FORWARD-LOOKING STATEMENTSLaboratory Corporation of America® Holdings together with its subsidiaries (the Company) has made in this report, and from time to time may otherwise make in its public filings, press releases and discussions by Company management, forward-looking statements concerning the Company's operations, performance and financial condition, as well as its strategic objectives. Some of these forward-looking statements relate to future events and expectations and can be identified by the use of forward-looking words such as "believes", "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates", or "anticipates" or the negative of those words or other comparable terminology. Such forward-looking statements speak only as of the time they are made and are subject to various risks and uncertainties. The Company claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those currently anticipated due to a number of factors in addition to those discussed elsewhere herein, including in the "Risk Factors" section of the Annual Report on Form 10-K, and in the Company's other public filings, press releases, and discussions with Company management, including: 1. changes in government and third-party payer regulations, reimbursement, or coverage policies or other future reforms in the healthcare system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (e.g., health insurance exchanges) affecting governmental and third-party coverage or reimbursement for commercial laboratory testing, including the impact of theU.S. Protecting Access to Medicare Act of 2014 (PAMA); 2. significant monetary damages, fines, penalties, assessments, refunds, repayments, damage to the Company's reputation, unanticipated compliance expenditures, and/or exclusion or debarment from or ineligibility to participate in government programs, among other adverse consequences, arising from enforcement of anti-fraud and abuse laws and other laws applicable to the Company in jurisdictions in which the Company conducts business; 3. significant fines, penalties, costs, unanticipated compliance expenditures and/or damage to the Company's reputation arising from the failure to comply with applicable privacy and security laws and regulations, including theU.S. Health Insurance Portability and Accountability Act of 1996, theU.S. Health Information Technology for Economic and Clinical Health Act, theEuropean Union's General Data Protection Regulation and similar laws and regulations in jurisdictions in which the Company conducts business; 4. loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of applicable licensing laws or regulations regarding the operation of clinical laboratories and the delivery of clinical laboratory test results, including, but not limited to, theU.S. Clinical Laboratory Improvement Act of 1967 and theU.S. Clinical Laboratory Improvement Amendments of 1988 and similar laws and regulations in jurisdictions in which the Company conducts business; 5. penalties or loss of license arising from the failure to comply with applicable occupational and workplace safety laws and regulations, including theU.S. Occupational Safety and Health Administration requirements and theU.S. Needlestick Safety and Prevention Act and similar laws and regulations in jurisdictions in which the Company conducts business; 6. fines, unanticipated compliance expenditures, suspension of manufacturing, enforcement actions, damage to the Company's reputation, injunctions, or criminal prosecution arising from failure to maintain compliance with current good manufacturing practice regulations and similar requirements of various regulatory agencies in jurisdictions in which the Company conducts business; 7. sanctions or other remedies, including fines, unanticipated compliance expenditures, enforcement actions, injunctions or criminal prosecution arising from failure to comply with the Animal Welfare Act or applicable national, state and local laws and regulations in jurisdictions in which the Company conducts business; 8. changes in testing guidelines or recommendations by government agencies, medical specialty societies and other authoritative bodies affecting the utilization of laboratory tests; 9. changes in applicable government regulations or policies affecting the approval, availability of, and the selling and marketing of diagnostic tests, drug development, or the conduct of drug development and medical device and diagnostic studies and trials, including regulations and policies of theU.S. Food and Drug Administration , theU.S. Department of Agriculture , the Medicine and Healthcare products Regulatory Agency in theUnited Kingdom (U.K. ), theNational Medical Products Administration inChina , thePharmaceutical and Medical Devices Agency inJapan , the 27
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European Medicines Agency and similar regulations and policies of agencies in other jurisdictions in which the Company conducts business; 10. changes in government regulations or reimbursement pertaining to the biopharmaceutical and medical device and diagnostic industries, changes in reimbursement of biopharmaceutical products or reduced spending on research and development by biopharmaceutical customers; 11. liabilities that result from the failure to comply with corporate governance requirements; 12. increased competition, including price competition, potential reduction in rates in response to price transparency and consumerism, competitive bidding and/or changes or reductions to fee schedules and competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry; 13. changes in payer mix or payment structure, including insurance carrier participation in health insurance exchanges, an increase in capitated reimbursement mechanisms, the impact of a shift to consumer-driven health plans or plans carrying an increased level of member cost-sharing, and adverse changes in payer reimbursement or payer coverage policies (implemented directly or through a third-party utilization management organization) related to specific diagnostic tests, categories of testing or testing methodologies; 14. failure to retain or attract managed care organization (MCO) business as a result of changes in business models, including