Feb. 25, 2021, 3:23 p.m. EST

10-K: LABORATORY CORP OF AMERICA HOLDINGS

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(EDGAR Online via COMTEX) -- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in millions) General During the year ended December 31, 2020, the Company's revenues grew by 21.0%, due to organic growth of 19.0%, acquisitions of 1.8% and favorable foreign currency translation of 0.4%, partially offset by the disposition of a business of 0.2%. The 19.0% increase in organic revenues includes the 24.1% contribution from PCR and antibody COVID-19 testing (COVID-19 Testing), partially offset by the 5.1% reduction in the Company's organic Base Business due to the pandemic. Base Business includes the Company's business operations except for COVID-19 Testing. The decline in the organic Base Business includes the negative impact of the U.S. Protecting Access to Medicare Act of 2014 (PAMA) of 0.6%. The Company defines organic growth as the increase in revenue excluding revenue from acquisitions for the first twelve months after the close of each acquisition. In March 2020, COVID-19 was declared a pandemic. COVID-19 has had and continues to have an extensive impact on the global health and economic environments. Given the continued unpredictability of the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial results for 2021. Throughout 2020, the Company's COVID-19 Testing has helped to offset the pressure experienced in the Base Business. To date, the Company has performed more than 18 million PCR and 3.0 million antibody COVID-19 tests and as of February 25, 2021, has the capacity to perform 275,000 PCR and 300,000 antibody tests per day, subject to the availability of equipment and testing supplies and key personnel. During 2020, the Company recorded goodwill and other asset impairment charges of $462.1, $450.5 within DD and $11.6 within Dx, as a result of the COVID-19 pandemic. The Company concluded that the fair value was less than carrying value for two of its reporting units and recorded goodwill impairment of $418.7 and $3.7 for DD and Dx, respectively. Additional impairment of identifiable intangible and tangible assets of $31.5 and $7.9 was recorded for DD and Dx, respectively, for impairment of a tradename, software, customer relationships, technology assets, and a note receivable. There remains significant uncertainty regarding the duration and severity of the pandemic and its impact on the Company's business, results of operations and financial position for 2021. For more information regarding the risks associated with COVID-19 and its impact on the Company's business, see Risk Factors in Part I - Item 1A. The Company expects Phase II of Dx's LaunchPad initiative to deliver approximately $200.0 in net savings by the end of 2021, while incurring approximately $40.0 in one-time implementation costs. Approximately one-third of the total savings are expected to be realized in 2021, and one-third of the total savings have been realized in each of 2019 and 2020. PAMA, which went into effect on January 1, 2018, resulted in a net reduction of revenue of approximately $72.0 and $107.0 in 2020 and 2019, respectively from all payers affected by the Clinical Lab Fee Schedule. Index







        Results of Operations
        The following tables present the financial measures that management considers to
        be the most significant indicators of the Company's performance. For discussion
        of 2019 results and comparison with 2018 results refer to "Management's
        Discussion and Analysis of Financial Conditions and Results of Operations" in
        the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
        2019.
        Years ended December 31, 2020 and 2019
        Revenues
                                           Years Ended December 31,
                                           2020                2019         Change
        Dx                          $     9,253.4          $  7,000.1        32.2  %
        DD                                4,877.7             4,578.1         6.5  %
        Intercompany eliminations          (152.6)              (23.4)      552.1  %
        Total                       $    13,978.5          $ 11,554.8        21.0  %
        


The 21.0% increase in revenues for the year ended December 31, 2020, as compared with the corresponding period in 2019 was primarily due to organic growth of 19.0%, acquisitions of 1.8% and favorable foreign currency translation of 0.4%, partially offset by the disposition of a business of 0.2%. The 19.0% increase in organic revenues includes the 24.1% contribution from COVID-19 Testing, partially offset by the 5.1% reduction in the Company's organic Base Business, which the Company believes was due to the pandemic. The decline in the organic Base Business includes the negative impact of PAMA of 0.6%.







        Cost of Revenues
                                                          Years Ended December 31,
                                                          2020                     2019         Change
        Cost of revenues                      $                     9,025.7    $    8,302.3      8.7  %
        


Cost of revenues (primarily laboratory, labor and distribution costs) increased 8.7% in 2020 as compared with 2019 primarily due to organic growth and acquisitions. Cost of revenues as a percentage of revenues decreased to 64.6% in 2020 as compared to 71.9% in 2019. This decrease was primarily due to the impact of COVID-19 Testing on revenues and LaunchPad savings, partially offset by PAMA and higher personnel costs (primarily driven by merit increases and one additional payroll day that predominantly impacted Dx).







        Index
        


Labor and testing supplies for the year ended December 31, 2020, comprise approximately 73.0% of the Company's cost of revenues. Cost of revenues has increased over the two-year period ended December 31, 2020, primarily due to the impact of acquisitions, overall growth in the Company's volume, including COVID-19 Testing, and increases in merit-based labor costs.







        Selling, General and Administrative Expenses
                                                                                  Years Ended December 31,
                                                                               2020                 2019                Change
        Selling, general and administrative expenses                      $       1,729.3       $     1,624.5               6.5  %
        


Selling, general and administrative expenses as a percentage of revenues decreased to 12.4% in 2020 compared to 14.1% in 2019. The decrease in selling, general and administrative expenses as a percentage of revenues is primarily due to the contribution of COVID-19 Testing on revenues and less acquisition activity.







