LabCorp 2009 Annual Report Download - page 27

LABORATORY CORPORATION OF AMERICA
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LABORATORY CORPORATION OF AMERICA 25
consolidated operating results of the Company, which is the
primary reason for the lower income from investments in joint
venture partnerships in 2009 and 2008 as compared with 2007.
Income Tax Expense
Years Ended December 31,
2009 2008 2007
Income tax expense $ 329.0 $ 307.9 $ 325.5
Income tax expense as a % of income before tax 37.2% 39.2% 40.6%
The effective tax rate for 2009 was favorably impacted by
adjustments of $21.5 relating to the resolution of certain state
tax issues under audit, as well as the realization of foreign tax
credits. 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.
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 flexibil-
ity in meeting operating, investing and financing needs.
In addition, the Company has senior unsecured credit facilities
that are further discussed in “Note 11 to Consolidated
Financial Statements.”
Operating Activities
In 2009, the Company’s operations provided $862.4 of cash,
net of $28.4 in transition payments to UnitedHeathcare and
$54.8 in contributions to the Company’s defined benefit retire-
ment plan (the “Company Plan”), reflecting the Company’s
solid business results. The increase in the Company’s cash
flow from operations primarily resulted from improved cash
collections. 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 made contributions to the Company Plan of
$54.8, $0.0 and $0.0 in 2009, 2008 and 2007, respectively. In
October 2009, the Company received approval from its Board
of Directors to freeze any additional service-based credits for
any years of service after December 31, 2009 on the Company
Plan and the PEP. Both plans will be closed to new entrants.
Current participants in the Company Plan and the PEP will
no longer earn service-based credits, but will continue to
earn interest credits. In addition, effective January 1, 2010, all
employees eligible for the defined contribution retirement plan
(the “401K Plan”) will receive a minimum 3% non-elective
contribution (“NEC”). The NEC replaces the Company match,
which will be discontinued. Employees are not required to make
a contribution to the 401K Plan to receive the NEC. The NEC
will be non-forfeitable and vests immediately. The 401K Plan
also provides discretionary contributions of 1% to 3% of pay
for eligible employees based on service.
As a result of the changes to the Company Plan and PEP,
which were adopted in the fourth quarter of 2009, projected
pension expense for these plans is expected to decrease
from $36.6 in 2009 to $10.4 in 2010. In addition, the Company
does not plan to make contributions to the Company Plan
during 2010. The implementation of the NEC is expected to
increase the Company’s 401K costs and contributions by an
additional $22.5 in 2010. See “Note 16 to the Consolidated
Financial Statements” for a further discussion of the Company’s
pension and postretirement plans.
Investing Activities
Capital expenditures were $114.7, $156.7 and $142.6 for 2009,
2008 and 2007, respectively. The Company expects capital
expenditures of approximately $135.0 in 2010. 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 borrow-
ings 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 $779.7 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 oper-
ations. The Company believes the acquisition market remains
attractive, especially in light of recent credit market corrections,
with a number of opportunities to strengthen its scientific
capabilities, grow esoteric testing capabilities and increase
presence in key geographic areas.