new risk-based or network approaches, out-sourced laboratory network management or utilization management companies, or other changes in strategy or business models by MCOs; 15. failure to obtain and retain new customers, an unfavorable change in the mix of testing services ordered, or a reduction in tests ordered, specimens submitted or services requested by existing customers, and delays in payment from customers; 16. difficulty in maintaining relationships with customers or retaining key employees as a result of uncertainty surrounding the integration of acquisitions and the resulting negative effects on the business of the Company; 17. consolidation and convergence of MCOs, biopharmaceutical companies, health systems, large physician organizations and other customers, potentially causing material shifts in insourcing, utilization, pricing and reimbursement, including full and partial risk-based models; 18. failure to effectively develop and deploy new systems, system modifications or enhancements required in response to evolving market and business needs; 19. customers choosing to insource services that are or could be purchased from the Company; 20. failure to identify, successfully close, and effectively integrate and/or manage acquisitions of new businesses; 21. inability to achieve the expected benefits and synergies of newly-acquired businesses, including due to items not discovered in the due-diligence process, and the impact on the Company's cash position, levels of indebtedness and stock price; 22. termination, loss, delay, reduction in scope or increased costs of contracts, including large contracts and multiple contracts; 23. liability arising from errors or omissions in the performance of testing services, contract research services, or other contractual arrangements; 24. changes or disruption in the provision or transportation of services or supplies provided by third parties; or their termination for failure to follow the Company's performance standards and requirements; 25. damage or disruption to the Company's facilities; 26. damage to the Company's reputation, loss of business, or other harm from acts of animal rights activists or potential harm and/or liability arising from animal research activities; 27. adverse results in litigation matters; 28. inability to attract and retain experienced and qualified personnel or the loss of significant personnel as a result of illness or otherwise; 29. failure to develop or acquire licenses for new or improved technologies, such as point-of-care testing, mobile health technologies, and digital pathology, or potential use of new technologies by customers and/or consumers to perform their own tests; 28
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30. substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests; 31. failure to obtain, maintain and enforce intellectual property rights for protection of the Company's products and services and defend against challenges to those rights; 32. scope, validity and enforceability of patents and other proprietary rights held by third parties that may impact the Company's ability to develop, perform, or market the Company's products or services or operate its business; 33. business interruption, receivable impairment, delays in cash collection impacting days sales outstanding, supply chain disruptions, increases in operating costs, or other impacts on the business due to natural disasters, including adverse weather, fires and earthquakes, political crises, including terrorism and war, public health crises and disease epidemics and pandemics, and other events outside of the Company's control; 34. discontinuation or recalls of existing testing products; 35. a failure in the Company's information technology systems, including with respect to testing turnaround time and billing processes, or the failure of the Company or its third-party suppliers and vendors to maintain the security of business information or systems or to protect against cybersecurity attacks such as denial of service attacks, malware, ransomware and computer viruses, or delays or failures in the development and implementation of the Company's automation platforms, any of which could result in a negative effect on the Company's performance of services, a loss of business or increased costs, damages to the Company's reputation, significant litigation exposure, an inability to meet required financial reporting deadlines, or the failure to meet future regulatory or customer information technology, data security and connectivity requirements; 36. business interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, general labor unrest or failure to comply with labor or employment laws; 37. failure to maintain the Company's days sales outstanding levels, cash collections (in light of increasing levels of patient responsibility), profitability and/or reimbursement arising from unfavorable changes in third-party payer policies, payment delays introduced by third party utilization management organizations and increasing levels of patient payment responsibility; 38. impact on the Company's revenues, cash collections and the availability of credit for general liquidity or other financing needs arising from a significant deterioration in the economy or financial markets or in the Company's credit ratings byStandard & Poor's and/or Moody's; 39. failure to maintain the expected capital structure for the Company, including failure to maintain the Company's investment grade rating, or leverage ratio covenants under its term loan facility and revolving credit facility; 40. changes in reimbursement by foreign governments and foreign currency fluctuations; 41. inability to obtain certain billing information from physicians, resulting in increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and revenues; 42. expenses and risks associated with international operations, including, but not limited to, compliance with theU.S. Foreign Corrupt Practices Act, theU.K. Bribery Act, other applicable anti-corruption laws and regulations, trade sanction laws and regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions; 43. failure to achieve expected efficiencies and savings in connection with the Company's business process improvement initiatives; 44. changes in tax laws and regulations or changes in their interpretation, including theU.S. Tax Cuts and Jobs Act (TCJA); 45. global economic conditions and government and regulatory changes, including, but not limited to theU.K.'s exit from theEuropean Union ; and 46. effects, duration, and severity of the ongoing COVID-19 pandemic, including the impact on operations, personnel, and liquidity, and the actions the Company, or governments, have taken or may take in response, and damage to the Company's reputation or loss of business resulting from the perception of the Company's response to the COVID-19 pandemic, including the availability and accuracy and timeliness of delivery of any tests that the Company develops, collaborates on or provides for the detection of COVID-19. 29
