Inc. (Covance) in
California. The lawsuit seeks monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. On
October 13, 2016, the case was removed to the United States District Court for the Southern District of California. The Company
will vigorously defend the lawsuit.
Prior to the Company’s acquisition of Sequenom, between August 15, 2016 and August 24, 2016, six putative class-action
lawsuits were filed on behalf of purported Sequenom stockholders (captioned Malkoff v. Sequenom, Inc., et al., No. 16-cv-02054-
JAH-BLM, Gupta v. Sequenom, Inc., et al., No. 16-cv-02084-JAH-KSC, Fruchter v. Sequenom, Inc., et al., No. 16-cv-02101-
WQH-KSC, Asiatrade Development Ltd. v. Sequenom, Inc., et al., No. 16-cv-02113-AJB-JMA, Nunes v. Sequenom, Inc., et al.,
No. 16-cv-02128-AJB-MDD, and Cusumano v. Sequenom, Inc., et al., No. 16-cv-02134-LAB-JMA) in the United States District
Court for the Southern District of California challenging the acquisition transaction. The complaints asserted claims against
Sequenom and members of its board of directors (the Individual Defendants). The Nunes action also named the Company and
Savoy Acquisition Corp. (Savoy), a wholly owned subsidiary of the Company, as defendants. The complaints alleged that the
defendants violated Sections 14(e), 14(d)(4) and 20 of the Securities Exchange Act of 1934 by failing to disclose certain allegedly
material information. In addition, the complaints in the Malkoff action, Asiatrade action, and the Cusumano action alleged that
the Individual Defendants breached their fiduciary duties to Sequenom shareholders. The actions sought, among other things,
injunctive relief enjoining the merger. On August 30, 2016, the parties entered into a Memorandum of Understanding (MOU) in
each of the above-referenced actions. In connection with the settlement, Sequenom agreed to make certain additional disclosures
to its stockholders. On September 6, 2016, the Court entered an order consolidating for all pre-trial purposes the six individual
actions described above under the caption In re Sequenom, Inc. Shareholder Litig., Lead Case No. 16-cv-02054-JAH-BLM, and
designating the complaint from the Malkoff action as the operative complaint for the consolidated action. On November 11, 2016,
two competing motions were filed by two separate stockholders (James Reilly and Shikha Gupta) seeking appointment as lead
plaintiff under the terms of the Private Securities Litigation Reform Act of 1995. On June 7, 2017, the Court entered an order
declaring Mr. Reilly as the lead plaintiff and approving Mr. Reilly's selection of lead counsel. The Company is awaiting the Court's
46
appointment of a permanent lead Plaintiff. The parties agree that the MOU has been terminated. The Plaintiffs filed a Consolidated
Amended Class Action Complaint on July 24, 2017, and the Defendants filed a Motion to Dismiss, which remains pending. The
Company will vigorously defend the lawsuit.
On February 7, 2017, Sequenom received a subpoena from the U.S. Securities and Exchange Commission (SEC) relating to
an SEC investigation into the trading activity of Sequenom shares in connection with the Company’s July 2016 announcement
regarding the Sequenom merger. On March 7, 2017, the Company received a similar subpoena. The Company is cooperating with
these requests.
On March 10, 2017, the Company was served with a putative class action lawsuit, Victoria Bouffard, et al. v. Laboratory
Corporation of America Holdings, filed in the United States District Court for the Middle District of North Carolina. The complaint
alleges that the Company’s patient list prices unlawfully exceed the rates negotiated for the same services with private and public
health insurers in violation of various state consumer protection laws. The lawsuit also alleges breach of implied contract or quasi-
contract, unjust enrichment, and fraud. The lawsuit seeks statutory, exemplary, and punitive damages, injunctive relief, and recovery
of attorney's fees and costs. In May 2017, the Company filed a Motion to Dismiss Plaintiffs’ Complaint and Strike Class Allegations;
this motion is currently pending. On October 10, 2017, a second putative class action lawsuit, Sheryl Anderson, et al. v. Laboratory
Corporation of America Holdings, was filed in the United States District Court for the Middle District of North Carolina. The
complaint contains similar allegations and seeks similar relief to the Bouffard complaint, and adds additional counts regarding
state consumer protection laws. The Company will vigorously defend the lawsuits.
On May 24, 2017, a putative class action lawsuit, Maria T. Gonzalez, et al. v. Examination Management Services, Inc. and
Laboratory Corporation of America Holdings, was filed against the Company in the United States District Court for the Southern
District of California. The complaint alleges that the Company misclassified phlebotomists as independent contractors through
an arrangement with the co-Defendant temporary staffing agency. The complaint further alleges that the Company violated the
California Labor Code and California Business and Professions Code by failing to pay minimum wage, failing to pay for all hours
worked, failing to pay for all wages owed upon termination, and failing to provide accurate itemized wage statements. The lawsuit
seeks monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. The Company will vigorously
defend the lawsuit.
On August 3, 2017, a putative class action lawsuit, John Sealock, et al. v. Covance Market Access Services, Inc., was filed in
the United States District Court for the Southern District of New York. The complaint alleges that Covance Market Access Services,
Inc. violated the Fair Labor Standards Act and New York labor laws by failing to provide overtime wages, failing to pay for all
hours worked, and failing to provide accurate wage statements. The lawsuit seeks monetary damages, civil penalties, injunctive
relief, and recovery of attorney’s fees and costs. In November 2017, the Company filed a Motion to Strike Class Allegations. In
December 2017, the Plaintiff filed a Motion for Conditional Certification of a Collective Action. The parties’ motions remain
pending. The Company will vigorously defend the lawsuit.
On November 6, 2017, Covance was served with two False Claims Act lawsuits, Health Choice Alliance, LLC on behalf of
the United States of America, et al. v. Eli Lilly and Company, Inc. et al., and Health Choice Advocates, LLC, on behalf of the
United States of America v. Gilead Sciences, Inc., et al., both filed in the United States District Court for the Eastern District of
Texas. The complaints allege under the Federal False Claims Act and various state analogues that Covance and the co-defendants
unlawfully provided in-kind remuneration to medical providers in the form of reimbursement support services in order to induce
providers to prescribe certain drugs. Neither the U.S. government nor any state government intervened in the lawsuits. The lawsuit
seeks actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs. The Company will
vigorously defend the lawsuits.
Under the Company's present insurance programs, coverage is obtained for catastrophic exposure as well as those risks required
to be insured by law or contract. The Company is responsible for the uninsured portion of losses related primarily to general,
professional and vehicle liability, certain medical costs and workers' compensation. The self-insured retentions are on a per
occurrence basis without any aggregate annual limit. Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregated liability of claims incurred. At December 31, 2017, the Company had provided letters
of credit aggregating approximately $72.2, primarily in connection with certain insurance programs. The Company’s availability
under its Revolving Credit Facility is reduced by the amount of these letters of credit.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
47
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock, par value $0.10 per share (Common Stock), trades on the New York Stock Exchange (NYSE)
under the symbol “LH.” The following table sets forth for the calendar periods indicated the high and low sales prices for the
Common Stock reported on the NYSE Composite Tape.
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$
$
$
$
$
$
$
$
123.99
131.99
141.32
140.27
145.00
154.82
164.22
165.18
$
$
$
$
$
$
$
$
97.79
115.98
129.68
119.51
128.00
134.19
146.68
147.28
On February 22, 2018, there were approximately 2,500 holders of record of the Common Stock.
Transfer Agent
The transfer agent for the Company's Common Stock is American Stock Transfer & Trust Company, Shareholder Services,
6201 Fifteenth Avenue, Brooklyn, NY 11219, telephone: 800-937-5449, website: www.amstock.com.
Dividends
The Company has not historically paid dividends on its Common Stock and does not presently anticipate paying any dividends
on its Common Stock in the foreseeable future.
Common Stock Performance
The graph below shows the cumulative total return assuming an investment of $100 on December 31, 2012, in each of the
Company’s common stock, the Standard & Poor’s (S&P) Composite-500 Stock Index and the S&P 500 healthcare Index (Peer
Group) and assuming that all dividends were reinvested.
Comparison of Five Year Cumulative Total Return
Laboratory Corporation of America Holdings
S&P 500 Index
S&P 500 Health Care Index
$
$
$
100.00
100.00
100.00
$
$
$
105.48
132.39
141.46
$
$
$
124.57
150.51
177.30
$
$
$
142.74
152.59
189.52
$
$
$
148.21
170.84
184.42
$
$
$
184.15
208.14
225.13
12/2012
12/2013
12/2014
12/2015
12/2016
12/2017
48
Issuer Purchases of Equity Securities (all amounts in millions, except per share amounts)
The following table sets forth information with respect to purchases of shares of the Company’s Common Stock made during
the quarter ended December 31, 2017, by or on behalf of the Company:
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total Number of
Shares
Repurchased
Average Price
Paid Per Share
Total Number of
Shares
Repurchased as
Part of Publicly
Announced
Program
Maximum Dollar
Value of Shares
that May Yet Be
Repurchased
Under the
Program
0.3
—
—
0.3
$
$
150.67
—
—
150.67
0.3
—
—
0.3
$
$
401.4
—
—
401.4
At the end of 2016, the Company had outstanding authorization from the board of directors to purchase up to $739.5 of Company
common stock. During 2017, the Company purchased 2.5 shares of its common stock at a total cost of $338.1 (inclusive of 0.1
shares of common stock at a cost of $6.0 representing committed purchases as of December 31, 2016, that settled in early 2017).
At the end of 2017, the Company had outstanding authorization from its board of directors to purchase an additional $401.4 of
Company common stock. The repurchase authorization has no expiration date.
Item 6.
SELECTED FINANCIAL DATA (in millions, except per share amounts)
The selected financial data presented below under the captions “Statement of Operations Data” and “Balance Sheet Data”
as of and for the five-year period ended December 31, 2017, are derived from consolidated financial statements of the Company,
which have been audited by an independent registered public accounting firm. This data should be read in conjunction with the
accompanying notes, the Company's consolidated financial statements and the related notes thereto, and “Management's
Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this annual report.
49
Statement of Operations Data:
Net revenues
Gross profit
Operating income (i)
Net earnings attributable to Laboratory
Corporation of America Holdings (j)
Basic earnings per common share
Diluted earnings per common share
Basic weighted average common
shares outstanding
Diluted weighted average common
shares outstanding
Balance Sheet Data:
Cash and cash equivalents, and
short-term investments
Goodwill and intangible assets, net (h)
Total assets (f)
Long-term obligations (f) (g)
Total shareholders' equity
(a)
2017
$ 10,205.9
3,464.0
1,364.2
$
$
$
1,268.2
12.39
12.21
102.4
103.9
316.7
11,870.8
16,568.0
6,762.1
6,830.0
Year Ended December 31,
(c)
2015
(b)
2016
(d)
2014
$
$
$
$
$
$
$
$
9,437.2
3,180.5
1,312.4
732.1
7.14
7.02
102.5
104.3
433.6
9,824.9
14,247.0
5,849.5
5,505.8
$
$
$
$
8,505.7
2,903.3
996.8
437.6
4.43
4.35
98.8
100.6
716.4
9,526.6
14,104.7
6,364.2
4,945.1
$
$
$
$
6,011.6
2,203.1
904.3
511.2
6.03
5.91
84.8
86.4
580.0
4,575.2
7,262.8
2,990.8
2,820.5
(e)
2013
5,808.3
2,223.2
983.3
573.8
6.36
6.25
90.2
91.8
404.0
4,594.8
6,939.8
2,974.3
2,491.3
(a)
(b)
(c)
(d)
(e)
(f)
(g)
During 2017, the Company recorded net restructuring charges of $70.9. The charges were comprised of $36.1 in severance
and other personnel costs and $39.9 in facility-related costs primarily associated with facility closures and general
integration initiatives. These charges were offset by the reversal of previously established reserves of $0.5 in unused
severance and $4.6 in unused facility-related costs. The Company also recognized asset impairment losses of $23.5
related to the termination of software development projects within the CDD segment and the forgiveness of certain
indebtedness for LCD customers in areas heavily impacted by hurricanes during the third quarter.
During 2016, the Company recorded net restructuring charges of $58.4. The charges were comprised of $30.9 in severance
and other personnel costs and $33.8 in facility-related costs primarily associated with facility closures and general
integration initiatives. These charges were offset by the reversal of previously established reserves of $2.8 in unused
severance and $3.5 in unused facility-related costs.
During 2015, the Company recorded net restructuring charges of $113.9. The charges were comprised of $59.2 in
severance and other personnel costs and $55.8 in facility-related costs primarily associated with facility closures and
general integration initiatives. These charges were offset by the reversal of previously established reserves of $1.1 in
unused facility-related costs.
During 2014, the Company recorded net restructuring charges of $17.8. The charges were comprised of $10.5 in severance
and other personnel costs and $8.4 in facility-related costs primarily associated with facility closures and general
integration initiatives. These charges were offset by the reversal of previously established reserves of $0.4 in unused
severance and $0.7 in unused facility-related costs.
During 2013, the Company recorded net restructuring charges of $21.8. The charges were comprised of $15.4 in severance
and other personnel costs and $9.5 in facility-related costs primarily associated with facility closures and general
integration initiatives. These charges were offset by the reversal of previously established reserves of $0.7 in unused
severance and $2.4 in unused facility-related costs.
During the first quarter of 2016, the Company adopted Accounting Standards Update (ASU) 2015-03, Interest-Imputation
of Interest: Simplifying the Presentation of Debt Issuance Costs. In accordance with this guidance, unamortized debt
issuance costs of $52.8, $39.0 and $26.1 associated with the Senior Notes and loan obligations have been reclassified
from total assets to long-term obligations for fiscal 2015, 2014, 2013, respectively, in the table above.
Long-term obligations primarily include the Company’s zero-coupon convertible subordinated notes, 5.625% Senior
Notes due 2015, 3.125% Senior Notes due 2016, 2.20% Senior Notes due 2017, 2.50% Senior Notes due 2018, 4.625%
Senior Notes due 2020, 2.625% Senior Notes due 2020, 3.75% Senior Notes due 2022, 3.20% Senior Notes due 2022,
4.00% Senior Notes due 2023, 3.25% Senior Notes due 2024, 3.60% Senior Notes due 2025, 3.60% Senior Notes due
2027, 4.70% Senior Notes due 2045, 2014 term loan, 2017 term loan, revolving credit facility and other long-term
obligations. The accreted balance of the zero-coupon convertible subordinated notes was $8.8, $42.4, $94.5, $93.9, and
$110.8 at December 31, 2017, 2016, 2015, 2014, and 2013, respectively. The principal balance of the 5.625% Senior
50
Notes was $0.0 at December 31, 2017, 2016 and 2015 and $250.0 at December 31, 2014 and 2013. The principal balance
of the 3.125% Senior Notes was $0.0 at December 31, 2017, and 2016 and $325.0 at December 31, 2015, 2014, and
2013. The principal balance of the 4.625% Senior Notes was $600.0 at December 31, 2017, 2016, 2015, 2014, and 2013.
The aggregate fair value of the fixed-to-variable interest rate swap on the 4.625% Senior Notes was $4.1 at December
31, 2017, $14.6 at December 31, 2016, $21.6 at December 31, 2015, $18.5 at December 31, 2014, and $0.0 at December
31, 2013. The principal balance of the 2.625% Senior Notes was $500.0 at December 31, 2017, 2016, and 2015, and
was $0.0 for the years 2014 and 2013. The principal balances of the 2.20% Senior Notes was $0.0 at December 31, 2017
and $500.0 at December 31, 2016, 2015, 2014, and 2013. The 3.75% Senior Notes was $500.0 at December 31, 2017,
2016, 2015, 2014, and 2013. The principal balance for the 3.20% Senior Notes was $500.0 at December 31, 2017, 2016
and 2015 and was $0.0 at both December 31, 2014 and 2013. The principal balances of the 2.50% Senior Notes due
2018 and 4.00% Senior Notes due 2023 were $400.0 and $300.0, respectively, at December 31, 2017, 2016, 2015, 2014,
and 2013. The principal balances of the 3.60% Senior Notes due 2025 and 4.70% Senior Notes due 2045 were $1,000.0
and $900.0, respectively, at December 31, 2017, 2016 and 2015 and were each $0.0 at both December 31, 2014, and
2013. The principal balance of the 3.25% Senior Notes due 2024 was $600.0 at December 31, 2017, and $0.0 for all
other years presented. The principal balance of the 3.60% notes due 2027 was $600.0 at December 31, 2017, and $0.0
for all other years presented. The outstanding balance on the 2014 term loan was $72.0 at December 31, 2017, $565.0
at December 31, 2016, $715.0 at December 31, 2015, and $0.0 for all other years presented. The outstanding balance
on the 2017 term loan was $750.0 at December 31, 2017, and $0.0 for all other years presented. The outstanding balance
on the revolving credit facility was $0.0 at December 31, 2017, 2016, 2015, 2014, and 2013. The remainder of other
long-term obligations consisted primarily of capital leases and mortgages payable with balances of $76.8, $71.8, $60.9,
$42.4, and $14.6 at December 31, 2017, 2016, 2015, 2014, and 2013, respectively. Long-term obligations exclude
amounts due to affiliates.
(h)
(i)
(j)
During 2016, the Company revised the final purchase price allocation for Covance. As a result, an out of period adjustment
of $25.6 was recorded to reduce goodwill and increase a deferred tax asset as of December 31, 2015. The Company
concluded that the impact of this adjustment was not material to the current or prior periods.
The Company changed its financial statement classification for certain gross receipts taxes in 2016, removing these
taxes from its provision for income taxes and moving this expense into selling, general and administrative
expenses. Certain gross receipts taxes of $6.1, $6.1, and $7.6 were reclassified in 2015, 2014 and 2013, respectively.
Net earnings attributable to Laboratory Corporation of America Holdings in 2017 includes a provisional net benefit of
$519.0 due to the Tax Cuts and Jobs Act (TCJA). For additional information on the TCJA, see Note 13 to the Consolidated
Financial Statements.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (in millions)
General
Net revenues increased 8.1% in comparison to 2016 primarily due to growth from acquisitions of 5.8% and organic growth
(net revenue growth less revenue from acquisitions for the first twelve months after the close of each acquisition) of 2.3%. Operating
income increased 3.9% in comparison to 2016 primarily due to acquisitions, organic revenue growth and the Company's LaunchPad
business process improvement initiative. During 2017, the Company achieved its three-year-goal to deliver $150.0 in net LaunchPad
savings. The Company expects the inclusion of Chiltern International Group Limited (Chiltern) for a full twelve months in 2018
will provide an approximate 13.0% to 14.0% increase in CDD revenue for 2018, excluding the impact of the adoption of the new
revenue recognition accounting standard.
On April 25, 2017, the Company announced that it was expanding its LaunchPad business process improvement initiative to
include its CDD segment. The Company generated $20.0 in savings in 2017, and expects to achieve additional net savings of
$130.0 through the three-year period ending 2020. This initiative is expected to align people and capabilities with client and
business demand, utilize automation and new information technology platforms to create efficiencies, and enhance customers'
experience with CDD through investments in commercial and operational processes.
During the fourth quarter of 2017, the Company recorded the estimated impact of the Tax Cuts and Jobs Act of 2017 (TCJA),
which resulted in a favorable re-valuation of deferred taxes, partially offset by the deemed repatriation tax. Given the significant
changes resulting from the TCJA, the estimated financial impact is provisional and subject to further clarification, which could
result in changes to these estimates in 2018. The Company expects its consolidated effective tax rate to be approximately 25.0%
in 2018, which will benefit earnings per share and cash flow compared to the tax rate in 2017. The Company will invest a portion
of this benefit in its employees, and has announced a one-time payment to all eligible employees that will be paid in 2018 based
on length of service and certain other criteria.
51
The new accounting standard on revenue recognition will be effective for the Company beginning January 1, 2018. The
Company will adopt the full retrospective method allowed by this standard and is continuing to evaluate the expected impact of
this adoption. Currently, the Company expects this standard to reduce LCD revenue but increase LCD operating margins due to
the recording of substantially all LCD bad debt expense against net revenues (versus selling, general and administrative expense)
as an implicit price reduction. The Company expects this standard to increase CDD reported revenue and decrease gross profit
margin due to inclusion of reimbursable out-of-pocket expenses and investigator fees in revenues and cost of sales. In addition,
the Company expects the timing of revenue recognition for customer contracts in the clinical business to accelerate, as revenue
from study related change orders will be included in the total transaction price and recognized as the single performance obligation
is satisfied, when reasonably estimated, which is often prior to the signed change order threshold used previously. CDD will also
discontinue its current practice of expensing sales commissions when paid upon the execution of a customer contract and instead
will recognize this selling expense over the weighted average of the underlying contract terms for each major revenue stream.
Based on its preliminary analysis, the Company currently anticipates that 2017 total revenue will be approximately 2.0% to 5.0%
higher under the new standard upon retrospective restatement consisting of an increase in CDD revenue (due in large part to the
inclusion of out-of-pocket and investigator fees in revenue) partially offset by a decrease in LCD revenue (due to the recording
of bad debt expense as an offset within revenue). The Company also anticipates enhanced financial statement disclosures
surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The
Company is currently performing a detailed contract review which will be completed before the final quantification of the impact
of the standard is completed. The impact of the new standard will be finalized upon adoption in the first quarter of 2018 and is
therefore subject to change.
The Company notes that changes to the Affordable Care Act may continue to affect coverage, reimbursement and utilization
of laboratory services, as well as administrative requirements, in ways that are currently unpredictable. Further, structural reforms
of Medicare that could occur, such as imposition of uniform co-insurance and combination of the Medicare Part A and Part B
deductibles, could adversely affect Medicare reimbursement for laboratory reimbursement.
CMS published its initial proposed CLFS rates under PAMA for 2018-2020 on September 22, 2017. Following a public comment
period, CMS made adjustments and published final CLFS rates for 2018-2020 on November 17, 2017, with additional adjustments
published on December 1, 2017. For 2018, the Company estimates that the CLFS rates will reduce LCD revenue from all payers
affected by the CLFS by a total of approximately 8% ($70.0 million)
The Company plans to continue to work to maintain its investment grade credit rating and plans to use its operating cash flows
to meet its annual capital expenditure requirements and to continue building long-term shareholder value through strategic
acquisitions, debt reduction and the return of capital to shareholders.
Seasonality and External Factors
The Company experiences seasonality in both segments of its business. For example, testing volume generally declines during
the year-end holiday period and other major holidays and can also decline due to inclement weather, reducing net revenues,
operating margins and cash flows. Operations are also impacted by changes in the global economy, exchange rate fluctuations,
political and regulatory changes, the progress of ongoing studies and the startup of new studies, as well as the level of expenditures
made by the biopharmaceutical industry in R&D. The results of both segments are impacted by exchange rate fluctuations.
Approximately 21.4% of the Company's net revenues are billed in currencies other than the U.S. dollar, with the Swiss franc,
British pound, Canadian dollar and the euro representing the largest components of its currency exposure. The Company expects
the inclusion of Chiltern for a full twelve months in 2018 will increase the Company's percentage of revenues billed in currencies
other than the U.S. dollar. Given the seasonality and changing economic factors impacting the business, comparison of the results
for successive quarters may not accurately reflect trends or results for the full year.
Results of Operations
Years ended December 31, 2017, 2016, and 2015
Net Revenues
LCD
CDD
Intercompany eliminations
Total
$
Years Ended December 31,
2016
6,593.9
2,844.1
(0.8)
9,437.2
2017
7,170.5
3,037.2
(1.8)
$ 10,205.9
$
$
$
$
2015
6,199.3
2,306.4
—
8,505.7
Change
2017
2016
8.7%
6.8%
125.0%
8.1%
6.4%
23.3%
N/A
11.0%
The 8.1% increase in net revenue for the year ended December 31, 2017, as compared with the corresponding period in 2016
was due to growth from acquisitions of 5.8% and organic growth of 2.3%.
52
LCD net revenues for the year ended December 31, 2017, were $7,170.5, an increase of 8.7% over net revenues of $6,593.9
in the corresponding period in 2016. The increase in net revenue was the result of acquisitions, organic volume growth (measured
by requisitions), price and mix. Total volume (measured by requisitions) increased by 5.8%, of which organic volume was 2.2%
and acquisition volume was 3.6%. Revenue per requisition increased 2.9%.
CDD net revenues for the year ended December 31, 2017, were $3,037.2, an increase of 6.8% over net revenues of $2,844.1
in the corresponding period in 2016. The increase in net revenue was primarily due to the acquisition of Chiltern, which contributed
growth of 6.6%, an increase in organic growth of 0.4% and an unfavorable impact from foreign currency translation of approximately
0.2%.
The increase in net revenues for the year ended December 31, 2016, as compared with the corresponding period in 2015 was
driven primarily by the inclusion of Covance's financial results for the entire year as well as solid organic growth and acquisitions,
partially offset by the negative impact of foreign currency translation.
LCD net revenues for the year ended December 31, 2016, were $6,593.9, an increase of 6.4% over net revenues of $6,199.3
in the corresponding period in 2015. The increase in net revenues was driven by organic volume growth, measured by requisitions,
of 1.2%. The commercial launch of Beacon LBS, the Company's technology-enabled solution providing point-of-care decision
support, contributed 0.3%. The increase in net revenues was unfavorably impacted by 0.3% of currency fluctuations. Revenue per
requisition favorably impacted revenue by 2.7%. In addition, acquisitions added 2.5% to net revenues.
CDD net revenues for the year ended December 31, 2016, were $2,844.1, an increase of 23.3% over net revenues of $2,306.4
in the corresponding period in 2015. The increase in revenue is due to the inclusion of a full year of Covance revenue for 2016 as
compared to the period from the close of the Covance acquisition on February 19, 2015, through December 31, 2015, as well as
demand and mix. This increase was partially offset by the expiration on October 31, 2015, of a minimum volume service contract
and an unfavorable currency impact of approximately 160 basis points.
Net Cost of Revenues
Net cost of revenues
Cost of revenues as a % of net revenues
Years Ended December 31,
2016
$ 6,256.7
2015
$ 5,602.4
2017
$ 6,741.9
66.1%
66.3%
65.9%
Change
2017
2016
7.8%
11.7%
Net cost of revenues (primarily laboratory, labor and distribution costs) increased 7.8% in 2017 as compared with 2016 primarily
due to increased volume, measured by requisitions, and test mix changes. The slight decrease in net cost of revenues as a percentage
of net revenues in 2017 as compared to 2016 was due to LaunchPad savings and acquisition integration synergies offset by relatively
higher costs of revenues for certain 2017 acquisitions. The increase in net cost of revenues in 2017 was negatively impacted by a
net increase of 0.1% due to currency fluctuations.
Net cost of revenues (primarily laboratory, labor and distribution costs) increased 11.7% in 2016 as compared with 2015
primarily due to increased volume, measured by requisitions, and test mix changes. The increase in net cost of revenues as a
percentage of net revenues in 2016 as compared to 2015 was due to the inclusion of CDD operations, which carry higher personnel
costs as a percentage of revenue, for the entire year along with overall growth in the Company's operations. The increase in net
cost of revenues in 2016 was negatively impacted by a net increase of 0.6% due to currency fluctuations.
Labor and testing supplies for the year ended December 31, 2017, comprise over 76.3% of the Company’s net cost of revenues.
Net cost of revenues has increased over the three-year period ended December 31, 2017, primarily due to the impact of acquisitions,
overall growth in the Company's volume and increases in merit-based labor costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
SG&A as a % of net revenues
Years Ended December 31,
2016
$ 1,630.2
2015
$ 1,628.1
2017
$ 1,812.4
17.8%
17.3%
19.1%
Change
2017
11.2%
2016
0.1%
Selling, general and administrative expenses as a percentage of net revenues increased to 17.8% in 2017 compared to 17.3%
in 2016. The increase in selling, general and administrative expenses as a percentage of net revenues is primarily due to current
year acquisitions offset by LaunchPad savings. Bad debt expense as a percentage of net revenues for LCD was 4.4% for that
segment during 2017 as compared to 4.3% in 2016. The increase in selling, general and administrative expenses in 2017 was
impacted by a net increase of 0.1% due to currency fluctuations.
The Company incurred legal and other costs of $49.7 primarily relating to the acquisition of Chiltern. The Company also
recorded $25.6 in consulting and other expenses relating to Covance and Chiltern integration initiatives. In addition, the Company
53
incurred $4.4 in consulting expenses relating to fees incurred as part of its integration and management transition costs. The
Company also recognized asset impairment losses of $20.9 related to the termination of software development projects within the
CDD segment and the forgiveness of certain indebtedness for LCD customers in areas heavily impacted by hurricanes during the
third quarter. Excluding these charges, selling, general and administrative expenses as a percentage of net revenues were 16.8%
for the year ended December 31, 2017.
Selling, general and administrative expenses as a percentage of net revenues decreased to 17.3% in 2016 compared to 19.1%
in 2015. The decrease in selling, general and administrative expenses as a percentage of net revenues is primarily due to the
Covance acquisition, integration synergies, and the impact of LaunchPad, LCD's comprehensive, enterprise-wide business process
improvement initiative. Bad debt expense as a percentage of net revenues for LCD remained constant at 4.3% for that segment
during 2016 and 2015. The increase in selling, general and administrative expenses in 2016 was impacted by a net increase of
0.5% due to currency fluctuations.
During 2016, the Company incurred additional legal and other costs of $4.6 relating to the wind-down of two operations used
to service minimum volume service contract operations. On February 9, 2016, the Company reached an agreement for the sale of
assets and business of one of these sites. As required by U.K. law, substantially all of the employees were transferred with the
business. On November 21, 2016, following the wind-down of the business, the Company reached an agreement for the sale of
the property and assets of the other site. In addition, the Company incurred $8.0 in acquisition fees and expenses. The Company
also recorded $6.9 in consulting expenses relating to fees incurred as part of its Covance acquisition integration costs and
compensation analysis, along with $2.5 in short-term equity retention arrangements relating to the Covance acquisition and $8.9
of accelerated equity compensation relating to executive transition. In addition, the Company incurred $9.0 of non-capitalized
costs associated with the implementation of a major system as part of LaunchPad. Excluding these charges, selling, general and
administrative expenses as a percentage of net revenues were 16.9% for the year ended December 31, 2016.
During 2015, the Company incurred additional legal and other costs of $5.7 relating to the wind-down of two operations used
to service minimum volume contract operations. The Company also recorded $25.6 in consulting expenses relating to fees incurred
as part of LaunchPad as well as Covance integration costs and employee compensation studies, along with $5.4 in short-term
equity retention arrangements relating to the Covance acquisition and $0.3 of accelerated equity compensation relating to the
previously disclosed retirement of a Company executive. During the fourth quarter, the Company paid $12.2 in settlement costs
and litigation expenses related to the resolution of a U.S. federal court putative class action lawsuit. In addition, the Company
incurred $3.0 of non-capitalized costs associated with the implementation of a major system as part of LaunchPad. Excluding
these charges, selling, general and administrative expenses as a percentage of net revenues were 18.5% for the year ended December
31, 2015.
Amortization Expense
LCD
CDD
Amortization of intangibles and other assets
$
$
116.7
99.8
216.5
$
$
93.4
86.1
179.5
$
$
82.4
82.1
164.5
Years Ended December 31,
2016
2015
2017
Change
2017
2016
24.9%
15.9%
20.6%
13.3%
4.9%
9.1%
The increase in amortization of intangibles and other assets from 2015 through 2017 primarily reflects the impact of acquisitions
offset by the impact of working capital and earnout adjustments.
Restructuring and Other Special Charges
Years Ended December 31,
2016
2015
2017
Restructuring and other special charges
$
70.9
$
58.4
$
113.9
During 2017, the Company recorded net restructuring charges of $70.9; $16.8 within LCD and $54.1 within CDD. The charges
were comprised of $36.1 in severance and other personnel costs and $39.9 in facility-related costs primarily associated with general
integration activities. The charges were offset by the reversal of previously established reserves of $0.5 in unused severance and
$4.6 in unused facility-related costs.
During 2016, the Company recorded net restructuring and other special charges of $58.4; $15.8 within LCD and $42.6 within
CDD. The charges were comprised of $30.9 related to severance and other personnel costs along with $33.8 in costs associated
with facility closures. A substantial portion of these costs relate to the planned closure of duplicative data center operations and
other facilities. These charges were offset by the reversal of previously established reserves of $2.8 in unused severance and $3.5
in unused facility-related costs, as the result of selling one of its minimum volume service contract facilities to a third party.
54
During 2015, the Company recorded net restructuring and other special charges of $113.9; $39.2 within LCD and $74.7 within
CDD. The charges were comprised of $59.2 related to severance and other personnel costs along with $55.8 in costs associated
with facility closures and general integration initiatives. A substantial portion of these costs relate to the planned closure of two
CDD operations that serviced a minimum volume contract that expired on October 31, 2015. These charges were offset by the
reversal of previously established reserves of $1.1 in unused facility-related costs. Included within the facility-related charges
noted above is a $26.7 asset impairment charge relating to CDD lab and customer service applications that will no longer be used.
Interest Expense
Interest expense
$
235.1
$
219.1
$
274.9
7.3%
Years Ended December 31,
2016
2015
2017
Change
2017
2016
(20.3)%
The increase in interest expense for 2017 as compared with the corresponding period in 2016 is primarily due to the issuance
of Senior Notes, the addition of the 2017 term loan, and increased borrowings under the Company's Revolving Credit Facility, to
fund the acquisition of Chiltern and support growth. This increase was partially offset by the repayment of the 2.20% Senior Notes
in August 2017 and a portion of the zero-coupon subordinated notes, and the retirement of the convertible Senior Notes acquired
as part of the Sequenom acquisition in October 2016.
The decrease in interest expense for 2016 as compared with the corresponding period in 2015 is primarily due to the reduction
of the term loan balance, Covance acquisition-related expenses including a $37.4 make-whole payment that was required in
connection with the prepayment of the $250.0 Covance Senior Notes and $15.2 of deferred financing costs associated with the
Company's previous credit agreement and the bridge financing facilities used to complete the Covance acquisition. In addition,
the Company repaid the 3.125% Senior Notes in May 2016. These decreases were offset by $5.6 of interest expense relating to
the early retirement of subsidiary indebtedness and the timing of Covance acquisition-related debt.
