LabCorp 2008 Annual Report Download - page 24

22 Laboratory Corporation of America® Holdings 2008
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (in millions)
Laboratory Corporation of America
Interest Expense
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Interest expense $ 72.0 $ 56.6 $ 47.8 27.2% 18.4%
The increase in interest expense for 2008 as compared to 2007 was primarily due to
borrowings outstanding under the Term Loan Facility since October 2007 and the Revolving
Facility that totaled $475.0 and $70.8, respectively, at December 31, 2008. The increase in
interest expense for 2007 as compared to 2006 was driven primarily by borrowings under the
five-year, $500.0 Term Loan Facility in October 2007.
Income from Joint Venture Partnerships
Years Ended December 31, % Change
2008 2007 2006 2008 2007
Income from joint
venture partnerships $ 14.4 $ 77.9 $ 66.7 (81.5)% 16.8%
Income from investments in joint venture partnerships represents the Company’s ownership
share in joint venture partnerships. During 2007 and 2006, a significant portion of this income
was derived from investments in Ontario and Alberta, Canada, and was earned in Canadian dollars.
Effective January 1, 2008, the income from the Ontario operation is included in the consolidated
operating results of the Company, which is the primary reason for the lower income from investments
in joint venture partnerships in 2008 as compared with 2007. From 2006 to 2007, the increase
in income from the investments in joint venture partnerships was driven by improvement in
operational performance and favorable exchange rates.
Income Tax Expense
Years Ended December 31,
2008 2007 2006
Income tax expense $ 307.9 $ 325.5 $ 289.3
Income tax expense as a % of income before tax 39.9% 40.6% 40.1%
The effective tax rate for 2008 was favorably impacted by the fifth protocol amending the
existing tax treaty with Canada entered into force December 15, 2008. A net reduction of $7.1
of the Company’s income tax expense was recorded to reflect the impact of amending prior period
income tax returns as a result of this treaty change. The increase in the effective tax rate for 2007
as compared to 2006 was primarily the result of higher foreign related earnings.
Liquidity, Capital Resources and Financial Position
The Company’s strong cash-generating capability and financial condition typically have provided
ready access to capital markets. The Company’s principal source of liquidity is operating cash
flow. This cash-generating capability is one of the Company’s fundamental strengths and provides
substantial financial flexibility in meeting operating, investing and financing needs. In addition,
the Company has senior unsecured credit facilities that are further discussed in “Note 12 to
Consolidated Financial Statements.”
Operating Activities
In 2008, the Company’s operations provided $780.9 of cash, net of $42.4 in transition payments
to UnitedHealthcare, reflecting the Company’s solid business results. The growth in the Company’s
cash flow from operations primarily resulted from improved cash collections and lower payments
for income taxes of $60.6 ($211.8 in 2008 as compared with $272.4 in 2007). 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.
The Company did not make any contributions to its defined benefit pension plan in 2008,
2007 and 2006. However, based upon the underlying value of the defined pension plan’s
assets and the amount of the pension plan’s benefit obligation as of December 31, 2008, the
Company plans to contribute $54.8 to the defined benefit pension plan during 2009.
Due to the stock market’s performance in 2008, the fair value of assets in the defined
pension plan decreased significantly from January 1, 2008 to December 31, 2008. As a result,
the Company’s projected pension expense for the defined pension plan and the nonqualified
supplemental retirement plan is expected to increase from $19.5 in 2008 to $34.2 in 2009.
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 $156.7, $142.6 and $115.9 for 2008, 2007 and 2006, respectively.
The Company expects capital expenditures of approximately $130.0 in 2009. The Company will
continue to make important investments in its business, including information technology. Such
expenditures are expected to be funded by cash flow 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 $603.1 over the past three years
in strategic business acquisitions. These acquisitions have helped strengthen the Company’s