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Except as may be required by applicable law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Given these uncertainties, one should not put undue reliance on any forward-looking statements. GENERAL (dollars in millions, except per share data) Revenues for the six months endedJune 30, 2020 were$5,592.6 , a decrease of (1.4)% from$5,672.9 during the six months endedJune 30, 2019 . The decrease in revenues was due to a 3.6% decline of organic revenue, 0.4% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 2.6% from acquisitions. The 3.6% decline of organic revenue was due to the pandemic, which reduced the Company's organic Base Business by 11.7%, partially offset by 8.1% from COVID-19 related business. Base Business includes the Company's business operations except for molecular and serology COVID-19 testing (COVID-19 Testing). The decline in the organic Base Business includes the negative impact from PAMA of 0.6%. InMarch 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 2020. While the Company's Base Business continues to be negatively impacted by the COVID-19 pandemic, the Company's outlook has improved across the enterprise. In LCD, demand for its Base Business continues to be below the Company's historical levels; however, the Company's Base Business has been steadily recovering from its trough in April, while at the same time COVID-19 Testing continues to grow. To date, the Company has performed more than 9.2 million molecular and 2.2 million antibody COVID-19 tests and has a current capacity of 180,000 molecular and 300,000 antibody tests per day. The Company continues to increase capacity across multiple platforms for its COVID-19 Testing subject to the availability of equipment and testing supplies and key personnel. In CDD, while the pandemic is expected to continue to negatively impact its business, this impact is expected to subside throughout the year as CDD continues to work on projects supporting global vaccine and treatment development, with additional support from COVID-19 Testing. As a result of the impact of COVID-19, during the six months endedJune 30, 2020 , the Company recorded goodwill and other asset impairment charges of$437.4 ,$426.4 within CDD and$11.0 within LCD, all of which were recorded in the three months endedMarch 31, 2020 . See Note 6Goodwill and Intangible Assets for discussion of goodwill and intangible asset impairments and Note 2 Revenue for the discussion of credit losses and additional price concessions. The Company also wrote-off or wrote down certain of the Company's investments by$25.4 due to the impact of COVID-19,$7.1 included in Equity method earnings (loss), net (recorded in the three months endedMarch 31, 2020 ), and$18.3 included in Other, net ($13.1 recorded during the three months endedMarch 31, 2020 and$5.2 recorded during the three months endedJune 30, 2020 ). The Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) plan contributions inthe United States (U.S. ). In response to its improved outlook, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in theU.S. InApril 2020 , the Company received cash payments of approximately$55.9 from thePublic Health andSocial Services Emergency Fund for provider relief (Relief Fund ) that was appropriated byCongress to theDepartment of Health and Human Services (HHS) in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Upon receiving and satisfying the terms and conditions associated with the distributed funds, the Company accounted for the transaction by applying the guidance in ASC 450-30 Gain Contingencies, and recorded these funds in Other, net non-operating income in the Consolidated Statement of Operations as ofJune 30, 2020 . OnJuly 30 , the Company announced plans to create a program to offer total antibody testing at no charge through the patient's doctor in support of increased blood plasma donations for use as a possible COVID-19 treatment. The Company is working with public health authorities and the provider community on the details of the three-month program and is evaluating the impact this program will have on the consolidated financial statements. There remains significant uncertainty regarding the duration and severity of the pandemic and its impact on the Company's business, results of operations and financial position for the balance of 2020 and beyond. For more information regarding the risks associated with COVID-19 and its impact on the Company's business, see Risk Factors in Part II - Item 1A. 30
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RESULTS OF OPERATIONS (dollars in millions)