Equity Method Income, Net
Equity method income, net
$
11.3
$
7.9
$
10.0
43.0%
Years Ended December 31,
2016
2015
2017
Change
2017
2016
(21.0)%
Equity method income, net represents the Company's ownership share in joint venture partnerships along with equity
investments in other companies in the healthcare industry. All of these partnerships and investments reside within LCD. The
increase in income for 2017 as compared with the corresponding period in 2016 was primarily due to the increased profitability
in one of the joint ventures and the addition of several joint ventures related to the May 2017 acquisition of Pathology Associates
Medical Laboratories (PAML).
Other, Net
Other, net
Years Ended December 31,
2016
2015
2017
Change
2017
$
(7.6) $
2.6
$
(7.8)
392.3%
2016
(133.3)%
Other, net is primarily comprised of net investment gains and losses as well as the realization of foreign currency transaction
losses.
The decrease in other, net for the year ended December 31, 2017, is primarily due to the inclusion of a net gain of $9.7 on the
sale of investment securities from the Company's venture fund in 2016, offset by an increase in net realized foreign currency
transaction losses.
The increase in other, net for the year ended December 31, 2016, is primarily due to a net gain of $9.7 on the sale of investment
securities from the Company's venture fund offset by net realized foreign currency transaction losses and a non-cash loss of $2.3
upon the dissolution of one of the Company's equity investments in 2015.
Income Tax Expense
Income tax expense
Income tax expense as a % of income before tax
Years Ended December 31,
2016
2015
$
372.3
$
287.3
2017
$ (139.1)
(12.3)%
33.7%
39.6%
During the fourth quarter of 2017, the Company recorded the estimated provisions of the TCJA, which resulted in a reduction
in income tax expense arising from a re-measurement of deferred taxes, and the release of deferred taxes on unremitted foreign
55
earnings, partially offset by the deemed repatriation tax. Given the significant changes resulting from the TCJA, the estimated
financial impact is provisional and subject to further clarification, which could result in changes to these estimates in 2018.
The effective rate for 2017 was favorably impacted by the re-measurement of the Company's net deferred tax liabilities to
rates enacted in the TCJA, partially offset by the deemed repatriation tax enacted in this legislation. The 2017 rate was also favorably
impacted by foreign earnings taxed at rates lower than the U.S. and by share-based compensation.
In 2016 and 2015, the Company's effective rate was favorably impacted by foreign earnings taxed at lower rates than the U.S.
statutory tax rate and, for 2016 specifically, by a reduction in certain foreign rates. The 2016 rate also benefited from the early
adoption of share-based payment accounting and the reversal of uncertain tax position reserves. The Company considers
substantially all of its foreign earnings to be permanently reinvested overseas.
The effective rate for 2015 was unfavorably impacted by restructuring and acquisition items, the recording of additional
uncertain tax reserves and a decrease in the benefit recorded from releasing uncertain tax reserves.
Operating Results by Segment
LCD
LCD operating margin
CDD
CDD operating margin
General corporate expenses
Total
Years Ended December 31,
2016
$ 1,187.6
2015
$ 1,053.7
2017
$ 1,298.6
18.1%
$
206.2
$
18.0%
272.7
6.8%
$
(140.6)
$ 1,364.2
9.6%
$
(147.9)
$ 1,312.4
$
$
$
17.0%
73.5
3.2%
(130.4)
996.8
Change
2017
2016
9.3 %
0.1 %
(24.4)%
(2.8)%
(4.9)%
3.9 %
12.7%
1.0%
271.0%
6.4%
13.4%
31.7%
LCD operating earnings were $1,298.6 for the year ended December 31, 2017, an increase of 9.3% over operating earnings
of $1,187.6 in the corresponding period of 2016 and an increase of 0.1% in operating margin year-over-year. The slight increase
in operating margin was primarily due to strong revenue growth and LaunchPad savings, offset by lower margins on certain 2017
acquisitions prior to the full impact of synergies. During the year, the Company achieved its three-year goal to deliver $150.0 in
net LaunchPad savings.
CDD operating earnings were $206.2 for the year ended December 31, 2017, a decrease of 24.4% over operating earnings of
$272.7 in the corresponding period of 2016 and a decrease of 2.8% in operating margin year-over-year. The decrease in operating
earning and operating margin was primarily due to acquisitions and transaction costs. The segment also experienced higher
personnel costs and increased restructuring and other special charges related to the expansion of LaunchPad and the termination
of a software development project. These costs were partially offset by cost synergies. During the year, the Company achieved its
three-year goal to deliver cost synergies of $100.0 related to the Covance acquisition.
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 $140.6 for the year ended
December 31, 2017, a decrease of 4.9% over corporate expenses of $147.9 in the corresponding period of 2016. The decrease in
corporate expenses in 2017 is primarily due to a reduction in acquisition related costs and certain incentive compensation.
Liquidity, Capital Resources and Financial Position
The Company's strong cash-generating capability 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 11 to the Company's Consolidated Financial Statements.
In summary the Company's cash flows were as follows:
Net cash provided by operating activities
Net cash used for investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate on changes in cash and cash equivalents
Net change in cash and cash equivalents
$
$
$
1,459.4
(2,228.7)
631.9
20.5
(116.9) $
$
1,175.9
(795.7)
(649.8)
(13.2)
(282.8) $
982.4
(3,994.9)
3,184.6
(35.7)
136.4
For the Year Ended December 31,
2015
2016
2017
56
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2017, 2016 and 2015 totaled $316.7, $433.6 and $716.4, respectively. Cash and
cash equivalents consist of highly liquid instruments, such as commercial paper, time deposits and other money market investments,
substantially all of which have original maturities of three months or less.
Cash Flows from Operating Activities
During the year ended December 31, 2017, the Company's operations provided $1,459.4 of cash as compared to $1,175.9 in
2016. The $283.5 increase in cash provided from operations in 2017 as compared with the corresponding 2016 period was primarily
due to higher net earnings and improved working capital in 2017. The Company’s 2017 earnings were impacted by $70.9 of
restructuring and special items compared to an impact of $58.4 during the same period in 2016.
During the year ended December 31, 2016, the Company's operations provided $1,175.9 of cash as compared to $982.4 in 2015.
The $193.5 increase in cash provided from operations in 2016 as compared with the corresponding 2015 period was primarily due
to higher net earnings in 2016. The Company’s 2016 earnings were impacted by $58.4 of restructuring and special items compared
to an impact of $113.9 during the same period in 2015, primarily in connection with the Covance acquisition.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2017, was $2,228.7 as compared to $795.7 for the year
ended December 31, 2016. The $1,433.0 increase in cash used in investing activities for the year ended December 31, 2017, was
primarily due to a year over year increase of $1,334.0 in cash paid for acquisitions. In addition, the Company had proceeds of $5.5
from the sale of assets during 2017 in comparison to $30.8 during 2016. Capital expenditures were $312.9 and $278.9 for the years
ended December 31, 2017 and 2016, respectively. Capital expenditures in 2017 were 3.1% of net revenues primarily in connection
with projects to support growth in the Company's core businesses, projects related to LaunchPad and further Covance integration
initiatives. The Company intends to continue to pursue acquisitions to fund growth and make important investments in its business,
including in information technology, and to improve efficiency and enable the execution of the Company's mission. Such
expenditures are expected to be funded by cash flow from operations or, as needed, through borrowings under debt facilities,
including the Company's revolving credit facility or any successor facility. The Company expects such capital expenditures in 2018
to be approximately 3.5% of net revenues, primarily in connection with projects to support growth in the Company's core businesses,
facility updates, ongoing projects related to LaunchPad within the LCD business, LaunchPad's expansion within the CDD business,
and further acquisition integration initiatives.
Net cash used in investing activities for the year ended December 31, 2016, was $795.7 as compared to $3,994.9 for the year
ended December 31, 2015. The $3,184.3 decrease in cash used in investing activities for the year ended December 31, 2016, was
primarily due to cash paid for the Covance acquisition in the first quarter of 2015. In addition, the Company had proceeds of $30.8
from the sale of assets during 2016 in comparison to $0.6 during 2015. Capital expenditures were $278.9 and $255.8 for the years
ended December 31, 2016 and 2015, respectively.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2017, was $631.9 compared to cash used for financing
activities of $649.8 for the year ended December 31, 2016. This movement in cash within financing activities for 2017, as compared
to 2016, was primarily a result of $923.0 of net financing proceeds and $338.1 in share repurchases in 2017 compared to $658.4
in debt repayments combined with $43.9 share repurchases in 2016.
Net cash used in financing activities for the year ended December 31, 2016, was $649.8 compared to $3,184.6 net cash provided
by financing activities for the year ended December 31, 2015. This movement in cash within financing activities for 2016, as
compared to 2015, was primarily a result of $3,113.7 of net financing proceeds in 2015 compared to $658.4 in debt repayments
combined with $43.9 for the re-initiation of the Company's share repurchase program in 2016.
On August 22, 2017, the Company issued new Senior Notes representing $1,200.0 in debt securities consisting of a $600.0
aggregate principal amount of 3.25% Senior Notes due 2024 and a $600.0 aggregate principal amount of 3.60% Senior Notes due
2027. Interest on these notes is payable semi-annually on March 1 and September 1 of each year, commencing on March 1, 2018.
Net proceeds from the offering of these notes were $1,190.1 after deducting underwriting discounts and other expenses of the
offering. Net proceeds were used to pay off the 2.20% Senior Notes due August 23, 2017, as well as a portion of the cash consideration
and the fees and expenses in connection with the Chiltern acquisition.
On September 15, 2017, the Company entered into a new $750.0 term loan. The 2017 term loan facility will mature on September
15, 2022. The 2017 term loan balance at December 31, 2017, was $750.0.
On December 19, 2014, the Company entered into a five-year term loan credit facility in the principal amount of $1,000.0 for
the purpose of financing a portion of the cash consideration and the fees and expenses in connection with the transactions
57
contemplated by the November 2, 2014, Merger Agreement to acquire Covance. The term loan credit facility was advanced in full
on the Covance acquisition date and was amended on July 13, 2016 and further amended on September 15, 2017. The term loan
credit facility will mature five years after the Covance acquisition date and may be prepaid without penalty. The 2014 term loan
balance at December 31, 2017, was $72.0.
Also as part of its financing of the Covance acquisition, the Company issued $2,900.0 in debt securities consisting of $500.0
aggregate principal amount of 2.625% Senior Notes due 2020, $500.0 aggregate principal amount of 3.20% Senior Notes due 2022,
$1,000.0 aggregate principal amount of 3.60% Senior Notes due 2025 and $900.0 aggregate principal amount of 4.70% Senior
Notes due 2045.
On February 13, 2015, the Company entered into a 60-day cash bridge term loan credit facility in the principal amount of $400.0
for the purpose of financing a portion of the cash consideration and the fees and expenses in connection with the Covance acquisition.
The 60-day cash bridge term loan credit facility was advanced in full on the Covance acquisition date, and was repaid in March
2015.
On September 15, 2017, the Company also entered into an amendment and restatement of its existing senior revolving credit
facility, which was originally entered into on December 21, 2011, and amended on December 21, 2011. The senior 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. The revolving credit facility also provides for a subfacility of up to $100.0 for
swing line borrowings and a subfacility of up to $150.0 for issuances of letters of credit. The revolving credit facility is permitted
to be used for general corporate purposes, including working capital, capital expenditures, funding of share repurchases and
certain other payments, and acquisitions and other investments. There were no balances outstanding on the Company's current
revolving credit facility at December 31, 2017, or December 31, 2016.
On January 30, 2015, the Company issued the Covance acquisition notes, which represent $2,900.0 in debt securities consisting
of $500.0 aggregate principal amount of 2.625% Senior Notes due 2020, $500.0 aggregate principal amount of 3.20% Senior
Notes due 2022, $1,000.0 aggregate principal amount of 3.60% Senior Notes due 2025 and $900.0 aggregate principal amount
of 4.70% Senior Notes due 2045. Net proceeds from the offering of the Covance acquisition notes were $2,870.2 after deducting
underwriting discounts and other estimated expenses of the offering. Net proceeds were used to pay a portion of the cash
consideration and the fees and expenses in connection with the acquisition of Covance.
Under the Company's term loan credit facilities 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 facilities
and the revolving credit facility at December 31, 2017. As of December 31, 2017, the ratio of total debt to consolidated pro forma
trailing 12 month earnings before interest, tax, depreciation, and amortization (EBITDA) was 3.2 to 1.0.
The 2014 term loan credit facility accrues interest at a per annum rate equal to, at the Company’s election, either an
Intercontinental Exchange London Inter-bank Offered Rate (LIBOR) rate plus a margin ranging from 1.125% to 2.00%, or a base
rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.125% to 1.00%. The 2017 term loan
credit facility accrues interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging
from 0.875% to 1.50%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0%
to 0.50%. Advances under the revolving credit facility accrue interest at a per annum rate equal to, at the Company’s election, either
a LIBOR rate plus a margin ranging from 0.775% to 1.25%, or a base rate determined according to a prime rate or federal funds
rate plus a margin ranging from 0.00% to 0.25%. Fees are payable on outstanding letters of credit under the revolving credit facility
at a per annum rate equal to the applicable margin for LIBOR loans, and the Company is required to pay a facility fee on the
aggregate commitments under the revolving credit facility, at a per annum rate ranging from 0.10% to 0.25%. The interest margin
applicable to the credit facilities, and the facility fee and letter of credit fees payable under the revolving credit facility, are based
on the Company’s senior credit ratings as determined by S&P and Moody’s.
As of December 31, 2017, the effective interest rate on the revolving credit facility was 2.7% and the effective interest rate
was 2.8% and 2.6% on the 2014 and 2017 term loans, respectively.
There was no outstanding balance on the Company's revolving credit facility at December 31, 2017, or 2016. As of December
31, 2017, the Company provided letters of credit aggregating $72.2, primarily in connection with certain insurance programs. Letters
of credit provided by the Company are issued under the Company's revolving credit facility and are renewed annually.
During 2017, the Company purchased 2.5 shares of its common stock at a total cost of $338.1. At the end of 2017, the Company
had outstanding authorization from the board of directors to purchase an additional $401.4 of Company common stock. The
repurchase authorization has no expiration date.
58
The Company had a $27.4 and $28.3 reserve for unrecognized income tax benefits, including interest and penalties, as of
December 31, 2017, and December 31, 2016, respectively. Substantially all of these tax reserves are classified in other long-term
liabilities in the Company's Consolidated Balance Sheets at December 31, 2017, and 2016.
During 2017 and 2016, the Company settled notices to convert $37.1 and $59.4 aggregate principal amount at maturity of its
zero-coupon subordinated notes with a conversion value of $33.9 and $53.7, respectively. The total cash used for these settlements
was $33.9 and $53.7 and the Company also issued 0.3 and 0.4 additional shares of common stock, respectively. As a result of these
conversions in 2017 and 2016, the Company also reversed approximately $0.0 and $4.9, respectively, of deferred tax liability to
reflect the tax benefit realized upon issuance of the shares.
On September 12, 2017, the Company announced that for the period of September 12, 2017 to March 10, 2018, the zero-coupon
subordinated notes will accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a zero-coupon
subordinated note for the five trading days ended September 8, 2017, in addition to the continued accrual of the original issue
discount.
On January 3, 2018, the Company announced that its zero-coupon subordinated notes may be converted into cash and common
stock at the conversion rate of 13.4108 per $1,000.0 principal amount at maturity of the notes, subject to the terms of the zero-
coupon subordinated notes and the Indenture, dated as of October 23, 2006, between the Company, and The Bank of New York
Mellon as trustee and the conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated
notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter beginning
January 1, 2018, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New York City
time, on Friday, March 31, 2018. If notices of conversion are received, the Company plans to settle the cash portion of the conversion
obligation with cash on hand and/or borrowings under its revolving credit facility.
Credit Ratings
The Company’s debt ratings of Baa2 from Moody’s and BBB from S&P contribute to its ability to access capital markets.
Contractual Cash Obligations
Operating lease obligations
Contingent future licensing payments (a)
Minimum royalty payments
Purchase obligations
Capital lease obligations
Scheduled interest payments on Senior Notes
Scheduled interest payments on Term Loan
Long-term debt
Total contractual cash obligations (b) (c)
Total
763.4
22.4
24.2
29.2
110.4
2,150.7
117.6
6,741.6
9,959.5
$
$
$
$
Payments Due by Period
2019-
2020
2021-
2022
2018
196.1
3.5
2.5
25.5
15.6
218.1
25.3
410.6
897.2
$
$
258.7
7.7
8.1
3.7
27.5
407.5
53.8
1,258.7
2,025.7
$
$
147.8
9.8
12.1
—
22.3
324.3
38.5
1,672.3
2,227.1
2023 and
thereafter
160.8
1.4
1.5
—
45.0
1,200.8
—
3,400.0
4,809.5
$
$
(a) Contingent future licensing payments will be made if certain events take place, such as the launch of a specific test, the transfer
of certain technology, and the achievement specified revenue milestones.
(b) The table does not include obligations under the Company’s pension and postretirement benefit plans, which are included in
“Note 16 to Consolidated Financial Statements.” Benefits under the Company's postretirement medical plan are made when
claims are submitted for payment, the timing of which is not practicable to estimate.
(c) The table does not include the Company’s reserves for unrecognized tax benefits. The Company had a $27.4 and $28.3 reserve
for unrecognized tax benefits, including interest and penalties, at December 31, 2017, and 2016, respectively, which is included
in “Note 13 to Consolidated Financial Statements.” Substantially all of these tax reserves are classified in other long-term
liabilities in the Company’s Consolidated Balance Sheets at December 31, 2017, and 2016.
Off-Balance Sheet Arrangements
The Company does not have transactions or relationships with “special purpose” entities, and the Company does not have any
off-balance sheet financing other than normal operating leases and letters of credit.
Other Commercial Commitments
As of December 31, 2017, the Company provided letters of credit aggregating approximately $72.2, primarily in connection
with certain insurance programs. Letters of credit provided by the Company are secured by the Company’s revolving credit facility
and are renewed annually.
59
The contractual value of the noncontrolling interest put in the Company's Ontario subsidiary totaled $20.8 and $15.2 at
December 31, 2017, and 2016, respectively, and has been classified as mezzanine equity in the Company's consolidated balance
sheet.
Based on current and projected levels of cash flows from operations, coupled with availability under its revolving credit facility,
the Company believes it has sufficient liquidity to meet both its anticipated short-term and long-term cash needs; however, the
Company continually reassesses its liquidity position in light of market conditions and other relevant factors.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.
While the Company believes these estimates are reasonable and consistent, they are by their very nature estimates of amounts that
will depend on future events. Accordingly, actual results could differ from these estimates. The Company’s Audit Committee
periodically reviews the Company’s significant accounting policies. The Company’s critical accounting policies arise in conjunction
with the following:
•
•
•
•
•
Revenue recognition and allowance for doubtful accounts;
Pension expense;
Accruals for self-insurance reserves;
Income taxes; and
Goodwill and indefinite-lived assets.
Revenue Recognition and Allowance for Doubtful Accounts
LCD recognizes revenue for services rendered when the testing process is complete and test results are reported to the ordering
physician. The sales are generally billed to three types of payers – customers, patients and third parties such as managed care
organizations (MCOs), Medicare and Medicaid. For customers, sales are recorded on a fee-for-service basis at the Company’s
customer list price, less any negotiated discount. Patient sales are recorded at the Company’s patient fee schedule, net of any
discounts negotiated with physicians on behalf of their patients, or made available through charity care or an uninsured or
underinsured patient program. LCD bills third-party payers in two ways: fee-for-service and capitated agreements. Fee-for-service
third-party payers are billed at the Company's patient fee schedule amount, and third-party revenue is recorded net of contractual
discounts. These discounts are recorded at the transaction level at the time of sale based on a fee schedule that is maintained for
each third-party payer. The majority of the Company’s third-party sales are recorded using an actual or contracted fee schedule at
the time of sale. For the remaining third-party sales, estimated fee schedules are maintained for each payer. Adjustments to the
estimated payment amounts are recorded at the time of final collection and settlement of each transaction as an adjustment to
revenue. These adjustments are not material to the Company’s results of operations in any period presented. The Company
periodically adjusts these estimated fee schedules based upon historical payment trends. Under capitated agreements with MCOs,
the Company recognizes revenue based on a negotiated monthly contractual rate for each member of the managed care plan
regardless of the number or cost of the tests performed.
CDD recognizes revenue either as services are performed or products are delivered, depending on the nature of the work
contracted. Historically, a majority of CDD’s net revenues have been earned under contracts that range in duration from a few
months to a few years, but can extend in duration up to five years or longer. Occasionally, CDD also has committed minimum
volume arrangements with certain customers. Under these types of arrangements, if the annual minimum dollar value of service
commitment is not reached, the customer is required to pay CDD for the shortfall. Annual minimum commitment shortfalls are
not included in net revenues until the amount has been determined and agreed to by the customer.
Service contracts generally take the form of fee-for-service or fixed-price arrangements subject to pricing adjustments based
on changes in scope. In cases where performance spans multiple accounting periods, revenue is recognized as services are
performed, measured on a proportional-performance basis, generally using output measures that are specific to the service provided.
Examples of output measures in preclinical services include, among others, the number of slides read, or specimens prepared.
Examples of output measures in the clinical trials services include, among others, the number of investigators enrolled, the number
of sites initiated, the number of trial subjects enrolled and the number of monitoring visits completed, or the number of dosings
for clinical pharmacology. Revenue is determined by dividing the actual units of work completed by the total units of work required
under the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments,
represents the aggregate contracted price for each of the agreed upon services to be provided. CDD does not have any contractual
arrangements spanning multiple accounting periods where revenue is recognized on a proportional-performance basis under which
the Company has earned more than an immaterial amount of performance-based revenue (i.e., potential additional revenue tied
to specific deliverables or performance). Changes in the scope of work are common, especially under long-term contracts, and
generally result in a change in contract value. Once the customer has agreed to the changes in scope and renegotiated pricing
60
terms, the contract value is amended with revenue recognized as described above. Estimates of costs to complete are made to
provide, where appropriate, for losses expected on contracts. Costs are not deferred in anticipation of contracts being awarded,
but instead are expensed as incurred.
Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, CDD bills the
customer for the total contract value in progress-based installments as certain non-contingent billing milestones are reached over
the contract duration, such as, but not limited to, contract signing, initial dosing, investigator site initiation, patient enrollment or
database lock. The term “billing milestone” relates only to a billing trigger in a contract whereby amounts become billable and
payable in accordance with a negotiated predetermined billing schedule throughout the term of a project. These billing milestones
are generally not performance-based (i.e., there is no potential additional consideration tied to specific deliverables or performance).
In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract
value and aggregate amounts billed to the customer would be the same at the end of the project. While CDD attempts to negotiate
terms that provide for billing and payment of services prior or within close proximity to the provision of services, this is not always
possible, and there are fluctuations in the levels of unbilled services and unearned revenue from period to period. While a project
is ongoing, cash payments are not necessarily representative of aggregate revenue earned at any particular point in time, as revenues
are recognized when services are provided, while amounts billed and paid are in accordance with the negotiated billing and payment
terms.
In some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide
for an upfront payment of 10% of the full contract value upon contract signing, but at the time of signing performance of services
has not yet begun. Payments received in advance of services being provided are deferred as unearned revenue on the balance sheet.
As the contracted services are subsequently performed and the associated revenue is recognized, the unearned revenue balance is
reduced by the amount of revenue recognized during the period.
In other cases, services may be provided and revenue recognized before the customer is invoiced. In these cases, revenue
recognized will exceed amounts billed, and the difference, representing an unbilled receivable, is recorded for the amount that is
currently not billable to the customer pursuant to contractual terms. Once the customer is invoiced, the unbilled services are reduced
for the amount billed, and a corresponding account receivable is recorded. All unbilled services are billable to customers within
one year from the respective balance sheet date.
Most contracts are terminable with or without cause by the customer, either immediately or upon notice. These contracts often
require payment to CDD of expenses to wind down the study or project, fees earned to date and, in some cases, a termination fee
or a payment to CDD of some portion of the fees or profits that could have been earned by CDD under the contract if it had not
been terminated early. Termination fees are included in net revenues when realization is assured. In connection with the management
of multi-site clinical trials, CDD pays on behalf of its customers fees to investigators, clinical trial subjects and certain out-of-
pocket costs, for which it is reimbursed at cost, without markup or profit. Investigator fees are not reflected in net revenues or
expenses where CDD acts in the capacity of an agent on behalf of the biopharmaceutical company sponsor, passing through these
costs without markup or profit. All other out-of-pocket costs are included in total revenues and expenses.
LCD has a formal process to estimate and review the collectability of its receivables based on the period of time they have
been outstanding. Bad debt expense is recorded within selling, general and administrative expenses as a percentage of sales
considered necessary to maintain the allowance for doubtful accounts at an appropriate level. LCD’s process for determining the
appropriate level of the allowance for doubtful accounts involves judgment and considers such factors as the age of the underlying
receivables, historical and projected collection experience, and other external factors that could affect the collectability of its
receivables. Accounts are written off against the allowance for doubtful accounts based on LCD’s write-off policy (e.g., when
they are deemed to be uncollectible). In the determination of the appropriate level of the allowance, accounts are progressively
reserved based on the historical timing of cash collections relative to their respective aging categories within LCD’s receivables.
These collection and reserve processes, along with the close monitoring of the billing process, help reduce the risks of material
revisions to reserve estimates resulting from adverse changes in collection or reimbursement experience.
The following table presents the percentage of LCD’s net accounts receivable outstanding by aging category at December 31,
2017, and 2016:
61
Days Outstanding
0 – 30
31 – 60
61 – 90
91 – 120
121 – 150
151 – 180
181 – 270
271 – 360
Over 360
2017
50.1%
19.5%
8.9%
6.1%
3.8%
3.7%
6.9%
0.9%
0.1%
2016
49.1%
17.3%
9.2%
7.5%
4.2%
3.9%
7.4%
1.3%
0.1%
The above table excludes the percentage of net accounts receivable outstanding by aging category for certain foreign operations,
BeaconLBS, and the nutritional chemistry and food safety business. Combined these net accounts receivable balances comprise
less than 10.8% of LCD's total net accounts receivable balances. The Company believes that including the agings of the accounts
receivable for these businesses would not be representative of the majority of accounts receivable by aging category for LCD.
The majority of the accounts receivable for the foreign operations, BeaconLBS, and the nutritional chemistry and food safety
business are generally paid within 30 to 60 days of billing.
CDD endeavors to assess and monitor the creditworthiness of its customers to which it grants credit terms in the ordinary
course of business. CDD maintains a provision for doubtful accounts relating to amounts due that may not be collected. This bad
debt provision is monitored on a monthly basis and adjusted as circumstances warrant. Since the recorded bad debt provision is
based upon management's judgment, actual bad debt write-offs may be greater or less than the amount recorded. Historically, bad
debt write-offs have not been material. The allowance for doubtful accounts amounted to $2.3 and $2.8 at December 31, 2017,
and 2016, respectively.
Pension Expense
The Company has a defined-benefit retirement plan (Company Plan) and a non-qualified supplemental retirement plan (PEP).
In October 2009, the Company received approval from its board of directors to freeze any additional service-based credits for any
years of service after December 31, 2009, on the Company Plan and the PEP. Both plans have been closed to new participants.
Employees participating in the Company Plan and the PEP no longer earn service-based credits, but continue to earn interest
credits. In addition, effective January 1, 2010, all employees eligible for the defined-contribution retirement plan (401K Plan)
receive a minimum 3% non-elective contribution (NEC) concurrent with each payroll period. The 401K Plan also permits
discretionary contributions by the Company of up to 1% and up to 3% of pay for eligible employees, based on service.
The Company Plan covers substantially all employees employed by the Company prior to December 31, 2009. The benefits
to be paid under the Company Plan are based on years of credited service through December 31, 2009, interest credits and average
compensation. The Company's policy is to fund the Company Plan with at least the minimum amount required by applicable
regulations. The PEP covers a portion of the Company's senior management group. Prior to 2010, the PEP provided for the payment
of the difference, if any, between the amount of any maximum limitation on annual benefit payments under the Employee Retirement
Income Security Act of 1974 and the annual benefit that would be payable under the Company Plan but for such limitation. Effective
January 1, 2010, employees participating in the PEP no longer earn service-based credits. The PEP is an unfunded plan.
In addition, as a result of the Covance acquisition, the Company has a frozen non-qualified Supplemental Executive Retirement
Plan (SERP). The SERP, which is not funded, is intended to provide retirement benefits for certain employees who were executive
officers of Covance prior to the Covance acquisition. Benefit amounts are based upon years of service and compensation of the
participating employees. As a result of the Covance acquisition, the Company also sponsors two defined-benefit pension plans
for the benefit of its employees at two U.K. subsidiaries (U.K. Plans) and one defined-benefit pension plan for the benefit of its
employees at a German subsidiary (German Plan), all of which are legacy plans of previously acquired companies and are closed
to new entrants. Benefit amounts for all three plans are based upon years of service and compensation. The German Plan is unfunded
while the U.K. Plans are funded. The Company’s funding policy for the U.K. Plans has been to contribute annually amounts at
least equal to the local statutory funding requirements.
The Company's net pension cost is developed from actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets, which are updated on an annual basis at the beginning of each year.
The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions.
Changes in pension costs may occur in the future due to changes in these assumptions. The key assumptions used in accounting
for the defined-benefit retirement plans were a 3.7% discount rate and a 6.8% expected long-term rate of return on plan assets for
the Company Plan, a 3.7% discount rate for the PEP, a 4.2% discount rate for the SERP, a 1.7% discount rate and a 2.0% expected
salary increase for the German plan and a 2.7% discount rate and a 3.8% expected salary increase for the U.K. Plans as of
December 31, 2017.
62
Discount Rate
The Company evaluates several approaches toward setting the discount rate assumption that is used to value the benefit
obligations of its retirement plans. At year-end, priority was given to use of the Towers Watson Bond:Link model, which simulates
the purchase of investment-grade corporate bonds at current market yields with principal amounts and maturity dates closely
matching the Company's projected cash disbursements from its plans. This completed model represents the yields to maturity at
which the Company could theoretically settle its plan obligations at year end. The weighted-average yield on the modeled bond
portfolio is then used to form the discount rate assumption used for each retirement plan. A one percentage point decrease or
increase in the discount rate would have resulted in a respective increase or decrease in 2017 retirement plan expense of $1.5 for
the Company Plan and PEP. A one percentage point decrease or increase in the discount rate would have resulted in a respective
increase or decrease in 2017 retirement plan expense of $1.1 for the U.K. Plans.
Return on Plan Assets
In establishing its expected return on plan assets assumption, the Company reviews its asset allocation and develops return
assumptions based on different asset classes adjusting for plan operating expenses. Actual asset over/under performance compared
to expected returns will respectively decrease/increase unrecognized loss. The change in the unrecognized loss will change
amortization cost in upcoming periods. A one percentage point increase or decrease in the expected return on plan assets would
have resulted in a corresponding change in 2017 pension expense of $2.4 for the Company Plan. A one percentage point increase
or decrease in the expected return on plan assets would have resulted in a corresponding change in 2017 pension expense of $2.4
for the U.K. Plans.
Net pension cost for 2017 was $14.6 as compared with $14.9 in 2016 and $12.0 in 2015. The increase in pension expense was
due to increases in the amount of net amortization and deferral as a result of lower discount rates. Pension expense for the Company
Plan and the PEP is expected to increase to $13.3 in 2018 as a result of a lower assumed discount rate and changes in participant
mortality tables. Pension expense for the Germany Plan and the U.K. Plans is expected to increase to $0.1 in 2018 as a result of
changes in participant mortality tables.
Further information on the Company’s defined-benefit retirement plans is provided in Note 16 to the Consolidated Financial
Statements.
Accruals for Self-Insurance Reserves
Accruals for self-insurance reserves (including workers’ compensation, auto and employee medical) are determined based on
a number of assumptions and factors, including historical payment trends and claims history, actuarial assumptions and current
and estimated future economic conditions. These estimated liabilities are not discounted.
The Company is self-insured (up to certain limits) for professional liability claims arising in the normal course of business,
generally related to the testing and reporting of laboratory test results. The Company maintains excess insurance which limits the
Company’s maximum exposure on individual claims. The Company estimates a liability that represents the ultimate exposure for
aggregate losses below those limits. The liability is based on assumptions and factors for known and incurred but not reported
claims, including the frequency and payment trends of historical claims.
If actual trends differ from these estimates, the financial results could be impacted. Historical trends have not differed materially
from these estimates.
Income Taxes
The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company does not recognize a tax benefit, unless the Company concludes
that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits
of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest
amount of the tax benefit that the Company believes is greater than 50% likely to be realized. The Company records interest and
penalties in income tax expense.
During the fourth quarter of 2017, the Company recorded the estimated impact of the TCJA, which resulted in a favorable
remeasurement of deferred taxes, partially offset by the deemed repatriation tax. Given the significant changes resulting from the
TCJA, the estimated financial impact is provisional and subject to further clarification, which could result in changes to these
estimates in 2018.
63
Goodwill and Indefinite-Lived Assets
The Company assesses goodwill and indefinite-lived intangibles for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In accordance with updates to
the FASB's authoritative guidance regarding goodwill and indefinite-lived intangible asset impairment testing, an entity is allowed
to first assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If
an entity determines that it is not more likely than not that the estimated fair value of an asset is less than its carrying value, then
no further testing is required. Otherwise, impairment testing must be performed in accordance with the original accounting
standards. The updated FASB guidance also allows an entity to bypass the qualitative assessment for any reporting unit in its
goodwill assessment and proceed directly to performing the quantitative assessment. Similarly, a company can proceed directly
to a quantitative assessment in the case of impairment testing for indefinite-lived intangible assets as well.
