LabCorp 2006 Annual Report Download - page 27

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions)
Laboratory Corporation of America® Holdings 2006 25
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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 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 has a formal process to estimate and review the
collectibility 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. The Company’s process for determining the appro-
priate 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 collectibility of its receivables. Accounts are written
off against the allowance for doubtful accounts based on the Company’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 the Company’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 the Company’s net accounts receivable outstanding
by aging category at December 31, 2006 and 2005:
Days Outstanding 2006 2005
0 – 30 44.9% 43.6%
31 – 61 19.3% 22.3%
61 – 91 11.2% 10.1%
91 – 120 7.3% 7.3%
121 – 150 5.2% 4.6%
151 – 180 3.6% 3.6%
181 – 270 6.6% 6.6%
271 – 360 1.6% 1.4%
Over 360 0.3% 0.5%
Pension Expense
Substantially all employees of the Company are covered by a defined
benefit retirement plan (the “Company Plan”). The benefits to be paid
under the Company Plan are based on years of credited service and
compensation earned while an employee of LabCorp. The Company
also has a nonqualified supplemental retirement plan which covers its
senior management group and provides for additional benefits, due in
part to limitations on benefits and pay imposed on the Company Plan
under the Employee Retirement Income Security Act of 1974.
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 6.0% discount rate and an 8.5% expected long-term rate
of return on plan assets as of December 31, 2006.
Discount Rate
The Company works with its independent actuary to develop a
discount rate assumption used to value the benefit obligations of its
retirement plans. The Company follows paragraph 186 of Financial
Accounting Standard 106 in developing this rate. The Company’s
actuary obtains information on high-quality corporate (AA rating or
higher) bonds from a nationally recognized credit rating agency.
These bonds are then reviewed and outliers are discarded. The
results of the actuary’s discount rate analysis are then reviewed by
the Company and a final decision on the discount rate assumption
is made by the Company. A one percentage point reduction in the
discount rate would have resulted in an increase in 2006 pension
expense of $4.0 million.
Return on Plan Assets
In establishing its expected return on plan assets assumption, the
Company reviews its asset allocation and develops return assump-
tions 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 in the
expected return on plan assets would have resulted in a decrease in
2006 pension expense of $2.5 million.
Current year net pension cost excluding the impact of the
$0.7 million non-recurring CEO retirement charge was $14.7 million,
an increase of $4.7 million from 2005. Our actuaries have estimated
that 2007 net pension cost will be approximately $14.7 million.
Further information on our defined benefit retirement plan is
provided in note 16 to the consolidated financial statements.