Three months endedJune 30, 2020 , compared with three months endedJune 30, 2019 Revenues Three Months Ended June 30, 2020 2019 Change LCD$ 1,692.7 $ 1,760.9 (3.9) % CDD 1,093.7 1,126.3 (2.9) % Intercompany eliminations and other (17.6) (5.5) 220.0 % Total$ 2,768.8 $ 2,881.7 (3.9) % The decrease in revenues for the three months endedJune 30, 2020 , as compared with the corresponding period in 2019 was 3.9%. The decrease in revenue was due to a 5.4% decline of organic revenue, 0.3% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 1.9% from acquisitions. The 5.4% decline of organic revenue was due to the pandemic, which reduced the Company's organic Base Business by 20.9%, partially offset by COVID-19 Testing of 15.4%. The decline in organic Base Business includes the lower Medicare and Medicaid pricing as a result of PAMA of 0.5%. LCD revenues for the quarter were$1,692.7 , a decrease of 3.9% compared to revenues of$1,760.9 in the second quarter of 2019. The decrease in revenues was primarily due to a 4.9% decline in organic revenue and 0.1% from unfavorable foreign currency translation, partially offset by 1.1% from acquisitions. The 4.9% organic revenue decline includes a 30.1% decline of the organic Base Business (due to the pandemic), partially offset by 25.2% from COVID-19 Testing. The 30.1% decline of the organic Base Business includes a 0.8% negative impact from PAMA and a 1.2% reduction due to theSeptember 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to theFlorida market. Total volume (measured by requisitions) decreased by 19.5% as organic volume declined by 20.7%, partially offset by acquisition volume of 1.2%. The decline in organic volume includes a 35.3% reduction of organic Base Business (due to the pandemic), partially offset by increased demand for COVID-19 Testing of 14.6%. The organic Base Business volumes continued to improve throughout the quarter with daily volume in June averaging approximately 17.0% below June volume in 2019. At the same time, demand for COVID-19 Testing continues to increase, contributing approximately 23.0% to total volume in June. While total volume declined 19.5%, price/mix increased by 15.6% due to COVID-19 Testing of 10.7% and the Base Business of 4.9%. The Base Business price includes the negative impact from PAMA of 0.8% and the non-renewal of the BeaconLBS contract of 1.2%. CDD revenues for the second quarter were$1,093.7 , a decrease of 2.9% over revenues of$1,126.3 in the second quarter of 2019. The decrease in revenues was primarily due to a 5.2% decline in organic revenue, 0.7% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 3.1% benefit from an acquisition. The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 1.1% increase from COVID-19 molecular testing through itsCentral Laboratories business. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit. Cost of Revenues Three Months Ended June 30, 2020 2019 Change Cost of revenues$ 2,008.3 $ 2,056.9 (2.4) % Cost of revenues as a % of revenues 72.5 % 71.4
%
Cost of revenues decreased 2.4% during the three months endedJune 30, 2020 , as compared with the corresponding period in 2019. Cost of revenues as a percentage of revenues during the three months endedJune 30, 2020 , increased to 72.5% as compared to 71.4% in the corresponding period in 2019. This increase was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases), and PAMA, partially offset by LaunchPad savings. Selling, General and Administrative Expenses Three Months
Ended
2020 2019 Change Selling, general and administrative expenses$ 396.3 $ 415.3 (4.6) % Selling, general and administrative expenses as a % of revenues 14.3 % 14.4 % 31
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During the three months endedJune 30, 2020 , the Company incurred$4.6 of acquisition and divestiture related costs and$7.8 in management transition costs. In addition, the Company recorded$0.2 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and$1.8 related to miscellaneous other items. These charges were offset by insurance proceeds of$10.0 related to the 2018 ransomware attack. These items increased selling, general and administrative expenses by$7.7 . During the three months endedJune 30, 2019 , the Company incurred$33.2 in acquisition and divestiture costs,$1.5 in management transition costs and$0.1 in costs related to the 2018 ransomware attack. In addition, the Company recorded$2.6 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by$37.4 . Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 14.0% and 13.1% during each of the three months endedJune 30, 2020 , and 2019, respectively. Amortization of Intangibles and Other Assets Three Months Ended June 30, 2020 2019 Change LCD$ 25.3 $ 25.6 (1.2) % CDD 34.8 34.6 0.6 %
Total amortization of intangibles and other assets
$ 60.2 (0.2) % The decrease in amortization of intangibles and other assets within LCD primarily reflects the impact of acquisitions occurring afterJune 30, 2019 , net of Amortization of intangible assets within CDD increased primarily due to the impact of acquisitions occurring afterJune 30, 2019 . Restructuring and Other Special Charges Three Months EndedJune 30, 2020 2019
Change
Restructuring and other charges$ 6.4 $ 13.6
(52.9) %
During the three months endedJune 30, 2020 , the Company recorded net restructuring and other charges of$6 .4:$3.7 within LCD and$2.7 within CDD. The charges were comprised of$5.4 related to severance and other personnel costs,$3.3 for a CDD lab facility and equipment impairment, and$4.2 in facility closures, impairment of operating lease right-of use assets and general integration activities. The charges were offset by the reversal of previously established liability of$1.0 and$5.5 in unused severance costs and facility-related costs, respectively. During the three months endedJune 30, 2019 , the Company recorded net restructuring and other special charges of$13 .6:$3.0 within LCD and$10.6 within CDD. The charges were comprised of$3.5 related to severance and other personnel costs along with$10.2 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were offset by the reversal of previously established reserves of$0.1 in unused facility reserves. Interest Expense Three Months Ended June 30, 2020 2019 Change Interest expense$ (52.7) $ (59.1) (10.8) % The decrease in interest expense for the three months endedJune 30, 2020 , as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of$1,050.0 in debt securities inNovember 2019 . Equity Method Income Three Months Ended June 30, 2020 2019 Change Equity method income, net$ 1.8 $ 2.5 (28.0) % Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. The 32