The quantitative goodwill impairment test includes the estimation of the fair value of each reporting unit as compared to the
carrying value of the reporting unit. Reporting units are businesses with discrete financial information that is available and reviewed
by management. The Company estimates the fair value of a reporting unit using both income-based and market-based valuation
methods. The income-based approach is based on the reporting unit's forecasted future cash flows that are discounted to the present
value using the reporting unit's weighted average cost of capital. For the market-based approach, the Company utilizes a number
of factors such as publicly available information regarding the market capitalization of the Company as well as operating results,
business plans, market multiples, and present value techniques. Based upon the range of estimated values developed from the
income and market-based methods, the Company determines the estimated fair value for the reporting unit. If the estimated fair
value of the reporting unit exceeds the carrying value, the goodwill is not impaired and no further review is required. An entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
The income-based fair value methodology requires management's assumptions and judgments regarding economic conditions
in the markets in which the Company operates and conditions in the capital markets, many of which are outside of management's
control. At the reporting unit level, fair value estimation requires management's assumptions and judgments regarding the effects
of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit's strategies and forecasts
of future cash flows. Forecasts of individual reporting unit cash flows involve management's estimates and assumptions regarding:
•
•
•
Annual cash flows, on a debt-free basis, arising from future revenues and profitability, changes in working capital, capital
spending and income taxes for at least a five-year forecast period.
A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration
of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.
A discount rate that reflects the risks inherent in realizing the forecasted cash flows. A discount rate considers the risk-
free rate of return on long-term treasury securities, the risk premium associated with investing in equity securities of
comparable companies, the beta obtained from the comparable companies and the cost of debt for investment grade
issuers. In addition, the discount rate may consider any company-specific risk in achieving the prospective financial
information.
Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions.
Management believes that the assumptions used for its impairment tests are representative of those that would be used by market
participants performing similar valuations of the reporting units.
Management performed its annual goodwill and intangible asset impairment testing as of the beginning of the fourth quarter
of 2017. The Company elected to perform the qualitative assessment for goodwill and intangible assets for all reporting units
except the Canadian reporting unit and its indefinite-lived assets consisting of acquired Canadian licenses for which a quantitative
assessment was performed.
In the qualitative assessment, the Company considered relevant events and circumstances for each reporting unit, including
(i) current year results, ii) financial performance versus management’s annual and five-year strategic plans, iii) changes in the
reporting unit carrying value since prior year, (iv) industry and market conditions in which the reporting unit operates, (v)
macroeconomic conditions, including discount rate changes, and (vi) changes in products or services offered by the reporting unit.
If applicable, performance in recent years was compared to forecasts included in prior valuations. Based on the results of the
qualitative assessment, the Company concluded that it was not more likely than not that the carrying values of the goodwill and
intangible assets were greater than their fair values, and that further quantitative testing was not necessary.
64
In 2017, the Company utilized an income approach to determine the fair value of its Canadian reporting unit and its indefinite-
lived assets consisting of acquired Canadian licenses. Based upon the results of the quantitative assessment, the Company concluded
that the fair value of the indefinite-lived Canadian licenses was greater than the carrying value.
It is possible that the Company's conclusions regarding impairment or recoverability of goodwill or intangible assets in any
reporting unit could change in future periods. There can be no assurance that the estimates and assumptions used in the Company's
goodwill and intangible asset impairment testing performed as of the beginning of the fourth quarter of 2017 will prove to be
accurate predictions of the future, if, for example, (i) the businesses do not perform as projected, (ii) overall economic conditions
in 2018 or future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies
for a specific reporting unit change from current assumptions, including loss of major customers, (iv) investors require higher
rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual
sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA. The Company
will particularly monitor the financial performance of and assumptions for two of the CDD reporting units for which an income
approach was performed in 2017. A future impairment charge for goodwill or intangible assets could have a material effect on the
Company's consolidated financial position and results of operations.
65
FORWARD-LOOKING STATEMENTS
The Company has made in this report, and from time to time may otherwise make in its public filings, press releases and
discussions by Company management, forward-looking statements concerning the Company’s operations, performance and
financial condition, as well as its strategic objectives. Some of these forward-looking statements can be identified by the use of
forward-looking words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”,
“estimates”, or “anticipates” or the negative of those words or other comparable terminology. Such forward-looking statements
are subject to various risks and uncertainties and the Company claims the protection afforded by the safe harbor for forward-
looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from
those currently anticipated due to a number of factors in addition to those discussed elsewhere herein, including in Item 1A Risk
Factors, and in the Company’s other public filings, press releases and discussion with Company management, including:
1.
2.
3.
4.
5.
6.
7.
8.
9.
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 the Protecting Access to Medicare
Act of 2014 (PAMA);
significant monetary damages, fines, penalties, assessments, refunds, repayments, unanticipated compliance expenditures
and/or exclusion or disbarment 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;
significant fines, penalties, costs, unanticipated compliance expenditures and/or damage to the Company’s reputation
arising from the failure to comply with national, state or local privacy and security laws and regulations, including the
Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and
Clinical Health Act, the European Union's General Data Protection Regulation and similar laws and regulations in
jurisdictions in which the Company conducts business;
loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of
applicable national, state or local licensing laws or regulations regarding the operation of clinical laboratories and the
delivery of clinical laboratory test results, including, but not limited to, the U.S. Clinical Laboratory Improvement Act
of 1967 and the Clinical Laboratory Improvement Amendments of 1988 and similar laws and regulations in jurisdictions
in which the Company conducts business;
penalties or loss of license arising from the failure to comply with applicable national, state or local occupational and
workplace safety laws and regulations, including the U.S. Occupational Safety and Health Administration requirements
and the U.S. Needlestick Safety and Prevention Act and similar laws and regulations in jurisdictions in which the Company
conducts business;
fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, 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;
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 similar national, state and local laws
and regulations in jurisdictions in which the Company conducts business;
changes in testing guidelines or recommendations by government agencies, medical specialty societies and other
authoritative bodies affecting the utilization of laboratory tests;
changes in national, state or local 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 the U.S. Food and Drug Administration, the U.S.
Department of Agriculture, the Medicine and Healthcare products Regulatory Agency in the U.K., the China Food and
Drug Administration, the Pharmaceutical and Medical Devices Agency in Japan, the European Medicines Agency and
similar regulations and policies of agencies in 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;
66
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
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;
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;
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;
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;
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;
consolidation and convergence of MCOs, biopharmaceutical companies, health systems, large physician organizations
and other customers, potentially causing material shifts in insourcing, utilization, pricing and reimbursements, including
full and partial risk based models;
failure to effectively develop and deploy new systems, system modifications or enhancements required in response to
evolving market and business needs;
customers choosing to insource services that are or could be purchased from the Company;
failure to identify, successfully close and effectively integrate and/or manage acquisitions of new businesses;
inability to achieve the expected benefits and synergies of newly acquired businesses, and impact on the Company's cash
position, levels of indebtedness and stock price;
termination, loss, delay, reduction in scope or increased costs of contracts, including large contracts and multiple contracts;
liability arising from errors or omissions in the performance of contract research services or other contractual arrangements;
failure to successfully obtain, maintain and enforce intellectual property rights and defend against challenges to the
Company’s intellectual property rights;
changes or disruption in services or supplies provided by third parties, including transportation;
damage or disruption to the Company's facilities;
damage to the Company's reputation, loss of business, or other harm from acts of animal rights extremists or potential
harm and/or liability arising from animal research activities or the provision of animal research products;
adverse results in litigation matters;
inability to attract and retain experienced and qualified personnel;
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;
substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate
coverage or reimbursement for such tests;
inability to obtain and maintain adequate patent and other proprietary rights for protection of the Company's products
and services and successfully enforce the Company's proprietary rights;
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;
business interruption or other impact on the business due to adverse weather, fires and/or other natural disasters, acts of
war, terrorism or other criminal acts, and/or widespread outbreak of influenza or other pandemic illness;
35.
discontinuation or recalls of existing testing products;
67
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
a failure in the Company's information technology systems, including with respect to testing turnaround time and billing
processes, or the failure to maintain the security of business information or systems or to protect against cyber security
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;
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;
failure to maintain the Company's days sales outstanding and/or bad debt expense levels including a negative impact on
the Company's reimbursement, cash collections and profitability arising from unfavorable changes in third-party payer
policies, payment delays introduced by third party benefit management organizations and increasing levels of patient
payment responsibility;
impact on the Company's revenue, 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 by
Standard & Poor's and/or Moody's;
failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment
grade rating;
changes in reimbursement by foreign governments and foreign currency fluctuations;
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 net revenues;
expenses and risks associated with international operations, including, but not limited to, compliance with the U.S. Foreign
Corrupt Practices Act, the U.K. Bribery Act, other global anti-corruption laws and regulations, trade sanction laws and
regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions;
failure to achieve expected efficiencies and savings in connection with the Company's business process improvement
initiatives;
changes in tax laws and regulations or changes in their interpretation, including the TCJA; and
global economic conditions and government and regulatory changes, including, but not limited to the United Kingdom's
announced intention to exit from the European Union.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (in millions)
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
the 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 swap
agreements. Although, as set forth below, the Company’s zero-coupon subordinated notes contain features that are considered to
be embedded derivative instruments, the Company does not hold or issue derivative financial instruments for trading purposes.
Foreign Currency Exchange Rates
Approximately 10.2% of the Company's net revenues for the year ended December 31, 2017 and approximately 10.3% of those
for the year ended 2016 were denominated in currencies other than the U.S. dollar. The Company's financial statements are reported
in U.S. dollars and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated
in foreign currencies into U.S. dollars for purposes of reporting the Company's consolidated financial results. In both 2017 and
2016, 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 to U.S. dollars would have impacted income before income taxes for 2016 by
approximately $2.3. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity
were $262.3 and $(250.0) at December 31, 2017, and 2016, 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
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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. At December 31, 2017, the Company had 26 open foreign exchange forward contracts with
various amounts maturing monthly through January 2018 with a notional value totaling approximately $360.5. At December 31,
2016, the Company had five open foreign exchange forward contracts with various amounts maturing monthly through January
2017 with a notional value totaling approximately $167.9.
Interest Rates
Some of the Company's debt is subject to interest at variable rates. As a result, fluctuations in interest rates affect the Company's
financial results. The Company attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of
fixed and variable rate debt including the utilization of derivative financial instruments, primarily interest rate swaps.
Borrowings under the Company's term loan credit facilities and revolving credit facility are subject to variable interest rates,
unless fixed through interest rate swaps or other agreements. As of December 31, 2017, and 2016, the Company had approximately
$72.0 and $565.0, respectively, of unhedged variable rate debt under the 2014 term loan credit facility and $750.0 and $0.0,
respectively, under the 2017 term loan credit facility.
During the third quarter of 2013, the Company entered into two fixed-to-variable interest rate swap agreements for its 4.625%
Senior Notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus
2.298% to hedge against changes in the fair value of a portion of the Company's long-term debt.
The Company’s zero-coupon subordinated notes contain the following two features that are considered to be embedded
derivative instruments under authoritative guidance in connection with accounting for derivative instruments and hedging activities:
1)
2)
The Company will pay contingent cash interest on the zero-coupon subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of the sum of the issue price, accrued original issue discount and
contingent additional principal, if any, for a specified measurement period.
Holders may surrender zero-coupon subordinated notes for conversion during any period in which the rating assigned to
the zero-coupon subordinated notes by S&P Ratings Services is BB- or lower.
Each quarter-point increase or decrease in the variable rate would result in the Company's interest expense changing by
approximately $2.1 per year for the Company's unhedged variable rate debt.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated to the Report of Independent Registered Public Accounting Firm and from the
consolidated financial statements, related notes and supplementary data. See the Index on Page F-1.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
Item 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, 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 Company's disclosure controls and procedures (as defined in Rules 13a-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 of the end of the period covered
by this annual report.
Changes in Internal Control over Financial Reporting
On May 4, 2017, the Company completed the acquisition of Pathology Associates Medical Laboratories (PAML), and on
September 1, 2017, the Company completed the acquisition of Chiltern International Group Limited (Chiltern). The Company’s
management has extended its oversight and monitoring processes that support internal control over financial reporting to include
PAML and Chiltern's operations. The Company’s management is continuing to integrate the acquired operations of PAML and
Chiltern's into the Company’s overall internal control over financial reporting process. However, management has excluded PAML
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and Chiltern from its assessment of internal controls over financial reporting set forth below. There have been no other changes
in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the
fiscal year ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
The internal control over financial reporting at the Company was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the U.S. Internal control over financial reporting includes those policies and procedures that:
•
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the U.S.;
provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with
authorization of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
The Company's management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2017. Management based this assessment on criteria for effective internal control over financial reporting described
in “Internal Control - Integrated Framework 2013” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, the Company's management determined that, as of December 31, 2017, the
Company maintained effective internal control over financial reporting. Management reviewed the results of its assessment with
the Audit Committee of the Company’s board of directors.
On May 4, 2017, the Company completed the acquisition of PAML, and on September 1, 2017, the Company completed the
acquisition of Chiltern. As a result, management has excluded PAML and Chiltern from its assessment of internal control over
financial reporting. PAML and Chiltern are wholly-owned subsidiaries whose total assets and total revenues, excluded from
management's assessment, represent 1.9% and 4.0%, respectively, of the related consolidated financial statement amounts as of
and for the year ended December 31, 2017.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who audited and reported on the consolidated
financial statements of the Company included in this annual report, also audited the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2017, as stated in its report, which is included herein immediately preceding the
Company’s audited financial statements.
Item 9B.
OTHER INFORMATION
None.
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE
Board of Directors
David P. King - Mr. King (61) has served as chairman of the board, president, and chief executive officer of the Company since
May 6, 2009; prior to that date he served as a director, president, and chief executive officer of the Company since January 1,
2007. Mr. King served as executive vice president and chief operating officer from December 2005 to January 2007, as executive
vice president of Strategic Planning and Corporate Development from January 2004 to December 2005 and was hired in September
2001 as senior vice president, general counsel, and chief compliance officer. Prior to joining the Company, he was a partner with
Hogan & Hartson LLP (now Hogan Lovells US LLP) in Baltimore, Maryland, from 1992 to 2001. Mr. King was appointed to the
board of directors of Cardinal Health Inc. in 2011 and chairs its Human Resources and Compensation Committee. He also sits on
the boards of directors of the Seattle Science Foundation and the American Clinical Laboratory Association, is board chair of
PATH, Inc., on the boards of trustees of Elon University and Durham Academy, and on the advisory board for Duke University’s
Robert J. Margolis, MD, Center for Health Policy. Mr. King has over 10 years’ experience with the Company in a variety of roles
of increasing responsibility in corporate operations, strategic planning, and corporate administration. Mr. King has a deep
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understanding of the commercial laboratory industry, business strategy, sales and marketing, and executive management of the
Company and its operations. Mr. King holds a bachelor’s degree, cum laude, from Princeton University and a J.D., cum laude,
from the University of Pennsylvania Law School.
Kerrii B. Anderson1,4 - Ms. Anderson (60) has served as a director of the Company since May 17, 2006. Ms. Anderson was chief
executive officer of Wendy’s International Inc., a restaurant operating and franchising company, from April 2006 until September
2008, when the company was merged with Triarc. Ms. Anderson served as executive vice president and chief financial officer of
Wendy’s International from 2000 to 2006. Prior to this position, she was chief financial officer and senior vice president of M/I
Schottenstein Homes Inc. from 1987 to 2000. Ms. Anderson served as the chairwoman of the board of Chiquita Brands International
Inc. from October 2012 until the Company was sold on January 6, 2015, and was the chair of the Nominating and Corporate
Governance Committee and a member of the Audit Committee. She is also a director and a member of the Compensation Committee
and Audit Committee of Worthington Industries Inc. Ms. Anderson serves on the Financial Committee of The Columbus
Foundation, and she is also a member of the board of trustees as well as the chair of the Finance and Audit Committee for Ohio
Health. She is also the chairman of the board of trustees for Elon University, as well as a member of the Audit Committee for
Elon. She also was a director of PF Chang’s China Bistro Inc. from 2010 until June 2012 and Wendy’s International from 2006
until September 30, 2008. She has a strong record of leadership in operations and strategy. Ms. Anderson is also an audit committee
financial expert as a result of her experience as CEO and CFO of Wendy’s International. Through her service on other public
company boards, Ms. Anderson brings extensive financial, corporate governance and executive compensation experience to the
Company’s board.
Jean-Luc Bélingard2,3 - Mr. Bélingard (69) has served as a director of the Company since April 28, 1995. Mr. Bélingard was
chairman of bioMérieux, the worldwide leader of the IVD microbiology segment and a non-U.S. public company from 2011 to
December 2017. Mr. Bélingard also served as chief executive officer of bioMérieux from July 2011 to April 2014. Mr. Bélingard
retired as chairman and chief executive officer of Ipsen SA, a diversified French healthcare holding company, on November 22,
2010. He had served in that position since 2002. Prior to this position, Mr. Bélingard was chief executive officer from 1999 to
2001 of bioMérieux-Pierre Fabre, a diversified French healthcare holding company, where his responsibilities included the
management of that company’s worldwide pharmaceutical and cosmetic business. From 1990 to 1999, Mr. Bélingard was CEO
of Roche Diagnostics and a member of the Hoffman La Roche group Executive Committee. Mr. Bélingard is a director of the
following non-U.S. public companies: Stallergenes Greer (U.K.) since 2011, Laboratoire Pierre Fabre (France) since 2013, and
Lupin Limited (India) since October 27, 2015. Mr. Bélingard holds directorships at various Institut Mérieux Group companies,
in particular at Institut Mérieux, the Group’s parent company, and at Transgene SA., a non-U.S. public company. Mr. Bélingard
is a member of the Bill and Melinda Gates Foundation CEO Roundtable. Mr. Bélingard has been chairman of “FEFIS,” the French
Federation of Health Industries (Fédération Française des Industries de Santé), since 2016, and, since January 2017, he has been
a member of the Conseil National de l’Industrie (C.N.I.) chaired by the French government. Mr. Bélingard’s long tenure at Roche,
Ipsen and bioMérieux demonstrates his valuable business, leadership and management experience, including leading a large
organization with global operations. He brings a strong strategic and operational background to the Company’s board. He also
brings an important international perspective to the board’s deliberations. Mr. Bélingard has extensive corporate governance
experience through his service on other public company boards.
D. Gary Gilliland, M.D., Ph.D.1,3 - Dr. Gilliland (63) has served as a director of the Company since April 1, 2014. Since January
2, 2015, Dr. Gilliland has served as president and director of the NCI-designated Fred Hutchinson Cancer Research Center in
Seattle, Washington. Prior to that, he was the inaugural vice dean and vice president for precision medicine at the University of
Pennsylvania Perelman School of Medicine from 2013 to January 2015, where he was responsible for synthesizing research and
clinical-care initiatives across all medical disciplines, including cancer, heart and vascular medicine, neurosciences, genetics and
pathology, in order to create a national model for the delivery of precise, personalized medicine. From 2009 until he joined Penn
Medicine in October 2013, Dr. Gilliland was senior vice president of Merck Research Laboratories and Oncology Franchise head.
At Merck, Dr. Gilliland oversaw first-in-human studies, proof-of-concept trials, and Phase II/III registration trials that included
the development of pembrolizumab (anti-PD1) for the treatment of cancer, and managed all preclinical and clinical oncology
licensing activities. Prior to joining Merck, Dr. Gilliland was a member of the faculty at Harvard Medical School for nearly 20
years, where he served as professor of medicine and a professor of stem cell and regenerative biology. He was also an investigator
of the Howard Hughes Medical Institute from 1996 to 2009, director of the Leukemia Program at the Dana-Farber/Harvard Cancer
Center from 2002 to 2009, and director of the Cancer Stem Cell Program of the Harvard Stem Cell Institute from 2004 to 2009.
Dr. Gilliland has a Ph.D. in microbiology from UCLA and an M.D. from University of California San Francisco School of Medicine.
He is board-certified in internal medicine and had his fellowship training in hematology and oncology, all at Harvard Medical
School. Dr. Gilliland’s expertise in cancer genetics and his experience working within medical communities ranging from academia
to the pharmaceutical industry position him to provide a practical and balanced perspective to the board.
Garheng Kong, M.D., Ph.D.2,4 - Dr. Kong (42) has served as a director of the Company since December 1, 2013. Dr. Kong is the
managing partner of Sofinnova HealthQuest Capital, a healthcare focused investment firm, and was previously a general partner
at Sofinnova Ventures, a position he held from 2010 to 2013. Before joining Sofinnova, Dr. Kong was a general partner from 2000
71
to 2010 at Intersouth Partners, a venture capital firm where he was a founding investor or board member for various life science
ventures, several of which were acquired by large pharmaceutical companies. Prior to his investing career, Dr. Kong was employed
by GlaxoSmithKline, McKinsey & Company, and TherOx. Dr. Kong has served on the board of directors of public biotechnology
companies Histogenics Corporation (since 2012), Melinta Therapeutics (since 2008 and chairman 2008 to 2017), Alimera Sciences
(since 2012) and Strongbridge Biopharmaceuticals (since 2015). He also sits on the Duke University Medical Center board of
visitors. Dr. Kong holds an M.D., a Ph.D. in biomedical engineering, and an MBA from Duke University. Dr. Kong brings to the
board knowledge and experience in both the healthcare and finance fields based on his medical background and his work in life
science-related venture capital.
Robert E. Mittelstaedt, Jr.2,4 - Mr. Mittelstaedt, Jr. (74) has served as a director of the Company since November 1996. Mr.
Mittelstaedt is dean emeritus of the W. P. Carey School of Business at Arizona State University, where he served as dean and
professor of management from 2004 to 2013. Prior to June 30, 2004, he was vice dean of executive education of The Wharton
School, University of Pennsylvania. Mr. Mittelstaedt had served with The Wharton School since 1973, with the exception of the
period from 1985 to 1989 when he founded, served as chief executive officer of, and subsequently sold, Intellego Inc., a company
engaged in practice management, systems development, and service bureau billing operations in the medical industry. Mr.
Mittelstaedt also serves as a lead independent director and Nominating and Governance Committee chair of Innovative Solutions
and Support Inc. He served on the board and was the Compensation Committee chair of W.P. Carey Inc. until his retirement on
September 21, 2016. Mr. Mittelstaedt brings to the board experience as a recognized expert in business strategy, corporate
governance and executive compensation issues. Mr. Mittelstaedt serves as the board’s lead independent director and brings a deep
understanding of the role of the board and its oversight of corporate governance and business strategy.
Peter M. Neupert1,4 - Mr. Neupert (61) has served as a director of the Company since January 2013. Mr. Neupert was an operating
partner at Health Evolution Partners, a health only, middle market private equity firm, from January 2012 until June 2015. Prior
to that, Mr. Neupert served as corporate vice president of the Microsoft Health Solutions Group from its formation in 2005 to
January 2012. Mr. Neupert served on the President’s Information Technology Advisory Committee (PITAC), co-chairing the Health
Information Technology Subcommittee and helping to drive the “Revolutionizing Health Care Through Information Technology”
report, published in June 2004. Mr. Neupert served as the founding president and chief executive officer of drugstore.com from
1998 to 2001 and as chairman of the board of directors through September 2004. Mr. Neupert is also a director of Clinithink Ltd.,
Adaptive Biotechnologies Inc. and higi LLC. He served on the board of directors of QSI from August 2013 to January 2014 and
Freedom Innovations LLC from May 2013 to April 2016. He serves as a trustee for the Fred Hutchinson Cancer Research Center
and was an active member of the Institute of Medicine’s Roundtable on Value & Science-Driven Healthcare from 2007 to 2011.
Mr. Neupert brings to the board experience as a recognized expert in health information technology and perspective on how to
grow shareholder value by leveraging business strategies with technology. Mr. Neupert is an audit committee financial expert as
a result of his experience, including his experience as CEO and chairman of drugstore.com. His prior experience as a public
company CEO and board member of both private and public companies brings practical insight to the board with respect to business
strategy, corporate governance, and emerging trends in healthcare. Mr. Neupert’s previous business experience also enables him
to provide the board with an understanding of businesses and services adjacent to the diagnostic testing industry.
Richelle Parham1,4 - Ms. Parham (50) has served as a director of the Company since February 8, 2016. In October 2016, Ms.
Parham joined Camden Partners, a private equity firm, as a general partner focusing on investments in growth stage global consumer
companies. Prior to Camden Partners, Ms. Parham served as vice president and chief marketing officer of eBay from November
2010 to March 2015. Ms. Parham was responsible, globally, for eBay brand strategy and brand marketing to reach 108+ million
active eBay users, as well as, for internet marketing and for customer relationship management. Prior to joining eBay, Ms. Parham
served as head of global marketing innovation and Initiatives and head of Global Marketing Services at Visa Inc. from 2008 to
2010. Her experience also includes 13 years at Digitas Inc., a leading marketing agency, where she held a variety of senior leadership
roles, including senior vice president and general manager of the agency's Chicago office. An advocate of empowering female
leaders through STEM programs, Ms. Parham is on the advisory board for Girls Who Code. She serves on the board of directors
for Scripps Network Interactive Inc. (NYSE:SNI), a position she has held since 2012. Ms. Parham holds double Bachelor of
Science degrees in business administration and design arts from Drexel University. She became a member of the Drexel University
board of trustees in 2014. Ms. Parham brings to the board extensive senior-level executive experience and more than 20 years of
global strategy and marketing experience, as well as expertise in understanding consumers and the consumer decision journey.
Adam H. Schechter2,3 - Mr. Schechter (53) has served as a director of the Company since April 1, 2013. Mr. Schechter is an
executive vice president of Merck & Co. Inc. and since 2010 has been president of Merck’s Global Human Health Division, which
includes the company’s worldwide pharmaceutical and vaccine businesses. He is a member of Merck’s Executive Committee and
Pharmaceutical and Vaccines Operating Committee. Prior to becoming president, Global Human Health, Mr. Schechter served as
president, Global Pharmaceutical Business, from 2007 to 2010. Mr. Schechter’s extensive experience at Merck includes global
and U.S.-focused leadership roles spanning sales, marketing, and managed markets, as well as business and product development.
Mr. Schechter serves on the board of directors for the European Federation of Pharmaceutical Industries and Associations. He is
a board member for Water.org and an executive board member for the National Alliance for Hispanic Health. Mr. Schechter brings
72
to the board global business acumen and general management experience, as well as demonstrated success in leading large,
innovation-focused organizations. Mr. Schechter’s deep knowledge of the pharmaceutical and healthcare industries and extensive
experience collaborating with many of its key stakeholders to achieve patient-focused outcomes bring practical insight to the board
with respect to business strategies to service the changing healthcare environment.
R. Sanders Williams, M.D.1,3 - Dr. Williams, M.D. (69) has served as a director of the Company since May 16, 2007. Dr. Williams
is chief executive officer of the Gladstone Foundation and president emeritus of the Gladstone Institutes since January 1, 2018. Prior
to this appointment, he was president of the Gladstone Institutes since 2009. Dr. Williams is also professor of medicine at the
University of California San Francisco. Dr. Williams served Duke University between 2001 and 2010 as dean of the School of
Medicine, senior vice chancellor, senior advisor for International Strategy, and founding dean of the Duke-NUS Graduate Medical
School Singapore. He has served previously as president of the Association of University Cardiologists, chairman of the Research
Committee of the American Heart Association, on the editorial boards of leading biomedical journals, on the Advisory Committee
to the Director of the National Institutes of Health and on the board of External Advisors of the National Heart, Lung and Blood
Institute. Dr. Williams was a director of Bristol-Meyers Squibb Company from 2006 until May 2013 and has been a director of
Amgen since October 2014. Dr. Williams is a member of the National Academy of Medicine, and a Fellow of the American
Association for the Advancement of Science. His experience as a physician, biomedical scientist, and executive leader brings
important perspective to his service to the Company as a director.
Committees:
1 Audit
2 Compensation
3 Quality and Compliance
4 Nominating and Corporate Governance
Management Team
David P. King - Mr. King (61) serves as chairman of the board, president, and chief executive officer. Refer to the biography
above in the “Board of Directors” section.
Glenn A. Eisenberg - Mr. Eisenberg (56) has served as executive vice president and chief financial officer since June 2014. Mr.
Eisenberg received his Bachelors of Arts degree from Tulane University in 1982 and his Master of Business Administration from
Georgia State University in 1988. From 2002 until he joined the Company, he served as the executive vice president of finance
and administration and chief financial officer at The Timken Company, a $4.3 billion leading global manufacturer of highly
engineered bearings and alloy steels and related products and services. Previously, he served as president and chief operating
officer of United Dominion Industries, now a subsidiary of SPX Corporation, after working in several roles in finance, including
executive vice president and chief financial officer. Mr. Eisenberg serves on the board of directors of US Ecology Inc., and he
served on the boards of directors of Family Dollar Stores Inc. until July 2015, where he chaired the Audit Committee; and Alpha
Natural Resources Inc. until May 2015, where he was the lead independent director and chaired the Nominating and Corporate
Governance Committee.
John D. Ratliff - Mr. Ratliff (58) is CEO of Covance Drug Development. Mr. Ratliff is a highly respected biopharmaceutical
leader, with extensive experience in increasingly important roles in the industry. Most recently, he served as president and CEO
of HUYA Bioscience International, a leader in globalizing biopharmaceutical innovation. Mr. Ratliff’s experience in
biopharmaceuticals also includes nearly 10 years at Quintiles (now known as IQVIA), joining as chief financial officer in 2004,
becoming chief operating officer in 2006, and president and chief operating officer in 2010. He led Quintiles’ global services
organization, with its clinical research, commercial, consulting, and lab operations, and was a member of the company’s board of
directors. Mr. Ratliff is chairman of the board of directors of the Association of Clinical Research Organizations. Previous roles
throughout his career also include serving as chief financial officer at Acterna, a provider of communications test solutions for
telecommunications and cable network operators; and in positions of increasing responsibility during his 19-year tenure at IBM.
Mr. Ratliff holds a bachelor’s degree in industrial and systems engineering from the Georgia Institute of Technology in Atlanta and
an MBA from Duke University in Durham, North Carolina.
Gary M. Huff - Mr. Huff (51) is CEO of LabCorp Diagnostics. Prior to becoming CEO, Huff served as the senior vice president
of health systems and strategic alliances for LabCorp Diagnostics. Before joining LabCorp, he was the president and CEO of
Baylor Miraca Genetics Laboratories (BMGL), a $68 million precision medicine genetics and genomics company formed by
Baylor College of Medicine and Miraca Holdings Inc. Before joining BMGL, Mr. Huff served as the executive vice president and
chief operating officer of Solstas Lab Partners. Prior to Solstas, he was a senior executive for LabCorp. During his tenure, he held
various leadership positions, including North Atlantic Division senior vice president, national toxicology vice president, associate
vice president of sales and marketing operations, and executive director of business development for hospitals and strategic
alliances. Mr. Huff started his career in the laboratory industry with Roche Biomedical Laboratories. He serves on the board of
73
directors of the Alzheimer’s Association - Western Carolina Chapter, and he is a graduate of Indiana University with a Bachelor
of Arts in general studies/psychology and has been certified in Lean Six Sigma.
Lance V. Berberian - Mr. Berberian (55) has served as senior vice president and chief information officer since February 2014.
Prior to that, he served as chief information officer at IDEXX Laboratories, a global leader in diagnostics and information
technology solutions for animal health and food and water quality, from May 2007 to January 2014. Mr. Berberian served as chief
information officer and president of Kellstrom Aerospace Defense, a fully integrated supply chain firm, from January 2000 to
April 2007. He also served as chief information officer of Interim Healthcare from September 1997 to January 2000.
Edward T. Dodson - Mr. Dodson (64) has served as senior vice president and chief accounting officer since June 2005. He also
has served as the principal accounting officer since December 2014. Mr. Dodson, who has been a certified public accountant for
35 years, joined the Company in August 1997 as vice president and corporate controller and became senior vice president in June
2001. Prior to joining the Company in 1997, Mr. Dodson was a senior manager in the audit and consulting practice of KPMG
LLP., where he worked for 17 years in that firm's Greensboro, North Carolina and Brussels, Belgium, offices.
F. Samuel Eberts III - Mr. Eberts (58) has served as senior vice president, chief legal officer, secretary, and chief compliance
officer since January 1, 2009. Prior to that time, he served as senior vice president, and general counsel since August 2004. Prior
to joining the Company, he was vice president, secretary, and general counsel of Stepan Company. Before joining Stepan Company,
he was assistant general counsel for Cardinal Health Inc. from 1998 to 2001 and associate general counsel for Allegiance Healthcare
Corporation (Allegiance Healthcare Corporation was purchased by Cardinal Health in 1998). Prior to that time, he was chief
counsel of the Biotech North America division of Baxter International Inc.
Lisa J. Uthgenannt - Ms. Uthgenannt (57) has served as chief human resources officer since March 2015. Prior to that she served
as senior vice president of human resources for Covance since November 2010. Prior to joining Covance, Ms. Uthgenannt held
numerous leadership positions at Johnson & Johnson, in both medical devices and pharmaceutical businesses since 2000. In her
last role as vice president of human resources for the comprehensive care sector, she served as a key adviser and executive coach
to the worldwide chairman, helping to define the initial strategies and plans to advance the corporation’s comprehensive approach
to chronic disease management. She also led the organization in designing and implementing a streamlined business model to
increase product pipeline performance and accelerate growth opportunities.
Brian Caveney - Dr. Caveney (44) has served as senior vice president and chief medical officer since September 2017. In this
role, he has broad responsibility for the medical and scientific strategy of the enterprise. Most recently, Dr. Caveney was chief
medical officer at Blue Cross and Blue Shield of North Carolina (Blue Cross NC) where he joined in 2011. In addition to various
roles in the Healthcare Division of the core health plan, Dr. Caveney also served as chief clinical officer of Mosaic Health Solutions,
a wholly owned subsidiary of Blue Cross NC for strategic investments in diversified health solutions businesses. Prior to joining
Blue Cross NC, Dr. Caveney was a practicing physician and assistant professor at Duke University Medical Center and also
provided consulting services for several companies in the Research Triangle Park, North Carolina, region. Dr. Caveney holds an
M.D. from the West Virginia University School of Medicine, a J.D. from the West Virginia University College of Law and an
M.P.H. in health policy and administration from the University of North Carolina at Chapel Hill. He completed his residency at
Duke University Medical Center and is board-certified in preventive medicine, with a specialty in occupational and environmental
medicine. He is the past president of the Southeastern Atlantic College of Occupational and Environmental Medicine.