        Goodwill and Other Asset Impairments
                                                           Years Ended December 31,
                                                               2020                    2019      Change
         Goodwill and other asset impairments   $            462.1                    $  -        N/A
        


During 2020, the Company recorded goodwill and other asset impairment charges of $462.1, $450.5 within DD and $11.6 within Dx. The Company concluded that the fair value was less than carrying value for two of its reporting units and recorded goodwill impairment of $418.7 and $3.7 for DD and Dx, respectively. Additional impairment of identifiable intangible and tangible assets of $31.8 and $7.9 was recorded for DD and Dx, respectively, for impairment of a tradename, software, customer relationships, technology assets and a note receivable.







        Amortization Expense
                                                                               Years Ended December 31,
                                                                              2020                2019              Change
        Dx                                                              $       104.9          $ 102.0                  2.8  %
        DD                                                                      170.5            141.2                 20.8  %
        Amortization of intangibles and other assets                    $       275.4          $ 243.2                 13.2  %
        


The increase in amortization of intangibles and other assets from 2019 through 2020 primarily reflects the impact of acquisitions partially offset by impairment of intangible assets recorded in fiscal 2020, and includes $27.5 of amortization acceleration of certain intangible assets related to the Covance trade name as a result of the Company's rebranding initiative.







        Restructuring and Other Charges
                                                  Years Ended December 31,
                                                     2020                 2019       Change
        Restructuring and other charges   $       40.6                  $ 54.6       (25.6) %
        


During 2020, the Company recorded net restructuring charges of $40.6; $15.3 within Dx and $25.3 within DD. The charges were comprised of $14.1 in severance and other personnel costs $17.4 for facility, operating lease right-of-use and equipment







        Index
        


impairments, and $18.9 in facility closures and general integration activities. The charges were offset by the reversal of previously established liability of $0.6 and $9.2 in unused severance costs and facility-related costs, respectively.







        Interest Expense
                                  Years Ended December 31,
                                     2020                 2019        Change
        Interest expense   $       207.4                $ 240.7       (13.8) %
        


The decrease in interest expense for 2020 as compared with the corresponding period in 2019 is primarily due to the repayment of debt and lower interest rates.







        Equity Method Income, Net
                                             Years Ended December 31,
                                                2020                  2019       Change
        Equity method income, net   $         2.9                    $ 9.8       (70.4) %
        


Equity method income, net represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the healthcare industry. All of these partnerships and investments reside within the Dx segment. The decrease in income for 2020 as compared with the corresponding period in 2019 was primarily due to the impairment of an equity method investment and the decreased profitability of the Company's joint ventures. Other, Net

The change in Other, net for the year ended December 31, 2020, as compared to the year ended December 31, 2019, was primarily due to an increase in the write-off or write down of certain of the Company's investments due to the negative impact of the COVID-19 global pandemic partially offset by lower foreign currency transaction losses. Foreign currency transaction losses of $10.1 and $11.1 were recognized for the years ended December 31, 2020 and 2019, respectively.







        Income Tax Expense
                                                               Years Ended December 31,
                                                              2020                     2019
        Income tax expense                               $     662.1                $ 280.0
        Income tax expense as a % of income before tax          29.8   %               25.3  %
        


In 2020, the Company's effective tax rate of 29.8% was unfavorable as compared to 2019 due to impairment charges which were not deductible and or generated tax assets which require a valuation allowance, and the geographic mix of earnings. The Company considers substantially all of its foreign earnings to be permanently reinvested overseas.







        Operating Results by Segment
                                                      Years Ended December 31,
                                                   2020                     2019        Change
                 Dx operating income          $      2,634.9             $  1,086.0     142.6  %
                 Dx operating margin                28.5   %                15.5  %      13.0  %
                 DD operating income          $     37.3                 $ 411.5        (90.9) %
                 DD operating margin                 0.8   %                 9.0  %      (8.2) %
        


Index

Dx operating income was $2,634.9 for the year ended December 31, 2020, an increase of 142.6% over operating income of $1,086.0 in the corresponding period of 2019 and an increase of 1,300 basis points in operating margin year-over-year. The increase in operating income and margin were primarily due to the increase in COVID-19 Testing and LaunchPad savings, partially offset by a reduction in Base Business (primarily due to the pandemic), higher personnel costs and PAMA. The Company remains on track to deliver approximately $200.0 of net savings from its three-year, Phase II of Dx's LaunchPad initiative by the end of 2021.







                                                                                 For the Year Ended December 31,
                                                                            2020                  2019               2018
        Net cash provided by operating activities                    $    2,135.3             $ 1,444.7          $ 1,305.4
        Net cash (used for) provided by investing activities               (643.2)             (1,283.1)             206.7
        Net cash used for financing activities                             (517.4)               (252.7)          (1,389.9)
        Effect of exchange rate on changes in cash and cash
        equivalents                                                           8.6                   1.8              (12.0)
        Net change in cash and cash equivalents                      $      983.3             $   (89.3)         $   110.2
        


Cash and Cash Equivalents







        Index
        


comparison to $42.1 during 2020. Capital expenditures were $381.7 and $400.2 for the years ended December 31, 2020 and 2019, respectively. Capital expenditures in 2020 were 2.7% of revenues, primarily in connection with projects to support growth in the Company's core businesses, projects related to LaunchPad, and further DD acquisition integration initiatives. The Company intends to continue to pursue acquisitions to drive growth, to make important investments in its business, including in information technology, and to improve efficiency and enable the execution of the Company's mission. Such expenditures are expected to be funded by cash flow from operations or, as needed, through borrowings under debt facilities, including the Company's revolving credit facility or any successor facility. The Company expects capital expenditures in 2021 to be approximately 4.0% of revenues, primarily in connection with projects to support growth in the Company's core businesses, facility updates, ongoing projects related to LaunchPad within the Dx business, LaunchPad's expansion within the DD business, and further acquisition integration initiatives. Cash Flows from Financing Activities

Feb 25, 2021

COMTEX_381735161/2041/2021-02-25T15:22:32

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