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decrease in income for the three months endedJune 30, 2020 , as compared with the corresponding period in 2019, was primarily due to decreased profitability of the Company's joint ventures. Other, net Three Months Ended June 30, 2020 2019 Change Other, net$ 47.7 $ (10.5) (554.3) % The change in other, net for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , is primarily due to$55.9 of funding from theRelief Fund that was appropriated byCongress to the HHS in the CARES Act. This funding was partially offset by the$5.2 write-off or write down of certain of the Company's investments primarily due to the negative impact of the COVID-19 global pandemic. In addition, foreign currency transaction losses of$1.7 were recognized for the three months endedJune 30, 2020 and losses of$3.2 were recognized in the corresponding period of 2019. Income Tax Expense Three Months Ended June 30, 2020 2019 Change Income tax expense$ 65.4 $ 79.3 (17.5) % Income tax expense as a % of earnings before income taxes 22.0 % 29.4 % The 2020 tax rate was favorable to the 2019 tax rate due to the mix of earnings inclusive of federal, state, and foreign changes. Operating Income by Segment Three Months Ended June 30, 2020 2019 Change LCD operating income$ 281.3 $ 312.5 (10.0) % LCD operating margin 16.6 % 17.7 % (1.1) % CDD operating income 65.5 65.8 (0.5) % CDD operating margin 6.0 % 5.9 % 0.1 % General corporate expenses (49.1) (42.6) 15.3 % Total operating income$ 297.7 $ 335.7 (11.3) % LCD operating income was$281.3 for the three months endedJune 30, 2020 , a decrease of 10.0% over operating income of$312.5 in the corresponding period of 2019, and LCD operating margin decreased 1.1% basis points year-over-year.The decrease was primarily due to the reduction in the Base Business (primarily due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings. The Company remains on track to deliver approximately$200.0 of net savings from its three-year LCD's LaunchPad initiative by the end of 2021. CDD operating income was$65.5 for the three months endedJune 30, 2020 , a decrease over operating income of$65.8 in the corresponding period of 2019. The decrease was primarily due to the negative impact from the pandemic and higher personnel costs, partially offset by molecular COVID-19 testing and LaunchPad savings. The Company remains on track to deliver approximately$150.0 of net savings from its three-year CDD's LaunchPad initiative by the end of 2020. General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were$49.1 for the three months endedJune 30, 2020 , an increase of 15.3% over corporate expenses of$42.6 in the corresponding period of 2019. The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs. Six months endedJune 30, 2020 , compared with six months endedJune 30, 2019 Revenues Six Months Ended June 30, 2020 2019 Change LCD$ 3,394.7 $ 3,482.9 (2.5) % CDD 2,237.5 2,201.0 1.7 % Intercompany eliminations and other (39.6) (11.0) 260.0 % Total$ 5,592.6 $ 5,672.9 (1.4) % 33
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Revenues for the six months endedJune 30, 2020 were$5,592.6 , a decrease of (1.4)% from$5,672.9 during the six months endedJune 30, 2019 . The decrease in revenues was due to a 3.6% decline of organic revenue, 0.4% from the disposition of a business, and 0.1% from unfavorable foreign currency translation, partially offset by 2.6% from acquisitions. The 3.6% decline of organic revenue was due to a 11.7% decline in the Company's organic Base Business (as a result of the pandemic), partially offset by 8.1% from COVID-19 related business. The decline in the organic Base Business includes the negative impact from PAMA of 0.6%. LCD revenues for the six months endedJune 30, 2020 were$3,394.7 , a decrease of 2.5% compared to revenues of$3,482.9 for the six months endedJune 30, 2019 . The decrease in revenue was due to a 3.9% decline in organic revenue, partially offset by 1.4% from acquisitions. The 3.9% decline in organic revenue,was due to a 17.1% decline of the organic Base Business (due to the pandemic), partially offset by 13.2% from COVID-19 Testing. The 17.1% decline of organic Base Business includes a 1.0% negative impact from PAMA and a 1.2% reduction due to theSeptember 2019 nonrenewal of the BeaconLBS - UnitedHealthcare contract pertaining to theFlorida market. Total volume (measured by requisitions) decreased by 12.0% as organic volume declined by 13.4%, partially offset by acquisition volume of 1.4%. The decline in organic volume includes a 21.0% reduction of organic Base Business (due to the pandemic), partially offset by increased demand for COVID-19 Testing of 7.6%. The organic Base Business volumes continued to improve throughout the second quarter with daily volume in June averaging approximately 17.0% below June volume in 2019. At the same time, demand for COVID-19 Testing continues to increase, contributing approximately 23.0% to total volume in June. While total volume declined 12.0%, price/mix increased by 9.4% due to COVID-19 Testing of 5.5% and Base Business of 3.9%. The Base Business price includes the negative impact from PAMA of 1.0% and the non-renewal of the BeaconLBS contract of 1.2%. CDD revenues for six months endedJune 30, 2020 were$2,237.5 , an increase of 1.7% over revenues of$2,201.0 for the six months endedJune 30, 2019 . The increase in revenue was primarily due to the benefit of acquisitions of 4.6%, partially offset by a decline in organic revenue 1.9% and disposition of a business of 1.0%. The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 0.6% increase from COVID-19 molecular testing through itsCentral Laboratories business. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit. Cost of Revenues Six Months Ended June 30, 2020 2019 Change Cost of revenues$ 4,104.1 $ 4,058.4 1.1 % Cost of revenues as a % of revenues 73.4 % 71.5 % Cost of revenues increased 1.1% during the six months endedJune 30, 2020 , as compared with the corresponding period in 2019. Cost of revenues as a percentage of revenues during the six months endedJune 30, 2020 , increased to 73.4% as compared to 71.5% in the corresponding period in 2019. This increase was primarily due to the impact of COVID-19, higher personnel costs (primarily driven by merit increases and one additional payroll day that predominantly impacted LCD), and PAMA, partially offset by LaunchPad savings. Selling, General and Administrative Expenses Six Months
Ended
2020 2019 Change Selling, general and administrative expenses$ 791.8 $ 809.1 (2.1) %
Selling, general and administrative expenses as a % of revenues