Except for the information regarding the executive officers and directors above, the information called for by this item is incorporated
by reference to information in the 2018 Proxy Statement under the captions “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Corporate Governance Policies and Procedures - Code of Conduct and Ethics,” and “Corporate Governance”.
Item 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to information in the 2018 Proxy Statement under the
captions “Executive Compensation” and “Director Compensation.”
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See “Note 14 to the Consolidated Financial Statements” for a discussion of the Company’s Stock Compensation Plans. Except
for the above referenced footnote, the information called for by this item is incorporated by reference to information in the 2018
Proxy Statement under the captions “Security Ownership of Certain Beneficial Holders and Management,” “Compensation
Discussion and Analysis” and “Executive Compensation.”
74
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated by reference to information in the 2018 Proxy Statement under the
captions “Board Independence” and “Related Party Transactions.”
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to information in the 2018 Proxy Statement under the
caption “Fees to Independent Registered Public Accounting Firm.”
75
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this report:
PART IV
Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm included
herein:
(1)
See Index on page F-1
(2)
Financial Statement Schedules:
See Index on page F-1
All other schedules are omitted as they are inapplicable or the required information is furnished in the
Consolidated Financial Statements or notes thereto.
(3)
Index to and List of Exhibits
Exhibits 10.1 through 10.32 and 10.40 and 10.41 are management contracts or compensatory plans or arrangements.
76
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
10.1
Asset Purchase Agreement, dated as of September 13, 2010, between the Company and Genzyme Corporation
(incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
September 16, 2010).
Agreement and Plan of Merger, dated as of November 2, 2014, among the Company, Covance, Inc. and Neon
Merger Sub, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on November 3, 2014).
Amended and Restated Certificate of Incorporation of the Company dated May 24, 2001 (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on Form S-3, filed with the Commission on
October 19, 2001, File No. 333-71896).
Amended and Restated By-Laws of the Company dated January 4, 2017. * (incorporated herein by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2017).
Specimen of the Company's Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
Registration Rights Agreement, dated as of January 28, 2003, between the Company and the Initial Purchasers
(incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the
Commission on February 3, 2003).
Indenture, dated as of October 23, 2006, between the Company and The Bank of New York, as trustee, including
the Form of Global Note attached as Exhibit A thereto (incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on October 24, 2006).
Indenture, dated as of November 19, 2010, between the Company and U.S. Bank National Association, as
trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
November 19, 2010).
Second Supplemental Indenture, dated as of November 19, 2010, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2020 Notes (incorporated herein by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on November 19, 2010).
Third Supplemental Indenture, dated as of August 23, 2012, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2017 Notes (incorporated herein by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed on August 23, 2012).
Fourth Supplemental Indenture, dated as of August 23, 2012, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2022 Notes (incorporated herein by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on August 23, 2012).
Fifth Supplemental Indenture, dated as of November 1, 2013, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2018 Notes (incorporated herein by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed on November 1, 2013).
Sixth Supplemental Indenture, dated as of November 1, 2013, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2023 Notes (incorporated herein by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on November 1, 2013).
Seventh Supplemental Indenture, dated as of January 30, 2015, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2020 Notes (incorporated herein by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K filed on January 30, 2015).
Eighth Supplemental Indenture, dated as of January 30, 2015, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2022 Notes (incorporated herein by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed on January 30, 2015).
Ninth Supplemental Indenture, dated as of January 30, 2015, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2025 Notes (incorporated herein by reference to Exhibit 4.4 to
the Company's Current Report on Form 8-K filed on January 30, 2015).
Tenth Supplemental Indenture, dated as of January 30, 2015, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2045 Notes (incorporated herein by reference to Exhibit 4.5 to
the Company's Current Report on Form 8-K filed on January 30, 2015).
Eleventh Supplemental Indenture, dated as of August 22, 2017, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2024 Notes (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K filed on August 22, 2017)
Twelfth Supplemental Indenture, dated as of August 22, 2017, between the Company and U.S. Bank National
Association, as trustee, including the form of the 2027 Notes (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K filed on August 22, 2017)
National Health Laboratories Incorporated Pension Equalization Plan (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
77
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Laboratory Corporation of America Holdings amended and restated new Pension Equalization Plan
(incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2004).
First Amendment to the Laboratory Corporation of America Holdings amended and restated new Pension
Equalization Plan (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2004).
Second Amendment to the Laboratory Corporation of America Holdings amended and restated new Pension
Equalization Plan. (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2004).
National Health Laboratories 1988 Stock Option Plan, as amended (incorporated herein by reference to the
Company's Registration Statement on Form S-1, filed with the Commission on July 9, 1990, File No. 33-35782).
National Health Laboratories 1994 Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8, filed with the Commission on August 12, 1994, File No. 33-55065).
Laboratory Corporation of America Holdings Senior Executive Transition Policy (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004).
Laboratory Corporation of America Holdings 1995 Stock Plan for Non-Employee Directors (incorporated herein
by reference Exhibit 4.c to the Company's Registration Statement on Form S-8, filed with the Commission on
September 26, 1995, File No. 33-62913).
First Amendment to Laboratory Corporation of America Holdings 1995 Stock Plan for Non-Employee Directors
(incorporated herein by reference to Annex II to the Company's Definitive Proxy Statement on Schedule 14A,
filed with the Commission on June 6, 1997).
Second Amendment to the Laboratory Corporation of America Holdings 1995 Stock Plan for Non-Employee
Directors (incorporated herein by reference to Annex I of the Company's Definitive Proxy Statement on
Schedule 14A, filed with the Commission on April 25, 2001).
Laboratory Corporation of America Holdings Amended and Restated 1999 Stock Incentive Plan (incorporated
herein by reference to Annex I to the Company's Definitive Proxy Statement on Schedule 14A filed with the
Commission on May 3, 1999).
Laboratory Corporation of America Holdings 2000 Stock Incentive Plan (incorporated herein by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-8, filed with the Commission on June 5, 2000,
File No. 333-38608).
Laboratory Corporation of America Holdings 2000 Stock Incentive Plan as Amended and Restated April 3,
2002, (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8,
filed with the Commission on June 19, 2002, File No. 333-90764).
Dynacare Inc., Amended and Restated Employee Stock Option Plan (incorporated herein by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-8, filed with the Commission on August 7, 2002, File
No. 333-97745).
DIANON Systems, Inc. 1996 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 the Company's
Registration Statement on Form S-8, filed with the Commission on January 21, 2003, File No. 333-102602).
DIANON Systems, Inc. 1999 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 the Company's
Registration Statement on Form S-8, filed with the Commission on January 21, 2003, File No. 333-102602).
DIANON Systems, Inc. 2000 Stock Incentive Plan(incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-8, filed with the Commission on January 21, 2003, File No. 333-102602).
DIANON Systems, Inc. 2001 Stock Incentive Plan (incorporated herein by reference Exhibit 10.4 to the Company's
Registration Statement on Form S-8, filed with the Commission on January 21, 2003, File No. 333-102602).
UroCor, Inc. Second Amended and Restated 1992 Stock Option Plan (incorporated herein by reference Exhibit
10.5 to the Company's Registration Statement on Form S-8, filed with the Commission on January 21, 2003, File
No. 333-102602).
Laboratory Corporation of America Holdings Deferred Compensation Plan (incorporated herein by reference to
Exhibit 10.22 the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
First Amendment to the Laboratory Corporation of America Holdings Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004).
Second Amendment to the Laboratory Corporation of America Holdings Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2005).
Third Amendment to the Laboratory Corporation of America Amended and Restated New Pension Equalization
Plan (incorporated herein by reference Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 2005).
78
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
Third Amendment to the Laboratory Corporation of America Holdings Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2006).
Fourth Amendment to the Laboratory Corporation of America Holdings Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2007).
Laboratory Corporation of America Holdings 2008 Stock Incentive Plan (incorporated herein by reference to Annex
III to the Company's Definitive Proxy Statement on Schedule 14A filed on March 25, 2008).
Amendment to Laboratory Corporation of America Holdings 2008 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 7, 2008).
Laboratory Corporation of America Holdings Amended and Restated Master Senior Executive Severance Plan
(incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2009).
Laboratory Corporation of America Holdings Master Senior Executive Change in Control Severance Plan
(incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2009).
First Amendment to the Laboratory Corporation of America Holdings Master Senior Executive Change in
Control Severance Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2010).
Second Amendment to the Laboratory Corporation of America Holdings Master Senior Executive Change in
Control Severance Plan (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2010).
Laboratory Corporation of America Holdings 2012 Omnibus Incentive Plan (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May, 2, 2012).
Amended and Restated Credit Agreement, dated as of December 19, 2014, (originally dated as of December 21,
2011) among the Company, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C
Issuer, Wells Fargo Bank, National Association as Syndication Agent and L/C Issuer, Credit Suisse AG,
Cayman Islands Branch as Documentation Agent and L/C Issuer, the Bank of Tokyo-Mitsubishi UFJ, LTD.,
Barclays Bank PLC, Credit Suisse AG, Cayman Island Branch, KeyBank National Association, PNC Bank,
National Association, TD Bank, N.A., and U.S. Bank National Association, as Documentation Agents, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and Credit Suisse Securities (USA)
LLC as Joint Lead Arrangers and Joint Book Managers, and the lenders named therein (incorporated herein by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K filed on February 26, 2015).
Second Amended and Restated Credit Agreement, dated as of September 15, 2017, (originally dated as of
December 21, 2011), among the Company, Bank of America, N.A. as Administrative Agent, Swing Line Lender
and L/C Issuer, Wells Fargo Bank, National Association as Syndication Agent and L/C Issuer, Credit Suisse AG,
Caymen Islands Branch as Documentation Agent and L/C Issuer, the Bank of Tokyo-Mitsubishi UFJ, LTD.,
Barclays Bank PLC, Credit Suisse AG, Cayman Islands Branch, KeyBank National Association, PNC Bank,
National Association, TD Bank, N.A., and U.S. Bank National Association, as Documentation Agents, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and Credit Suisse Securities (USA)
LL as Joint Lead Arrangers and Joint Book Managers, and the lenders named therein (incorporated herein by
reference to Exhibit 10.3 to the Company's Annual Report on Form 10-Q filed on November 2, 2017).
Amendment No. 1, dated as of July 13, 2016, to Amended and Restated Credit Agreement dated as of December
19, 2014, with Bank of America, N.A. (incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q filed on October 28, 2016).
Term Loan Credit Agreement, dated as of December 19, 2014, among the Company, Bank of America, N.A., as
Administrative Agent, Wells Fargo Bank, National Association, as Syndication Agent, the Bank of Tokyo-
Mitsubishi UFJ, LTD., Barclays Bank PLC, Credit Suisse AG, Cayman Islands Branch, KeyBank National
Association, PNC Bank, National Association, TD Bank, N.A. and U.S. Bank National Association, as
Documentation Agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and
Credit Suisse Securities (USA) LLC as Joint Lead Arrangers and Joint Book Managers, and the lenders named
therein (incorporated herein by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed
on February 26, 2015).
Amendment No. 1, dated as of March 5, 2015, to the Term Loan Credit Agreement dated as of December 19,
2014, with Bank of America, N.A. (incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q filed on May 4, 2015).
Amendment No. 2, dated as of July 13, 2016, to the Term Loan Credit Agreement dated as of December 19,
2014, with Bank of America, N.A. (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q filed on October 28, 2016).
Amendment No. 3, dated as of September 15, 2017, to the Term Loan Credit Agreement dated as of
December 19, 2014, with Bank of America, N.A (incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed on November 2, 2017).
79
10.40
10.41
10.42
12.1*
21*
23.1*
24.1*
24.2*
24.3*
24.4*
24.5*
24.6*
24.7*
24.8*
24.9*
31.1*
31.2*
32*
Laboratory Corporation of America Holdings 2016 Omnibus Incentive Plan (incorporated by reference herein to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 16, 2016).
Laboratory Corporation of America Holdings 2016 Employee Stock Purchase Plan (incorporated by reference
herein to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 16, 2016).
Term Loan Credit Agreement, dated as of September 15, 2017, with Bank of America, N.A. (incorporated
herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on November 2,
2017).
Ratio of earnings to fixed charges
List of Subsidiaries of the Company
Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm
Power of Attorney of Kerrii B. Anderson
Power of Attorney of Jean-Luc Bélingard
Power of Attorney of D. Gary Gilliland, M.D., Ph.D.
Power of Attorney of Garheng Kong, M.D., Ph.D.
Power of Attorney of Robert E. Mittelstaedt, Jr.
Power of Attorney of Peter M. Neupert
Power of Attorney of Richelle Parham
Power of Attorney of Adam H. Schechter
Power of Attorney of R. Sanders Williams, M.D.
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
XBRL Instance Document
101.INS*
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase
*
Filed herewith
80
Item 16.
FORM 10-K SUMMARY
None.
81
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
Dated: February 27, 2018
By:
/s/ DAVID P. KING
David P. King
Chairman of the Board, President
and Chief Executive Officer
82
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant on February 27, 2018 in the capacities indicated.
Signature
Title
/s/ DAVID P. KING
David P. King
/s/ GLENN A. EISENBERG
Glenn A. Eisenberg
/s/ EDWARD T. DODSON
Edward T. Dodson
*
Kerrii B. Anderson
*
Jean-Luc Bélingard
*
D. Gary Gilliland, M.D., Ph.D.
*
Garheng Kong, M.D., Ph.D.
*
Robert E. Mittelstaedt, Jr.
*
Peter M. Neupert
*
Richelle Parham
*
Adam H. Schechter
*
R. Sanders Williams, M.D.
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial Officer)
Chief Accounting Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
* F. Samuel Eberts III, by his signing his name hereto, does hereby sign this report on behalf of the directors of the Registrant
after whose typed names asterisks appear, pursuant to powers of attorney duly executed by such directors and filed with the
Securities and Exchange Commission.
By:
/s/ F. SAMUEL EBERTS III
F. Samuel Eberts III
Attorney-in-fact
83
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Earnings
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-48
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Laboratory Corporation of America Holdings:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Laboratory Corporation of America Holdings and its subsidiaries
as of December 31, 2017, and December 31, 2016, and the related consolidated statements of operations, comprehensive earnings,
changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the
related notes and schedule of valuation and qualifying accounts and reserves for each of the three years in the period ended
December 31, 2017 listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also
have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2017, and December 31, 2016, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
Report of Management on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As described in the Report of Management on Internal Control over Financial Reporting appearing under Item 9A, management
has excluded Chiltern International Group Limited and Pathology Associates Medical Laboratories from its assessment of internal
control over financial reporting as of December 31, 2017, because they were acquired by the Company in a purchase business
combination during 2017. We have also excluded Chiltern International Group Limited and Pathology Associates Medical
Laboratories from our audit of internal control over financial reporting. Chiltern International Group Limited and Pathology
Associates Medical Laboratories are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s
assessment and our audit of internal control over financial reporting represent 1.9% and 4.0%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
F-2
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 27, 2018
We have served as the Company’s auditor since 1997.
F-3
PART I – FINANCIAL INFORMATION
Item 1. Financial Information
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $260.9 and $235.6 at
December 31, 2017 and 2016, respectively
Unbilled services
Supplies inventories
Prepaid expenses and other
Total current assets
Property, plant and equipment, net
Goodwill, net
Intangible assets, net
Joint venture partnerships and equity method investments
Deferred income taxes
Other assets, net
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other
Unearned revenue
Short-term borrowings and current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Deferred income taxes and other tax liabilities
Other liabilities
Total liabilities
Commitments and contingent liabilities
Noncontrolling interest
Shareholders’ equity
Common stock, 101.9 and 102.7 shares outstanding at December 31, 2017 and 2016,
respectively
Additional paid-in capital
Retained earnings
Less common stock held in treasury
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2017
December 31,
2016
$
316.7
$
433.6
1,481.3
235.6
227.6
421.4
2,682.6
1,748.9
7,530.0
4,340.8
58.4
1.9
205.4
16,568.0
663.0
632.9
332.7
417.5
2,046.1
6,344.6
948.3
378.2
9,717.2
20.8
$
$
12.0
1,989.8
6,224.0
(1,060.1)
(335.7)
6,830.0
16,568.0
$
1,328.7
190.0
205.2
321.2
2,478.7
1,718.6
6,424.4
3,400.5
57.6
2.1
165.1
14,247.0
508.4
593.7
176.0
549.5
1,827.6
5,300.0
1,206.4
392.0
8,726.0
15.2
12.1
2,131.7
4,955.8
(1,012.7)
(581.1)
5,505.8
14,247.0
$
$
$
F-4
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
Net revenues
Reimbursable out-of-pocket expenses
Total revenues
Net cost of revenue
Reimbursable out-of-pocket expenses
Total cost of revenue
Gross profit
Selling, general and administrative expenses
Amortization of intangibles and other assets
Restructuring and other special charges
Operating income
Other income (expenses):
Interest expense
Equity method income, net
Investment income
Other, net
Earnings before income taxes
Provision for income taxes
Net earnings
Less: Net earnings attributable to the noncontrolling interest
Net earnings attributable to Laboratory Corporation of America Holdings
Basic earnings per common share
Diluted earnings per common share
$
$
Years Ended December 31,
2016
9,437.2
204.6
9,641.8
6,256.7
204.6
6,461.3
3,180.5
1,630.2
179.5
58.4
1,312.4
2017
$ 10,205.9
235.5
10,441.4
6,741.9
235.5
6,977.4
3,464.0
1,812.4
216.5
70.9
1,364.2
2015
8,505.7
174.4
8,680.1
5,602.4
174.4
5,776.8
2,903.3
1,628.1
164.5
113.9
996.8
(235.1)
11.3
2.1
(7.6)
1,134.9
(139.1)
1,274.0
(5.8)
1,268.2
12.39
12.21
$
$
$
(219.1)
7.9
1.7
2.6
1,105.5
372.3
733.2
(1.1)
732.1
7.14
7.02
$
$
$
$
$
$
(274.9)
10.0
1.9
(7.8)
726.0
287.3
438.7
(1.1)
437.6
4.43
4.35
The accompanying notes are an integral part of these consolidated financial statements.
F-5
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In Millions, Except Per Share Data)
Net earnings
Foreign currency translation adjustments
Net benefit plan adjustments
Investment adjustments
Other comprehensive loss before tax
Provision for income tax related to items of comprehensive earnings
Other comprehensive loss, net of tax
Comprehensive earnings
Less: Net earnings attributable to the noncontrolling interest
$
Years Ended December 31,
2016
2015
2017
1,274.0
262.3
20.9
—
283.2
(37.8)
245.4
1,519.4
(5.8)
$
$
733.2
(250.0)
(40.3)
—
(290.3)
(3.8)
(294.1)
439.1
(1.1)
438.7
(370.7)
7.7
(0.1)
(363.1)
86.6
(276.5)
162.2
(1.1)
Net comprehensive earnings attributable to Laboratory Corporation of America
Holdings
$
1,513.6
$
438.0
$
161.1
The accompanying notes are an integral part of these consolidated financial statements.
F-6
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Millions)
BALANCE AT DECEMBER 31, 2014
Net earnings attributable to Laboratory Corporation of America
Holdings
Other comprehensive earnings, net of tax
Issuance of common stock for acquisition consideration
Issuance of common stock under employee stock plans
Surrender of restricted stock and performance share awards
Conversion of zero-coupon convertible debt
Stock compensation
Income tax benefit from stock options exercised
BALANCE AT DECEMBER 31, 2015
Net earnings attributable to Laboratory Corporation of America
Holdings
Other comprehensive earnings, net of tax
Issuance of common stock under employee stock plans
Surrender of restricted stock and performance share awards
Conversion of zero-coupon convertible debt
Stock compensation
Purchase of common stock
BALANCE AT DECEMBER 31, 2016
Net earnings attributable to Laboratory Corporation of America
Holdings
Other comprehensive earnings, net of tax
Issuance of common stock under employee stock plans
Surrender of restricted stock and performance share awards
Conversion of zero-coupon convertible debt
Stock compensation
Purchase of common stock
BALANCE AT DECEMBER 31, 2017
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
$
10.4
$
— $
3,786.1
$
(965.5) $
(10.5) $
2,820.5
—
—
1.5
0.1
—
—
—
—
12.0
—
—
0.1
—
—
—
—
12.1
—
—
0.1
—
—
—
(0.2)
12.0
$
$
$
—
—
1,761.0
98.8
—
0.4
102.1
12.2
1,974.5
—
—
70.5
—
21.0
109.6
(43.9)
2,131.7
—
—
73.5
—
12.8
109.7
(337.9)
1,989.8
$
$
$
437.6
—
—
—
—
—
—
—
—
—
—
(12.6)
—
—
—
4,223.7
$
—
(978.1) $
732.1
—
—
—
—
—
—
4,955.8
1,268.2
—
—
—
—
—
—
6,224.0
$
$
—
—
—
(34.6)
—
—
—
(1,012.7) $
—
—
—
(47.4)
—
—
—
(1,060.1) $
—
(276.5)
—
—
—
—
—
—
(287.0) $
—
(294.1)
—
—
—
—
—
(581.1) $
—
245.4
—
—
—
—
—
(335.7) $
437.6
(276.5)
1,762.5
98.9
(12.6)
0.4
102.1
12.2
4,945.1
732.1
(294.1)
70.6
(34.6)
21.0
109.6
(43.9)
5,505.8
1,268.2
245.4
73.6
(47.4)
12.8
109.7
(338.1)
6,830.0
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
Years Ended December 31,
2016
2015
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Stock compensation
(Gain) loss on sale of assets
Accrued interest on zero-coupon subordinated notes
Cumulative earnings less than distributions from equity method investments
Asset impairment
Deferred income taxes
Change in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable, net
Increase in unbilled services
Increase in inventories
(Increase) decrease in prepaid expenses and other
(Decrease) increase in accounts payable
Increase in unearned revenue
Decrease in accrued expenses and other
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Proceeds from sale of assets
Proceeds from sale of investments
Acquisition of licensing technology
Investments in equity affiliates
Acquisition of businesses, net of cash acquired
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes offerings
Proceeds from term loan
Payments on term loan
Proceeds from revolving credit facilities
Payments on revolving credit facilities
Proceeds from bridge loan
Payments on bridge loan
Payments on Senior Notes
Payments on zero-coupon subordinated notes
Payment of debt issuance costs
Payments on long-term lease obligations
Noncontrolling interest distributions
Deferred payments on acquisitions
Excess tax benefits from stock based compensation
Net proceeds from issuance of stock to employees
Purchase of common stock
Net cash (used for) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
1,274.0
$
733.2
$
438.7
533.2
109.7
1.5
0.3
0.5
23.5
(525.8)
(2.1)
(8.3)
(16.4)
(20.3)
85.6
19.0
(15.0)
1,459.4
(312.9)
5.5
—
(2.5)
(36.2)
(1,882.6)
(2,228.7)
1,200.0
750.0
(493.0)
1,392.2
(1,392.2)
—
—
(500.1)
(33.9)
(15.3)
(7.7)
(1.0)
(2.6)
—
73.6
(338.1)
631.9
20.5
(116.9)
433.6
316.7
$
499.2
109.6
(9.2)
1.6
1.2
—
54.7
(85.5)
(33.4)
(9.6)
(20.5)
(8.7)
29.9
(86.6)
1,175.9
(278.9)
30.8
13.5
—
(12.5)
(548.6)
(795.7)
—
—
(150.0)
139.5
(139.5)
—
—
(454.7)
(53.7)
—
(8.4)
(2.1)
(7.6)
—
70.6
(43.9)
(649.8)
(13.2)
(282.8)
716.4
433.6
$
457.8
102.1
4.6
2.0
0.1
39.7
(34.1)
(71.8)
(16.9)
(0.2)
62.3
30.7
5.4
(38.0)
982.4
(255.8)
0.6
8.0
—
(11.7)
(3,736.0)
(3,994.9)
2,900.0
1,000.0
(285.0)
60.0
(60.0)
400.0
(400.0)
(500.0)
(1.3)
(36.7)
(4.3)
—
(0.1)
13.1
98.9
—
3,184.6
(35.7)
136.4
580.0
716.4
$
The accompanying notes are an integral part of these consolidated financial statements.
F-8
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
Laboratory Corporation of America Holdings® together with its subsidiaries (the Company) is a leading global life sciences
company that is deeply integrated in guiding patient care, providing comprehensive clinical laboratory and end-to-end drug
development services. The Company’s mission is to improve health and improve lives by delivering world-class diagnostic
solutions, bringing innovative medicines to patients faster and using technology to provide better care. The Company serves a
broad range of customers, including managed care organizations (MCOs), biopharmaceutical companies, governmental agencies,
physicians and other healthcare providers (e.g. physician assistants and nurse practitioners, generally referred to herein as
physicians), hospitals and health systems, employers, patients and consumers, contract research organizations, food and nutritional
companies and independent clinical laboratories. The Company believes that it generated more revenue from laboratory testing
than any other company in the world in 2017.
The Company reports its business in two segments, LabCorp Diagnostics (LCD) and Covance Drug Development (CDD).
For further financial information about these segments, including information for each of the last three fiscal years regarding
revenue, operating income, and other important information, see Note 20 to the Consolidated Financial Statements. In 2017, LCD
and CDD contributed 70.3% and 29.7%, respectively, of net revenues to the Company, and in 2016 contributed 69.9% and 30.1%,
respectively.
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries for which it
exercises control. Long-term investments in affiliated companies in which the Company exercises significant influence, but which
it does not control, are accounted for using the equity method. Investments in which the Company does not exercise significant
influence (generally, when the Company has an investment of less than 20% and no representation on the investee's board of
directors) are accounted for using the cost method. All significant inter-company transactions and accounts have been eliminated.
The Company does not have any variable interest entities or special purpose entities whose financial results are not included in
the consolidated financial statements.
The financial statements of the Company's operating foreign subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated
at average monthly exchange rates prevailing during the year. Resulting translation adjustments are included in “Accumulated
other comprehensive income.”
Revenue Recognition
LCD recognizes revenue on the accrual basis at the time test results are reported, which approximates when services are
provided. Services are provided to certain patients covered by various third-party payer programs including various MCOs, as
well as the Medicare and Medicaid programs. Billings for services under third-party payer programs are included in sales net of
allowances for contractual discounts and allowances for differences between the amounts billed and estimated program payment
amounts. Adjustments to the estimated payment amounts based on final settlement with the programs are recorded upon settlement
as an adjustment to revenue. In 2017, 2016 and 2015, approximately 15.1%, 15.5% and 16.0%, respectively, of LCD's revenues
were derived directly from the Medicare and Medicaid programs. LCD has capitated agreements with certain MCO customers
and recognizes related revenue based on a predetermined monthly contractual rate for each member of the managed care plan
regardless of the number of tests performed. In 2017, 2016 and 2015, approximately 3.6%, 3.4% and 3.5%, respectively, of LCD's
revenues were derived from such capitated agreements.
CDD recognizes revenue either as services are performed or products are delivered, depending on the nature of the work
contracted. Historically, a majority of CDD’s net revenues have been earned under contracts that range in duration from a few
months to a few years, but can extend in duration up to five years or longer. Occasionally, CDD also has committed minimum
volume arrangements with certain customers. Underlying these arrangements are individual project contracts for the specific
services to be provided. These arrangements enable CDD's customers to secure its services in exchange for which they commit
to purchase an annual minimum dollar value of services. Under these types of arrangements, if the annual minimum dollar value
of service commitment is not reached, the customer is required to pay CDD for the shortfall. Progress towards the achievement
of annual minimum dollar value of service commitments is monitored throughout the year. Annual minimum commitment shortfalls
are not included in net revenues until the amount has been determined and agreed to by the customer.
Service contracts generally take the form of fee-for-service or fixed-price arrangements subject to pricing adjustments based
on changes in scope. In cases where performance spans multiple accounting periods, revenue is recognized as services are
performed, measured on a proportional-performance basis, generally using output measures that are specific to the service provided.
Examples of output measures in preclinical services, include among others, the number of slides read, or specimens prepared.
F-9
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Examples of output measures in the clinical trials services, include among others, number of investigators enrolled, number of
sites initiated, number of trial subjects enrolled and number of monitoring visits completed, or number of dosings for clinical
pharmacology. Revenue is determined by dividing the actual units of work completed by the total units of work required under
the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments,
represents the aggregate contracted price for each of the agreed upon services to be provided. CDD does not have any contractual
arrangements spanning multiple accounting periods where revenue is recognized on a proportional-performance basis under which
the Company has earned more than an immaterial amount of performance-based revenue (i.e., potential additional revenue tied
to specific deliverables or performance). Changes in the scope of work are common, especially under long-term contracts, and
generally result in a change in contract value. Once the customer has agreed to the changes in scope and renegotiated pricing
terms, the contract value is amended with revenue recognized as described above. Estimates of costs to complete are made to
provide, where appropriate, for losses expected on contracts. Costs are not deferred in anticipation of contracts being awarded,
but instead are expensed as incurred.
Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, CDD bills the
customer for the total contract value in progress-based installments as certain non-contingent billing milestones are reached over
the contract duration, such as, but not limited to, contract signing, initial dosing, investigator site initiation, patient enrollment or
database lock. The term “billing milestone” relates only to a billing trigger in a contract whereby amounts become billable and
payable in accordance with a negotiated predetermined billing schedule throughout the term of a project. These billing milestones
are generally not performance-based (i.e., there is no potential additional consideration tied to specific deliverables or performance).
In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract
value and aggregate amounts billed to the customer would be the same at the end of the project. While CDD attempts to negotiate
terms that provide for billing and payment of services prior or within close proximity to the provision of services, this is not always
possible, and there are fluctuations in the levels of unbilled services and unearned revenue from period to period. While a project
is ongoing, cash payments are not necessarily representative of aggregate revenue earned at any particular point in time, as revenues
are recognized when services are provided, while amounts billed and paid are in accordance with the negotiated billing and payment
terms.
In some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide
for an upfront payment of 10% of the full contract value upon contract signing, but at the time of signing performance of services
has not yet begun. Payments received in advance of services being provided are deferred as unearned revenue on the balance sheet.
As the contracted services are subsequently performed and the associated revenue is recognized, the unearned revenue balance is
reduced by the amount of revenue recognized during the period.
In other cases, services may be provided and revenue recognized before the customer is invoiced. In these cases, revenue
recognized will exceed amounts billed, and the difference, representing an unbilled receivable, is recorded for the amount that is
currently unbillable to the customer pursuant to contractual terms. Once the customer is invoiced, the unbilled services are reduced
for the amount billed, and a corresponding account receivable is recorded. All unbilled services are billable to customers within
one year from the respective balance sheet date.
Most contracts are terminable with or without cause by the customer, either immediately or upon notice. These contracts often
require payment to CDD of expenses to wind down the study or project, fees earned to date and, in some cases, a termination fee
or a payment to CDD of some portion of the fees or profits that could have been earned by CDD under the contract if it had not
been terminated early. Termination fees are included in net revenues when services are performed and realization is assured. In
connection with the management of multi-site clinical trials, CDD pays on behalf of its customers fees to investigators, clinical
trial subjects and certain out-of-pocket costs, for which it is reimbursed at cost, without markup or profit. Investigator fees are not
reflected in net revenues or expenses where CDD acts in the capacity of an agent on behalf of the biopharmaceutical company
sponsor, passing through these costs without markup or profit. All other out-of-pocket costs are included in total revenues and
expenses.
The Company's total revenues are comprised of the following:
Total revenues
LCD - net revenue
CDD - net revenue
CDD - reimbursable out-of-pocket expenses
Intercompany eliminations
Total revenues
Years Ended December 31,
2016
2015
2017
$
$
7,170.5
3,037.2
235.5
(1.8)
10,441.4
$
$
6,593.9
2,844.1
204.6
(0.8)
9,641.8
$
$
6,199.3
2,306.4
174.4
—
8,680.1
F-10
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Reimbursable Out-of-Pocket Expenses
CDD pays on behalf of its customers certain out-of-pocket costs for which the Company is reimbursed at cost, without mark-
up or profit. Out-of-pocket costs paid by CDD are reflected in operating expenses, while the reimbursements received are reflected
in revenues in the consolidated statements of operations. CDD excludes from revenue and expense in the consolidated statements
of operations fees paid to investigators and the associated reimbursement because CDD acts as an agent on behalf of the
biopharmaceutical company sponsors with regard to investigator payments.
Cost of Revenue
Cost of revenue includes direct labor and related benefit charges, other direct costs, shipping and handling fees, and an allocation
of facility charges and information technology costs. Selling, general and administrative expenses consist primarily of
administrative payroll and related benefit charges, advertising and promotional expenses, administrative travel and an allocation
of facility charges and information technology costs. Cost of advertising is expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.
Significant estimates include the allowances for doubtful accounts, deferred tax assets, fair values and amortization lives for
intangible assets, and accruals for self-insurance reserves and pensions. The allowance for doubtful accounts is determined based
on historical collections trends, the aging of accounts, current economic conditions and regulatory changes. Actual results could
differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable.
The Company maintains cash and cash equivalents with various major financial institutions. The total cash and cash equivalent
balances that exceeded the balances insured by the Federal Deposit Insurance Commission, were approximately $315.5 at
December 31, 2017.
Substantially all of the Company’s accounts receivable are with companies in the healthcare or biopharmaceutical industry
and individuals. However, concentrations of credit risk are limited due to the number of the Company’s customers as well as their
dispersion across many different geographic regions.
Although LCD has receivables due from U.S. and state governmental agencies, the Company does not believe that such
receivables represent a credit risk since the related healthcare programs are funded by U.S. and state governments, and payment
is primarily dependent upon submitting appropriate documentation. Accounts receivable balances (gross) from Medicare and
Medicaid were $109.8 and $113.0 at December 31, 2017, and 2016, respectively.
