LabCorp 2014 Annual Report Download - page 54

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52
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (in millions)
General
Net sales for 2014 increased 3.5% in comparison to 2013. The increase was the result of strong organic volume growth along
with the benefit of fold-in acquisitions, which was partially offset by changes in test and payer mix. Total test volume (measured
by number of requisitions) increased 5.3% year over year, and year over year revenue per requisition decreased 1.7% of which
0.4% was due to foreign currency translation with the remainder due to changes in test and payer mix.
During 2014 and 2013, the impact of weather reduced the Company's revenues by an estimated $40.0 and $12.7, respectively.
The Company has seen growth in the amount of its patient accounts receivable. A significant portion of the Company’s bad
debt expense is related to accounts receivable from patients. The Company believes its current allowance for doubtful accounts
is sufficient to properly record its accounts receivable at their estimated net realizable value. Should the shift towards increased
patient responsibility continue, the Company may need to increase its allowance for doubtful accounts and bad debt expense in
future periods.
On February, 19. 2015, the Company completed its acquisition of Covance Inc. (“Covance”), a leading drug development
services company and a leader in nutritional analysis, for approximately $6,200.0. In connection with the transaction, the Company
secured permanent financing, including a $1,000.0 5 year term loan and $2,900.0 in long term bonds, ranging from 5 years to 30
years. The weighted average interest rate on the $3,900.0 of long-term debt is approximately 3.15%, while the average maturity
is approximately 12 years. As a result, the Company anticipates a significant increase in the total debt to consolidated EBITDA
ratio for the combined company. In addition, the Company issued approximately 15.3 million shares of the Company's common
stock to the Covance shareholders. The Company expects to maintain an investment grade credit profile and intends to utilize
its free cash flow to pay down debt and make small "fold-in" acquisitions.
Covance 2014 net revenues were approximately $2,500.0 and operating income margin was approximately 9.3%.
Approximately 52.0% of Covance's net revenues are billed in currencies other than the U.S. dollar, with the Swiss franc, British
pound, and the Euro representing approximately 70.0% of Covance's total foreign currency exposure. While the Company expects
to achieve annual cost synergies in excess of $100.0 to be fully realized within three years of closing the transaction, 2015 results
will be impacted by increased interest expense and lower margins from Covance.
The Company manages its operations through two reportable segments: the Clinical diagnostics laboratory segment, which
includes core testing as well as genomic and esoteric testing, and the Other segment, which consists of the Company's non-U.S.
clinical diagnostic laboratory operations in Ontario, Canada, which is reviewed separately by corporate management for the
purposes of allocation of resources. As mentioned above, in Item 1, "Business," of this annual report, the Clinical diagnostics
laboratory segment results of operations have been negatively impacted by reductions in payments for laboratory services, primarily
from federal and state government entities. Operating results for the Other segment have declined as compared to 2013, primarily
due to government reimbursement reductions, as well as the impact of the stronger U.S. dollar in 2014 as compared with 2013.
The discussion of the Company’s financial condition and results of operations set forth below does not reflect the operations
or results of Covance, which will operate as Covance Drug Development. References in this Item 7 to the “Company” do not
include Covance Drug Development, except where the circumstances clearly indicate otherwise.
Seasonality
The majority of the Company’s testing volume is dependent on patient visits to physician offices and other providers of health
care. Volume of testing generally declines during the year-end holiday periods and other major holidays. In addition, volume
declines due to inclement weather may reduce net revenues and cash flows. Therefore, comparison of the results of successive
periods may not accurately reflect trends or results from one year to the next.