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MarketScreener Homepage  >  Equities  >  Nyse  >  Laboratory Corporation of America Holdings    LH

LABORATORY CORPORATION OF AMERICA HOLDIN

(LH)
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LABORATORY OF AMERICA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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05/03/2019 | 02:36pm EDT

FORWARD-LOOKING STATEMENTS


Laboratory 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 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 are subject to various risks and uncertainties and 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 and in the Company's
other public filings, press releases and discussion 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 the 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 disbarment 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 the Health Insurance Portability and Accountability Act of 1996,
       the Health Information Technology for Economic and Clinical Health Act,
       the European 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, the U.S. Clinical Laboratory Improvement Act of 1967 and the
       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 the U.S. Occupational Safety and Health Administration
       requirements and the U.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 the U.S. Food and Drug Administration, the U.S. Department of
       Agriculture, the Medicine and Healthcare products Regulatory Agency in the
       United Kingdom (U.K.), the State Drug Administration in China (formerly
       the China Food and Drug Administration), the Pharmaceutical and Medical
       Devices Agency in Japan, the European Medicines Agency and similar
       regulations and policies of agencies in jurisdictions in which the Company
       conducts business;



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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;


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 services or supplies provided by third parties,
       including transportation;

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 or the provision of animal research
       products;

27. adverse results in litigation matters;

28. inability to attract and retain experienced and qualified personnel;


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;


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;



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33.    business interruption or other impact on the business due to adverse
       weather, fires and/or other natural disasters, acts of war, terrorism or
       other criminal acts, and/or widespread outbreak of influenza or other
       pandemic illness;

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
       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
       benefit management organizations and increasing levels of patient payment
       responsibility;


38.    impact on the Company's revenue, 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 by Standard &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;


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 net revenues;


42.    expenses and risks associated with international operations, including,
       but not limited to, compliance with the U.S. Foreign Corrupt Practices
       Act, the U.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 the Tax Cuts and Jobs Act (TCJA); and


45.    global economic conditions and government and regulatory changes,
       including, but not limited to the U.K.'s announced intention to exit from
       the European Union.

GENERAL (dollars in millions, except per share data) During the three months ended March 31, 2019, revenue was $2,791.2, a decrease of 2.0% from $2,848.3 in the first quarter of 2018. The decline in revenue was primarily due to the negative impacts from the disposition of businesses of 1.8%, the implementation of PAMA of 1.0% and foreign currency translation of approximately 90 basis points, partially offset by organic growth of 1.2% and acquisitions of 0.5%. Effective January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842 Leases using the effective date method. The Company elected the package of practical expedients, which includes not reassessing whether existing contracts contain leases under the new definition of a lease, reassessing the classification of existing leases, and reassessing whether previously capitalized initial direct costs qualify for capitalization under the new standard. The Company also elected not to separate lease and non-lease components. The adoption of this standard resulted in the recording of $770.0 of additional operating lease liabilities as of March 31, 2019. On April 17, 2019, the Company announced that it will acquire Envigo International Holdings, Inc. (Envigo) nonclinical research services business, thus expanding CDD's global nonclinical drug development capabilities, and Envigo's Research Models Services business will acquire the Covance Research Products business. The transaction will result in net implied cash consideration to be paid by the Company of $485.0 and is expected to close within the second quarter. The Company will pay Envigo $595.0 in cash and will receive a note receivable of $110.0. The net impact of the proposed transactions will be an incremental $156.0 in revenues on a pro forma 2018 basis. The proposed transactions are expected to meet the Company's financial criteria of earnings and cash accretion in year one and exceed the cost of capital by year three.


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The Company remains on track to deliver $150.0 of net savings from CDD's three-year LaunchPad initiative by the end of 2020, and $30.0 of cost synergies from the integration of Chiltern by the end of 2019. The Company expects phase II of LCD's LaunchPad initiative to deliver approximately $200.0 in net savings over the next three years, while incurring approximately $40.0 in one-time implementation costs. Approximately one-third of the total savings are expected to be realized each year. PAMA which became law on April 1, 2014, and went into effect on January 1, 2018, resulted in a net reduction of revenue of approximately $70.0 in 2018 from all payers affected by the Clinical Lab Fee Schedule. Unless further implementation of PAMA is delayed or changed, an additional reduction of approximately $115.0 is expected for 2019, from all payers affected by the Clinical Lab Fee Schedule. RESULTS OF OPERATIONS (dollars in millions)