For the Company's operations in Ontario, Canada, the Ontario Ministry of Health and Long-Term Care (Ministry) determines
who can establish a licensed community medical laboratory and caps the amount that each of these licensed laboratories can bill
the government sponsored healthcare plan. The Ontario government-sponsored healthcare plan covers the cost of commercial
laboratory testing performed by the licensed laboratories. The provincial government discounts the annual testing volumes based
on certain utilization discounts and establishes an annual maximum it will pay for all community laboratory tests. The agreed-
upon reimbursement rates are subject to Ministry review at the end of year and can be adjusted (at the government's discretion)
based upon the actual volume and mix of test work performed by the licensed healthcare providers in the province during the year.
The capitated accounts receivable balances from the Ontario government sponsored healthcare plan were CAD $12.9 and CAD
$15.8 at December 31, 2017, and 2016, respectively.
The portion of the Company's accounts receivable due from patients comprises the largest portion of credit risk. At December 31,
2017, and 2016, receivables due from patients represented approximately 20.9% and 20.0% of the Company's consolidated gross
accounts receivable. The Company applies assumptions and judgments including historical collection experience for assessing
collectability and determining allowances for doubtful accounts for accounts receivable from patients.
Earnings per Share
Basic earnings per share is computed by dividing net earnings attributable to Laboratory Corporation of America Holdings by
the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings
including the impact of dilutive adjustments by the weighted average number of common shares outstanding plus potentially
dilutive shares, as if they had been issued at the earlier of the date of issuance or the beginning of the period presented. Potentially
F-11
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, performance
share awards, and shares issuable upon conversion of zero-coupon subordinated notes.
The following represents a reconciliation of basic earnings per share to diluted earnings per share:
2017
Basic earnings per share
Stock options
Restricted stock awards and other
Effect of convertible debt, net of tax
Diluted earnings per share
Income
$
$
1,268.2
—
—
—
1,268.2
Shares
102.4
1.4
—
0.1
103.9
Per
Share
Amount
$ 12.39
$ 12.21
Income
$ 732.1
—
—
—
$ 732.1
2016
Shares
102.5
1.5
—
0.3
104.3
Per
Share
Amount
7.14
$
$
7.02
Income
$ 437.6
—
—
—
$ 437.6
2015
Shares
98.8
1.2
—
0.6
100.6
Per
Share
Amount
4.43
$
$
4.35
The following table summarizes the potential common shares not included in the computation of diluted earnings per share
because their impact would have been antidilutive:
Stock options
Stock Compensation Plans
Years Ended December 31,
2016
—
2015
—
2017
0.1
The Company measures stock compensation cost for all equity awards at fair value on the date of grant and recognizes
compensation expense over the service period for awards expected to vest. The fair value of restricted stock units and performance
share awards is determined based on the number of shares granted and the quoted price of the Company’s common stock on the
grant date. Such value is recognized as expense over the service period, net of estimated forfeitures. The estimation of equity
awards that will ultimately vest requires judgment and the Company considers many factors when estimating expected forfeitures,
including types of awards, employee class, and historical experience. The cumulative effect on current and prior periods of a
change in the estimated forfeiture rate is recognized as compensation expense in earnings in the period of the revision. Actual
results and future estimates may differ substantially from the Company’s current estimates.
See Note 14 for assumptions used in calculating compensation expense for the Company’s stock compensation plans.
Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments, such as commercial paper, time deposits, and other money
market instruments, substantially all of which have maturities when purchased of three months or less.
Inventories
Inventories, consisting primarily of purchased laboratory and customer supplies and finished goods, are stated at the lower of
cost (first-in, first-out) or market. Supplies accounted for $195.2 and $171.7 and finished goods accounted for $32.4 and $33.5 of
total inventory at December 31, 2017, and 2016, respectively.
Prepaid Expenses and Other
In connection with the management of multi-site clinical trials, CDD pays on behalf of its customers certain out-of-pocket
costs, for which the Company is reimbursed at cost, without markup or profit. Amounts receivable from customers in connection
with such out-of-pocket pass-through costs are included in prepaid expenses and other in the accompanying consolidated balance
sheets and totaled $138.2 at December 31, 2017, and $97.1 at December 31, 2016.
Also included in prepaid expenses and other current assets are assets held for sale. The Company records long-lived assets as
held for sale when a plan to sell the asset has been initiated and all other held for sale criteria have been satisfied. Assets classified
as held for sale of $55.2 and $51.2 as of December 31, 2017, and 2016, respectively, are recorded in other current assets on the
consolidated balance sheet at the lower of their carrying value or fair value less cost to sell.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The cost of properties held under capital leases is equal to the lower of the
net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease. Depreciation
and amortization expense is computed on all classes of assets based on their estimated useful lives, as indicated below, using the
straight-line method.
F-12
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Buildings and building improvements
Machinery and equipment
Furniture and fixtures
Software
Years
10 - 40
3 - 10
5 - 10
3 - 10
Leasehold improvements and assets held under capital leases are amortized over the shorter of their estimated useful lives or
the term of the related leases. Expenditures for repairs and maintenance are charged to operations as incurred. Retirements, sales
and other disposals of assets are recorded by removing the cost and accumulated depreciation from the related accounts with any
resulting gain or loss reflected in the consolidated statements of operations.
Capitalized Software Costs
The Company capitalizes purchased software which is ready for service and capitalizes software development costs incurred
on significant projects starting from the time that the preliminary project stage is completed and the Company commits to funding
a project until the project is substantially complete and the software is ready for its intended use. Capitalized costs include direct
material and service costs and payroll and payroll-related costs. Research and development (R&D) costs and other computer
software maintenance costs related to software development are expensed as incurred. Capitalized software costs are amortized
using the straight-line method over the estimated useful life of the underlying system, generally five years.
Long-Lived Assets
The Company assesses goodwill and indefinite-lived intangibles for impairment at least annually or whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be recoverable. In accordance with the FASB updates
to their authoritative guidance regarding goodwill and indefinite-lived intangible asset impairment testing, an entity is allowed to
first assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If an
entity determines that it is not more likely than not that the estimated fair value of an asset is less than its carrying value, then no
further testing is required. Otherwise, impairment testing must be performed in accordance with the original accounting standards.
The updated FASB guidance also allows an entity to bypass the qualitative assessment for any reporting unit in its goodwill
assessment and proceed directly to performing the quantitative assessment. Similarly, a company can proceed directly to a
quantitative assessment in the case of impairment testing for indefinite-lived intangible assets as well.
The quantitative goodwill impairment test includes the estimation of the fair value of each reporting unit as compared to the
carrying value of the reporting unit. Reporting units are businesses with discrete financial information that is available and reviewed
by management. The Company estimates the fair value of a reporting unit using both income-based and market-based valuation
methods. The income-based approach is based on the reporting unit's forecasted future cash flows that are discounted to the present
value using the reporting unit's weighted average cost of capital. For the market-based approach, the Company utilizes a number
of factors such as publicly available information regarding the market capitalization of the Company as well as operating results,
business plans, market multiples, and present value techniques. Based upon the range of estimated values developed from the
income and market-based methods, the Company determines the estimated fair value for the reporting unit. If the estimated fair
value of the reporting unit exceeds the carrying value, the goodwill is not impaired and no further review is required. An entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Management performed its annual goodwill and intangible asset impairment testing as of the beginning of the fourth quarter
of 2017. The Company elected to perform the qualitative assessment for goodwill and intangible assets for all reporting units
except the Canadian reporting unit and its indefinite-lived assets consisting of acquired Canadian licenses for which a quantitative
assessment was performed.
In this qualitative assessment, the Company considered relevant events and circumstances for each reporting unit, including
(i) current year results, (ii) financial performance versus management’s annual and five-year strategic plans, iii) changes in the
reporting unit carrying value since prior year, (iv) industry and market conditions in which the reporting unit operates, (v)
macroeconomic conditions, including discount rate changes, and (vi) changes in products or services offered by the reporting unit.
If applicable, performance in recent years was compared to forecasts included in prior valuations. Based on the results of the
qualitative assessment, the Company concluded that it was not more likely than not that the carrying values of the goodwill and
intangible assets were greater than their fair values, and that further quantitative testing was not necessary.
In 2017, the Company utilized an income approach to determine the fair value of its Canadian reporting unit and its indefinite-
lived assets consisting of acquired Canadian licenses. Based upon the results of the quantitative assessment, the Company concluded
that the fair value of the indefinite-lived Canadian licenses was greater than the carrying value.
F-13
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
It is possible that the Company's conclusions regarding impairment or recoverability of goodwill or intangible assets in any
reporting unit could change in future periods. There can be no assurance that the estimates and assumptions used in the Company's
goodwill and intangible asset impairment testing performed as of the beginning of the fourth quarter of 2017 will prove to be
accurate predictions of the future, if, for example, (i) the businesses do not perform as projected, (ii) overall economic conditions
in 2018 or future years vary from current assumptions (including changes in discount rates), (iii) business conditions or strategies
for a specific reporting unit change from current assumptions, including loss of major customers, (iv) investors require higher
rates of return on equity investments in the marketplace or (v) enterprise values of comparable publicly traded companies, or actual
sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and earnings before interest,
tax, depreciation and amortization (EBITDA). A future impairment charge for goodwill or intangible assets could have a material
effect on the Company's consolidated financial position and results of operations.
Long-lived assets, other than goodwill and indefinite-lived assets, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable. Recoverability of assets to be held and used is
determined by the Company at the level for which there are identifiable cash flows by comparison of the carrying amount of the
assets to future undiscounted net cash flows before interest expense and income taxes expected to be generated by the assets.
Impairment, if any, is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets
(based on market prices in an active market or on discounted cash flows). Assets to be disposed of are reported at the lower of the
carrying amount or fair value.
Intangible Assets
Intangible assets are amortized on a straight-line basis over the expected periods to be benefited, as set forth in the table below,
such as legal life for patents and technology and contractual lives for non-compete agreements.
Customer relationships
Patents, licenses and technology
Non-compete agreements
Trade names
Debt Issuance Costs
Years
-
-
-
-
10
3
5
5
36
15
10
15
The costs related to the issuance of debt are capitalized, netted against the related debt for presentation purposes and amortized
to interest expense over the terms of the related debt.
Professional Liability
The Company is self-insured (up to certain limits) for professional liability claims arising in the normal course of business,
generally related to the testing and reporting of laboratory test results. The Company estimates a liability that represents the ultimate
exposure for aggregate losses below those limits. The liability is based on assumptions and factors for known and incurred but
not reported claims, including the frequency and payment trends of historical claims.
Income Taxes
The Company accounts for income taxes utilizing the asset and liability method. Under this method deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and for tax loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company does not recognize a tax benefit unless the Company concludes
that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits
of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest
amount of the tax benefit that the Company believes is greater than 50% likely to be realized. The Company records interest and
penalties in income tax expense.
Derivative Financial Instruments
Interest rate swap agreements, which have been used by the Company from time to time in the management of interest rate
exposure, are accounted for at fair value. The Company’s zero-coupon subordinated notes contain two features that are considered
to be embedded derivative instruments under authoritative guidance in connection with accounting for derivative instruments and
hedging activities. The Company believes these embedded derivatives had no fair value at December 31, 2017, and 2016.
See Note 18 for the Company’s objectives in using derivative instruments and the effect of derivative instruments and related
hedged items on the Company’s financial position, financial performance and cash flows.
F-14
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Fair Value of Financial Instruments
Fair value measurements for financial assets and liabilities are determined based on the assumptions that a market participant
would use in pricing an asset or liability. A three-tiered fair value hierarchy draws distinctions between market participant
assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices
in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company
to use present value and other valuation techniques in the determination of fair value (Level 3).
Research and Development
The Company expenses R&D costs as incurred.
Foreign Currencies
For subsidiaries outside of the U.S. that operate in a local currency environment, income and expense items are translated to
U.S. dollars at the monthly average rates of exchange prevailing during the period, assets and liabilities are translated at period-
end exchange rates and equity accounts are translated at historical exchange rates. Translation adjustments are accumulated in a
separate component of shareholders’ equity in the consolidated balance sheets and are included in the determination of
comprehensive income in the consolidated statements of comprehensive earnings and consolidated statements of changes in
shareholders’ equity. Transaction gains and losses are included in the determination of net income in the consolidated statements
of operations.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued the converged standard on revenue recognition with
the objective of providing a single, comprehensive model for all contracts with customers to improve comparability in the financial
statements of companies reporting using International Financial Reporting Standards and U.S. GAAP. The standard contains
principles that an entity must apply to determine the measurement of revenue and timing of when it is recognized. The underlying
principle is that an entity must recognize revenue to depict the transfer of goods or services to customers at an amount that the
entity expects to be entitled to in exchange for those goods or services. An entity can apply the revenue standard retrospectively
to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying
the standard recognized at the date of initial application in retained earnings. The standard will be effective for the Company
beginning January 1, 2018.
The Company will adopt the full retrospective method allowed by this standard effective January 1, 2018, and is continuing
to evaluate the expected impact of the standard. Currently, the Company expects this standard to reduce LCD revenue but increase
LCD operating margins due to the recording of substantially all LCD bad debt expense against net revenues (versus selling, general
and administrative expense) as an implicit price reduction. The Company expects this standard to increase CDD reported revenue
and decrease gross profit margin due to inclusion of reimbursable out-of-pocket expenses and investigator fees in revenues and
cost of sales. In addition, the Company expects the timing of revenue recognition for customer contracts in the clinical business
to accelerate, as revenue from study related change orders will be included in the total transaction price and recognized as the
single performance obligation is satisfied, when reasonably estimated, which is often prior to the signed change order threshold
used previously. CDD will also discontinue its current practice of expensing sales commissions when paid upon the execution of
a customer contract and instead will recognize this selling expense over the weighted average of the underlying contract terms for
each major revenue stream. Based on its preliminary analysis, the Company currently anticipates that 2017 total revenue will be
approximately 2% to 5% higher under the new standard upon retrospective restatement consisting of an increase in CDD revenue
(due in large part to the inclusion of out-of-pocket and investigator fees in revenue) partially offset by a decrease in LCD revenue
(due to the recording of bad debt expense as an offset within revenue). The Company also anticipates enhanced financial statement
disclosures surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company is currently performing a detailed contract review which will be completed before the final quantification of the
impact of the standard is completed. The impact of the new standard will be finalized upon adoption in the first quarter of 2018
and is therefore subject to change.
In January 2016, the FASB issued a new accounting standard that addresses certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. A financial instrument is defined as cash, evidence of ownership interest in
a company or other entity, or a contract that both: (i) imposes on one entity a contractual obligation either to deliver cash or another
financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with the second
entity, and (ii) conveys to that second entity a contractual right either to receive cash or another financial instrument from the first
entity or to exchange other financial instruments on potentially favorable terms with the first entity. The standard will be effective
for the Company beginning January 1, 2018. The Company is evaluating the impact that this new standard will have on the
consolidated financial statements.
F-15
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
In February 2016, the FASB issued a new accounting standard that sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to
apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease
is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on
an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use
asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term
of 12 months or less will be accounted for based on guidance similar to current guidance for operating leases. The new standard
requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases,
direct financing leases and operating leases. The standard is effective for the Company on January 1, 2019. The Company has
selected its leasing software solution and is evaluating the impact that this new standard will have on the consolidated financial
statements.
In June 2016, the FASB issued a new accounting standard intended to provide financial statement users with more decision-
useful information about expected credit losses and other commitments to extend credit held by the reporting entity. The standard
replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective
on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact this new standard will have
on the consolidated financial statements.
In August 2016, the FASB issued a new accounting standard that will make eight targeted changes to how cash receipts and
cash payments are presented and classified in the statement of cash flows. This update is effective on January 1, 2018, and will
require adoption on a retrospective basis. The Company expects the adoption of this standard to reclassify interest paid upon
conversion of its zero-coupon subordinated notes from a financing activity to an operating activity and potentially to impact the
classification of deferred acquisition payments depending upon timing and amount of final payout.
In January 2017, the FASB issued a new accounting standard that changes the definition of a business to assist entities with
evaluating when a set of transferred assets and activities is a business. This update is effective on January 1, 2018, with early
adoption permitted. The Company is currently evaluating the impact the application of this new standard will have on the
consolidated financial statements. This adoption of this standard is not expected to have a material impact on the consolidated
financial statements.
In January 2017, the FASB issued a new accounting standard that eliminates Step 2 of the goodwill impairment test. Instead,
an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative
impairment test is necessary. The update is effective for public business entities for the first interim and annual reporting periods
beginning after January 1, 2020 with early adoption permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company adopted this standard effective January 1, 2017.
In March 2017, the FASB issued a new accounting standard that requires employers that present a measure of operating income
in their statement of income to include only the service cost component of net periodic pension cost and net periodic post-retirement
benefit cost in operating expenses with other employee compensation costs. The other components of net benefit cost, including
amortization of prior service cost/credit, and settlement and curtailment effects are to be included in non-operating expenses. This
update is effective on January 1, 2018, with early adoption permitted. The Company expects that the adoption of this standard
will reduce operating margin due to the service cost remaining in operating expenses with no offset from the other components
of net pension cost. This will have no impact on net earnings.
In May 2017, the FASB issued a new accounting standard that amends the scope of modification accounting for share-based
payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards
to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification
accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the
modification. This update is effective on January 1, 2018, with early adoption permitted and should be applied prospectively to
an award modified on or after the adoption date.
In July 2017, the FASB issued a new accounting standard intended to reduce the complexity associated with the issuer's
accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would
no longer cause a free-standing equity-linked financial instrument (or embedded conversion option) to be accounted for as a
derivative liability at fair value with changes in fair value recognized in current earnings. This update is effective on January 1,
F-16
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
2019, with early adoption permitted and the option to use the retrospective or modified retrospective adoption method. The
Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2017, the FASB issued a new accounting standard intended to more closely align hedge accounting with companies'
risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of
hedging programs. As a result, more hedging strategies will be eligible for hedge accounting. This update is effective on January
1, 2019, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the
consolidated financial statements.
2. BUSINESS ACQUISITIONS
On September 1, 2017, the Company completed the acquisition of Chiltern International Group Limited (Chiltern), a specialty
contract research organization, pursuant to a definitive agreement to acquire all of the share capital of Chiltern, in an all-cash
transaction valued at approximately $1,224.5. The Company funded the acquisition through a combination of bank financing and
the issuance of bonds. Chiltern is part of the Company's CDD segment.
The valuation of acquired assets and assumed liabilities as of September 1, 2017, include the following:
Consideration Transferred
Cash consideration
Net Assets Acquired
Cash and cash equivalents
Accounts receivable
Unbilled services
Prepaid expenses and other
Property, plant and equipment
Goodwill
Customer relationships
Trade names and trademarks
Technology
Favorable leases
Total assets acquired
Accounts payable
Accrued expenses and other
Unearned revenue
Deferred income taxes
Other liabilities
Total liabilities acquired
Net assets acquired
Initial
Measurement
Period Adjustments
Preliminary as of
December 31, 2017
$
1,224.5
$
$
30.7
116.9
32.6
57.9
12.1
676.6
629.0
24.1
47.0
—
1,626.9
18.1
51.0
124.2
208.0
1.1
402.4
1,224.5
$
— $
(11.3)
—
—
—
83.9
(27.0)
(13.5)
(21.0)
0.9
12.0
27.0
(27.6)
—
12.6
—
12.0
$
— $
30.7
105.6
32.6
57.9
12.1
760.5
602.0
10.6
26.0
0.9
1,638.9
45.1
23.4
124.2
220.6
1.1
414.4
1,224.5
The amortization periods for intangible assets acquired are 21 years for customer relationships, 4 years for trade names and
trademarks, and 6 years for technology. During the fourth quarter, the Company recorded certain measurement period adjustments
to appropriately state the fair value of the net assets acquired from Chiltern. Given the September 1, 2017 closing date of the
Chiltern acquisition, these adjustments would have had no material income statement impact had they been recorded as part of
the initial purchase price allocation.
The acquisition contributed $188.4 and $11.6 of net revenue and operating income, respectively, during the year ended
December 31, 2017.
Unaudited Pro Forma Information
The Company completed the Chiltern acquisition on September 1, 2017. Had the Chiltern acquisition been completed as of
January 1, 2016, the Company's pro forma results for 2017 would have been as follows:
F-17
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Total net revenues
Operating income
Net income
Earnings per share:
Basic
Diluted
Year Ended
December 31, 2017 December 31, 2016
9,937.4
$
1,327.2
714.3
10,576.3 $
1,377.0
1,258.3
$
$
12.29 $
12.11 $
6.97
6.85
During the year ended December 31, 2017, the Company also acquired various laboratories and related assets, including
Pathology Associates Medical Laboratories (PAML), for approximately $688.8 in cash (net of cash acquired). These acquisitions
were made primarily to extend the Company's geographic reach in important market areas and/or enhance the Company's scientific
differentiation and esoteric testing capabilities. The purchase consideration for these acquisitions, including Chiltern, has been
allocated to the estimated fair market value of the net assets acquired, including approximately $1,053.0 in identifiable intangible
assets (primarily customer relationships and non-compete agreements) and a residual amount of goodwill of approximately
$1,009.8.
As a result of the acquisition of PAML, the Company acquired PAML’s ownership interests in six joint ventures. During 2017,
the Company further acquired the ownership interests of the other members of two of the six joint ventures, and the Company’s
ownership interest in one of the six joint ventures was acquired by the other member. During 2018, the Company intends to acquire
the membership interests of the other members of an additional two of these six joint ventures and will continue to evaluate future
options for the membership interests in the sixth joint venture. The Company will continue to record minority interests in the
consolidated joint ventures for which final transactions have not yet been completed. The purchase consideration for the transaction
has been preliminarily allocated to the estimated fair market value of the net assets acquired. The amounts paid in advance for the
ownership interest in the three joint ventures are included in other assets on the condensed consolidated balance sheet. The total
purchase consideration for the transaction is classified as cash paid for acquisition of a business on the condensed consolidated
statement of cash flows.
The purchase price allocation for the Chiltern and PAML acquisitions are still preliminary and subject to change. The areas of
the purchase price allocation that are not yet finalized relate primarily to intangible assets, goodwill, investment in joint ventures
and the impact of finalizing deferred taxes. Accordingly, adjustments may be made as additional information is obtained about
the facts and circumstances that existed as of the valuation date. The Company expects these purchase price allocations to be
finalized within a year from each acquisition date. Any adjustments will be recorded in the period in which they are identified.
During the year ended December 31, 2016, the Company acquired various laboratories and related assets for approximately
$548.6 in cash (net of cash acquired).
The Company completed the acquisition of Sequenom, Inc., a market leader in non-invasive prenatal testing, women's health
and reproductive genetics on September 7, 2016, through a cash tender offer for $2.40 per share, or a transaction price of $249.1,
net of cash received, and acquired $130.0 of debt. The Sequenom purchase consideration has been allocated to the estimated fair
market value of the net assets acquired, including approximately $146.6 in identifiable intangible assets (primarily customer
relationships, technology, and trade names) with weighted-average useful lives of approximately 14.6 years; $45.1 in deferred tax
liabilities (relating to identifiable intangible assets); and a residual amount of non-tax deductible goodwill of approximately $206.0.
The Company also acquired various other laboratories and related assets for approximately $299.5 in cash (net of cash acquired).
The purchase consideration for these acquisitions has been allocated to the estimated fair market value of the net assets acquired,
including approximately $126.2 in identifiable intangible assets (primarily customer relationships) and a residual amount of
goodwill of approximately $192.3. These acquisitions were made primarily to extend the Company's geographic reach in important
market areas and/or enhance the Company's scientific differentiation and esoteric testing capabilities.
On February 19, 2015, the Company completed its acquisition of Covance Inc. (Covance), a leading drug development services
company and a leader in nutritional analysis, for $6,150.7. The Company issued debt and common stock to fund the acquisition
of Covance. Covance stockholders received $75.76 in cash and 0.2686 shares of the Company's common stock for each share of
Covance common stock they owned. The Company financed the Covance acquisition with $3,900.0 of debt, 15.3 shares of its
common stock and $488.2 of available cash, $400.0 of which was derived from a bridge term loan credit facility. On January 30,
2015, the Company issued $2,900.0 in debt securities, consisting of $500.0 aggregate principal amount of 2.625% Senior Notes
due 2020, $500.0 aggregate principal amount of 3.20% Senior Notes due 2022, $1,000.0 aggregate principal amount of 3.60%
Senior Notes due 2025 and $900.0 aggregate principal amount of 4.70% Senior Notes due 2045. The Company also entered into
a $1,000.0 term loan facility which was advanced in full on the February 19, 2015. The term loan credit facility will mature five
years after the closing date of the Covance acquisition and may be prepaid without penalty.
F-18
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Unaudited Pro Forma Information
The Company completed the acquisition of Covance on February 19, 2015. Had the acquisition been completed as of the
beginning of 2014, the Company's pro forma results for 2015 would have been as follows:
Total revenues
Operating income
Net income
Earnings per share:
Basic
Diluted
Year Ended
December 31, 2015
$
$
$
9,033.3
1,117.2
547.5
5.05
5.03
During the year ended December 31, 2015, the Company also acquired various other laboratories and related assets for
approximately $128.4 in cash (net of cash acquired). These acquisitions were made primarily to extend the Company's geographic
reach in important market areas and/or enhance the Company's scientific differentiation and esoteric testing capabilities. The
purchase consideration for these acquisitions has been allocated to the estimated fair market value of the net assets acquired,
including approximately $17.4 in identifiable intangible assets (primarily customer relationships and non-compete agreements)
and a residual amount of goodwill of approximately $68.4.
3. RESTRUCTURING AND OTHER SPECIAL CHARGES
During 2017, the Company recorded net restructuring charges of $70.9; $16.8 within LCD and $54.1 within CDD. The charges
were comprised of $36.1 in severance and other personnel costs and $39.9 in facility-related costs primarily associated with general
integration activities. The charges were offset by the reversal of previously established reserves of $0.5 in unused severance and
$4.6 in unused facility-related costs. The Company also incurred legal and other costs of $43.9 relating to acquisition initiatives,
including Chiltern. The Company recorded $25.4 in consulting and other expenses relating to the Covance and Chiltern integration
and compensation analysis, along with $0.9 in short-term equity retention arrangements relating to the Covance acquisition. In
addition, the Company incurred $1.3 in consulting expenses relating to fees incurred as part of its integration and management
transition costs as well as $8.2 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad
business process improvement initiative (all recorded in selling, general and administrative expenses). The Company also
recognized asset impairment losses of $23.5 related to the termination of software development projects within the CDD segment
and the forgiveness of certain indebtedness for LCD customers in areas heavily impacted by hurricanes during the third quarter.
On April 25, 2017, the Company announced that it was expanding LaunchPad to include its CDD segment. The Company
generated $20.0 in savings in 2017, and expects to achieve additional net savings of $130.0 through the three-year period ending
2020. This initiative is expected to align people and capabilities with client and business demand, utilize automation and new
information technology platforms to create efficiencies, and enhance customers' experience with CDD through investments in
commercial and operational processes.
During 2016, the Company recorded net restructuring charges of $58.4; $15.8 within LCD and $42.6 within CDD. The charges
were comprised of $30.9 in severance and other personnel costs and $33.8 in facility-related costs primarily associated with general
integration activities. The Company incurred additional legal and other costs of $4.6 relating to the wind down of its minimum
volume service contract operations and incurred $8.0 in acquisition fees and expenses. The Company also recorded $6.9 in
consulting expenses relating to fees incurred as part of its Covance acquisition integration costs and compensation analysis, along
with $2.5 in short-term equity retention arrangements relating to the Covance acquisition and $8.9 of accelerated equity
compensation and other final compensation relating to executive transition, along with $9.0 of non-capitalized costs associated
with the implementation of a major system as part of LaunchPad, LCD's comprehensive, enterprise-wide business process
improvement initiative (all recorded in selling, general and administrative expenses). The Company also recorded a $3.6 gain on
sale for certain assets held for sale. The Company incurred $5.6 of interest expense relating to the early retirement of subsidiary
indebtedness assumed as part of its recent acquisition of Sequenom.
During 2015, the Company recorded net restructuring charges of $113.9; $39.2 within LCD and $74.7 within CDD. The charges
were comprised of $59.2 in severance and other personnel costs and $55.8 in facility-related costs primarily associated with the
ongoing integration of Orchid Cellmark, Inc. and the Integrated Genetics business (formerly Genzyme Genetics) and costs
associated with the previously announced termination of an executive vice president. These charges were offset by the reversal
of previously established reserves of $1.1 in unused facility-related costs. A substantial portion of these costs relate to the planned
closure of two CDD operations that serviced a minimum volume contract that expired on October 31, 2015. These charges were
offset by the reversal of previously established reserves of $3.5 in unused facility related costs. Included within the facility-related
F-19
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
charges noted above is a $26.7 asset impairment charge relating to CDD lab and customer service applications that will no longer
be used.
In addition, during 2015, the Company recorded $25.6 in consulting expenses (recorded in selling, general and administrative
expenses) relating to fees incurred as part of LaunchPad as well as Covance integration costs and employee compensation studies,
along with $5.4 in short-term equity retention arrangements relating to the acquisition of Covance and $0.3 of accelerated equity
compensation relating to the retirement of a Company executive (all recorded in selling, general and administrative expenses).
The Company also incurred $5.7 relating to the wind down of the minimum volume contract operations referred to in the previous
paragraph.
Additionally, the Company recorded $166.0 of deal costs related to the Covance acquisition, of which $113.4 is included in
selling, general and administrative expenses and $52.6 is included in interest expense. During 2015, the Company also recorded
a non-cash loss of $2.3, upon the dissolution of one of its equity investments, which is included in other, net expenses. During the
fourth quarter, the Company paid $12.2 in settlement costs and litigation expenses related to the resolution of a U.S. court putative
class action lawsuit. In addition, the Company incurred $3.0 of non-capitalized costs associated with the implementation of a
major system as part of LaunchPad.
4. RESTRUCTURING RESERVES
The following represents the Company’s restructuring activities for the period indicated:
Balance as of December 31, 2016
Restructuring charges
Reduction of prior restructuring accruals
Cash payments and other adjustments
Balance as of December 31, 2017
Current
Non-current
LCD
CDD
Severance and
Other
Employee Costs
7.5
$
11.4
(1.1)
(16.1)
1.7
$
Lease and
Other
Facility Costs
14.1
$
6.6
(0.1)
(10.5)
10.1
$
Severance and
Other
Employee Costs
28.2
$
24.7
(3.5)
(41.1)
8.3
$
Lease and
Other
Facility Costs
32.5
$
33.3
(0.4)
(30.8)
34.6
$
Total
$
$
$
$
82.3
76.0
(5.1)
(98.5)
54.7
22.2
32.5
54.7
The non-current portion of the restructuring liabilities is expected to be paid out over 6.4 years. Cash payments and other
adjustments include the reclassification of profit sharing, pension, and holiday accrual.
5. JOINT VENTURE PARTNERSHIPS AND EQUITY METHOD INVESTMENTS
At December 31, 2017, the Company had investments in the following unconsolidated joint venture partnerships and equity
method investments:
Locations
Joint Venture Partnerships:
Alberta, Canada (2)
Florence, South Carolina
PAML joint ventures
Equity Method Investments:
Various
Net Investment
Interest Owned
$
$
45.5
10.1
(0.1)
3.7
43.37%
49.00%
various
various
The joint venture agreements that govern the conduct of business of these partnerships mandate unanimous agreement between
partners on all major business decisions as well as providing other participating rights to each partner. The equity method investments
represent the Company’s purchase of ownership interests in clinical diagnostic companies. The investments are accounted for
under the equity method of accounting as the Company does not have control of these investments. The Company has no material
obligations or guarantees to, or in support of, these unconsolidated investments and their operations.
As a result of the acquisition of PAML, the Company acquired PAML’s ownership interests in six joint ventures. During 2017,
the Company further acquired the ownership interests of the other members of two of the six joint ventures, and the Company’s
ownership interest in one of the six joint ventures was acquired by the other member. During 2018, the Company intends to acquire
the membership interests of the other members of an additional two of these six joint ventures and will continue to evaluate future
options for the membership interests in the sixth joint venture. The Company will continue to record minority interests in the
consolidated joint ventures for which final transactions have not yet been completed.
F-20
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Condensed unconsolidated financial information for joint venture partnerships and equity method investments is shown in the
following table.
As of December 31:
Current assets
Other assets
Total assets
Current liabilities
Other liabilities
Total liabilities
Partners' equity
Total liabilities and partners’ equity
For the period January 1 - December 31:
Net revenues
Gross profit
Net earnings
$
$
$
$
$
2017
2016
45.7
14.4
60.1
31.6
1.0
32.6
27.5
60.1
2016
156.7
45.7
20.3
$
$
$
$
$
24.3
16.9
41.2
15.5
0.3
15.8
25.4
41.2
2015
213.7
54.3
20.1
$
2017
212.5
62.6
25.7
The Company’s recorded investment in one of its Alberta joint venture partnerships at December 31, 2017, includes $34.6 of
value assigned to that partnership’s Canadian license to conduct diagnostic testing services in the province. Substantially all of
the joint venture's revenue is received as reimbursement from the Alberta government's healthcare programs. While the Canadian
license provides the joint venture the ability to conduct diagnostic testing in Alberta, it does not guarantee that the provincial
government will continue to reimburse diagnostic laboratory testing in future years at current levels. A decision by the provincial
government to limit or reduce its reimbursement of laboratory diagnostic services would have a negative impact on the profits
and cash flows the Company derives from the joint venture. In August 2016, AHS and the Canadian partnership reached an
agreement to extend the contract for five additional years through March 2022, with the intent to have the services provided
pursuant to the contract transferred to AHS at the end of the five-year period. In consideration of AHS acquiring the assets and
assuming liabilities in accordance with the parties’ agreement, AHS will pay CAD $50.0 to the partnership when the transfer is
effective, subject to a working capital adjustment. The Company will amortize the value of the partnership's Canadian license to
its residual over the remaining term of the agreement.
6. ACCOUNTS RECEIVABLE, NET
Gross accounts receivable
Less allowance for doubtful accounts
Bad debt expense was $314.7, $287.3 and $265.4 in 2017, 2016 and 2015 respectively.
