01—Abstract
Summary
Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.
Laboratory Corporation of America Holdings, headquartered in Burlington, North Carolina, describes itself as the second largest independent clinical laboratory company in the United States based on 2005 net revenues.
It operates 36 primary laboratories and over 1,300 service sites, employs approximately 24,000 people, and processes more than 360,000 patient specimens daily. For 2005, net sales rose to $3.33 billiona from $3.08 billion in 2004, with net earnings of $386.2 million ($2.71 diluted EPS) versus $363.0 million ($2.45 diluted EPS). The Company attributes growth mainly to a shift in test mix toward higher-priced genomic and esoteric tests, which were 34.0% of 2005 sales, along with improved routine test pricing.
Genomic and esoteric net sales grew 16.9% to $1.13 billionb. The 2005 acquisitions of US Pathology Labs (about $155 million) and Esoterix (about $150 million) expanded its cancer and specialty testing capabilities, and the Company expects roughly $30 million in pre-tax cost reductions over time from integrating them. Cash from operations was $574.2 million, and the Company repurchased $588.7 million of stock during 2005.
Long-term debt was $604.5 millionc at year-end, after a $250 million 5 5/8% senior notes offering due 2015, and the zero coupon convertible subordinated notes of $544.4 million are classified as current because holders may put them on September 11, 2006. Key risks cited include government and third-party reimbursement reductions, Medicare fee schedule freezes, compliance with fraud and abuse and CLIA regulations, managed care price pressure, and dependence on licensed new technologies. Pending litigation includes a securities class action from 2003 and a patent case that the Supreme Court agreed to hear, with argument scheduled for March 21, 2006.
02—Key points
Key Highlights
- Net sales of $3,327.6 million in 2005, up from $3,084.8 million in 2004.
- Net earnings of $386.2 million in 2005 versus $363.0 million in 2004; diluted EPS of $2.71 versus $2.45.
- Genomic and esoteric testing reached 34.0% of net sales in 2005, up from 30.2% in 2003; genomic and esoteric net sales rose 16.9% in 2005.
- Acquisitions of US Pathology Labs (about $155 million) and Esoterix (about $150 million) in 2005, with targeted pre-tax cost reductions of about $30 million.
- Operating cash flow of $574.2 million; $588.7 million of stock repurchased during 2005; $285.2 million authorization remaining at year-end.
- Zero coupon convertible subordinated notes of $544.4 million may be put to the Company on September 11, 2006, and are classified as current liabilities.
- Medicare and Medicaid accounted for approximately 20% of net sales, and capitated contracts for about 4.1% of net sales, both exposing results to reimbursement changes.
03—Questions
Frequently Asked Questions
How large is the Company's business and where does it operate?
The Company is the second largest independent clinical laboratory company in the United States based on 2005 net revenues. It operates 36 primary laboratories and over 1,300 service sites, has about 24,000 employees, and serves clients in all 50 states, the District of Columbia, Puerto Rico, Belgium, and three Canadian provinces.
What drove the increase in 2005 net sales?
The filing attributes the increase mainly to a continued shift in test mix toward higher-priced genomic and esoteric tests, along with improved pricing in routine testing that reflected pricing discipline and the loss of a large capitated contract in Florida and a large hospital laboratory agreement.
What is the Company's exposure to government reimbursement?
In 2005 and 2004 the Company derived approximately 20% of its net sales from tests for Medicare and Medicaid beneficiaries. The filing states that Medicare fee schedule updates were frozen for 2004 through 2008 and that further reimbursement reductions could have a material adverse effect.
Does the Company face near-term obligations on its convertible notes?
Yes. Holders of the zero coupon convertible subordinated notes may require the Company to purchase them in cash on September 11, 2006 and 2011 at $741.92 and $819.54 per note, respectively. The Company believes it can satisfy this with cash on hand, revolving credit borrowings, and additional financing if necessary.
What legal matters are pending?
A putative shareholder class action filed in June 2003 alleging securities fraud is pending in the Middle District of North Carolina, and management says it is premature to assess its outcome. A patent case with about $7.8 million in damages paid has been granted Supreme Court review, with argument scheduled for March 21, 2006.
04—Continue