14.2 % 14.3 % During the six months endedJune 30, 2020 , the Company incurred$13.0 of acquisition and divestiture related costs and$10.6 in management transition costs. In addition, the Company recorded$1.1 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative and$1.2 related to miscellaneous other items.These charges were offset by insurance proceeds of$10.0 related to the 2018 ransomware attack. These items increased selling, general and administrative expenses by$19.6 . During the six months endedJune 30, 2019 , the Company incurred$44.3 in acquisition and divestiture costs,$2.9 in consulting expenses relating to fees incurred as part of its integration and management transition costs and$0.7 in costs related to the 2018 ransomware attack. In addition, the Company recorded$5.0 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative. These items increased selling, general and administrative expenses by$52.9 . 34
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Excluding these charges, selling, general and administrative expenses as a percentage of revenues were 13.8% and 13.3% during each of the six months endedJune 30, 2020 , and 2019, respectively. Amortization of Intangibles and Other Assets Six Months Ended June 30, 2020 2019 Change LCD$ 51.4 $ 50.3 2.2 % CDD 71.0 67.0 6.0 %
Total amortization of intangibles and other assets
$ 117.3 4.3 %
The increase in amortization of intangibles and other assets within LCD
primarily reflects the impact of acquisitions occurring after
Six Months Ended June 30, 2020 2019 Change Goodwill and other asset impairments $ 437.4
$ - N/A
During the six months endedJune 30, 2020 , the Company recorded goodwill and other asset impairment charges of$437.4 ,$426.4 within CDD and$11.0 within LCD, representing 3.9% of the Company's total goodwill and intangible assets. 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 in the CDD segment and$3.7 in the LCD segment. The Company also recorded a charge of$2.7 for the impairment of a CDD tradename,$7.3 for LCD software, and$5.0 for the impairment of the CDD floating rate secured note receivable due 2022. Restructuring and Other Special Charges Six Months EndedJune 30, 2020 2019
Change
Restructuring and other charges$ 31.8 $ 34.2
(7.0) %
During the six months endedJune 30, 2020 , the Company recorded net restructuring and other charges of$31 .8:$11.8 within LCD and$20.0 within CDD. The charges were comprised of$10.5 related to severance and other personnel costs,$8.0 for a CDD lab facility impairment, and$20.0 in facility closures, impairment of operating lease right-of use assets and general integration activities. The charges were offset by the reversal of previously established liability of$1.0 and$5.7 in unused severance costs and facility-related costs, respectively. During the six months endedJune 30, 2019 , the Company recorded net restructuring and other special charges of$34 .2:$16.1 within LCD and$18.1 within CDD. The charges were comprised of$20.3 related to severance and other personnel costs along with$13.5 in costs associated with facility closures, impairment of operating lease right-of-use assets and general integration initiatives. The charges were increased by the adjustment of previously established reserves of$0.4 in facility reserves. Interest Expense Six Months Ended June 30, 2020 2019 Change Interest expense $ (107.7) (115.8) (7.0) % The decrease in interest expense for the six months endedJune 30, 2020 , as compared with the corresponding period in 2019, is primarily due to a lower outstanding balance on term loans, lower variable interest rates, the repayment of the 2.625% senior notes and a portion of the 4.625% senior notes in 2019, partially offset by the issuance of$1,050.0 in debt securities inNovember 2019 . Equity Method Income Six Months Ended June 30, 2020 2019 Change Equity method income, net$ (4.8) $ 5.5 (187.3) % 35
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Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the health care industry. All of these partnerships and investments reside within LCD. The decrease in income for the six months endedJune 30, 2020 , as compared with the corresponding period in 2019, was primarily due to the impairment of an equity method investment and decreased profitability of the Company's joint ventures. Other, net Six Months Ended June 30, 2020 2019 Change Other, net$ 31.6 $ (20.9) (251.2) % The change in other, net for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , is primarily due to the$55.9 funding from theRelief Fund that was appropriated byCongress to the HHS in the CARES Act. This funding was partially offset by the$18.3 write-off or write down of certain of the Company's investments primarily due to the negative impact of the COVID-19 global pandemic. In addition, foreign currency transaction losses of$4.5 were recognized for the six months endedJune 30, 2020 and losses of$7.8 were recognized in the corresponding period of 2019. Income Tax Expense Six Months Ended June 30, 2020 2019 Change Income tax expense$ 114.6 $ 148.1 (22.6) %
Income tax expense as a % of earnings before income taxes
391.1 %
28.2 %
The 2020 tax rate was unfavorable to the 2019 tax rate due to impairment charges for which either no tax benefit was recorded (as they were not deductible) or the associated tax assets required a full valuation allowance. Six Months Ended June 30, 2020 2019 Change LCD operating income$ 486.7 $ 580.8 (16.2) % LCD operating margin 14.3 % 16.7 % (2.4) % CDD operating income (273.2) 153.8 (277.6) % CDD operating margin (12.2) % 7.0 % (19.2) % General corporate expenses (108.4) (80.7) 34.3 % Total operating income$ 105.1 $ 653.9 (83.9) % LCD operating income was$486.7 for the six months endedJune 30, 2020 , a decrease of 16.2% over operating income of$580.8 in the corresponding period of 2019, and LCD operating margin decreased (2.4)% basis points year-over-year. The decrease in operating income and margin were primarily due to the reduction in Base Business (primarily due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings. The Company remains on track to deliver approximately$200.0 of net savings from its three-year, phase II of LCD's LaunchPad initiative by the