7. PROPERTY, PLANT AND EQUIPMENT, NET
Land
Buildings and building improvements
Machinery and equipment
Software
Leasehold improvements
Furniture and fixtures
Construction in progress
Equipment and real estate under capital leases
Less accumulated depreciation and amortization of capital lease assets
December 31,
2017
December 31,
2016
$
$
1,742.2
(260.9)
1,481.3
$
$
1,564.3
(235.6)
1,328.7
December 31,
2017
December 31,
2016
$
$
78.4
708.6
1,181.0
672.2
333.5
90.6
185.1
79.2
3,328.6
(1,579.7)
1,748.9
$
$
78.4
692.8
1,060.1
626.2
302.0
76.9
193.0
81.3
3,110.7
(1,392.1)
1,718.6
Depreciation expense and amortization of property, plant and equipment was $306.8, $311.1 and $269.9 for 2017, 2016 and
2015, respectively, including software depreciation of $85.6, $79.2, and $66.1 for 2017, 2016 and 2015, respectively.
F-21
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
8. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill (net of accumulated amortization) for the years ended December 31, 2017
and 2016 are as follows:
Balance as of January 1
Goodwill acquired during
the year
Foreign currency impact
and other adjustments to
goodwill
Balance at end of year
LCD
CDD
Total
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$
3,644.8
$
3,137.7
$
2,779.6
$
3,064.4
$
6,424.4
$
6,202.1
198.5
398.3
811.3
—
1,009.8
398.3
1.1
3,844.4
$
108.8
3,644.8
$
94.7
3,685.6
$
(284.8)
2,779.6
$
95.8
7,530.0
$
(176.0)
6,424.4
$
The components of identifiable intangible assets are as follows:
December 31, 2017
December 31, 2016
Customer relationships
Patents, licenses and technology
Non-compete agreements
Trade names
Land use rights
Canadian licenses
Gross
Carrying
Amount
$
$
4,297.9
457.9
79.0
426.3
10.9
495.7
5,767.7
Accumulated
Amortization
$
(1,014.9) $
(188.6)
(49.4)
(171.4)
(2.6)
—
(1,426.9) $
$
Net
Carrying
Amount
Gross
Carrying
Amount
3,283.0
269.3
29.6
254.9
8.3
495.7
4,340.8
$
$
3,275.3
395.3
53.0
406.3
10.0
464.2
4,604.1
Accumulated
Amortization
$
(855.2) $
(163.3)
(42.1)
(141.6)
(1.4)
—
(1,203.6) $
$
Net
Carrying
Amount
2,420.1
232.0
10.9
264.7
8.6
464.2
3,400.5
A summary of amortizable intangible assets acquired during 2017, and their respective weighted average amortization periods
are as follows:
Customer relationships
Patents, licenses and technology
Non-compete agreements
Trade names
Favorable leases
Amount
955.7
52.9
27.8
15.7
0.9
1,053.0
$
$
Weighted Average
Amortization Period
20.7
6.7
6.6
5.7
3.0
19.3
Amortization of intangible assets, including amortization of the Canadian license recorded in other assets, was $216.5, $179.5
and $164.5 in 2017, 2016 and 2015, respectively. The Company recorded earn-out and purchase accounting adjustments through
amortization expense of $3.0, $4.9, and $1.7 in 2017, 2016 and 2015, respectively. Amortization expense of intangible assets is
estimated to be $195.0 in fiscal 2018, $187.2 in fiscal 2019, $179.8 in fiscal 2020, $176.8 in fiscal 2021, $175.0 in fiscal 2022,
and $2,899.7 thereafter.
F-22
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
9. ACCRUED EXPENSES AND OTHER
Employee compensation and benefits
Self-insurance reserves
Accrued taxes payable
Royalty and license fees payable
Restructuring reserves
Acquisition related reserves
Interest payable
Rebates
Other
10. OTHER LIABILITIES
Post-retirement benefit obligation
Defined-benefit plan obligation
Restructuring reserves
Self-insurance reserves
Acquisition related reserves
Deferred compensation plan obligation
Worker's compensation and auto
Straight-line rent
Escheat liability
Other
11. DEBT
December 31,
2017
December 31,
2016
$
$
324.6
45.7
64.5
6.2
22.2
21.3
71.7
24.6
52.1
632.9
$
$
288.2
48.2
61.2
9.5
47.7
10.3
58.6
19.5
50.5
593.7
December 31,
2017
December 31,
2016
$
$
7.4
163.4
32.5
28.9
3.1
64.5
39.0
12.7
10.9
15.8
378.2
$
$
5.8
195.4
34.6
17.1
15.7
54.2
33.1
13.3
8.3
14.5
392.0
Short-term borrowings and current portion of long-term debt at December 31, 2017, and 2016 consisted of the following:
Zero-coupon convertible subordinated notes
2.20% Senior Notes due 2017
2.50% Senior Notes due 2018
Debt issuance costs
Capital lease obligation
Current portion of note payable
Total short-term borrowings and current portion of long-term debt
Long-term debt at December 31, 2017, and 2016 consisted of the following:
December 31,
2017
December 31,
2016
$
$
8.8
—
400.0
(1.4)
8.3
1.8
417.5
$
$
42.4
500.0
—
(1.3)
8.4
—
549.5
F-23
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
2.50% Senior Notes due 2018
4.625% Senior Notes due 2020
2.625% Senior Notes due 2020
3.75% Senior Notes due 2022
3.20% Senior Notes due 2022
4.00% Senior Notes due 2023
3.25% Senior Notes due 2024
3.60% Senior Notes due 2025
3.60% Senior Notes due 2027
4.70% Senior Notes due 2045
2014 Term loan
2017 Term loan
Debt issuance costs
Capital leases
Note payable
Total long-term debt
Credit Facilities
December 31,
2017
December 31,
2016
—
604.1
500.0
500.0
500.0
300.0
600.0
1,000.0
600.0
900.0
72.0
750.0
(48.2)
57.8
8.9
6,344.6
$
400.0
614.6
500.0
500.0
500.0
300.0
—
1,000.0
—
900.0
565.0
—
(43.0)
56.2
7.2
5,300.0
$
On September 15, 2017, the Company entered into a new $750.0 term loan. The 2017 term loan facility will mature on
September 15, 2022. The 2014 term loan balance was $72.0 and $565.0 at December 31, 2017, and 2016, respectively. The
2017 term loan balance at December 31, 2017, was $750.0.
On December 19, 2014, the Company entered into a five-year term loan credit facility in the principal amount of $1,000.0
for the purpose of financing a portion of the cash consideration and the fees and expenses in connection with the transactions
contemplated by the November 2, 2014 Merger Agreement to acquire Covance. The term loan credit facility was advanced in
full on the Covance acquisition date and was amended on July 13, 2016 and further amended on September 15, 2017. The term
loan credit facility will mature five years after the Covance acquisition date and may be prepaid without penalty. The term loan
balance at December 31, 2017, was $72.0.
On September 15, 2017, the Company also entered into an amendment and restatement of its existing senior revolving credit
facility, which was originally entered into on December 21, 2011, was amended and restated on December 15, 2015 and was
further amended on July 13, 2016. The senior 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. The revolving
credit facility also provides for a subfacility of up to $100.0 for swing line borrowings and a subfacility of up to $150.0 for
issuances of letters of credit. The revolving credit facility is permitted to be used for general corporate purposes, including
working capital, capital expenditures, funding of share repurchases and certain other payments, and acquisitions and other
investments. There were no balances outstanding on the Company's current revolving credit facility at December 31, 2017, or
December 31, 2016.
On January 30, 2015, the Company issued the Covance acquisition notes, which represent $2,900.0 in debt securities
consisting of $500.0 aggregate principal amount of 2.625% Senior Notes due 2020, $500.0 aggregate principal amount of 3.20%
Senior Notes due 2022, $1,000.0 aggregate principal amount of 3.60% Senior Notes due 2025 and $900.0 aggregate principal
amount of 4.70% Senior Notes due 2045. Net proceeds from the offering of the Covance acquisition notes were $2,870.2 after
deducting underwriting discounts and other estimated expenses of the offering. Net proceeds were used to pay a portion of the
cash consideration and the fees and expenses in connection with the Covance acquisition.
On February 13, 2015, the Company entered into a 60-day cash bridge term loan credit facility in the principal amount of
$400.0 for the purpose of financing a portion of the cash consideration and the fees and expenses in connection with the
transactions contemplated by the Merger Agreement. The 60-day cash bridge term loan credit facility was entered into on the
terms set forth in the bridge facility commitment letter for the $400.0 60-day cash bridge tranche. The 60-day cash bridge term
loan credit facility was advanced in full on the Covance acquisition date. On March 16, 2015, the Company elected to prepay
the bridge facility without penalty.
Under the Company's term loan facilities 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 in the term loan facility and
the revolving credit facility at December 31, 2017, and 2016. As of December 31, 2017, the ratio of total debt to consolidated
F-24
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
EBITDA was 3.2 to 1.0.
The 2014 term loan credit facility accrues interest at a per annum rate equal to, at the Company’s election, either an
Intercontinental Exchange London Inter-bank Offered Rate (LIBOR) rate plus a margin ranging from 1.125% to 2.00%, or a base
rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.125% to 1.00%. The 2017 term loan
credit facility accrues interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin ranging
from 0.875% to 1.50%, or a base rate determined according to a prime rate or federal funds rate plus a margin ranging from 0.0%
to 0.50%. Advances under the revolving credit facility accrue interest at a per annum rate equal to, at the Company’s election,
either a LIBOR rate plus a margin ranging from 0.775% to 1.25%, or a base rate determined according to a prime rate or federal
funds rate plus a margin ranging from 0.00% to 0.25%. Fees are payable on outstanding letters of credit under the revolving credit
facility at a per annum rate equal to the applicable margin for LIBOR loans, and the Company is required to pay a facility fee on
the aggregate commitments under the revolving credit facility, at a per annum rate ranging from 0.10% to 0.25%. The interest
margin applicable to the credit facilities, and the facility fee and letter of credit fees payable under the revolving credit facility,
are based on the Company’s senior credit ratings as determined by S&P and Moody’s.
As of December 31, 2017, the effective interest rate on the revolving credit facility was 2.7%, and the effective interest rate
on the 2014 term loan was 2.8% and on the 2017 term loan was 2.6%.
Zero-Coupon Convertible Subordinated Notes
The Company had $9.0 and $46.0 aggregate principal amount at maturity of zero-coupon convertible subordinated notes (the
Notes) due 2021 outstanding at December 31, 2017, and 2016, respectively. The Notes, which are subordinate to the Company’s
bank debt, were sold at an issue price of $671.65 per $1,000.0 principal amount at maturity (representing a yield to maturity of
2.0% per year). Each one thousand dollar principal amount at maturity of the Notes is convertible into 13.4108 shares of the
Company’s common stock, subject to adjustment in certain circumstances, if one of the following conditions occurs:
1)
2)
3)
4)
The sales price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days
ending on the last trading day of the preceding quarter reaches specified thresholds (beginning at 120% and declining
0.1282% per quarter until it reaches approximately 110% for the quarter beginning July 1, 2021 of the accreted conversion
price per share of common stock on the last day of the preceding quarter). The accreted conversion price per share will
equal the issue price of a note plus the accrued original issue discount and any accrued contingent additional principal,
divided by the number of shares of common stock issuable upon conversion of a note on that day. The conversion trigger
price for the fourth quarter of 2017 was $77.45.
The credit rating assigned to the notes by S&P Ratings Services is at or below BB-.
The Notes are called for redemption.
Specified corporate transactions have occurred (such as if the Company is party to a consolidation, merger or binding
share exchange or a transfer of all or substantially all of its assets).
The Company may redeem for cash all or a portion of the Notes at any time at specified redemption prices per one thousand
dollar principal amount at maturity of the Notes.
The Company has registered the notes and the shares of common stock issuable upon conversion of the Notes with the Securities
and Exchange Commission.
During 2017 and 2016, the Company settled notices to convert $37.1 and $59.4 aggregate principal amount at maturity of its
zero-coupon subordinated notes with a conversion value of $33.9 and $53.7, respectively. The total cash used for these settlements
was $33.9 and $53.7 and the Company also issued 0.3 and 0.4 additional shares of common stock, respectively. As a result of
these conversions, in 2017 and 2016 the Company also reversed approximately $0.0 and $4.9, respectively, of deferred tax liability
to reflect the tax benefit realized upon issuance of the shares.
On September 12, 2017, the Company announced that for the period of September 12, 2017, to March 10, 2018, the zero-
coupon subordinated notes will accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a
zero-coupon subordinated note for the five trading days ended September 8, 2017, in addition to the continued accrual of the
original issue discount.
On January 3, 2018, the Company announced that its zero-coupon subordinated notes may be converted into cash and common
stock at the conversion rate of 13.4108 per $1,000.0 principal amount at maturity of the notes, subject to the terms of the zero-
coupon subordinated notes and the Indenture, dated as of October 24, 2006, between the Company, and The Bank of New York
Mellon as trustee and the conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated
F-25
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter
beginning January 1, 2018, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New
York City time, on Friday, March 31, 2018. If notices of conversion are received, the Company plans to settle the cash portion of
the conversion obligation with cash on hand and/or borrowings under its revolving credit facility.
Senior Notes
On August 22, 2017, the Company issued new Senior Notes representing $1,200.0 in debt securities and consisting of a $600.0
aggregate principal amount of 3.25% Senior Notes due 2024 and a $600.0 aggregate principal amount of 3.60% Senior Notes
due 2027. Interest on these notes is payable semi-annually on March 1 and September 1 of each year, commencing on March 1,
2018. Net proceeds from the offering of these notes were $1,190.1 after deducting underwriting discounts and other expenses of
the offering. Net proceeds were used to pay off the 2.20% Senior Notes due August 23, 2017, as well as a portion of the cash
consideration and the fees and expenses in connection with the Chiltern acquisition.
On September 30, 2016, the Company announced the successful completion of consent solicitations for the 5.00% convertible
Senior Notes due 2017 and 2018, totaling $130.0, assumed as part of the acquisition of Sequenom. On October 20, 2016, the
Company retired $129.9 of these outstanding notes, and paid an additional $5.6 relating to the early retirement of the subsidiary
indebtedness (recorded as interest expense in the Consolidated Statement of Operations).
On January 30, 2015, the Company issued the Covance acquisition notes, which represent $2,900.0 in debt securities consisting
of $500.0 aggregate principal amount of 2.625% Senior Notes due 2020, $500.0 aggregate principal amount of 3.20% Senior
Notes due 2022, $1,000.0 aggregate principal amount of 3.60% Senior Notes due 2025 and $900.0 aggregate principal amount
of 4.70% Senior Notes due 2045. Interest on these notes is payable semi-annually on February 1 and August 1 of each year,
commencing on August 1, 2015. Net proceeds from the offering of the Covance acquisition notes were $2,870.2 after deducting
underwriting discounts and other estimated expenses of the offering. Net proceeds were used to pay a portion of the cash
consideration and the fees and expenses in connection with the Covance acquisition.
On November 1, 2013, the Company issued $700.0 in new Senior Notes pursuant to the Company’s effective shelf registration
on Form S-3. The Senior Notes consisted of $400.0 aggregate principal amount of 2.50% Senior Notes due 2018 and $300.0
aggregate principal amount of 4.00% Senior Notes due 2023. Interest on these notes is payable semi-annually on November 1 and
May 1 of each year, commencing on May 1, 2014. The net proceeds were used to repay all of the outstanding borrowings under
the Company’s former revolving credit facility and for general corporate purposes.
During the third quarter of 2013, the Company entered into two fixed-to-variable interest rate swap agreements for the 4.625%
Senior Notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus
2.298% to hedge against changes in the fair value of a portion of the Company's long-term debt. These derivative financial
instruments are accounted for as fair value hedges of the Senior Notes due 2020 outstanding at that time. These interest rate swaps
are included in other long-term assets or liabilities, as applicable, and added to the value of the Senior Notes, with an aggregate
fair value of $4.1 at December 31, 2017.
The Senior Notes due 2022 bear interest at the rate of 3.75% per annum, payable semi-annually on February 23 and August 23
of each year, commencing February 23, 2013. The Senior Notes due 2017 bore interest at the rate 2.20% of per annum from
November 19, 2010, which was payable semi-annually on February 23 and August 23.
The scheduled payments of long-term debt and future minimum lease payments for capital leases at the end of 2017 are
summarized as follows:
2018
2019
2020
2021
2022
Thereafter
Less amounts representing interest
Total long-term debt
Less current portion
Long-term debt, due beyond one year
F-26
$
Notes and Other Capital Leases
15.6
$
14.4
13.1
11.7
10.6
45.1
110.5
(44.4)
66.1
(8.3)
57.8
409.2
35.9
1,226.9
71.0
1,601.3
3,351.7
6,696.0
—
6,696.0
(409.2)
6,286.8
$
$
Total
424.8
50.3
1,240.0
82.7
1,611.9
3,396.8
6,806.5
(44.4)
6,762.1
(417.5)
6,344.6
$
$
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
12. PREFERRED STOCK AND COMMON SHAREHOLDERS’ EQUITY
The Company is authorized to issue up to 265.0 shares of common stock, par value $0.10 per share. The Company’s treasury
shares are recorded at aggregate cost. Common shares issued and outstanding are summarized in the following table:
Issued
In treasury
Outstanding
2017
2016
125.1
(23.2)
101.9
125.6
(22.9)
102.7
The Company is authorized to issue up to 30.0 shares of preferred stock, par value $0.10 per share. There were no preferred
shares outstanding as of December 31, 2017 and 2016.
The changes in common shares issued and held in treasury are summarized below:
Common Shares Issued
Common stock issued at January 1
Common stock issued under employee stock plans
Common stock issued upon conversion of zero-coupon subordinated notes
Common stock issued in conjunction with the Covance acquisition
Retirement of common stock
Common stock issued at December 31
Common Shares Held in Treasury
Common shares held in treasury at January 1
Surrender of restricted stock and performance share awards
Common shares held in treasury at December 31
Share Repurchase Program
2017
2016
2015
125.6
1.7
0.3
—
(2.5)
125.1
123.9
1.6
0.4
—
(0.3)
125.6
107.1
1.5
—
15.3
—
123.9
2017
2016
2015
22.9
0.3
23.2
22.6
0.3
22.9
22.5
0.1
22.6
During 2017, the Company purchased 2.5 shares of its common stock at a total cost of $338.1. At the end of 2017, the Company
had outstanding authorization from its board of directors to purchase $401.4 of Company common stock. The repurchase
authorization has no expiration date.
Accumulated Other Comprehensive Earnings
The components of accumulated other comprehensive earnings are as follows:
Foreign
Currency
Translation
Adjustments
Net
Benefit
Plan
Adjustments
Unrealized
Gains and
Losses on
Available for
Sale Securities
0.1
(0.1)
$
(78.6) $
19.0
Accumulated
Other
Comprehensive
Earnings
Balance at December 31, 2014
Current year adjustments
Amounts reclassified from accumulated other
comprehensive income (a) (b)
Tax effect of adjustments
Balance at December 31, 2015
Current year adjustments
Amounts reclassified from accumulated other
comprehensive income (a)
Tax effect of adjustments
Balance at December 31, 2016
Current year adjustments
Amounts reclassified from accumulated other
comprehensive income (a)
Tax effect of adjustments
Balance at December 31, 2017
$
68.0
(370.7)
$
—
90.1
(212.6)
(250.0)
—
(8.1)
(470.7)
262.3
—
(34.3)
(242.7) $
F-27
$
(11.3)
(3.5)
(74.4)
(3.3)
(37.0)
4.3
(110.4)
2.4
—
—
—
—
—
—
—
—
18.5
(3.5)
(93.0) $
—
—
— $
(10.5)
(351.8)
(11.3)
86.6
(287.0)
(253.3)
(37.0)
(3.8)
(581.1)
264.7
18.5
(37.8)
(335.7)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
(a) The amortization of prior service cost is included in the computation of net periodic benefit cost. Refer to Note 16 Pension
and Postretirement Plans for additional information regarding the Company's net periodic benefit cost.
(b) The realized gain from the sale of an available for sale investment and the other-than-temporary impairment on an available
for sale investment are included in Other, net on the Consolidated Statement of Operations.
13. INCOME TAXES
The sources of income before taxes, classified between domestic and foreign entities are as follows:
Pre-tax income
Domestic
Foreign
Total pre-tax income
2017
891.8
243.1
1,134.9
$
$
2016
914.0
191.5
1,105.5
$
$
$
$
2015
593.5
132.5
726.0
The provisions (benefits) for income taxes in the accompanying consolidated statements of operations consist of the following:
Years Ended December 31,
2016
2015
2017
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$
$
$
$
300.8
32.9
53.0
386.7
$
$
(534.3) $
12.9
(4.4)
(525.8)
(139.1) $
235.1
38.6
43.9
317.6
64.4
6.0
(15.7)
54.7
372.3
$
$
$
$
218.3
33.7
69.4
321.4
(14.1)
(4.2)
(15.8)
(34.1)
287.3
In 2017, a benefit of $18.9 in excess stock-based compensation was recorded directly to income tax expense. In 2016, as a
result of the early adoption of the accounting standard associated with simplifying several aspects of share-based compensation,
a benefit of $14.0 in excess stock-based compensation was recorded directly to income tax expense. For 2015, a portion of the
tax benefit associated with option exercises from stock plans, which reduces taxes payable, was recorded through additional paid-
in capital. The 2015 benefits recorded through additional paid-in capital were approximately $13.1.
The effective tax rates on earnings before income taxes are reconciled to statutory U.S. income tax rates as follows:
Years Ended December 31,
2016
2015
2017
Statutory U.S. rate
State and local income taxes, net of U.S. Federal income tax effect
Foreign earnings taxed at lower rates than the statutory U.S. rate
Restructuring and acquisition items
Share-based compensation
Re-measurement of deferred taxes
Deferred taxes on unremitted foreign earnings
Repatriation tax
Other
Effective rate
35.0 %
2.5
(3.5)
0.6
(1.7)
(35.0)
(15.8)
5.0
0.6
(12.3)%
35.0%
2.6
(3.1)
—
(1.2)
—
—
—
0.4
33.7%
35.0%
3.2
(1.8)
2.7
—
—
—
—
1.1
40.2%
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA) which makes widespread changes to the Internal
Revenue Code. The TCJA, among other things, reduces the U.S. federal corporate tax rate from 35% to 21% beginning January
1, 2018, requires companies to pay a repatriation tax on earnings of certain foreign subsidiaries that were previously not subject
to U.S. tax, and creates new income taxes on certain foreign sourced earnings. Also on December 22, 2017, the SEC issued Staff
Accounting Bulletin No. 118 (SAB 118), which provides companies with additional guidance on how to account for the TCJA in
its financial statements, allowing companies to use a measurement period. At December 31, 2017, the Company had not completed
the accounting for the tax effects of enactment of the TCJA; however, as described below, a reasonable estimate on the re-
measurement of the Company's existing deferred tax balances, the deferred tax revaluation for unremitted foreign earnings, and
the one-time repatriation tax has been made. For these items, in accordance with SAB 118, a provisional net benefit has been
recognized, totaling $519.0, which is included as a component of income tax expense from continuing operations. The Company
expects to finalize this provisional estimate before the end of 2018 after completing its reviews and analysis, and after incorporating
F-28
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
further anticipated guidance from the U.S. Treasury issued during this measurement period. As a result, the reported net benefit
could change during 2018.
The effective rate for 2017 was favorably impacted by the re-measurement of the Company's net deferred tax liabilities using
the rates enacted in the TCJA and the deferred tax revaluation for unremitted foreign earnings, partially offset by the deemed
repatriation tax enacted in this legislation. The 2017 rate was also favorably impacted by foreign earnings taxed at rates lower
than the U.S. and by share-based compensation.
The effective rate for 2016 was favorably impacted by foreign earnings taxed at rates lower than the U.S. statutory rate and
the early adoption of the share-based compensation standard.
The effective rate for 2015 was favorably impacted by foreign earnings taxed at rates lower than the U.S. statutory rate and
unfavorably impacted by restructuring and acquisition items, the recording of additional uncertain tax reserves, and a decrease in
the benefit recorded from releasing uncertain tax reserves.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
are as follows:
Deferred tax assets:
Accounts receivable
Employee compensation and benefits
Acquisition and restructuring reserves
Tax loss carryforwards
Other
Less: valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Deferred earnings
Intangible assets
Property, plant and equipment
Zero-coupon subordinated notes
Currency translation adjustment
Other
Total gross deferred tax liabilities
Net deferred tax liabilities
December 31,
2017
December 31,
2016
$
$
$
14.7
113.6
16.8
107.0
26.0
278.1
(42.8)
235.3
$
$
(5.1) $
(913.2)
(156.9)
(10.1)
(0.1)
(27.2)
(1,112.6)
$
(877.3) $
13.5
160.8
38.5
167.7
44.8
425.3
(31.3)
394.0
(193.2)
(1,047.4)
(208.8)
(48.5)
(47.0)
(27.9)
(1,572.8)
(1,178.8)
The TCJA includes provisions relating to global low-taxed intangible income (GILTI). Relevant to the current consolidated
financial statements is the Company's selection of an accounting policy with respect to the new GILTI tax rules, and whether to
account for GILTI as a periodic charge in the period it arises, or to record deferred taxes associated with the basis in the Company’s
foreign subsidiaries. Due to the intricacy of this topic, the Company is still in the process of investigating the implications of
accounting for the GILTI tax and intends to make an accounting policy decision once additional guidance is available for assessment.
The Company has U.S. federal tax loss carryforwards of approximately $294.3, which expire periodically through 2035. The
utilization of tax loss carryforwards is limited due to change of ownership rules; however, at this time, the Company expects to
fully utilize substantially all U.S. federal tax loss carryforwards with the exception of approximately $3.9 for which a full valuation
allowance has been provided. The Company has U.S. state tax loss carryforwards of $602.2, which also expire periodically through
2036, and on which a valuation allowance of $485.5 has been provided. The Company has foreign tax loss carryforwards of $37.4
of which $27.1 has a full valuation allowance. Most of the foreign losses have an indefinite carryover. In addition to the foreign
net operating losses, the Company has a foreign capital loss carryforward of $6.9. The capital loss has an indefinite life and has
a full valuation allowance.
The valuation allowance increased from $31.3 in 2016 to $42.8 in 2017 primarily due to additional state losses for which no
benefit is anticipated.
Unrecognized income tax benefits were $19.5 and $18.4 at December 31, 2017, and 2016, respectively. It is anticipated that
the amount of the unrecognized income tax benefits will change within the next 12 months; however, these changes are not expected
to have a significant impact on the results of operations, cash flows or the financial position of the Company.
F-29
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
The Company recognizes interest and penalties related to unrecognized income tax benefits in income tax expense. Accrued
interest and penalties related to uncertain tax positions totaled $7.9 and $9.9 as of December 31, 2017, and 2016, respectively.
During the years ended December 31, 2017, 2016 and 2015, the Company recognized $2.3, $1.2 and $1.8, respectively, in interest
and penalties expense, which was offset by a benefit from reversing previous accruals for interest and penalties of $4.3, $4.0 and
$2.2, respectively.
The following table shows a reconciliation of the unrecognized income tax benefits, excluding interest and penalties, from
uncertain tax positions for the years ended December 31, 2017, 2016 and 2015:
Balance as of January 1
Increase in reserve for tax positions taken in the current year
Increase in reserve as a result of acquisition
Decrease in reserve as a result of lapses in the statute of limitations
Balance as of December 31
2017
2016
2015
18.4
7.3
—
(6.2)
19.5
$
$
24.2
2.3
—
(8.1)
18.4
$
$
16.7
4.1
8.5
(5.1)
24.2
$
$
As of December 31, 2017, and 2016, $19.5 and $18.4, respectively, are the approximate amounts of unrecognized income tax
benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.
The Company has substantially concluded all U.S. federal income tax matters for years through 2012. Substantially all material
state and local and foreign income tax matters have been concluded through 2012 and 2008, respectively.
The Internal Revenue Service concluded the examination of the Company's 2014 federal consolidated income tax return, which
did not include Covance Inc., in the third quarter of 2016. Covance Inc.'s 2013 federal consolidated income tax return is under
examination. The Canada Revenue Agency is currently examining the Company's 2013 and 2014 Canadian subsidiaries' tax returns.
The Company has various state and foreign income tax examinations ongoing throughout the year. The Company believes adequate
provisions have been recorded related to all open tax years.
As a result of the TCJA, the Company was effectively taxed on all of its previously unremitted foreign earnings. The TCJA
also enacts a territorial tax system that allows, for the most part, tax-free repatriation of foreign earnings. The Company still
considers the earnings of its foreign subsidiaries to be permanently reinvested, but if repatriation were to occur we would be
required to accrue U.S. taxes, if any, and applicable withholding taxes as appropriate. Along with the provisions of the TCJA, the
Company will continue to review its repatriation policy.
14. STOCK COMPENSATION PLANS
Stock Incentive Plans
There are currently 10.7 shares authorized for issuance under the Laboratory Corporation of America Holdings 2016 Omnibus
Incentive Plan (the Plan) and at December 31, 2017 there were 8.3 additional shares available for grant under the Plan. The Plan
was approved by shareholders at the 2016 annual meeting.
Stock Options
The following table summarizes grants of non-qualified options made by the Company to officers, key employees, and non-
employee directors under all plans. Stock options are generally granted at an exercise price equal to or greater than the fair market
price per share on the date of grant. Also, for each grant, options vest ratably over a period of three years on the anniversaries of
the grant date, subject to their earlier expiration or termination.
Changes in options outstanding under the plans for the period indicated were as follows:
Number of
Options
Weighted-Average
Exercise Price
per Option
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
Outstanding at December 31, 2016
Granted
Exercised
Cancelled
Outstanding at December 31, 2017
Vested and expected to vest at December 31, 2017
Exercisable at December 31, 2017
82.43
130.60
83.85
80.37
86.55
81.73
81.73
1.6
0.1
(0.5)
—
1.2
1.1
1.1
$
$
$
$
F-30
3.9
3.3
3.3
$
$
$
85.4
82.1
82.1
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s
closing stock price on the last trading day of 2017 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on December 31, 2017. The amount
of intrinsic value will change based on the fair market value of the Company’s stock.
Cash received by the Company from option exercises, the actual tax benefit realized for the tax deductions and the aggregate
intrinsic value of options exercised from option exercises under all share-based payment arrangements during the years ended
December 31, 2017, 2016, and 2015 were as follows:
Cash received by the Company
Tax benefits realized
Aggregate intrinsic value
2017
2016
2015
$
$
$
43.9
13.4
34.8
$
$
$
52.6
13.6
35.5
$
$
$
82.6
16.2
42.2
The following table summarizes information concerning currently outstanding and exercisable options.
Range of
Exercise Prices
$59.38 - 67.60
$67.61 - 75.63
$75.64 - 84.86
$84.87 - 130.60
Number
Outstanding
0.1
0.2
0.6
0.3
1.2
Options Outstanding
Options Exercisable
Weighted Average
Remaining
Contractual
Life
1.1
1.8
4.2
5.2
3.9
Average
Exercise
Price
$60.64
$72.06
$84.73
$105.29
$86.55
Number
Exercisable
0.1
0.2
0.6
0.3
1.2
Weighted
Average
Exercise
Price
$60.64
$72.06
$84.73
$91.13
$81.73
The following table shows the weighted average grant-date fair values of options issued during the respective year and the
weighted average assumptions that the Company used to develop the fair value estimates:
Fair value per option
Valuation assumptions
Weighted average expected life (in years)
Risk free interest rate
Expected volatility
Expected dividend yield
2017
$
32.75
6.0
2.1%
0.2
N/A
2016
2015
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free interest rate for periods within
the contractual life of the option is based on a zero-coupon U.S. government instrument over the contractual term of the equity
instrument. Expected volatility of the Company’s stock is based on historical volatility of the Company’s stock. The Company
uses historical data to calculate the expected life of the option. Groups of employees and non-employee directors that have similar
exercise behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation purposes. For
2017, 2016 and 2015, expense related to the Company’s stock option plan totaled $0.9, $0.0 and $2.2, respectively. The Company
did not grant any options to employees during 2016 or 2015.
Restricted Stock, Restricted Stock Units and Performance Shares
The Company grants restricted stock, restricted stock units and performance shares (non-vested shares) to officers and key
employees and grants restricted stock and restricted stock units to non-employee directors. Restricted stock and units typically
vest annually in equal one third increments beginning on the first anniversary of the grant. A performance share grant in 2015
represents a three-year award opportunity for the period 2015-2017, and if earned, vests fully (to the extent earned) in the first
quarter of 2018. A performance share grant in 2016 represents a three-year award opportunity for the period of 2016-2018 and, if
earned, vests fully (to the extent earned) in the first quarter of 2019. A performance share grant in 2017 represents a three-year
award opportunity for the period of 2017-2019 and, if earned, vests fully (to the extent earned) in the first quarter of 2020.
Performance share awards are subject to certain earnings per share, revenue, operating income, earnings before income taxes and
total shareholder return targets, the achievement of which may increase or decrease the number of shares which the grantee earns
and therefore receives upon vesting. Unearned restricted stock and performance share compensation is amortized to expense over
the applicable vesting periods. For 2017, 2016 and 2015, total restricted stock, restricted stock unit and performance share
compensation expense was $100.8, $104.1 and $83.8, respectively.
F-31
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
The following table shows a summary of non-vested shares for the year ended December 31, 2017:
Non-vested at January 1, 2017
Granted
Vested
Canceled
Non-vested at December 31, 2017
Number of
Shares
Weighted-Average
Grant Date
Fair Value
1.6
0.9
(0.9)
(0.1)
1.5
$
$
108.23
132.48
100.86
118.74
121.36
As of December 31, 2017, there was $104.0 of total unrecognized compensation cost related to non-vested restricted stock,
restricted stock unit and performance share-based compensation arrangements granted under the Company's stock incentive plans.
That cost is expected to be recognized over a weighted average period of 1.8 years.
