LabCorp 2007 Annual Report Download - page 29

Management’s Discussion and Analysis of Financial
Condition and Results of Operations (Dollars in millions)
Laboratory Corporation of America® Holdings 2007 27
Discount Rate
The Company uses a laddered bond portfolio model to develop a
discount rate assumption used to value the benefi t obligations of its
retirement plans. The Company follows paragraph 186 of Financial
Accounting Standard 106 in developing this rate. The Company obtains
information on high-quality corporate (AA rating or higher) bonds from
a nationally recognized credit rating agency with maturities that match
the anticipated cash outfl ows of each plan. These bonds are then
reviewed and outliers are discarded. The results of this analysis form
the basis for the discount rate assumption used by the Company. A one
percentage point reduction in the discount rate would have resulted in
an increase in 2007 retirement plan expense of $4.6 million.
Return on Plan Assets
In establishing its expected return on plan assets assumption, the
Company reviews its asset allocation and develops return assumptions
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 2007 pension
expense of $2.7 million.
Current year net pension cost was $14.5 million, as compared with
$14.6 in the prior year excluding the impact of the $0.7 million non-
recurring CEO retirement charge in 2006. The Company estimates
that 2008 net pension cost will be approximately $17.8 million.
Further information on the Company’s defi ned benefi t retirement
plan is provided in Note 17 to the consolidated fi nancial statements.
Accruals for Self-Insurance Reserves
Accruals for self-insurance reserves (including workers’ compensation,
auto and employee medical) are determined based on historical
payment trends and claims history, along with current and estimated
future economic conditions.
The Company is self-insured for professional liability claims arising
in the normal course of business, generally related to the testing and
reporting of laboratory test results. The Company records an accrual
for known and incurred but not reported claims based on an actuarial
assessment of the accrual driven by frequency and amounts of claims,
which is performed at least annually.
Income Taxes
The Company accounts for income taxes utilizing the asset and
liability method. Under this method deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differ-
ences between the fi nancial statement carrying amounts of existing
assets and liabilities and their respective tax bases and for tax loss
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. The Company does not recognize a tax benefi t,
unless the Company concludes that it is more likely than not that the
benefi t will be sustained on audit by the taxing authority based solely
on the technical merits of the associated tax position. If the recogni-
tion threshold is met, the Company recognizes a tax benefi t measured
at the largest amount of the tax benefi t that the Company believes is
greater than 50 percent likely to be realized. The Company records
interest and penalties in income tax expense.
FORWARD-LOOKING STATEMENTS
The Company has made in this report, and from time to time may
otherwise make in its public fi lings, press releases and discussions
by Company management, forward-looking statements concerning
the Company’s operations, performance and fi nancial condition, as
well as its strategic objectives. Some of these forward-looking state-
ments can be identifi ed by the use of forward-looking words such as
“believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately”,
“intends,” “plans,” “estimates,” or “anticipates” or the negative of
those words or other comparable terminology. Such forward-looking
statements are subject to various risks and uncertainties and the
Company claims the protection afforded by the safe harbor for
forward-looking statements contained in the Private Securities Litiga-
tion Reform Act of 1995. Actual results could differ materially from
those currently anticipated due to a number of factors in addition to
those discussed elsewhere herein and in the Company’s other public
fi lings, press releases and discussions with Company management,
including:
1) changes in federal, state, local and third-party payer regulations
or policies (or in the interpretation of current regulations) affecting
governmental and third-party coverage or reimbursement for
clinical laboratory testing;
Laboratory Corporation of America