Three months ended March 31, 2019, compared with three months ended March 31,
2018
Revenues
                              Three Months Ended March 31,
                                2019                 2018           Change
LCD                       $      1,722.0$      1,770.2        (2.7 )%
CDD                              1,074.7              1,078.5        (0.4 )%
Intercompany eliminations           (5.5 )               (0.4 )   1,275.0  %
Total                     $      2,791.2$      2,848.3        (2.0 )%


The decrease in revenues for the three months ended March 31, 2019, as compared with the corresponding period in 2018 was (2.0)%. The decline in revenue was primarily due to the negative impacts from the disposition of businesses of 1.8%, the implementation of PAMA of 1.0% and foreign currency translation of approximately 90 basis points, partially offset by organic growth of 1.2% and acquisitions of 0.5%.


Revenue for the quarter was $1,722.0, a decrease of (2.7%) compared to revenues
of $1,770.2 in the first quarter of 2018. The decrease in revenues was primarily
driven by the negative impact from disposition of businesses of (2.9%) and
foreign currency translation of (0.3%), partially offset by organic revenue
growth of 0.4%. Excluding the negative impact from PAMA of 1.5%, organic revenue
for the quarter would have increased by 1.9%.
CDD revenues for the first quarter were $1,074.7, a decrease of (0.4%) over
revenues of $1,078.5 in the first quarter of 2018. The decrease was primarily
from foreign currency translation of (2.1%) partially offset by 1.2% due to
acquisitions and 0.5% of organic growth.
Cost of Revenues
                                        Three Months Ended March 31,
                                          2019                 2018         Change
Cost of revenues                    $      2,001.5$      2,069.3     (3.3 )%
Cost of revenues as a % of revenues           71.7 %               72.7 %


Cost of revenues decreased (3.3)% during the three months ended March 31, 2019, as compared with the corresponding period in 2018. Cost of revenues as a percentage of revenues during the three months ended March 31, 2019, decreased to 71.7% as compared to 72.7% in the corresponding period in 2018. The decrease is primarily due to the 2018 payment of a special one-time bonus of $31.0 ($24.8 of which was recorded in cost of revenues) to non-bonus eligible employees in recognition of the benefits the Company received from the passage of the TCJA. Selling, General and Administrative Expenses

                                                Three Months Ended March 31,
                                                   2019               2018            Change

Selling, general and administrative expenses $ 393.8$ 397.0 (0.8 )% Selling, general and administrative expenses as a % of revenues

                                    14.1 %              13.9 %


Selling, general and administrative expenses as a percentage of revenues increased to 14.1% during the three months ended March 31, 2019, as compared to 13.9% during the corresponding period in 2018, partially due to the decreased revenue from the implementation of PAMA. During the three months ended March 31, 2019, the Company incurred $11.1 of acquisition and divestiture related costs, $1.4 in consulting expenses relating to fees incurred as part of its integration and management transition cost and $0.6 in costs related to the previous ransomware attack. In addition, the Company recorded $2.4 of non-capitalized costs associated with the


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implementation of a major system as part of its LaunchPad business process
improvement initiative. These items increased selling, general and
administrative expenses by $15.5.
During the three months ended March 31, 2018, the Company incurred integration
and other related costs of $18.0 primarily relating to the Chiltern
acquisition. In addition, the Company incurred $3.1 in consulting expenses
relating to fees incurred as part of its integration and management transition
costs. During the quarter, the Company paid a special one-time bonus of $31.0
($6.2 of which was recorded in selling, general and administrative expenses) to
non-bonus eligible employees in recognition of the benefits the Company received
from the passage of the TCJA. In addition, the Company incurred $1.7 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 $29.0 in the first
quarter of 2018.
Excluding these charges, selling, general and administrative expenses as a
percentage of revenues were 13.6% and 12.9% during the three months ended
March 31, 2019, and 2018, respectively.
The increase in selling, general and administrative expenses as a percentage of
revenues, excluding these charges, is primarily due to the integration of
acquisitions. Selling, general and administrative expenses in the quarter were
negatively impacted by 80 basis points due to currency fluctuations.
Amortization of Intangibles and Other Assets
                                                Three Months Ended March 31,
                                                   2019               2018           Change
LCD                                          $          24.7     $       30.2         (18.2 )%
CDD                                                     32.4             32.1           0.9  %
Total amortization of intangibles and other
assets                                       $          57.1     $       62.3          (8.3 )%


The decrease in amortization of intangibles and other assets primarily reflects the impact of acquisitions occurring after March 31, 2018, offset by the reduction of amortizable intangible assets pursuant to the divestiture of three LCD businesses in 2018. Restructuring and Other Special Charges

