LabCorp 2006 Annual Report Download

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THE FUTURE OF HEALTH CARE IS
A FOUR-LETTER
WORD
LabCorp | 2006 Annual Report

Table of contents

  • Page 1
    THE FUTURE OF HEALTH CARE IS ... A FOUR-LETTER ... WORD LabCorp | 2006 Annual Report

  • Page 2
    ...with its Centers of Excellence: The Center for Molecular Biology and Pathology, National Genetics Institute, Inc., ViroMed Laboratories, Inc., The Center for Esoteric Testing, DIANON Systems, Inc., US LABS, and Esoterix. Our clients include physicians, government agencies, managed care organizations...

  • Page 3
    test ... Today's Lab Tests represent some of the most compelling opportunities for improving health care for millions of people. Laboratory Corporation of America Holdings 2006 1 ®

  • Page 4
    test offer value ... Testing represents approximately 4 percent of health care expenditures, but influences more than 70 percent of health care decisions - clearly, one of health care's most compelling value propositions. 2 Laboratory Corporation of America Holdings 2006 ®

  • Page 5
    ... preserving good health is identifying and reducing cardiovascular disease risk factors. Conventional cholesterol testing alone may not be sufficient - more than half of patients who experienced a heart attack had "normal" cholesterol test results.* LabCorp has been a leader in bringing to market...

  • Page 6
    ... ... Testing is a critical element of every phase of the health care continuum.

  • Page 7
    ... the status and progression of HCV. LabCorp's hepatitis C QuantaSureâ„¢ and QuantaSureâ„¢ Plus assays can detect and measure extraordinarily small levels of virus in the blood, providing physicians with an early diagnosis and critical information about a patient's HCV viral load. More precise and...

  • Page 8
    ... tool to fight this disease. HPV is the cause of almost all cases of cervical cancer. Using advanced molecular technology, HPV testing can determine if one of the HPV virus types that causes cervical cancer is present. HPV screening volumes grew by more than half in 2006. Together, the image-guided...

  • Page 9
    ... for each patient a therapeutic regimen - which may include chemotherapy, radiation or hormone therapy - that provides the best prospects to cure the disease. Highly sensitive tests, such as assays measuring the HER2/neu protein, can give critical prognostic information to clinicians, and help to...

  • Page 10
    ...of patient data. LabCorp's leadership in customer care, standardized testing platforms and data connectivity helps managed care providers control costs and allows physicians to make better health care decisions for their patients. ... In 2006, LabCorp added more than 400 new patient service centers...

  • Page 11
    ...systems, electronic medical record networks, and lab information systems. The capability to speed the throughput of enormous volumes of test results and patient data to both payers and medical providers is a key differentiator that helps make LabCorp the partner of choice for managed care customers...

  • Page 12
    ...effort by LabCorp personnel produced extraordinary results, and, by year's end, we opened more than 400 new patient access points and hired 1,200 new team members to ensure the highest level of service for our patients and physicians as we bring UnitedHealthcare on board. This agreement is expected...

  • Page 13
    ...of test results and patient information wherever needed. Today, LabCorp employs some 6,200 highly trained phlemotomists in over 1,700 patient service centers, connected to a nationwide logistics network of 2,600 couriers who work to ensure on-time pickup, rapid turnaround and timely result reporting...

  • Page 14
    ... with other managed care providers and afford physicians and patients increased access to medical testing. Our proven ability to partner with managed care organizations to make service delivery more efficient, constrain leakage and reduce their overall lab spending will continue to pay significant...

  • Page 15
    Tom Mac Mahon Chairman of the Board ... Dave King President and Chief Executive Officer

  • Page 16
    ... that reasonable fee increases for laboratories fuel innovation that is good for patients, physicians, and our health care system. We also need to make sure that regulation of our industry is fair and sensible, balancing the need to provide assurances of test reliability to the public against the...

  • Page 17
    ... the value that laboratory services provide, both toward the goal of reducing spending on health care services and on Today's Laboratory Testing Industry ...achieving better patient outcomes. At the same time, we need a process to obtain fair reimbursement for new technology. In laboratory testing...

  • Page 18
    ...Vice President, Esoteric Business William B. Hayes Executive Vice President, Chief Financial Officer and Treasurer Myla P. Lai-Goldman, M.D. Executive Vice President, Chief Scientific Officer and Medical Director Benjamin R. Miller Executive Vice President, Sales, Marketing and Managed Care Bradford...

