LabCorp 2008 Annual Report Download - page 23

Laboratory Corporation of America® Holdings 2008 21
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (in millions)
Laboratory Corporation of America
Cost of Sales
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Cost of sales $ 2,631.4 $ 2,377.0 $ 2,061.4 10.7% 15.3%
Cost of sales as a % of sales 58.4% 58.4% 57.4%
Cost of sales, which includes primarily laboratory and distribution costs, has increased
over the three year period ended December 31, 2008 primarily due to increased volume in the
Company’s Managed Care business, the impact of acquisitions and the continued shift in test
mix to higher cost genomic and esoteric testing. As a percentage of sales, cost of sales has
increased during the three year period ended December 31, 2008 from 57.4% in 2006 to
58.4% in 2008 and 2007. Excluding the Ontario operation, cost of sales as a percentage of
net sales was 59.1% for 2008. The increase in cost of sales from 2007 to 2008 as a percentage
of net sales is primarily due to increases in the cost of materials, which is caused by shifts in
the Company’s test mix. From 2006 to 2007, the increase in cost of sales was driven by the
Company’s roll-out of patient service centers and other customer service infrastructure, along
with increases in cost of materials due to shifts in the Company’s test mix. Labor and testing
supplies comprise over 75% of the Company’s cost of sales.
Selling, General and Administrative Expenses
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Selling, general and
administrative expenses $ 935.1 $ 808.7 $ 779.1 15.6% 3.8%
SG&A as a % of sales 20.8% 19.9% 21.7%
Total selling, general and administrative expenses (“SG&A”) as a percentage of sales
over the three year period ended December 31, 2008 have ranged from 21.7% to 19.9%.
Excluding the Ontario operation, SG&A as a percentage of net sales was 21.0% for 2008. Bad
debt expense increased to 6.2% of net sales in 2008 as compared with 4.8% in 2007 primarily
due to an increase of $45.0 in the Company’s provision for doubtful accounts recorded in the
second quarter of 2008, due to the impact of the economy, higher patient deductibles and
copayments, and recent acquisitions on the collectibility of accounts receivable balances. During
the fourth quarter of 2008, the Company also recorded charges of $3.7 related to the acceleration
of the recognition of stock compensation and certain defined benefit plan obligations due to the
retirement of the Company’s Executive Vice President of Corporate Affairs which was effective
December 31, 2008. From 2006 to 2007, the decrease in SG&A as a percentage of net sales
was due to 2006 including charges of $12.3 primarily related to the acceleration of the recog-
nition of stock compensation due to the retirement of the Company’s Chief Executive Officer,
which was effective December 31, 2006. In addition, the Managed Care volume and revenue
growth in 2007 drove an increase in net sales of $477.4, or 13.3%, while the Company controlled
costs and also made reductions in workforce.
Amortization of Intangibles and Other Assets
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Amortization of intangibles
and other assets $ 57.9 $ 54.9 $ 52.2 5.5% 5.2%
The increase in amortization of intangibles and other assets over the three year period
ended December 31, 2008 primarily reflects certain acquisitions closed during 2008 and 2007.
Restructuring and Other Special Charges
Years Ended December 31,
2008 2007 2006
Restructuring and other special charges $ 37.9 $ 50.6 $ 1.0
During 2008, the Company recorded charges primarily related to workforce reductions
and the closing of redundant and underutilized facilities. For 2008, the Company recorded net
restructuring charges of $32.4. Of this amount, $20.9 related to severance and other employee
costs in connection with the general workforce reductions and $13.4 related to contractual
obligations associated with leased facilities and equipment. The Company also recorded a credit
of $1.9, comprised of $1.2 of previously recorded facility costs and $0.7 of employee severance
benefits relating to changes in cost estimates accrued in prior periods. These restructuring
initiatives are expected to provide annualized cost savings of approximately $62.0.
During the third quarter of 2008, the Company also recorded a special charge of $5.5 related
to estimated uncollectible amounts primarily owed by patients in the areas of the Gulf Coast
severely impacted by hurricanes similar to losses incurred during the 2005 hurricane season.
During 2007, the Company recorded charges related to reductions in workforce and
consolidation of redundant and underutilized facilities. For 2007, the Company recorded net
restructuring charges of $50.6. Of this amount, $24.8 related to employee severance benefits
for employees primarily in management, administrative, technical, service and support functions
and $19.4 related to contractual obligations and other costs associated with the closure of
facilities. The charges also included a write-off of approximately $6.5 of accounts receivable
balances remaining on a subsidiary’s billing system that was abandoned during the year and
$0.9 related to settlement of a preacquisition employment liability. The Company also recorded
a credit of $1.0, comprised of $0.7 of previously recorded facility costs and $0.3 of employee
severance benefits.
During the third quarter of 2006, the Company recorded net restructuring charges of $1.0
related to certain expense-reduction initiatives undertaken across the Company’s corporate and
divisional operations. This net charge was the result of a charge of $2.4 related to employee
severance benefits for employees primarily in administrative and support functions, and a credit
of $1.4 related to occupying a testing facility that had previously been shut down.