                                                Three Months Ended March 31,
                                                   2019               2018          Change

Restructuring and other special charges $ 20.6 $ 14.3 44.1 %

During the three months ended March 31, 2019, the Company recorded net restructuring and other special charges of $20.6: $13.1 within LCD and $7.5 within CDD. The charges were comprised of $16.8 related to severance and other personnel costs along with $3.3 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 $0.5 in facility reserves. During the first three months of 2018, the Company recorded net restructuring and other special charges of $14.3: $3.6 within LCD and $10.7 within CDD. The charges were comprised of $11.3 related to severance and other personnel costs along with $1.2 in costs associated with facility closures and general integration initiatives and $2.3 in impairment to land held for sale. The charges were offset by the reversal of previously established reserves of $0.5, primarily in unused facility reserves. Interest Expense

                   Three Months Ended March 31,
                       2019              2018         Change

Interest expense $ (56.7 ) (63.5 ) (10.7 )%

The decrease in interest expense for the three months ended March 31, 2019, as compared with the corresponding period in 2018, is primarily due to the repayment of the 2.50% senior notes in 2018, the repayment of the 2014 term loan, partial repayment of the 2017 term loan and a reduced level of borrowing on the revolving credit facility. Equity Method Income

                             Three Months Ended March 31,
                                    2019                    2018    Change
Equity method income $           3.0                       $ 2.5     20.0 %


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 increase in income for the three months ended March 31, 2019, as compared with the corresponding period in 2018, was primarily due to increased profitability of the Company's joint ventures.


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Other, net

              Three Months Ended March 31,
                 2019               2018        Change
Other, net $       (10.4 )$      (3.5 )    197.1 %


The change in other, net for the three months ended March 31, 2019, is primarily due to a larger investment loss during the three months ended March 31, 2019 than the comparable period in 2018. Foreign currency transaction losses were $4.7 and $2.0, respectively for the 2019 and 2018 periods presented. Income Tax Expense

                                                  Three Months Ended March 31,
                                                    2019                  2018           Change
Income tax expense                           $         68.8         $         69.0         (0.3%)
Income tax expense as a % of earnings before
income taxes                                           27.0 %                 28.6 %


The 2019 tax rate was favorable to 2018 primarily due to the Company recording
additional tax expense in 2018 related to the TCJA. This was partially offset by
a lower stock compensation benefit in the first quarter of 2019 as compared to
the first quarter of 2018. The Company's 2019 and 2018 tax rates were favorably
impacted by foreign earnings taxed at lower rates than the U.S. statutory tax
rate.
The Company considers substantially all of its foreign earnings to be
permanently reinvested overseas.
Operating Income by Segment
                              Three Months Ended March 31,
                                 2019               2018          Change
LCD operating income       $       268.3$       303.4     (11.6%)
LCD operating margin                15.6 %              17.1 %    (1.5%)
CDD operating income                88.0                38.6       128.0 %
CDD operating margin                 8.2 %               3.6 %       4.6 %
General corporate expenses         (38.1 )             (36.6 )       4.1 %
Total operating income     $       318.2$       305.4         4.2 %


LCD operating income was $268.3 for the three months ended March 31, 2019, a
decrease of (11.6%) over operating income of $303.4 in the corresponding period
of 2018, and LCD operating margin decreased 150 basis points year-over-year. The
decline in operating income and margin were primarily due to the impact from
PAMA of approximately $27.0 or 120 basis points, disposition of businesses,
personnel costs, and cybersecurity expenses, partially offset by LaunchPad
initiatives. The Company remains on track to deliver approximately $200.0 of net
savings from its three-year, phase II of LabCorp Diagnostics' LaunchPad
initiative by the end of 2021.
CDD operating income was $88.0 for the three months ended March 31, 2019, an
increase of 128.0% over operating income of $38.6 in the corresponding period of
2018, and CDD operating margin increased 460 basis points year-over-year. The
increase in operating income and margin were primarily due to organic demand,
LaunchPad savings, acquisitions and currency translation, partially offset by
personnel costs. The Company is on track to deliver $150.0 of net savings from
its three-year CDD LaunchPad initiative by the end of 2020, and $30.0 of cost
synergies from the integration of Chiltern by the end of 2019.
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 $38.1 for the three
months ended March 31, 2019, an increase of 4.1% over corporate expenses of
$36.6 in the corresponding period of 2018. The increase in corporate expenses in
2019 is primarily due to higher personnel costs.
LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions)

