LabCorp 2006 Annual Report Download - page 23

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions)
Laboratory Corporation of America® Holdings 2006 21
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Cost of Sales
Years Ended December 31, % Change
2006 2005 2004 2006 2005
Cost of sales $2,061.4 $1,937.3 $1,795.5 6.4% 7.9%
Cost of sales as
a % of sales 57.4% 58.2% 58.2%
Cost of sales, which includes primarily laboratory and distribution
costs, has increased over the three year period ended December 31,
2006 primarily due to increased volume in genomic and esoteric test-
ing and the impact of acquisitions. In addition, the Company incurred
approximately $14 in costs in the fourth quarter of 2006 to add to its
patient service delivery capabilities in preparation for its new contract
with UnitedHealthcare. As a percentage of sales, cost of sales has
remained relatively stable during 2004 and 2005, but has declined
during 2006, as the Company has leveraged volume and price growth
over its laboratory infrastructure. Labor and testing supplies comprise
over 75% of the Company’s cost of sales.
Selling, General and Administrative Expenses
Years Ended December 31, % Change
2006 2005 2004 2006 2005
Selling, general and
administrative
expenses $779.1 $703.9 $649.1 10.7% 8.4%
SG&A as a % of sales 21.7% 21.2% 21.0%
Total selling, general and administrative expenses as percent-
age of sales have increased slightly over the three year period
ended December 31, 2006. The Company has reduced its bad debt
expense rate over the three year period from 6.3% in 2004 to 4.8%
in 2006. The decrease in the bad debt expense rate is the result of
improved billing and collection performance. Other SG&A expenses
remained relatively flat in 2004 and increased significantly in 2005
as the Company began the integration of the Esoterix and US LABS
acquisitions. Other SG&A expenses increased in 2006 due to the
Company’s adoption of SFAS 123(R) during the first quarter of 2006,
which required the Company to record compensation expense of
$23.3 related to its stock option and stock purchase plans. During
the second half of fiscal year 2006, the Company recorded charges
of approximately $12.4, primarily related to the acceleration of the
recognition of stock compensation due to the announced retirement
of the Company’s Chief Executive Officer, which was effective
December 31, 2006.
Amortization of Intangibles and Other Assets
Years Ended December 31, % Change
2006 2005 2004 2006 2005
Amortization of
intangibles and
other assets $52.2 $51.4 $42.7 1.6% 20.4%
Amortization of intangibles and other assets is driven primarily
by the impact of acquisitions and licensed technology. The increase
during 2005 was driven primarily by the impact of the Esoterix and
US LABS acquisitions.
Investment Loss
Years Ended December 31,
2006 2005 2004
Investment loss $ – $(3.1) $ –
During the second quarter of 2005, the Company recorded an
investment loss of $3.1, related to a write-off of the value of warrants
to purchase common stock of Exact Sciences Corporation (“Exact”),
which were obtained as part of the Company’s licensing agreement
for Exact’s PreGen Plus technology in 2002. The original term of the
warrants expired in June 2005.
Restructuring and Other Special Charges
Years Ended December 31,
2006 2005 2004
Restructuring and other special charges $1.0 $16.9 $(0.9)
During the third quarter of 2006, the Company recorded
net restructuring charges of $1.0 relating to certain expense-
reduction initiatives undertaken across the Company’s corporate
and divisional operations.
During the third and fourth quarters of 2005, the Company
began to implement its plan related to the integration of Esoterix 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 the plan. The majority of these integration costs
related to employee severance and contractual obligations associated
with leased facilities and equipment. Of this amount, $10.1 related to
employee severance benefits for approximately 700 employees, with