LabCorp 2007 Annual Report Download - page 25

Management’s Discussion and Analysis of Financial
Condition and Results of Operations (Dollars in millions)
Laboratory Corporation of America® Holdings 2007 23
The increase in the effective tax rate for the year ended December 31,
2007 as compared to the year ended December 31, 2006 was primarily
the result of higher foreign related earnings. The effective tax rate for
the year ended December 31, 2005 was favorably impacted by a
deduction for certain dividends received in 2005.
LIQUIDITY, CAPITAL RESOURCES AND
FINANCIAL POSITION
The Company’s strong cash-generating capability and fi nancial condition
provide ready access to capital markets. The Company’s principal source
of liquidity is operating cash fl ow. This cash-generating capability is one of
the Company’s fundamental strengths and provides substantial fi nancial
fl exibility in meeting operating, investing and fi nancing needs. In addition,
the Company has new senior unsecured credit facilities that are further
discussed in “Note 12 to Consolidated Financial Statements.”
Operating Activities
In 2007, the Company’s operations provided $709.7 of cash, net
of $32.0 in transition payments to UnitedHeathcare, refl ecting the
Company’s solid business results. The growth in the Company’s cash
fl ow from operations primarily resulted from improved revenues. The
Company continued to focus on efforts to increase cash collections
from all payers, as well as on-going improvements to the claim
submission processes.
During 2007, 2006 and 2005, the Company made contributions
to its defi ned pension plan in the amounts of $0.0, $0.0 and $8.0,
respectively. The Company does not expect to contribute to its defi ned
benefi t pension plan during 2008 and is not legally required to do so.
See “Note 17 to the Consolidated Financial Statements” for a further
discussion of the Company’s pension and postretirement plans.
Investing Activities
Capital expenditures were $142.6, $115.9 and $93.6 for 2007, 2006
and 2005, respectively. The Company expects capital expenditures
of approximately $120 to $140 in 2008. The Company will continue
to make important investments in information technology. Such
expenditures are expected to be funded by cash fl ow from operations
as well as borrowings under the Company’s revolving credit facilities
as needed.
The Company remains committed to growing its business through
strategic acquisitions and licensing agreements. The Company has
invested a total of $593.6 over the past three years in strategic business
acquisitions. These acquisitions have helped strengthen the Company’s
geographic presence along with expanding capabilities in the specialty
testing businesses. The Company believes the acquisition market
remains attractive, especially in light of recent credit market corrections,
with a number of opportunities to strengthen its scientifi c capabilities,
grow esoteric testing capabilities and increase presence in key
geographic areas.
The Company has invested a total of $6.7 over the past three
years in licensing new testing technologies and had $46.9 net book
value of capitalized patents, licenses and technology at December 31,
2007. While the Company continues to believe its strategy of entering
into licensing and technology distribution agreements with the developers
of leading-edge technologies will provide future growth in revenues,
there are certain risks associated with these investments. These risks
include, but are not limited to, the risk that the licensed technology
will not gain broad acceptance in the marketplace; or that insurance
companies, managed care organizations, or Medicare and Medicaid
will not approve reimbursement for these tests at a level commensurate
with the costs of running the tests. Any or all of these circumstances
could result in impairment in the value of the related capitalized
licensing costs.
Financing Activities
On October 26, 2007, the Company entered into new senior unsecured
credit facilities totaling $1,000.0. The new facilities consist of a fi ve-year
Revolving Facility in the principal amount of $500.0 and a fi ve-year,
$500.0 Term Loan Facility. On October 26, 2007, the Company
borrowed $500.0 under the Term Loan Facility, and outstanding Letters
of Credit totaling $110.5 were extended under the new facilities. The
Company’s previous revolving credit facility was terminated upon the
closing of the new facilities. The balance outstanding on the Company’s
new Revolving Facility at December 31, 2007 was $0.0. The senior
unsecured credit facilities bear interest at varying rates based upon the
Company’s credit rating with Standard & Poor’s Ratings Services. As of
December 31, 2007, the interest rates on the Term Loan Facility and
the new Revolving Facility were 5.6% and 5.1%, respectively.
The new senior credit facilities contain certain debt covenants,
which require that the Company maintain leverage and interest
coverage ratios of 2.5 to 1.0 and 5.0 to 1.0, respectively. Both ratios
are calculated in relation to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization). The covenants also restrict the pay-
ment of dividends. The Company is in compliance with all covenants
at December 31, 2007.
During 2007, the Company repurchased $924.2 of stock
representing 13.1 million shares. As of December 31, 2007, the
Company had outstanding authorization from the Board of Directors
to purchase approximately $425.8 of Company common stock.
Laboratory Corporation of America