  • Page 19
    ... CHIEF FINANCIAL OFFICER Five-Year Selected Financial Data 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Management's Report on Internal Control Over Financial Reporting 28 Report of Independent Registered Public Accounting Firm 29 Consolidated Balance...

  • Page 20
    ... the captions "Statement of Operations Data" and "Balance Sheet Data" as of and for the five-year period ended December 31, 2006 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...

  • Page 21
    ...based on the fair market value of the award as of the grant date. As a result of adopting SFAS 123(R), the Company recorded approximately $23.3 in stock compensation expense relating to its stock option and employee stock purchase plans for the year ended December 31, 2006. Net earnings for the year...

  • Page 22
    ... $16.0 in capital projects relating to the United Healthcare contract. Seasonality The majority of the Company's testing volume is dependent on patient visits to doctor's offices and other providers of health care. Volume of testing generally declines during the year-end holiday periods and other...

  • Page 23
    ...and US LABS operations into the Company's service delivery network. The plan is directed at reducing redundant facilities, while maintaining the goal of providing excellent customer service. In connection with the integration plan, the Company recorded $11.9 of costs associated with the execution of...

  • Page 24
    ... financial systems. Such expenditures are expected to be funded by cash flow from operations as well as borrowings under the Company's revolving credit facilities as needed. The Company has invested a total of $13.9 over the past three years in new testing technologies and had $51.0 net book value...

  • Page 25
    ... to access capital markets. Total Capital lease obligations Operating lease obligations Contingent future licensing payments(a) Minimum royalty payments Minimum purchase obligations Zero-coupon subordinated notes(b) Scheduled interest payments on Senior Notes Long-term debt Total contractual cash...

  • Page 26
    ... for services rendered when test results are reported to the ordering physician and the testing process is complete. The Company's sales are generally billed to three types of payers - clients, patients and third parties, such as managed care companies, Medicare and Medicaid. For clients, sales are...

  • Page 27
    ... fee schedules based upon historical payment trends. Under capitated agreements with managed care companies, the Company recognizes revenue based on a negotiated monthly contractual rate for each member of the managed care plan regardless of the number or costs of services performed. The Company...

  • Page 28
    ... in tests ordered or specimens submitted by existing customers; 10. failure to retain or attract managed care business as a result of changes in business models, including new risk based or network approaches, or other changes in strategy or business models by managed care companies; FORWARD...

  • Page 29
    ... develop, perform, or market the Company's tests or operate its business; 20. failure in the Company's information technology systems resulting in an increase in testing turnaround time or billing processes or the failure to meet future regulatory or customer information technology and connectivity...

  • Page 30
    ... of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by...

  • Page 31
    ... financial position of Laboratory Corporation of America Holdings and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted...

  • Page 32
    ...liabilities Long-term debt, less current portion Deferred income taxes Other liabilities Total liabilities Commitments and contingent liabilities Shareholders' equity: Common stock, 122.2 and 126.5 shares outstanding at December 31, 2006 and December 31, 2005, respectively Additional paid-in capital...

  • Page 33
    ...45 Net sales Cost of sales Gross profit Selling, general and administrative expenses Amortization of intangibles and other assets Restructuring and other special charges Operating income Other income (expenses): Investment loss Interest expense Income from joint venture partnerships, net Investment...

  • Page 34
    ... of common stock under employee stock plans Issuance of restricted stock awards Surrender of restricted stock awards Cancellation of restricted stock awards Stock compensation Income tax benefit from stock options exercised Retirement of common stock Purchase of common stock BALANCE AT DECEMBER...

  • Page 35
    ... from senior note offering Bank overdraft Payments on other long-term debt Payment of debt issuance costs Payments on long-term lease obligations Excess tax benefits from stock based compensation Purchase of common stock Net proceeds from issuance of stock to employees Net cash provided by (used for...

  • Page 36
    ... and Medicaid programs. The Company has capitated agreements with certain managed care customers and recognizes related revenue based on a predetermined monthly contractual rate for each member of the managed care plan regardless of the number or cost of services provided by the Company. In 2006...

  • Page 37
    .... Prior to 2006, the Company accounted for stock-based compensation in accordance with APB 25 using the intrinsic value method, which did not require that compensation cost be recognized for the Company's stock option and stock purchase plans provided the option exercise price was established at...

  • Page 38
    ...2.45 $2.45 2.27 See note 14 for assumptions used in calculating pro forma compensation expense for the employee stock option and stock purchase plans. Cash Equivalents: Cash equivalents (primarily investments in money market funds, time deposits, commercial paper and Eurodollars which have original...