The Company's ability to generate cash and its 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 and availability under its senior unsecured revolving credit facility. The Company's senior unsecured revolving credit facility is further discussed in Note 8 (Debt) to the Company's Unaudited Condensed Consolidated Financial Statements. During the three months ended March 31, 2019, and 2018, respectively, the Company's cash flows were as follows:


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                                                           Three Months Ended March 31,
                                                              2019               2018
Net cash provided by operating activities               $       165.8$       179.7
Net cash used for investing activities                         (140.5 )             (74.3 )
Net cash used for financing activities                         (103.2 )             (65.0 )

Effect of exchange rate on changes in cash and cash equivalents

                                                      (0.1 )               4.7
Net change in cash and cash equivalents                 $       (78.0 )$        45.1


Cash and Cash Equivalents
Cash and cash equivalents at March 31, 2019 and 2018, totaled $348.8 and $361.8,
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 three months ended March 31, 2019, the Company's operations provided
$165.8 of cash as compared to $179.7 during the same period in 2018. The $13.9
decrease in cash provided from operations in 2019 as compared with the
corresponding 2018 period is primarily due to lower cash earnings partially
offset by favorable working capital.
Investing Activities
Net cash used for investing activities for the three months ended March 31,
2019, was $140.5 as compared to net cash used for investing activities of $74.3
for the three months ended March 31, 2018. The change in cash used for investing
activities was primarily due to more business acquisitions during the three
months ended March 31, 2019. Capital expenditures were $94.2 and $72.5 for the
three months ended March 31, 2019, and 2018, respectively. The Company expects
capital expenditures in 2019 to be approximately 4.0% of revenues primarily in
connection with projects to support growth in the Company's core businesses,
including projects related to LaunchPad. The Company intends to continue to
pursue acquisitions to fund growth and make important investments in its
business, including in information technology, to improve efficiency and enable
the execution of the Company's strategic vision. Such expenditures are expected
to be funded by cash flow from operations, as well as borrowings under the
Company's revolving credit facility or any successor facility, as needed.
Financing Activities
Net cash used for financing activities for the three months ended March 31,
2019, was $103.2 compared to net cash used for financing activities of $65.0 for
the three months ended March 31, 2018. The change in the cash used for financing
activities for three months ended March 31, 2019, as compared to 2018, was
primarily the result of debt proceeds greater than payments during the first
quarter of 2018 and increased share repurchases during the first quarter of
2019.
On September 15, 2017, the Company entered into a new $750.0 term loan. The 2017
term loan facility will mature on September 15, 2022. The 2017 term loan balance
was $527.0 and $527.0 at March 31, 2019, and December 31, 2018, respectively.
On September 15, 2017, the Company also entered into an amendment and
restatement of its existing senior unsecured revolving credit facility, which
was originally entered into on December 21, 2011, amended and restated December
19, 2014, and further amended on July 13, 2016. The senior 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. The revolving credit facility also provides for a subfacility of up
to $100.0 for swing line borrowings and a subfacility of up to $150.0 for
issuances of letters of credit. The revolving credit facility is permitted to be
used for general corporate purposes, including working capital, capital
expenditures, funding of share repurchases and certain other payments, and
acquisitions and other investments. The Company had no outstanding balances on
its revolving credit facility at March 31, 2019, or December 31, 2018.
Under the Company's term loan credit facilities 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
facilities and the revolving credit facility at March 31, 2019. As of March 31,
2019, the ratio of total debt to consolidated proforma trailing 12 month EBITDA
was 3.0 to 1.0.
As of March 31, 2019, the effective interest rate on the 2017 term loan was
3.62%.
As of March 31, 2019, the Company provided letters of credit aggregating $72.2,
primarily in connection with certain insurance programs. Letters of credit
provided by the Company are issued under the Company's revolving credit facility
and are renewed annually.