Employee Stock Purchase Plan
Under the 2016 Employee Stock Purchase Plan, the Company is authorized to issue 2.4 shares of common stock. The plan
permits substantially all employees to purchase a limited number of shares of Company stock at 85% of market value. The Company
issues shares to participating employees semi-annually in January and July of each year. Approximately 0.3 shares were purchased
by eligible employees in each of 2017, 2016 and 2015, respectively, under either the 2016 Employee Stock Purchase Plan or the
prior plan, which began in 1997 and was amended in 1999, 2004, 2008 and 2012. For 2017, 2016 and 2015, expense related to
the Company’s employee stock purchase plan was $8.0, $5.5 and $4.1, respectively.
The Company uses the Black-Scholes model to calculate the fair value of the employee’s purchase right. The fair value of the
employee’s purchase right and the assumptions used in its calculation are as follows:
Fair value of the employee’s purchase right
Valuation assumptions
Risk free interest rate
Expected volatility
Expected dividend yield
15. COMMITMENTS AND CONTINGENT LIABILITIES
2017
2016
2015
$
31.54
$
23.32
$
21.95
1.3%
0.2
—
0.5%
0.2
—
0.3%
0.2
—
The Company is involved from time to time in various claims and legal actions, including arbitrations, class actions, and other
litigation (including those described in more detail below), arising in the ordinary course of business. Some of these actions involve
claims that are substantial in amount. These matters include, but are not limited to, intellectual property disputes; commercial and
contract disputes; professional liability; employee-related matters; and inquiries, including subpoenas and other civil investigative
demands, from governmental agencies, Medicare or Medicaid payers and MCOs reviewing billing practices or requesting comment
on allegations of billing irregularities that are brought to their attention through billing audits or third parties. The Company
receives civil investigative demands or other inquiries from various governmental bodies in the ordinary course of its business.
Such inquiries can relate to the Company or other parties, including physicians and other healthcare providers (e.g., physician
assistants and nurse practitioners, generally referred to herein as physicians). The Company works cooperatively to respond to
appropriate requests for information.
The Company also is named from time to time in suits brought under the qui tam provisions of the False Claims Act and
comparable state laws. These suits typically allege that the Company has made false statements and/or certifications in connection
with claims for payment from U.S., federal or state healthcare programs. The suits may remain under seal (hence, unknown to the
Company) for some time while the government decides whether to intervene on behalf of the qui tam plaintiff. Such claims are
an inevitable part of doing business in the healthcare field today.
The Company believes that it is in compliance in all material respects with all statutes, regulations and other requirements
applicable to its commercial laboratory operations and drug development support services. The healthcare diagnostics and drug
development industries are, however, subject to extensive regulation, and the courts have not interpreted many of the applicable
statutes and regulations. Therefore, the applicable statutes and regulations could be interpreted or applied by a prosecutorial,
regulatory or judicial authority in a manner that would adversely affect the Company. Potential sanctions for violation of these
statutes and regulations include significant civil and criminal penalties, fines, the loss of various licenses, certificates and
authorizations, additional liabilities from third-party claims, and/or exclusion from participation in government programs.
F-32
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Many of the current claims and legal actions against the Company are in preliminary stages, and many of these cases seek an
indeterminate amount of damages. The Company records an aggregate legal reserve, which is determined using calculations based
on historical loss rates and assessment of trends experienced in settlements and defense costs. In accordance with FASB Accounting
Standards Codification Topic 450 “Contingencies,” the Company establishes reserves for judicial, regulatory, and arbitration
matters outside the aggregate legal reserve if and when those matters present loss contingencies that are both probable and estimable
and would exceed the aggregate legal reserve. When loss contingencies are not both probable and estimable, the Company does
not establish separate reserves.
The Company is unable to estimate a range of reasonably probable loss for the proceedings described in more detail below in
which damages either have not been specified or, in the Company's judgment, are unsupported and/or exaggerated and (i) the
proceedings are in early stages; (ii) there is uncertainty as to the outcome of pending appeals or motions; (iii) there are significant
factual issues to be resolved; and/or (iv) there are novel legal issues to be presented. For these proceedings, however, the Company
does not believe, based on currently available information, that the outcomes will have a material adverse effect on the Company's
financial condition, though the outcomes could be material to the Company's operating results for any particular period, depending,
in part, upon the operating results for such period. The amount of ultimate loss may also differ from the Company’s estimates. It
is possible that an unfavorable outcome that exceeds the Company’s current accrued estimate, if any, for one or more of the matters
below could have a material adverse effect on the Company’s financial condition.
As previously reported, the Company reached a settlement in the previously disclosed lawsuit, California ex rel. Hunter
Laboratories, LLC et al. v. Quest Diagnostics Incorporated, et al. (Hunter Labs Settlement Agreement), to avoid the uncertainty
and costs associated with prolonged litigation. Pursuant to the executed Hunter Labs Settlement Agreement, the Company recorded
a litigation settlement expense of $34.5 in the second quarter of 2011 (net of a previously recorded reserve of $15.0) and paid the
settlement amount of $49.5 in the third quarter of 2011. The Company also agreed to certain reporting obligations regarding its
pricing for a limited time period and, at the option of the Company in lieu of such reporting obligations, to provide Medi-Cal with
a discount from Medi-Cal's otherwise applicable maximum reimbursement rate from November 1, 2011, through October 31,
2012. In 2011, the California legislature enacted Assembly Bill No. 97, which imposed a 10.0% Medi-Cal payment cut on most
providers of healthcare services, including clinical laboratories. In 2012, the California legislature enacted Assembly Bill No.
1494, which directed the Department of Healthcare Services (DHCS) to establish new reimbursement rates for Medi-Cal
commercial laboratory services based on payments made to California clinical laboratories for similar services by other third-
party payers, and provided that until the new rates are set through this process, Medi-Cal payments for commercial laboratory
services will be reduced (in addition to a 10.0% payment reduction imposed by Assembly Bill No. 97 in 2011) by “up to 10 percent”
for tests with dates of service on or after July 1, 2012, with a cap on payments set at 80.0% of the lowest maximum allowance
established under the Medicare program. Under the terms of the Hunter Labs Settlement Agreement, the enactment of this California
legislation terminated the Company's reporting obligations (or obligation to provide a discount in lieu of reporting) under that
agreement. In April 2015, CMS approved a 10.0% payment reduction under Assembly Bill No. 1494. The new rate methodology
established new rates that were effective July 1, 2015, but these new rates were not entered into the state computer system until
February 2016. The 2016 rates have been implemented and recoupments began in 2017. Taken together, these changes are not
expected to have a material impact on the Company's consolidated revenues or results of operations.
As previously reported, the Company responded to an October 2007 subpoena from the U.S. Department of Health & Human
Services Office of Inspector General's regional office in New York. On August 17, 2011, the United States District Court for the
Southern District of New York unsealed a False Claims Act lawsuit, United States of America ex rel. NPT Associates v. Laboratory
Corporation of America Holdings, which alleges that the Company offered UnitedHealthcare kickbacks in the form of discounts
in return for Medicare business. The Plaintiff's Third Amended Complaint further alleges that the Company's billing practices
violated the False Claims Acts of 14 states and the District of Columbia. The lawsuit seeks actual and treble damages and civil
penalties for each alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. Neither the U.S. government
nor any state government has intervened in the lawsuit. The Company's Motion to Dismiss was granted in October 2014 and
Plaintiff was granted the right to replead. On January 11, 2016, Plaintiff filed a motion requesting leave to file an amended complaint
under seal and to vacate the briefing schedule for the Company's motion to dismiss while the government reviews the amended
complaint. The Court granted the motion and vacated the briefing dates. Plaintiff then filed an amended complaint under seal. The
Company will vigorously defend the lawsuit.
In addition, the Company has received various other subpoenas since 2007 related to Medicaid billing. In October 2009, the
Company received a subpoena from the State of Michigan Department of Attorney General seeking documents related to its billing
to Michigan Medicaid. The Company cooperated with this request. In October 2013, the Company received a civil investigative
demand from the State of Texas Office of the Attorney General requesting documents related to its billing to Texas Medicaid. The
Company is cooperating with this request.
F-33
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
On May 2, 2013, the Company was served with a False Claims Act lawsuit, State of Georgia ex rel. Hunter Laboratories, LLC
and Chris Riedel v. Quest Diagnostics Incorporated, et al., filed in the State Court of Fulton County, Georgia. The lawsuit, filed
by a competitor laboratory, alleges that the Company overcharged Georgia's Medicaid program. The State of Georgia filed a Notice
of Declination on August 13, 2012, before the Company was served with the Complaint. The case was removed to the United
States District Court for the Northern District of Georgia. The lawsuit seeks actual and treble damages and civil penalties for each
alleged false claim, as well as recovery of costs, attorney's fees, and legal expenses. On March 14, 2014, the Company's Motion
to Dismiss was granted. The Plaintiffs repled their complaint, and the Company filed a Motion to Dismiss the First Amended
Complaint. In May 2015, the Court dismissed the Plaintiffs' anti-kickback claim and remanded the remaining state law claims to
the State Court of Fulton County. In July 2015, the Company filed a Motion to Dismiss these remaining claims. The Plaintiffs
filed an opposition to the Company's Motion to Dismiss in August 2015. Also, the State of Georgia filed a brief as amicus curiae.
The Company will vigorously defend the lawsuit.
On August 24, 2012, the Company was served with a putative class action lawsuit, Sandusky Wellness Center, LLC, et al. v.
MEDTOX Scientific, Inc., et al., filed in the United States District Court for the District of Minnesota. The lawsuit alleges that on
or about February 21, 2012, the defendants violated the U.S. Telephone Consumer Protection Act (TCPA) by sending unsolicited
facsimiles to Plaintiff and more than 39 other recipients without the recipients' prior express invitation or permission. The lawsuit
seeks the greater of actual damages or the sum of $0.0005 for each violation, subject to trebling under the TCPA, and injunctive
relief. In September of 2014, Plaintiff’s Motion for Class Certification was denied. In January of 2015, the Company’s Motion
for Summary Judgment on the remaining individual claim was granted. Plaintiff filed a notice of appeal. On May 3, 2016, the
United States Court of Appeals for the Eighth Circuit issued its decision and order reversing the District Court’s denial of class
certification. The Eighth Circuit remanded the matter for further proceedings. On December 7, 2016, the District Court granted
the Plaintiff’s renewed Motion for Class Certification. The Company will vigorously defend the lawsuit.
On August 31, 2015, the Company was served with a putative class action lawsuit, Patty Davis v. Laboratory Corporation of
America, et al., filed in the Circuit Court of the Thirteenth Judicial Circuit for Hillsborough County, Florida. The complaint alleges
that the Company violated the Florida Consumer Collection Practices Act by billing patients who were collecting benefits under
the Workers’ Compensation Statutes. The lawsuit seeks injunctive relief and actual and statutory damages, as well as recovery of
attorney's fees and legal expenses. In April 2017, the Circuit Court granted the Company's Motion for Judgment on the Pleadings.
The Plaintiff has appealed the Circuit Court's ruling to the Florida Second District Court of Appeal. The Company will vigorously
defend the lawsuit.
In December 2014, the Company received a Civil Investigative Demand issued pursuant to the U.S. False Claims Act from
the U.S. Attorney’s Office for South Carolina, which requests information regarding remuneration and services provided by the
Company to physicians who also received draw and processing/handling fees from competitor laboratories Health Diagnostic
Laboratory, Inc. and Singulex, Inc. The Company is cooperating with the request.
On August 3, 2016, Covance Inc. was served with a putative class action lawsuit, Daniel L. Bloomquist v. Covance Inc., et al.,
filed in the Superior Court of California, County of San Diego. The complaint alleges that Covance violated the California Labor
Code and California Business & Professions Code by failing to provide overtime wages, failing to provide meal and rest periods,
failing to pay for all hours worked, failing to pay for all wages owed upon termination, and failing to provide accurate itemized
wage statements to Clinical Research Associates and Senior Clinical Research Associates employed by Covance, Inc. in California.
The lawsuit seeks monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. On October 13,
2016, the case was removed to the United States District Court for the Southern District of California. The Company will vigorously
defend the lawsuit.
Prior to the Company’s acquisition of Sequenom, between August 15, 2016, and August 24, 2016, six putative class-action
lawsuits were filed on behalf of purported Sequenom stockholders (captioned Malkoff v. Sequenom, Inc., et al., No. 16-cv-02054-
JAH-BLM, Gupta v. Sequenom, Inc., et al., No. 16-cv-02084-JAH-KSC, Fruchter v. Sequenom, Inc., et al., No. 16-cv-02101-
WQH-KSC, Asiatrade Development Ltd. v. Sequenom, Inc., et al., No. 16-cv-02113-AJB-JMA, Nunes v. Sequenom, Inc., et al.,
No. 16-cv-02128-AJB-MDD, and Cusumano v. Sequenom, Inc., et al., No. 16-cv-02134-LAB-JMA) in the United States District
Court for the Southern District of California challenging the acquisition transaction. The complaints asserted claims against
Sequenom and members of its Board of Directors (the Individual Defendants). The Nunes action also named the Company and
Savoy Acquisition Corp. (Savoy), a wholly owned subsidiary of the Company, as defendants. The complaints alleged that the
defendants violated Sections 14(e), 14(d)(4) and 20 of the Securities Exchange Act of 1934 by failing to disclose certain allegedly
material information. In addition, the complaints in the Malkoff action, Asiatrade action, and the Cusumano action alleged that
the Individual Defendants breached their fiduciary duties to Sequenom shareholders. The actions sought, among other things,
injunctive relief enjoining the merger. On August 30, 2016, the parties entered into a Memorandum of Understanding (MOU) in
each of the above-referenced actions. In connection with the settlement, Sequenom agreed to make certain additional disclosures
to its stockholders. On September 6, 2016, the Court entered an order consolidating for all pre-trial purposes the six individual
F-34
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
actions described above under the caption In re Sequenom, Inc. Shareholder Litig., Lead Case No. 16-cv-02054-JAH-BLM, and
designating the complaint from the Malkoff action as the operative complaint for the consolidated action. On November 11, 2016,
two competing motions were filed by two separate stockholders (James Reilly and Shikha Gupta) seeking appointment as lead
plaintiff under the terms of the Private Securities Litigation Reform Act of 1995. On June 7, 2017, the Court entered an order
declaring Mr. Reilly as the lead plaintiff and approving Mr. Reilly's selection of lead counsel The Company is awaiting the Court’s
appointment of a permanent lead plaintiff. The Company is awaiting the Court's appointment of a permanent lead plaintiff. The
parties agree that the MOU has been terminated. The Plaintiffs filed a Consolidated Amended Class Action Complaint on July 24,
2017, and the Defendants filed a Motion to Dismiss, which remains pending. The Company will vigorously defend the lawsuit.
On February 7, 2017, Sequenom received a subpoena from the U.S. Securities and Exchange Commission (SEC) relating to
an SEC investigation into the trading activity of Sequenom shares in connection with the Company’s July 2016 announcement
regarding the Sequenom merger. On March 7, 2017, the Company received a similar subpoena. The Company is cooperating with
these requests.
On March 10, 2017, the Company was served with a putative class action lawsuit, Victoria Bouffard, et al. v. Laboratory
Corporation of America Holdings, filed in the United States District Court for the Middle District of North Carolina. The complaint
alleges that the Company’s patient list prices unlawfully exceed the rates negotiated for the same services with private and public
health insurers in violation of various state consumer protection laws. The lawsuit also alleges breach of implied contract or quasi-
contract, unjust enrichment, and fraud. The lawsuit seeks statutory, exemplary, and punitive damages, injunctive relief, and recovery
of attorney's fees and costs. In May 2017, the Company filed a Motion to Dismiss Plaintiffs’ Complaint and Strike Class Allegations;
this motion is currently pending. On October 10, 2017, a second putative class action lawsuit, Sheryl Anderson, et al. v. Laboratory
Corporation of America Holdings, was filed in the United States District Court for the Middle District of North Carolina. The
complaint contains similar allegations and seeks similar relief to the Bouffard complaint, and adds additional counts regarding
state consumer protection laws. The Company will vigorously defend the lawsuits.
On May 24, 2017, a putative class action lawsuit, Maria T. Gonzalez, et al. v. Examination Management Services, Inc. and
Laboratory Corporation of America Holdings, was filed against the Company in the United States District Court for the Southern
District of California. The complaint alleges that the Company misclassified phlebotomists as independent contractors through
an arrangement with the co-Defendant temporary staffing agency. The complaint further alleges that the Company violated the
California Labor Code and California Business and Professions Code by failing to pay minimum wage, failing to pay for all hours
worked, failing to pay for all wages owed upon termination, and failing to provide accurate itemized wage statements. The lawsuit
seeks monetary damages, civil penalties, injunctive relief, and recovery of attorney's fees and costs. The Company will vigorously
defend the lawsuit.
On August 3, 2017, a putative class action lawsuit, John Sealock, et al. v. Covance Market Access Services, Inc., was filed in
the United States District Court for the Southern District of New York. The complaint alleges that Covance Market Access Services,
Inc. violated the Fair Labor Standards Act and New York labor laws by failing to provide overtime wages, failing to pay for all
hours worked, and failing to provide accurate wage statements. The lawsuit seeks monetary damages, civil penalties, injunctive
relief, and recovery of attorney’s fees and costs. In November 2017, the Company filed a Motion to Strike Class Allegations. In
December 2017, the Plaintiff filed a Motion for Conditional Certification of a Collective Action. The parties’ motions remain
pending. The Company will vigorously defend the lawsuit.
On November 6, 2017, Covance was served with two False Claims Act lawsuits, Health Choice Alliance, LLC on behalf of
the United States of America, et al. v. Eli Lilly and Company, Inc. et al., and Health Choice Advocates, LLC, on behalf of the
United States of America v. Gilead Sciences, Inc., et al., both filed in the United States District Court for the Eastern District of
Texas. The complaints allege under the Federal False Claims Act and various state analogues that Covance and the co-defendants
unlawfully provided in-kind remuneration to medical providers in the form of reimbursement support services in order to induce
providers to prescribe certain drugs. Neither the U.S. government nor any state government intervened in the lawsuits. The lawsuit
seeks actual and treble damages and civil penalties for each alleged false claim, as well as recovery of costs. The Company will
vigorously defend the lawsuits.
Under the Company's present insurance programs, coverage is obtained for catastrophic exposure as well as those risks required
to be insured by law or contract. The Company is responsible for the uninsured portion of losses related primarily to general,
professional and vehicle liability, certain medical costs and workers' compensation. The self-insured retentions are on a per-
occurrence basis without any aggregate annual limit. Provisions for losses expected under these programs are recorded based upon
the Company's estimates of the aggregated liability of claims incurred. At December 31, 2017, the Company had provided letters
of credit aggregating approximately $72.2, primarily in connection with certain insurance programs. The Company’s availability
under its Revolving Credit Facility is reduced by the amount of these letters of credit.
F-35
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
The Company leases various facilities and equipment under non-cancelable lease arrangements. Future minimum rental
commitments for leases with non-cancelable terms of one year or more at December 31, 2017 are as follows:
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Less:
Amounts included in restructuring and acquisition related accruals
Non-cancelable sub-lease income
Total minimum operating lease payments
$
Operating
196.1
149.0
109.7
83.5
64.2
160.9
763.4
(17.6)
—
745.8
$
Rental expense, which includes rent for real estate, equipment and automobiles under operating leases, amounted to $313.8,
$291.2 and $287.1 for the years ended December 31, 2017, 2016 and 2015, respectively.
16. PENSION AND POSTRETIREMENT PLANS
Pension Plans
The Company has a defined-benefit retirement plan (Company Plan) and a nonqualified supplemental retirement plan (PEP).
Both plans have been closed to new participants since December 31, 2009. Employees participating in the Company Plan and the
PEP no longer earn service-based credits, but continue to earn interest credits. In addition, effective January 1, 2010, all employees
eligible for the defined-contribution retirement plan (401K Plan) receive a minimum 3% non-elective contribution (NEC)
concurrent with each payroll period. Employees are not required to make a contribution to the 401K Plan to receive the NEC. The
NEC is non-forfeitable and vests immediately. The 401K Plan also permits discretionary contributions by the Company of up to
1% and up to 3% of pay for eligible employees based on service.
The Company’s 401K Plan covers substantially all pre-Covance acquisition employees. Prior to 2010, Company contributions
to the plan were based on a percentage of employee contributions. From 2011, the Company made non-elective and discretionary
contributions to the plan. In 2017, 2016, and 2015, non-elective and discretionary contributions were $58.1, $56.0 and $43.3,
respectively. As a result of the Covance acquisition, the Company also incurred expense of $37.8 for the Covance 401K Plan
during the year ended December 31, 2015. Under the Covance 401K Plan, which is available on a voluntary basis to substantially
all U.S. Covance employees, the Company matches employee contributions up to a maximum Company contribution of 4.5%.
The Company Plan covers substantially all employees employed prior to December 31, 2009. The benefits to be paid under
the Company Plan are based on years of credited service through December 31, 2009, interest credits and average compensation.
The Company’s policy is to fund the Company Plan with at least the minimum amount required by applicable regulations. The
Company made contributions to the Company Plan of $16.0, $10.8 and $9.5 in 2017, 2016 and 2015, respectively.
The PEP covers a portion of the Company’s senior management group. Prior to 2010, the PEP provided for the payment of
the difference, if any, between the amount of any maximum limitation on annual benefit payments under the Employee Retirement
Income Security Act of 1974 and the annual benefit that would be payable under the Company Plan but for such limitation. Effective
January 1, 2010, employees participating in the PEP no longer earn service-based credits. The PEP is an unfunded plan.
Projected pension expense for the Company Plan and the PEP is expected to increase to $13.3 in 2018. This amount excludes
any accelerated recognition of pension cost due to the total lump-sum payouts exceeding certain components of net periodic
pension cost in a fiscal year. If such levels were to be met in 2018, the Company projects that it would result in additional pension
expense of several million dollars. The actual amount would be determined in the fiscal quarter when the lump-sum payments
cross the threshold and would be based upon the plan's funded status and actuarial assumptions in effect at that time.
The Company plans to make contributions of $7.6 to the Company Plan and the PEP during 2018.
The effect on operations for both the Company Plan and the PEP are summarized as follows:
F-36
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Year ended December 31,
2016
2015
2017
Service cost for benefits earned
Interest cost on benefit obligation
Expected return on plan assets
Net amortization and deferral
Defined-benefit plan costs
$
$
5.5
14.4
(16.3)
11.0
14.6
$
$
4.9
15.5
(16.7)
11.2
14.9
$
$
3.9
15.1
(18.3)
11.3
12.0
Amounts included in accumulated other comprehensive earnings consist of unamortized net loss of $127.4. The accumulated
other comprehensive earnings that are expected to be recognized as components of the defined-benefit plan costs during 2018 are
$10.9 related to amortization of the net loss.
A summary of the changes in the projected benefit obligations of the Company Plan and the PEP are summarized as
follows:
Balance at January 1
Service cost
Interest cost
Actuarial loss
Benefits and administrative expenses paid
Balance at December 31
2017
2016
$
$
366.5
5.5
14.4
12.2
(30.6)
368.0
$
$
$
$
363.1
4.9
15.5
12.1
(29.1)
366.5
2016
250.6
13.6
12.4
(29.1)
247.5
2017
247.5
29.2
17.6
(30.6)
263.7
2017
2016
104.3
$
119.0
2.2
102.1
104.3
$
$
2.0
117.0
119.0
The Accumulated Benefit Obligation was $368.0 and $366.5 at December 31, 2017 and 2016, respectively.
A summary of the changes in the fair value of plan assets follows:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits and administrative expenses paid
Fair value of plan assets at end of year
The net funded status of the Company Plan and the PEP at December 31:
Funded status
Recorded as:
Accrued expenses and other
Other liabilities
$
$
$
$
$
Weighted average assumptions used in the accounting for the Company Plan and the PEP are summarized as follows:
Discount rate
Expected long term rate of return
2017
2016
2015
3.7%
6.8%
4.2%
6.8%
4.0%
7.0%
The Company also updated the mortality assumption to the RP-2014 Mortality Tables in 2016 and again in 2017 which
decreased the Company's total projected obligation.
The Company maintains an investment policy for the management of the Company Plan’s assets. The objective of this policy
is to build a portfolio designed to achieve a balance between investment return and asset protection by investing in indexed funds
that are comprised of equities of high quality companies and in high quality fixed income securities which are broadly balanced
and represent all market sectors. The target allocations for plan assets are 50% equity securities, 45% fixed income securities and
5% in other assets. Equity securities primarily include investments in large-cap, mid-cap and small-cap companies located in the
U.S. and to a lesser extent international equities in developed and emerging countries. Fixed income securities primarily include
U.S. Treasury securities, mortgage-backed bonds and corporate bonds of companies from diversified industries. Other assets
include investments in commodities. The weighted average expected long-term rate of return for the Company Plan’s assets is as
follows:
F-37
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Equity securities
Fixed income securities
Other assets
Target
Allocation
Weighted Average
Expected Long-Term
Rate of Return
50.0%
45.0%
5.0%
5.6%
1.1%
0.1%
The fair values of the Company Plan’s assets at December 31, 2017, and 2016, by asset category are as follows:
Asset Category
Cash
Equity securities:
U.S. large cap - blend (a)
U.S. mid cap - blend (b)
U.S. small cap - blend (c)
International equity - blend (d)
Real estate (e)
Fixed income securities:
U.S. fixed income (f)
U.S inflation protection income (g)
Total fair value of the Company Plan’s assets
Asset Category
Cash
Equity securities:
U.S. large cap - blend (a)
U.S. mid cap - blend (b)
U.S. small cap - blend (c)
International equity - blend (d)
Commodities index (h)
Fixed income securities:
U.S. fixed income (f)
U.S inflation protection income (g)
Total fair value of the Company Plan’s assets
Fair Value as of
December 31,
2017
Fair Value Measurements as of
December 31, 2017
Using Fair Value Hierarchy
Level 1
Level 2
Level 3
$
7.4
$
7.4
$
— $
59.9
23.6
7.7
39.1
12.8
107.0
6.2
263.7
$
$
—
—
—
—
—
—
—
7.4
59.9
23.6
7.7
39.1
12.8
107.0
6.2
256.3
$
$
Fair Value as of
December 31,
2016
Fair Value Measurements as of
December 31, 2016
Using Fair Value Hierarchy
Level 1
Level 2
Level 3
$
$
6.8
$
6.8
$
— $
55.3
21.2
7.4
36.1
12.9
101.8
6.0
247.5
$
—
—
—
—
—
—
—
6.8
55.3
21.2
7.4
36.1
12.9
101.8
6.0
240.7
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
a) This category represents an equity index fund not actively managed that tracks the S&P 500 Index.
b) This category represents an equity index fund not actively managed that tracks the S&P mid-cap 400 Index.
c) This category represents an equity index fund not actively managed that tracks the Russell 2000 Index.
d) This category represents an equity index fund not actively managed that tracks the MSCI ACWI ex USA Index.
e) This category represents a real estate index fund not actively managed that tracks the MSCI US REIT Index.
f) This category primarily represents bond index funds not actively managed that track the Barclays Capital U.S. Aggregate
Index as well as an actively managed strategy which utilizes the Barclays Capital U.S. Aggregate Bond Index as its primary
prospectus benchmark.
g) This category primarily represents a bond index fund not actively managed that tracks the Barclays Capital U.S. TIPS Index.
h) This category represents a commodities index fund not actively managed that tracks the Dow Jones - UBS Commodity Index.
The following assumed benefit payments under the Company Plan and PEP, which were used in the calculation of projected
benefit obligations, are expected to be paid as follows:
F-38
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
2018
2019
2020
2021
2022
Years 2023 and thereafter
$
27.2
26.6
26.2
25.5
25.4
118.2
In addition to the PEP, as a result of the Covance acquisition, the Company also has a frozen non-qualified Supplemental
Executive Retirement Plan (SERP). The SERP, which is not funded, is intended to provide retirement benefits for certain employees
who were executive officers of Covance prior to the acquisition. Benefit amounts are based upon years of service and compensation
of the participating employees. The pension benefit obligation as of the Covance acquisition date was $32.8. The components of
the net periodic pension cost for the years ended December 31, 2017, and December 31, 2016, are as follows:
Service cost
Interest cost
Settlement gain
Net periodic pension cost
Assumptions used to determine defined-benefit plan cost
Discount rate
Expected return on assets
Year Ended
December 31, 2017
Year Ended
December 31, 2016
$
$
— $
0.2
(0.3)
(0.1)
$
4.2%
N/A
—
0.8
—
0.8
3.8%
N/A
The change in the projected benefit obligation, the funded status of the plan and a reconciliation of such funded status to the
amounts reported in the consolidated balance sheet as of December 31, 2017, and December 31, 2016, is as follows:
Balance at beginning of year
Service cost
Interest cost
Actuarial loss/(gain)
Gross benefits paid
Termination benefits
Balance at end of year
Funded status
Recorded as:
Accrued expenses and other
Other liabilities
2017
2016
7.5
—
0.2
0.3
(3.7)
—
4.3
$
$
2017
2016
4.3
$
0.9
3.4
4.3
$
$
30.9
—
0.8
(0.8)
(25.0)
1.6
7.5
7.5
3.7
3.8
7.5
$
$
$
$
$
The accumulated benefit obligation was $4.3 and $7.5 as of December 31, 2017, and December 31, 2016, respectively.
The following assumed benefit payments under the SERP, which were used in the calculation of projected benefit obligations,
are expected to be paid as follows:
2018
2019
2020
2021
2022
Year 2023 and thereafter
$
0.9
0.1
0.1
0.1
0.1
0.9
As a result of the Covance acquisiton, the Company sponsors two defined-benefit pension plans for the benefit of its employees
at two U.K. subsidiaries (U.K. Plans) and one defined-benefit pension plan for the benefit of its employees at a German subsidiary
(German Plan), all of which are legacy plans of previously acquired companies. Benefit amounts for all three plans are based upon
years of service and compensation. The German Plan is unfunded while the U.K. Plans are funded. The Company’s funding policy
has been to contribute annually amounts at least equal to the local statutory funding requirements.
F-39
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
U.K. Plans
Year Ended December 31,
2017
Year Ended December 31,
2016
Service cost
Interest cost
Expected return on plan assets
Net amortization and deferral
Expected participant contributions
Defined-benefit plan costs
Assumptions used to determine defined-benefit plan cost:
Discount rate
Expected return on assets
Salary increases
$
$
5.1
7.6
(11.5)
0.7
(1.3)
0.6
$
$
2.7%
4.7%
3.8%
German Plan
4.4
8.4
(11.6)
—
(1.5)
(0.3)
3.8%
5.6%
3.6%
Year Ended December 31,
2017
Year Ended December 31,
2016
Service cost
Interest cost
Net amortization and deferral
Defined-benefit plan costs
$
$
Assumptions used to determine defined-benefit plan cost:
Discount rate
Expected return on assets
Salary increases
1.2
0.5
—
1.7
$
$
1.7%
N/A
2.0%
0.9
0.6
(0.2)
1.3
2.5%
N/A
2.0%
The weighted average expected long-term rate of return on assets of the U.K Plans is based on the target asset allocation and
the average rate of growth expected for the asset classes invested. The rate of expected growth is derived from a combination of
historic returns, current market indicators, the expected risk premium for each asset class over the risk-free rate, and the opinion
of professional advisors.
The change in the projected benefit obligation and plan assets, the funded status of the plan and a reconciliation of such funded
status to the amounts reported in the consolidated balance sheet as of December 31, 2017, and December 31, 2016, is as follows:
Change in Projected Benefit Obligation:
Balance at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Foreign currency exchange rate changes
Balance at end of year
Change in Projected Benefit Obligation:
Balance at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Foreign currency exchange rate changes
Balance at end of year
U.K. Plans
2017
2016
278.1
5.1
7.6
(7.7)
(6.1)
26.4
303.4
$
$
German Plan
2017
2016
29.0
1.2
0.5
1.0
(0.2)
4.2
35.7
$
$
246.5
4.4
8.4
72.6
(4.2)
(49.6)
278.1
23.6
0.9
0.6
5.3
(0.2)
(1.2)
29.0
$
$
$
$
F-40
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Change in Fair Value of Assets:
Balance at beginning of year
Company contributions
Participant contributions
Actual return on assets
Benefits paid
Foreign currency exchange rate changes
Fair value of plan assets at end of year
Funded status
Recorded as:
Other liabilities
Funded status
Recorded as:
Accrued expenses and other
Other liabilities
U.K. Plans
2017
2016
233.2
6.3
1.3
23.6
(6.1)
23.6
281.9
$
$
U.K. Plans
2017
2016
21.5
$
21.5
21.5
$
German Plan
2017
2016
35.7
0.3
35.4
35.7
$
$
$
226.2
6.8
1.5
46.2
(4.2)
(43.3)
233.2
44.9
44.9
44.9
29.0
0.2
28.8
29.0
$
$
$
$
$
$
$
The Company contributed $6.3 in 2017 to the U.K. Plans and expects to contribute $6.6 in 2018. No contributions were made
to the German plan during 2017, nor are any contributions expected to be made in 2018, as the plan is unfunded.
The accumulated benefit obligation for the U.K. Plans and the German Plan was $261.2 and $31.5 at December 31, 2017,
respectively. The accumulated benefit obligation for the U.K. Plans and the German Plan was $235.8 and $25.4 at December 31,
2016, respectively.
The amounts recognized in accumulated other comprehensive income for the year ended December 31, 2017, and December 31,
2016, is as follows:
Net actuarial loss
Less: Tax benefit (deferred tax asset)
Accumulated other comprehensive income impact
Assumptions used to determine benefit obligations:
Discount rate
Salary increases
Net actuarial loss/(gain)
Less: Tax expense (deferred tax liability)
Accumulated other comprehensive income impact
Assumptions used to determine benefit obligations:
Discount rate
Salary increases
$
$
$
$
U.K. Plans
2017
2016
17.2
(2.9)
14.3
$
$
2.5%
3.6%
German Plan
2017
2016
0.7
(0.2)
0.5
$
$
1.7%
2.0%
39.2
(6.7)
32.5
2.7%
3.8%
(0.4)
0.1
(0.3)
1.7%
2.0%
There is no net actuarial loss for the U.K. Plans and German Plan, respectively required to be amortized from accumulated
other comprehensive income into net periodic pension cost in 2018.