  • Page 39
    ... periods to be benefited, such as legal life for patents and technology, 10 to 25 years for customer lists and contractual lives for non-compete agreements. Debt Issuance Costs: The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest...

  • Page 40
    ...as a result of this plan included those involved in the collection and testing of specimens, as well as administrative and other support functions. The Company also recorded a special charge of $5.0 related to forgiveness of amounts owed by patients and clients as well as other costs associated with...

  • Page 41
    ...618.0 (124.6) $ 493.4 The components of identifiable intangible assets are as follows: December 31, 2006 Gross Carrying Amount Customer lists Patents, licenses and technology Non-compete agreements Trade name $690.3 89.1 27.4 100.5 $907.3 Accumulated Amortization $(215.7) (38.0) (23.9) (19.5) $(297...

  • Page 42
    ... ACCRUED EXPENSES AND OTHER December 31, 2006 Employee compensation and benefits Self-insurance reserves Other tax accruals Accrued taxes payable Royalty and license fees payable Accrued repurchases of common stock Restructuring reserves Acquisition related reserves Interest payable Other $109.7 46...

  • Page 43
    ... 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 7, 2006, in addition to the continued accrual of the original issue discount. On October 2, 2006, the Company announced that its zero-coupon...

  • Page 44
    ... initial purchase price of $73.40 per share. The Company used cash on hand to pay for the shares. The purchase price for these shares is subject to an adjustment based on the volume weighted-average price of the Company's stock during a period following execution of the agreement. The total cost of...

  • Page 45
    ... credit facility. Pursuant to the agreement with the bank, the bank purchased 4.8 shares in the open market over the period ended June 13, 2006. At the end of the purchase period, the Company made a cash payment of $22.9 to the bank to settle its obligation for the purchase price adjustment based...

  • Page 46
    ...Company's stock option plans. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: December 31, 2006 Deferred tax assets: Employee compensation and benefits Accounts receivable Self-insurance reserves...

  • Page 47
    ... 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 2006, expense related to...

  • Page 48
    ... July of each year. Approximately 207, 209, and 247 thousand shares were purchased by eligible employees in 2006, 2005 and 2004 respectively. For 2006, expense related to the Company's employee stock purchase plan was $2.3. The Company uses the Black-Scholes model to calculate the fair value of the...

  • Page 49
    ... regions across the United States. During the first three years of the ten-year agreement, the Company has committed to reimburse UnitedHealthcare up to $200 for transition costs related to developing an expanded network in the Oxford, MAMSI and Neighborhood Health Partnership markets, as well...

  • Page 50
    ...follows: 2006 Discount rate Compensation increases Expected long term rate of return 6.00% 3.0% 8.5% 2005 5.60% 3.0% 8.5% 2004 6.00% 3.0% 8.5% 2006 Service cost for benefits earned Interest cost on benefit obligation Expected return on plan assets Net amortization and deferral CEO retirement charge...

  • Page 51
    ... 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: Years Ended December 31, 2006 Service cost for benefits earned...

  • Page 52
    ...the opening balance of retained earnings. Based on its evaluation as of December 31, 2006, the Company does not believe that FIN 48 will have a material impact on its financial statements. In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 provides a new...

  • Page 53
    ...based on the fair market value of the award as of the grant date. As a result of adopting SFAS 123(R), the Company recorded approximately $23.3 in stock compensation expense relating to its stock option and employee stock purchase plans for the year ended December 31, 2006. Net earnings for the year...

  • Page 54
    ...President Investor Relations 336-436-4879 Center for Molecular Biology and Pathology 800-533-0567 Center for Occupational Testing 800-833-3984 Center for Esoteric Testing Reference Testing 800-334-5161 Paternity/Identity 800-742-3944 LabCorp Drug Development Laboratory Services 888-244-4102 Web Site...

  • Page 55
    ... 1,3 Executive Vice President, University of Pennsylvania Health System and Dean of the School of Medicine Andrew G. Wallace, M.D. 2,4 Former Dean of Dartmouth Medical School M. Keith Weikel, Ph.D. 2,3. Senior Vice President and Chief Operating Officer of HCR Manor Care, Inc. ...Board of Directors...

  • Page 56
    Laboratory Corporation of America Holdings ® 358 South Main Street Burlington, NC 27215 336-584-5171 www.labcorp.com