LabCorp 2006 Annual Report Download - page 26

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions)
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24 Laboratory Corporation of America® Holdings 2006
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.
Other Commercial Commitments
At December 31, 2006, the Company provided letters of credit aggre-
gating approximately $111.7, primarily in connection with certain
insurance programs and contractual guarantees on obligations under the
Company’s new contract with UnitedHealthcare. The UnitedHealthcare
contract requires that the Company provide a $50.0 letter of credit,
as security for the Company’s contingent obligation to reimburse
up to $200.0 in transitional costs during the first three years of the
contract. Letters of credit provided by the Company are secured by
the Company’s senior credit facilities and are renewed annually,
around mid-year.
At December 31, 2006, the Company was named as guarantor
on approximately $6.4 of equipment leases. These leases were
entered into by a joint venture that the Company owns a fifty percent
interest in and have a five year term.
Based on current and projected levels of operations, coupled
with availability under its senior credit facilities, the Company believes
it has sufficient liquidity to meet both its short-term and long-term
cash needs.
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109.” FIN 48 clarifies how companies should
recognize, measure, present, and disclose uncertain tax positions.
FIN 48 also provides guidance on derecognition, interest and penalties,
accounting for interim periods, and transition. This interpretation is
effective for fiscal years beginning after December 15, 2006 and the
Company is adopting the interpretation effective January 1, 2007.
The cumulative effect of applying FIN 48 is to be reported as an
adjustment to the opening balance of retained earnings. Based on our
evaluation as of December 31, 2006, the Company does not believe
that FIN 48 will have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 provides a new single
authoritative definition of fair value and provides enhanced guidance
for measuring the fair value of assets and liabilities and requires addi-
tional disclosures related to the extent to which companies measure
assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings.
SFAS 157 is effective for the Company as of January 1, 2008. The
Company is currently assessing the impact, if any, of SFAS 157 on
its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).
SFAS 159 permits all entities to choose to measure eligible items at
fair value at specified election dates. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007. The Company is currently assessing the impact, if any, of SFAS
159 on its consolidated financial statements.
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. The Company’s
critical accounting policies arise in conjunction with the following:
• Revenue recognition and allowances for doubtful accounts
• Pension expense
• Accruals for self insurance reserves
• Income taxes
Revenue Recognition and Allowance for Doubtful Accounts
Revenue is recognized 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 recorded
on a fee-for-service basis at the Company’s client 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. The Company 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