The investment policies for the U.K. Plans are set by the plan trustees, based upon the guidance of professional advisors and
after consultation with the Company, taking into consideration the plans’ liabilities and future funding levels. The trustees have
F-41
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
set the long-term investment policy largely in accordance with the asset allocation of a broadly diversified investment portfolio.
Assets are generally invested within the target ranges as follows:
Equity securities
Debt securities
Annuities
Real estate
Other
60.0% to 70.0%
10.0% to 15.0%
10.0% to 20.0%
—% to 10.0%
—% to 5.0%
The weighted average asset allocation of the U.K. Plans as of December 31, 2017, by asset category is as follows:
Equity securities
Debt securities
Annuities
Real estate
December 31, 2017
66.0%
19.0%
11.0%
4.0%
Investments are made in pooled investment funds. Pooled investment fund managers are regulated by the Financial Conduct
Authority in the U.K. and operate under terms which contain restrictions on the way in which the portfolios are managed and
require the managers to ensure that suitable internal operating procedures are in place. The trustees have set performance objectives
for each fund manager and routinely monitor and assess the managers’ performance against such objectives. Annuities represent
annuity buy-in insurance policies purchased by the plan trustees from large, financially sound insurers. The cash flows from the
annuities are intended to match the plan’s obligations to specific groups of participants, typically those participants currently
receiving benefits.
The fair value of the Company’s U.K. Plans' assets as of December 31, 2017, and December 31, 2016, by asset category, are
as follows:
Asset Category
Cash
Mutual funds (a)
Annuities (b)
Total fair value of the Company Plan’s assets
Asset Category
Cash
Mutual funds (a)
Annuities (b)
Total fair value of the Company Plan’s assets
December 31,
2017
$
$
0.8
249.6
31.5
281.9
December 31,
2016
$
$
0.9
202.5
29.8
233.2
$
$
$
$
Fair Value Measurements as of
December 31, 2017
Using Fair Value Hierarchy
Level 2
Level 3
Level 1
0.8
—
—
0.8
$
$
— $
249.6
—
249.6
$
—
—
31.5
31.5
Fair Value Measurements as of
December 31, 2016
Using Fair Value Hierarchy
Level 2
Level 3
Level 1
0.9
—
—
0.9
$
$
— $
202.5
—
202.5
$
—
—
29.8
29.8
a)
b)
Mutual funds represent pooled investment vehicles offered by investment managers, which are generally comprised of
investments in equities, bonds, property and cash. The plans’ trustees hold units in these funds, the value of which is
determined by the number of units held multiplied by the unit price calculated by the investment managers. That unit
price is derived based on the market value of the securities that comprise the fund, which are determined by quoted prices
in active markets. No element of the valuation is based on inputs made by the plans’ trustees.
Annuities represent annuity buy-in insurance policies, whereby the insurer pays the pension payments for the lifetime of
the members covered. The annuities are assets of the plan and payments from the insurer are made to the plans’ trustees,
who then use those proceeds to pay the pensioners. The cash flows from the annuities are intended to effectively match
the payments to the pensioners covered by the policy. As such, these assets are valued actuarially based upon the value
of the liabilities with which they are associated. As the valuation of these assets is judgmental, and there are no observable
inputs associated with the valuation, these assets are classified as Level 3 in the fair value hierarchy.
F-42
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Expected future benefit payments are as follows:
2018
2019
2020
2021
2022
Years 2023 and thereafter
U.K. Plans
German Plan
$
$
4.4
5.3
5.5
6.0
7.4
43.0
0.3
0.4
0.6
0.6
0.7
3.7
Post-employment Retiree Health and Welfare Plan
As a result of the Covance acquisition, the Company sponsors a post-employment retiree health and welfare plan for the benefit
of eligible employees at certain U.S. subsidiaries who retire after satisfying service and age requirements. This plan is funded on
a pay-as-you-go basis and the cost of providing these benefits is shared with the retirees. The net periodic post-retirement benefit
cost for the year ended December 31, 2017, and December 31, 2016, was $(2.0) and ($2.0), respectively, and the pension benefit
obligation as of the Covance acquisition date was $6.3.
The components of net periodic post-retirement benefit cost for 2017 are as follows:
Interest cost
Actuarial gain
Prior service credit
Net periodic post-retirement benefit cost
Year Ended
December 31, 2017
$
Year Ended
December 31, 2016
—
(0.1)
(1.9)
(2.0)
— $
(0.1)
(1.9)
(2.0) $
$
Assumptions used to determine net periodic post-retirement benefit cost:
Discount rate
Healthcare cost trend rate
4.1%
N/A
4.2%
7.0%
The change in the projected post-retirement benefit obligation, the funded status of the plan and the reconciliation of such
funded status to the amounts reported in the consolidated balance sheets as of December 31, 2017, and December 31, 2016, is as
follows:
Balance at beginning of year
Interest cost
Participant contributions
Actuarial (gain) loss
Benefits paid
Plan amendments
Balance at end of year
Funded status
Recorded as:
Accrued expenses and other
Other liabilities
2017
2016
0.8 $
—
—
(0.1)
—
—
0.7 $
2017
2016
0.7 $
0.1 $
0.6
0.7 $
5.2
—
0.7
0.1
(1.3)
(3.9)
0.8
0.8
0.1
0.7
0.8
$
$
$
$
$
The amounts recognized in accumulated other comprehensive income as of December 31, 2017, are as follows:
Net actuarial gain
Less: Deferred tax benefit
Accumulated other comprehensive income impact
Assumptions used to determine benefit obligation:
Discount rate
Healthcare cost trend rate
Year Ended
December 31, 2017
$
Year Ended
December 31, 2016
(0.7) $
0.3
(0.4) $
$
(2.6)
0.9
(1.7)
4.1%
6.7%
3.6%
N/A
F-43
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
A one percentage point (1.0%) increase or decrease in the assumed healthcare cost trend rate would not impact the net service
and interest cost components of the net periodic post-retirement benefit cost or the post-retirement benefit obligation since future
increases in plan costs are paid by participant contributions. The Company expects to contribute $1.3 to the post-employment
retiree health and welfare plan in 2018.
Expected future gross benefit payments are as follows:
2018
2019
2020
2021
2022
2023 and thereafter
Post-retirement Medical Plan
$
0.1
0.1
0.1
0.1
0.1
0.2
The Company assumed obligations under a subsidiary's post-retirement medical plan. Coverage under this plan is restricted
to a limited number of existing employees of the subsidiary. This plan is unfunded and the Company’s policy is to fund benefits
as claims are incurred. The effect on operations of the post-retirement medical plan is shown in the following table:
Year ended December 31,
2016
2015
2017
Service cost for benefits earned
Interest cost on benefit obligation
Net amortization and deferral
Post-retirement medical plan costs
$
$
— $
0.3
(6.7)
(6.4) $
— $
0.3
(15.9)
(15.6) $
0.1
1.0
(10.4)
(9.3)
Amounts included in accumulated other comprehensive earnings consist of unamortized net loss of $2.3. The accumulated
other comprehensive earnings that are expected to be recognized as components of the post-retirement medical plan costs during
2018 are $0.7 related to amortization of the net gain resulting from the shift of Medicare-eligible participants to private exchanges.
A summary of the changes in the accumulated post-retirement benefit obligation follows:
Balance at January 1
Service cost for benefits earned
Interest cost on benefit obligation
Actuarial loss
Benefits paid
Plan amendment
Balance at December 31
Recorded as:
Accrued expenses and other
Other liabilities
2017
2016
6.8
—
0.3
2.5
(1.0)
—
8.6
1.2
7.4
8.6
$
$
$
$
21.4
—
0.3
(0.2)
(1.3)
(13.4)
6.8
1.0
5.8
6.8
$
$
$
$
The weighted-average discount rates used in the calculation of the accumulated post-retirement benefit obligation were 3.4%
and 3.8% as of December 31, 2017, and 2016, respectively. The healthcare cost trend rate was removed due to the expectation of
future funding to be at the same level as the previous year's funding.
The following assumed benefit payments under the Company's post-retirement benefit plan, which reflect expected future
service, as appropriate, and which were used in the calculation of projected benefit obligations, are expected to be paid as follows:
2018
2019
2020
2021
2022
Years 2023 and thereafter
$
1.3
1.1
1.0
1.0
0.9
2.8
F-44
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
Deferred Compensation Plan
The Company has a Deferred Compensation Plan (DCP) under which certain of its executives may elect to defer up to 100.0%
of their annual cash incentive pay and/or up to 50.0% of their annual base salary and/or eligible commissions subject to annual
limits established by the U.S. government. The DCP provides executives a tax efficient strategy for retirement savings and capital
accumulation without significant cost to the Company. The Company makes no contributions to the DCP. Amounts deferred by
a participant are credited to a bookkeeping account maintained on behalf of each participant, which is used for measurement and
determination of amounts to be paid to a participant, or his or her designated beneficiary, pursuant to the terms of the DCP. The
amounts accrued under this plan were $64.5 and $54.2 at December 31, 2017, and 2016, respectively. Deferred amounts are the
Company's general unsecured obligations and are subject to claims by the Company's creditors. The Company's general assets
may be used to fund obligations and pay DCP benefits.
17. FAIR VALUE MEASUREMENTS
The Company’s population of financial assets and liabilities subject to fair value measurements as of December 31, 2017, and
2016 were as follows:
Noncontrolling interest put
Interest rate swap
Cash surrender value of life insurance policies
Deferred compensation liability
Contingent consideration
Noncontrolling interest put
Interest rate swap
Cash surrender value of life insurance policies
Deferred compensation liability
Contingent consideration
$
$
Fair Value as of
December 31,
2017
16.7
4.1
64.0
64.5
16.5
Fair Value as of
December 31,
2016
15.2
14.6
53.6
54.2
16.8
$
$
Fair Value Measurements as of
December 31, 2017
Using Fair Value Hierarchy
Level 1
Level 2
Level 3
— $
—
—
—
—
$
16.7
4.1
64.0
64.5
—
—
—
—
—
16.5
Fair Value Measurements as of
December 31, 2016
Using Fair Value Hierarchy
Level 1
Level 2
Level 3
— $
—
—
—
—
$
15.2
14.6
53.6
54.2
—
—
—
—
—
16.8
The noncontrolling interest put is valued at its contractually determined value, which approximates fair value. During the year
ended December 31, 2017, the carrying value of the noncontrolling interest put increased by $1.0 consisting of a $0.7 increase in
the contractually determined value and a $0.3 increase for foreign currency translation.
The Company offers certain employees the opportunity to participate in a DCP. A participant's deferrals are allocated by the
participant to one or more of 16 measurement funds, which are indexed to externally managed funds. From time to time, to offset
the cost of the growth in the participant's investment accounts, the Company purchases life insurance policies, with the Company
named as beneficiary of the policies. Changes in the cash surrender value of the life insurance policies are based upon earnings
and changes in the value of the underlying investments, which are typically invested in a similar manner to the participants'
allocations. Changes in the fair value of the DCP obligation are derived using quoted prices in active markets based on the market
price per unit multiplied by the number of units. The cash surrender value and the DCP obligations are classified within Level 2
because their inputs are derived principally from observable market data by correlation to the hypothetical investments.
Contingent accrued earn-out business acquisition consideration liabilities for which fair values are measured as Level 3
instruments. These contingent consideration liabilities were recorded at fair value on the acquisition date and are remeasured
quarterly based on the then assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent
consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates.
As the fair value measure is based on significant inputs that are not observable in the market, they are categorized as Level 3.
The carrying amounts of cash and cash equivalents, accounts receivable, income taxes receivable, and accounts payable are
considered to be representative of their respective fair values due to their short-term nature. The fair market value of the zero-
coupon subordinated notes, based on market pricing, was approximately $18.8 and $79.3 as of December 31, 2017, and 2016,
F-45
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
respectively. The fair market value of the Senior Notes, based on market pricing, was approximately $6,078.9 and $5,254.5 as of
December 31, 2017, and 2016, respectively. The Company's note and debt instruments are considered Level 2 instruments, as the
fair market values of these instruments are determined using other observable inputs.
18. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company addresses its exposure to market risks, principally the market risk associated with changes in interest rates,
through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such
as interest rate swap agreements (see Interest Rate Swap section below). Although the Company’s zero-coupon subordinated notes
contain features that are considered to be embedded derivative instruments (see Embedded Derivative section below), the Company
does not hold or issue derivative financial instruments for trading purposes. The Company does not believe that its exposure to
market risk is material to the Company’s financial position or results of operations.
Interest Rate Swap
During the third quarter of 2013, the Company entered into two fixed-to-variable interest rate swap agreements for the 4.625%
Senior Notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus
2.298% to hedge against changes in the fair value of a portion of the Company's long-term debt. These derivative financial
instruments are accounted for as fair value hedges of the Senior Notes due 2020. These interest rate swaps are included in other
long-term assets or liabilities, as applicable, and added to the value of the Senior Notes, with an aggregate fair value of $4.1 at
December 31, 2017. As the specific terms and notional amounts of the derivative financial instruments match those of the fixed-
rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges and accordingly, there is no impact
to the Company's consolidated statements of operations. Cash flows from the interest rate swaps are including in operating activities.
Embedded Derivatives Related to the Zero-Coupon Subordinated Notes
The Company’s zero-coupon subordinated notes contain the following two features that are considered to be embedded
derivative instruments under authoritative guidance in connection with accounting for derivative instruments and hedging activities:
1)
2)
The Company will pay contingent cash interest on the zero-coupon subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of the sum of the issue price, accrued original issue discount and
contingent additional principal, if any, for a specified measurement period.
Holders may surrender zero-coupon subordinated notes for conversion during any period in which the rating assigned to
the zero-coupon subordinated notes by S&P’s Ratings Services is BB- or lower.
The Company believes these embedded derivatives had no fair value at December 31, 2017, and 2016. These embedded
derivatives also had no impact on the consolidated statements of operations for the years ended December 31, 2017, 2016 and
2015.
Derivatives Instruments
The Company periodically enters into foreign currency forward contracts, which are recognized as assets or liabilities at their
fair value. These contracts do not qualify for hedge accounting and the changes in fair value are recorded directly to earnings. The
contracts are short-term in nature and the fair value of these contracts is based on market prices for comparable contracts. The fair
value of these contracts is not significant as of December 31, 2017.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31,
2016
2015
2017
Supplemental schedule of cash flow information:
Cash paid during period for:
Interest
Income taxes, net of refunds
Disclosure of non-cash financing and investing activities:
Surrender of restricted stock awards and performance shares
Conversion of zero-coupon convertible debt
Assets acquired under capital leases
Accrued property, plant and equipment
$
$
239.1
348.0
$
210.7
345.7
166.1
237.6
47.4
35.0
7.3
1.6
34.6
39.1
16.0
4.4
12.6
1.1
22.6
4.3
F-46
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
20. BUSINESS SEGMENT INFORMATION
The following table is a summary of segment information for the years ended December 31, 2017, 2016, and 2015. The
“management approach” has been used to present the following segment information. This approach is based upon the way the
management of the Company organizes segments within an enterprise for making operating decisions and assessing performance.
Financial information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating
segment performance and deciding how to allocate resources to segments. The Company’s chief executive officer has been identified
as the CODM.
Segment asset information is not presented because it is not used by the CODM at the segment level. Operating earnings (loss)
of each segment represents net revenues less directly identifiable expenses to arrive at operating income for the segment. General
management and administrative corporate expenses are included in general corporate expenses below.
Net Revenues:
LCD
CDD
Intercompany eliminations
Total net revenues
Operating Earnings (Loss):
LCD
CDD
General corporate expenses
Total operating income
Non-operating expenses, net
Earnings before income taxes
Provision for income taxes
Net earnings
Less: Net income attributable to noncontrolling interests
Net income attributable to Laboratory Corporation of America Holdings
Depreciation and Amortization
LCD
CDD
General corporate
Total depreciation and amortization
Geographic distribution of net revenues
US
Canada
United Kingdom
Switzerland
Other
Total net revenues
2017
2016
2015
$
7,170.5
3,037.2
(1.8)
$ 10,205.9
$
$
$
$
1,298.6
206.2
(140.6)
1,364.2
(229.3)
1,134.9
(139.1)
1,274.0
(5.8)
1,268.2
2017
304.7
217.4
1.2
523.3
$
$
$
$
$
$
6,593.9
2,844.1
(0.8)
9,437.2
1,187.6
272.7
(147.9)
1,312.4
(206.9)
1,105.5
372.3
733.2
(1.1)
732.1
2016
270.9
219.5
0.1
490.5
$
$
$
$
$
$
6,199.3
2,306.4
—
8,505.7
1,053.7
73.5
(130.4)
996.8
(270.8)
726.0
287.3
438.7
(1.1)
437.6
2015
245.8
184.4
4.1
434.3
LCD
CDD
Intercompany
Eliminations
Total
$
$
6,808.6
327.8
29.6
—
4.5
7,170.5
$
$
1,427.2
—
272.4
484.4
853.2
3,037.2
$
$
(1.8) $
—
—
—
—
(1.8) $
8,234.0
327.8
302.0
484.4
857.7
10,205.9
Geographic distribution of property, plant and equipment, net
U.S.
Canada
U.K.
Switzerland
Other
Total property, plant and equipment, net
LCD
CDD
Total
$
$
826.2
54.6
2.1
—
3.0
885.9
$
$
590.6
—
120.7
81.4
70.3
863.0
$
$
1,416.8
54.6
122.8
81.4
73.3
1,748.9
F-47
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data)
21. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Net revenues
Gross profit
Net earnings attributable to Laboratory Corporation
of America Holdings
Basic earnings per common share
Diluted earnings per common share
1st
Quarter
$
2,408.1
803.6
$
Year Ended December 31, 2017
4th
3rd
2nd
Quarter (a)
Quarter
Quarter
2,701.5
$
915.8
2,597.9
882.8
2,498.4
861.8
$
Full
Year
$ 10,205.9
3,464.0
192.2
1.87
1.84
188.6
1.84
1.82
180.6
1.77
1.74
706.8
6.91
6.81
1,268.2
12.39
12.21
(a) Net earnings attributable to Laboratory Corporation of America Holdings in the fourth quarter of 2017 includes amounts
recorded due to TCJA.
Net revenues
Gross profit
Net earnings attributable to Laboratory Corporation
of America Holdings
Basic earnings per common share
Diluted earnings per common share
1st
Quarter
Year Ended December 31, 2016
4th
3rd
2nd
Quarter
Quarter
Quarter
$
2,295.2
777.3
$
2,382.0
826.8
$
2,372.7
788.4
$
2,387.3
788.0
$
164.1
1.61
1.58
204.1
2.00
1.96
179.5
1.74
1.71
184.4
1.79
1.75
Full
Year
9,437.2
3,180.5
732.1
7.14
7.02
F-48
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2017, 2016 and 2015
(Dollars in millions)
Balance at
beginning
of year
Additions
Charged to Costs
and Expense
(1)
Other
(Deductions)Ad
ditions
Balance
at end
of year
Year ended December 31, 2017:
Applied against asset accounts:
Allowance for doubtful accounts
Valuation allowance-deferred tax assets
Year ended December 31, 2016:
Applied against asset accounts:
Allowance for doubtful accounts
Valuation allowance-deferred tax assets
Year ended December 31, 2015:
Applied against asset accounts:
Allowance for doubtful accounts
Valuation allowance-deferred tax assets
$
$
$
$
$
$
235.6
31.3
217.0
15.1
211.6
17.1
$
$
$
$
$
$
314.7
11.5
287.3
16.2
$
$
$
$
(289.4) $
— $
(268.7) $
— $
265.4
$
— $
(260.0) $
(2.0) $
260.9
42.8
235.6
31.3
217.0
15.1
(1) Other (Deductions) Additions consists primarily of write-offs of accounts receivable amounts.
F-49
Exhibit 12.1
STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(dollars in millions, except ratio information)
2013
Fiscal Years Ended December 31,
2016
2015
2014
2017
Income from continuing operations before (a)
income tax
Equity in the income of investees
Cash distributions received from equity
investees
$
$
908.0
(18.6)
14.4
903.8
$
820.6
(14.6)
8.8
814.8
726.0
(10.6)
10.7
726.1
$ 1,105.5
(8.3)
9.5
1,106.7
$ 1,134.9
(8.8)
9.3
1,135.4
Fixed Charges:
Interest on long-term and
short-term debt including
amortization of debt expense
Portion of rental expense as can be
demonstrated to be representative
of the interest factor (b)
96.5
109.5
274.9
219.1
235.1
78.6
79.7
95.7
97.1
104.6
Total fixed charges
175.1
189.2
370.6
316.2
339.7
Earnings before income taxes and
fixed charges
$ 1,078.9
$ 1,004.0
$ 1,096.7
$ 1,422.9
$ 1,475.1
Ratio of earnings to fixed charges
6.16
5.31
2.96
4.50
4.34
Exhibit 21 LIST OF SUBSIDIARIES
1957285 Ontario Inc. dba Quality Underwriting Services
2089729 Ontario, Inc.
2248848 Ontario Inc.
3065619 Nova Scotia Company
3257959 Nova Scotia Company
8165335 Canada Inc.
8348596 Canada Inc.
896988 Ontario Limited
9279-3280 Quebec Inc.
Accupath Diagnostic Laboratories, Inc.
Alpha Medical Laboratory LLC
Beacon Laboratory Benefit Solutions, Inc.
Bode Cellmark Forensics, Inc.
CannAmm GP Inc.
CannAmm Limited Partnership
Cellmark Forensics, Inc.
Center for Disease Detection, LLC
Center for Disease Detection International
Centrex Clinical Laboratories, Inc.
Clearstone Central Laboratories (U.S.) Inc.
Clearstone Holdings (International) Ltd.
Clipper Holdings, Inc.
Colorado Coagulation Consultants, Inc.
Correlagen Diagnostics, Inc.
Covance Inc.
Curalab Inc.
Cytometry Associates, Inc.
Czura Thornton (Hong Kong) Limited
DCL Acquisition, Inc.
DCL Medical Laboratories, LLC
DCL Medical Laboratories, LLC
DCL Sub LLC
Decision Diagnostics, L.L.C. (aka DaVinici/Medicorp LLC)
Diagnostic Services, Inc.
DIANON Systems, Inc.
DL Holdings Limited Partnership
Dynacare - Gamma Laboratory Partnership
Dynacare Company
Dynacare G.P. Inc.
Dynacare Holdco LLC
Dynacare Laboratories Limited Partnership
Dynacare Laboratories Inc.
Dynacare Northwest Inc.
Dynacare Realty Inc.
DynaLifeDX
DynaLifeDX Infrastructure Inc.
Endocrine Sciences, Inc.
Esoterix Genetic Counseling, LLC
Esoterix Genetic Laboratories, LLC
Esoterix, Inc.
Execmed Health Services Inc.
FirstSource Laboratory Solutions, Inc.
Gamma Dynacare Central Medical Laboratories GP Inc.
Gamma Dynacare Central Medical Laboratory Limited Partnership
GDML Medical Laboratories Inc
GeneScreen, Inc.
Health Testing Centers, Inc.
Health Trans Services Inc.
HHLA Lab-In-An-Envelope, LLC
Home Healthcare Laboratory of America, LLC
IDX Pathology, Inc.
Impact Genetics Corporation
Impact Genetics, Inc.
Kaleida LabCorp, LLC
Lab Delivery Service of New York City, Inc.
LabCorp Belgium Holdings, Inc.
LabCorp BVBA
LabCorp Central Laboratories (Canada) Inc.
LabCorp Central Laboratories (China) Inc.
LabCorp Development Company
LabCorp Health System Diagnostics, LLC
LabCorp Japan, G.K.
LabCorp Limited
LabCorp Nebraska, Inc.
LabCorp Neon Ltd.
LabCorp Neon Luxenbourg S.à r.l.
LabCorp Specialty Testing Billing Service, Inc.
LabCorp Specialty Testing Group, Inc.
LabCorp Tennessee, LLC
LabCorp UK Holdings, Ltd.
Laboratoire Bio-Medic Inc.
Laboratory Corporation of America (LCA)
LabWest, Inc.
Lifecodes Corporation
LipoScience, Inc.
Litholink Corporation
MedAxio Insurance Medical Services GP Inc.
MedAxio Insurance Medical Services LP
Medtox Diagnostics, Inc.
Medtox Laboratories, Inc.
MEDTOX Scientific, Inc.
Monogram Biosciences, Inc.
National Genetics Institute
New Brighton Business Center LLC
New Imaging Diagnostics, LLC
New Molecular Diagnostics Ventures LLC
NWT Inc.
Orchid Cellmark Ltd.
Orchid Cellmark ULC
PA Labs, Inc.
Path Lab, Incorporated
Pathology Associates Medical Lab, LLC
Pee Dee Pathology Associates, Inc.
Persys Technology Inc.
Pixel by LabCorp
Princeton Diagnostic Laboratories of America, Inc.
Protedyne Corporation
ReliaGene Technologies Inc.
Sequenom Biosciences (India) Pvt. Ltd.
Sequenom Center for Molecular Medicine, LLC
Sequenom, Inc.
SW/DL LLC
Tandem Labs Inc.
The Biomarker Factory, LLC
Viro-Med Laboratories, Inc.
Covance Inc. Operating Entities
Chiltern International Group Limited
CJB Inc.
Covance (Argentina) SA
Covance (Asia) Pte. Ltd.
Covance (Barbados) Holdings Ltd.
Covance (Barbados) Ltd.
Covance (Canada) Inc.
Covance (Cayman) Holdings, Ltd.
Covance (Cayman) Ltd.
Covance (Polska) Sp.Zo.O
Covance Asia-Pacific Inc.
Covance Austria GmbH
Covance Bioanalytical Services LLC
Covance Brazil Pharmaceutical Services Limitada
Covance Central Laboratory Services Inc.
Covance Central Laboratory Services Limited Partnership
Covance Central Laboratory Services S.a r.l..
Covance Chile Services Limitada
Covance Clinical and Periapproval Services AG
Covance Clinical and Periapproval Services GmbH
Covance Clinical and Periapproval Services Limited
Covance Clinical and Periapproval Services Limited
Covance Clinical and Periapproval Services LLC
Covance Clinical and Periapproval Services SA
Covance Clinical and Periapproval Services S.a r.l.
Covance Clinical Product Developments Ltd.
Covance Clinical Research Unit Inc.
Covance Clinical Research Unit Limited
Covance Clinical Research, L.P.
Covance CLS Holdings Limited LLC
Covance CLS Holdings Partnership LP
Covance Colombia Services Limitada
Covance CRU Inc.
Covance Denmark Aps
Covance Development Services (Pty) Ltd.
Covance Hong Kong Holdings Limited
Covance Hong Kong Services Limited
Covance Hungaria Consultancy Limited Liability Company
Covance India Pharmaceutical Services Private Limited
Covance International Holdings B.V.
Covance Japan Co., Ltd.
Covance Korea Services Limited
Covance Laboratories Inc.
Covance Laboratories Korea Company Limited
Covance Laboratories Limited
Covance Latin America Inc.
Covance Limited
Covance Luxembourg S.a r.l.
Covance Market Access Services Inc.
Covance Mexico Services, S. DE R. L. De C.V.
Covance Neon Luxembourg S.a r.l.
Covance New Zealand Limited
Covance Periapproval Services Inc.
Covance Peru Services S.A.
Covance Pharmaceutical Research and Development (Beijing) Co., Ltd
Covance Pharmaceutical Research and Development (Shanghai) Co., Ltd.
Covance Preclinical Corporation
Covance Preclinical Services GmbH
Covance Pty. Ltd.
Covance Research Holdings, LLC
Covance Research Products Inc.
Covance Services (Thailand) Limited
Covance Services Malaysia Sdn. Bhd.
Covance Specialty Pharmacy LLC
Covance Taiwan Services Limited
Covance US Holdings Limited LLC
Covance US Holdings Partnership LP
Covance Virtual Central Laboratory B.V.
CRPP Inc.
Fairfax Storage Limited
Global Specimen Solutions, Inc.
Hazpen Trustees Ltd.
IFN Research, LLC
International Food Network Ltd.
International Food Network, LLC
Medaxial Limited
Safe Foods International Holdings, LLC
Texas Covance GP, Inc.
The Covance Charitable Foundation
The National Food Laboratory, LLC
Covance Inc. Inactive Entities
Covance Classic Laboratory Services Inc.
Covance Genomics Laboratory LLC
PMD Properties, LLC
SLJK LLC
REIM LLC
SPHN LLC
JSG R&D LLC
Nexigent Inc.
Chiltern International Group Limited Operating Entities
Chiltern Clinical Research GmbH & Co. KG
Chiltern Clinical Research KK
Chiltern Clinical Research S.R.L.
Chiltern Clinical Research YH
Chiltern Clinical Research India Private Ltd.
Chiltern Clinical Research International GmbH
Chiltern Clinical Research (Philippines) Inc.
Chiltern Clinical Research Ukraine LLC
Chiltern International AB
Chiltern International B.V.
Chiltern International GmbH
Chiltern International Kft
Chiltern International LLC
Chiltern International Ltd
Chiltern International SARL
Chiltern International S.R.L.
Chiltern International S.R.L.
Chiltern International Sprl
Chiltern International Sp.z.o.o.
Chiltern International Sro
Chiltern International (Canada) Ltd.
Chiltern International (Hong Kong) Ltd
Chiltern International Clinical Research S.R.L.
Chiltern International Holdings Limited
Chiltern International Inc.
Chiltern International Limited
Chiltern International Portugal LDA
Chiltern International Private Limited
Chiltern International Pty. Ltd
Chiltern International Spain S.A.
Chiltern International Switzerland SARL
Chiltern International Taiwan Ltd
Chiltern International Ukraine LLC
Chiltern Investigacion Clinica Ltda
Chiltern Klinik Arastirma Organizasyon Limited Sirketi
Chiltern – Pesquisa Clinica Ltda
Chiltern Research International (Pty) Ltd
Chiltern Pharmaceutical and Technology Consulting (Shanghai) Co. Ltd.
Chiltern Research International (Singapore) Pte.
Endpoint Clinical Inc.
Havenfern Limited
Nexus Oncology sp.z.o.o.
Pacific Clinical Research India Private Limited
Ockham Australia Pty Ltd.
Ockham Development Group (Holdings) UK Ltd
Ockham Europe Ltd.
Ockham India Clinical Research and Data Services Private Limited
Ockham Oncology (Germany) GmbH
Ockham Oncology Kft
Theorem Clinical Latin America B.V.
Theorem Clinical Research Co., Ltd.
Theorem Clinical Research Inc.
Theorem Clinical Research K.F.T.
Theorem Clinical Research Limited
Theorem Clinical Research L.L.C.
Theorem Clinical Research NV.
Theorem Clinical Research Pty. Ltd
Theorem Clinical Research S.L.
Theorem Clinical Research Sp. Z o.o.
Theorem Clinical Research Holdings B.V.
Theorem Clinical Research International B.V.
Theorem Research Associates, Inc.
[THIS PAGE INTENTIONALLY LEFT BLANK]
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-219977) and
Forms S-8 (No. 333-102602, No. 333-90764, No. 333-97745, No. 333-150704, No. 333-181107, No. 333-211324 and No.
333-211323) of Laboratory Corporation of America Holdings of our report dated February 27, 2018, relating to the financial
statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 27, 2018
Exhibit 24.1
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III her true and lawful attorney-in-fact and agent, with full power of substitution, for her and in her name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or she substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ KERRII B. ANDERSON
Kerrii B. Anderson
Exhibit 24.2
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ JEAN-LUC BÉLINGARD
Jean-Luc Bélingard
Exhibit 24.3
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ D. GARY GILLILAND, M.D., Ph.D
D. Gary Gilliland, M.D., Ph.D
Exhibit 24.4
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ GARHENG KONG, M.D., Ph.D.
Garheng Kong, M.D., Ph.D.
Exhibit 24.5
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ ROBERT E. MITTELSTAEDT, JR.
Robert E. Mittelstaedt, Jr.
Exhibit 24.6
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2017.
By:
/s/ PETER M. NEUPERT
Peter M. Neupert
Exhibit 24.7
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III her true and lawful attorney-in-fact and agent, with full power of substitution, for her and in her name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ RICHELLE PARHAM
Richelle Parham
Exhibit 24.8
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ ADAM H. SCHECHTER
Adam H. Schechter
Exhibit 24.9
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints F. Samuel
Eberts III his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, in connection with the Laboratory Corporation of America Holdings (Corporation)
Annual Report on Form 10-K for the year ended December 31, 2017, under the Securities Exchange Act of 1934, as
amended, including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf
of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to
the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or
amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission and any applicable securities exchange
or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents in this 27th day of February, 2018.
By:
/s/ R. SANDERS WILLIAMS, M.D.
R. Sanders Williams, M.D.
Exhibit 31.1
Certification
I, David P. King, certify that:
1. I have reviewed this annual report on Form 10-K of Laboratory Corporation of America Holdings;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2018
By:
/s/ DAVID P. KING
David P. King
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification
I, Glenn A. Eisenberg, certify that:
1. I have reviewed this annual report on Form 10-K of Laboratory Corporation of America Holdings;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2018
By:
/s/ GLENN A. EISENBERG
Glenn A. Eisenberg
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
Written Statement of
Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
The undersigned, the Chief Executive Officer and the Chief Financial Officer of Laboratory Corporation of America
Holdings (Company), each hereby certifies that, to his knowledge on the date hereof:
(a) the Form 10-K of the Company for the Period Ended December 31, 2017, filed on the date hereof with the Securities
and Exchange Commission (Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
By:
By:
/s/ DAVID P. KING
David P. King
Chief Executive Officer
February 27, 2018
/s/ GLENN A. EISENBERG
Glenn A. Eisenberg
Chief Financial Officer
February 27, 2018
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906,
has been provided to Laboratory Corporation of America Holdings and will be retained by Laboratory Corporation of America
Holdings and furnished to the Securities and Exchange Commission or its staff upon request.
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