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During the three months ended March 31, 2019, the Company purchased 0.8 shares
of its common stock at a total cost of $100.1. On February 6, 2019, the board of
directors replaced the Company's existing share repurchase plan with a new plan
authorizing repurchase of up to $1.25 billion of the Company's shares and no
shares have been repurchased under this plan. The repurchase authorization has
no expiration.
The Company had a $26.2 and $26.7 reserve for unrecognized income tax benefits,
including interest and penalties, as of March 31, 2019, and December 31, 2018,
respectively. Approximately $5.1 and $6.0 is classified in accrued expenses and
other, and approximately $21.1 and $20.7 is classified in deferred income taxes
and other tax liabilities in the Company's Condensed Consolidated Balance
Sheets.
Zero-coupon Subordinated Notes
On March 11, 2019, the Company announced that for the period from March 11,
2019, to September 10, 2019, the zero-coupon subordinated notes will accrue
contingent cash interest at a rate of no less than 0.125% of the average market
price of a zero-coupon subordinated note for the five trading days ended August
27, 2019, in addition to the continued accrual of the original issue discount.
During the three months ended March 31, 2019, the Company settled notices to
convert $7.7 aggregate principal amount of its zero-coupon subordinated notes
with a conversion value of $14.5. The total cash used for these settlements was
$7.3. As a result of these conversions, the Company also reversed deferred tax
liabilities of $1.7.
On April 1, 2019, the Company announced that its zero-coupon subordinated notes
may be converted into cash and common stock at the conversion rate of 13.4108
per $1,000.0 principal amount at maturity of the notes, subject to the terms of
the zero-coupon subordinated notes and the Indenture, dated as of October 24,
2006, between the Company and The Bank of New York Mellon, as trustee and the
conversion agent. In order to exercise the option to convert all or a portion of
the zero-coupon subordinated notes, holders are required to validly surrender
their zero-coupon subordinated notes at any time during the calendar quarter
beginning April 1, 2019, through the close of business on the last business day
of the calendar quarter, which is 5:00 p.m., New York City time, on Friday, June
28, 2019. If notices of conversion are received, the Company plans to settle the
cash portion of the conversion obligation with cash on hand and/or borrowings
under the revolving credit facility.
Credit Ratings
The Company's investment grade debt ratings from Moody's and Standard and Poor's
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. Although, as set forth below, the Company's
zero-coupon subordinated notes contain features that are considered to be
embedded derivative instruments, the Company does not hold or issue derivative
financial instruments for trading purposes.
Foreign Currency Exchange Rates
Approximately 12.6% of the Company's revenues for the three months ended
March 31, 2019, and approximately 13.3% of those for the three months ended
March 31, 2018, were denominated in currencies other than the U.S. dollar. The
Company's financial statements are reported in U.S. dollars and, accordingly,
fluctuations in exchange rates will affect the translation of revenues and
expenses denominated in foreign currencies into U.S. dollars for purposes of
reporting the Company's consolidated financial results. In the first quarter of
2019 and the year ended December 31, 2018, 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 to U.S. dollars would have impacted income
before income taxes for the three months ended March 31, 2019, by approximately
$1.1. Gross accumulated currency translation adjustments recorded as a separate
component of shareholders' equity were $21.6 and $39.4 at March 31, 2019, and
2018, 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

                                       33

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INDEX



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. At March 31, 2019, the
Company had 31 open foreign exchange forward contracts relating to service
contracts with various amounts maturing monthly through April 2019 with a
notional value totaling approximately $282.7. At December 31, 2018, the Company
had 34 open foreign exchange forward contracts relating to service contracts
with various amounts maturing monthly through January 2019 with a notional value
totaling approximately $487.9.
The Company is party to six U.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.
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 of March 31, 2019, the Company had $527.0 of
unhedged variable rate debt from the 2017 term loan credit facility and $0.0
outstanding on its revolving credit facility. As of December 31, 2018, the
Company had $527.0 of unhedged variable rate debt from the 2017 term loan credit
facility and $0.0 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 two fixed-to-variable interest rate swap
agreements for the 4.625% senior notes due 2020 with an aggregate notional
amount of $600.0 and variable interest rates based on one-month LIBOR plus
2.298%.
The Company's zero-coupon subordinated notes contain the following two features
that are considered to be embedded derivative instruments under authoritative
guidance in connection with accounting for derivative instruments and hedging
activities:
1)     The Company will pay contingent cash interest on the zero-coupon
       subordinated notes after September 11, 2006, if the average market price
       of the notes equals 120% or more of the sum of the issue price, accrued
       original issue discount and contingent additional principal, if any, for a
       specified measurement period.


2)     Holders may surrender zero-coupon subordinated notes for conversion during
       any period in which the rating assigned to the zero-coupon subordinated
       notes by Standard & Poor's Ratings Services is BB- or lower.


Each quarter-point increase or decrease in the variable rate would result in the
Company's interest expense changing by approximately $2.1 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 of March 31, 2019.
Changes in Internal Control Over Financial Reporting
The Company adopted new lease accounting guidance effective January 1, 2019. To
comply with this new lease guidance, the Company implemented changes to its
processes and internal controls related to identifying and measuring our leases.
There were no other 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 ended
March 31, 2019, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.

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INDEX

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

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