end of 2021. CDD operating loss was$(273.2) for the six months endedJune 30, 2020 , a decrease over operating income of$153.8 in the corresponding period of 2019. The decrease in operating income and margin was primarily due to the negative impact of COVID-19, specifically goodwill and other asset impairments of$426.4 , and higher personnel costs, partially offset by organic demand, acquisitions, and LaunchPad savings. The Company is on track to deliver$150.0 of net savings from its three-year CDD LaunchPad initiative by the end of 2020. General corporate expenses are comprised primarily of administrative services such as executive management, human resources, legal, finance, corporate affairs, and information technology. Corporate expenses were$108.4 for the six months endedJune 30, 2020 , an increase of 34.3% over corporate expenses of$80.7 in the corresponding period of 2019. The increase in corporate expenses in 2020 is primarily due to higher personnel costs, including executive transition costs, and COVID-19 related expenses. LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions) The Company's strong cash-generating ability and financial condition typically have provided ready access to capital markets. The Company's principal source of liquidity is operating cash flow, supplemented by proceeds from debt offerings. The Company's senior unsecured revolving credit facility is further discussed in Note 7 Debt to the Company's Condensed Consolidated Financial Statements. 36
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In summary, the Company's cash flows were as follows for the six months ended
Six Months Ended
2020 2019 Net cash provided by operating activities$ 574.5 $ 419.3 Net cash used for investing activities (230.0) (891.3) Net cash used for financing activities (119.7) 311.7 Effect of exchange rate changes on cash and cash equivalents (5.3) (1.1) Net (decrease) increase in cash and cash equivalents$ 219.5 $ (161.4) Cash and Cash Equivalents Cash and cash equivalents atJune 30, 2020 and 2019, totaled$557.0 and$265.4 , respectively. Cash and cash equivalents consist of highly liquid instruments, such as time deposits, commercial paper, and other money market investments, substantially all of which have original maturities of three months or less. Operating Activities During the six months endedJune 30, 2020 , the Company's operations provided$574.5 of cash as compared to$419.3 during the same period in 2019. The$155.2 increase in cash provided from operations in 2020 as compared with the corresponding 2019 period is primarily due to higher cash earnings partially offset by higher working capital. For the first six months of 2020, cash earnings included the$55.9 CARES Act funding and benefited from income and payroll tax deferrals, while working capital was negatively impacted by an increase in COVID-19 related testing supplies inventory and accounts receivable. The COVID-19 pandemic has created uncertainty about the Company's near-term operating cash flows. Based on current expectations of the impact of COVID-19, the Company expects to continue to generate positive cash flows from operating activities, however, should the COVID-19 impact worsen or last longer than anticipated, the Company may see a significant decline in cash flows from operating activities. For more information regarding the risks associated with the COVID-19 and its impact on the Company's business, see Risk Factors in Part II - Item IA. Investing Activities Net cash used for investing activities for the six months endedJune 30, 2020 , was$230.0 as compared to net cash used for investing activities of$891.3 for the six months endedJune 30, 2019 . The change in cash used for investing activities was primarily due to a decrease in business acquisitions during the six months endedJune 30, 2020 . Capital expenditures were$205.1 and$179.4 for the six months endedJune 30, 2020 , and 2019, respectively. Financing Activities Net cash used for financing activities for the six months endedJune 30, 2020 , was$119.7 compared to net cash provided by financing activities of$311.7 for the six months endedJune 30, 2019 . The change in cash flows from financing activities for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , were primarily due to net financing proceeds from the term loan and revolving credit facilities in 2019 of$635.0 offset by$200.0 more in share repurchases in 2019. The Company's revolving credit facility consists of a five-year revolving facility in the principal amount of up to$1,000.0 , with the option of increasing the facility by up to an additional$350.0 , subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. Under the Company's term loan credit facility and the revolving credit facility, the Company is subject to negative covenants limiting subsidiary indebtedness and certain other covenants typical for investment grade-rated borrowers and the Company is required to maintain certain leverage ratios. The Company was in compliance with all covenants under the term loan credit facility and the revolving credit facility atJune 30, 2020 and expects that it will remain in compliance with its existing debt covenants for the next twelve months. During the fourth quarter of 2020,$412.2 of the Company's senior notes mature. The Company has elected to redeem these notes inAugust 2020 at par using available cash on hand and borrowings under its revolving credit facility. AtJune 30, 2020 the Company had$557.0 of cash and$997.0 of available borrowings under its revolving credit facility, which does not mature until 2022. InMay 2020 , in order to obtain increased financial covenant flexibility, the Company and its lenders entered into amendments to the term loan facility and the revolving credit facility to increase the maximum leverage ratio to 5.0x debt to last twelve months EBITDA for the three month periods endingJune 30 ,September 30 andDecember 31, 2020 , 4.5x for period endedMarch 31, 2021 and then reverts back to 4.0x. The amendments also provide that during any period in which the Company's leverage ratio exceeds 4.5x debt to last twelve months EBITDA (i) the company will be prohibited from consummating share repurchases, subject to limited exceptions, (ii) borrowings under the revolving credit facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.25% or a base 37
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rate plus a margin of 0.25%, (iii) the facility fee that the Company is required to pay on the aggregate commitments under the revolving credit facility will be 0.25% per annum, and (iv) borrowings under the term loan facility will accrue interest at a per annum rate equal to, at the Company's election, either a LIBOR rate plus a margin of 1.175% or a base rate plus a margin of 0.175%. The Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) plan contributions inthe United States (U.S. ). In response to its improved outlook, the Company has been rapidly resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) plan contributions in theU.S. At the end of 2019, the Company had outstanding authorization from the board of directors to purchase up to$900.0 of Company common stock. As ofJune 30, 2020 , the Company had outstanding authorization from the board of directors to purchase up to$800.0 of the Company's common stock. The repurchase authorization has no expiration date; however, the Company temporarily suspended stock repurchases beginning inMarch 2020 due to impact of the COVID-19 pandemic. Credit Ratings The Company's investment grade debt ratings from Moody's and from Standard and Poor's (S&P) contribute to its ability to access capital markets. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates, and other relevant market rate or price changes. In the ordinary course of business, the Company is exposed to various market risks, including changes in foreign currency exchange and interest rates, and the Company regularly evaluates its exposure to such changes. The Company addresses its exposure to market risks, principally the market risks associated with changes in foreign currency exchange rates and interest rates, through a controlled program of risk management that includes, from time to time, the use of derivative financial instruments such as foreign currency forward contracts, and interest rate and cross currency swap agreements. Foreign Currency Exchange Rates Approximately 12.0% of the Company's revenues for the six months endedJune 30, 2020 , and approximately 12.5% of the Company's revenue for the six months endedJune 30, 2019 , were denominated in currencies other than theU.S. dollar. The Company's financial statements are reported inU.S. dollars and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies intoU.S. dollars for purposes of reporting the Company's consolidated financial results. In the second quarter of 2020 and the year endedDecember 31, 2019 , the most significant currency exchange rate exposures were to the Canadian dollar, Swiss Franc, Euro and British Pound. Excluding the impacts from any outstanding or future hedging transactions, a hypothetical change of 10% in average exchange rates used to translate all foreign currencies toU.S. dollars would have impacted income before income taxes for the six months endedJune 30, 2020 by approximately$2.6 . Gross accumulated currency translation adjustments recorded as a separate component of shareholders' equity were$(80.5) and$47.2 atJune 30, 2020 and 2019, respectively. The Company does not have significant operations in countries in which the economy is considered to be highly-inflationary. The Company earns revenue from service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company's profitability with respect to such contracts. The Company is also subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. The Company limits its foreign currency transaction risk through exchange rate fluctuation provisions stated in some of its contracts with customers, or it may hedge transaction risk with foreign currency forward contracts. AtJune 30, 2020 , the Company had 38 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly throughJuly 2020 with a notional value totaling approximately$612.5 . AtDecember 31, 2019 , the Company had 34 open foreign exchange forward contracts relating to service contracts with various amounts maturing monthly throughJanuary 2020 with a notional value totaling approximately$369.2 . The Company is party toU.S. Dollar to Swiss Franc cross-currency swap agreements with an aggregate notional amount of$600.0 , maturing in 2022 and 2025, as a hedge against the impact of foreign exchange movements on its net investment in a Swiss Franc functional currency subsidiary. Interest Rates Some of the Company's debt is subject to interest at variable rates. As a result, fluctuations in interest rates affect the business. The Company attempts to manage interest rate risk and overall borrowing costs through an appropriate mix of fixed and variable rate debt including by the utilization of derivative financial instruments, primarily interest rate swaps. 38
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Borrowings under the Company's term loan credit facility and revolving credit facility are subject to variable interest rates, unless fixed through interest rate swaps or other agreements. As ofJune 30, 2020 andDecember 31, 2019 , the Company had$375.0 and$375.0 , respectively, of unhedged variable debt from the 2019 term loan credit facility and$0.0 and$0.0 , respectively, outstanding on its revolving credit facility. To hedge against changes in the fair value of a portion of the Company's long-term debt, the Company is party to a fixed-to-variable interest rate swap agreement for a portion of the 4.625% senior notes due 2020 with an aggregate notional amount of$300.0 and variable interest rates based on one-month LIBOR plus 2.298%. Each quarter-point increase or decrease in the variable rate would result in the Company's interest expense changing by approximately$0.9 per year for the Company's unhedged variable rate debt. ITEM 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as ofJune 30, 2020 . Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter endedJune 30, 2020 , that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 39
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LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
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