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EX-32.1 - EXHIBIT 32.1 - LABORATORY CORP OF AMERICA HOLDINGSex32q22018.htm
EX-31.2 - EXHIBIT 31.2 - LABORATORY CORP OF AMERICA HOLDINGSex312q22018.htm
EX-31.1 - EXHIBIT 31.1 - LABORATORY CORP OF AMERICA HOLDINGSex311q22018.htm
EX-12.1 - EXHIBIT 12.1 - LABORATORY CORP OF AMERICA HOLDINGSex121q22018.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to  ______

Commission file number   1-11353

LABORATORY CORPORATION OF
AMERICA HOLDINGS
(Exact name of registrant as specified in its charter)
Delaware
 
13-3757370
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

358 South Main Street,
 
 
Burlington, North Carolina
 
27215
(Address of principal executive offices)
 
(Zip Code)

(Registrant's telephone number, including area code) 336-229-1127

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [  ]
 
Emerging growth company [ ]
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].
The number of shares outstanding of the issuer's common stock is 101.9 million shares, net of treasury stock as of July 25, 2018.




INDEX


PART I. FINANCIAL INFORMATION

Item 1.
 
 
 
 
 
 
June 30, 2018 and December 31, 2017
 
 
 
 
 
 
Three months and six months ended June 30, 2018 and 2017

 
 
 
 
 
 
Three months and six months ended June 30, 2018 and 2017
 
 
 
 
 
 
Six months ended June 30, 2018 and 2017


 
 
 
 
 
 
Six months ended June 30, 2018 and 2017

 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.

PART II. OTHER INFORMATION



1


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
221.4

 
$
316.6

Accounts receivable
1,520.3

 
1,531.0

Unbilled services
351.3

 
316.5

Supplies inventories
230.7

 
227.2

Prepaid expenses and other
286.1

 
308.8

Current assets held for sale
411.4

 
33.7

Total current assets
3,021.2

 
2,733.8

Property, plant and equipment, net
1,710.9

 
1,706.6

Goodwill, net
7,423.3

 
7,400.9

Intangible assets, net
4,049.5

 
4,166.1

Joint venture partnerships and equity method investments
58.9

 
58.4

Deferred income tax assets
1.7

 
1.9

Other assets, net
239.0

 
217.5

Long-term assets held for sale

 
387.8

Total assets
$
16,504.5

 
$
16,673.0

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
488.1

 
$
573.9

Accrued expenses and other
739.9

 
793.3

Unearned revenue
393.3

 
380.8

Short-term borrowings and current portion of long-term debt
417.8

 
417.5

Current liabilities held for sale
82.4

 
20.2

Total current liabilities
2,121.5

 
2,185.7

Long-term debt, less current portion
6,039.4

 
6,344.6

Deferred income taxes and other tax liabilities
914.1

 
875.5

Other liabilities
371.8

 
376.0

Long-term liabilities held for sale

 
66.3

Total liabilities
9,446.8

 
9,848.1

Commitments and contingent liabilities


 


Noncontrolling interest
20.0

 
20.8

Shareholders’ equity:
 

 
 

Common stock, 102.0 and 101.9 shares outstanding at June 30, 2018 and December 31, 2017, respectively
12.0

 
12.0

Additional paid-in capital
1,934.8

 
1,989.8

Retained earnings
6,603.1

 
6,196.1

Less common stock held in treasury
(1,105.2
)
 
(1,060.1
)
Accumulated other comprehensive loss
(407.0
)
 
(333.7
)
Total shareholders’ equity
7,037.7

 
6,804.1

Total liabilities and shareholders’ equity
$
16,504.5

 
$
16,673.0


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
2,866.3

 
$
2,528.2

 
$
5,714.6

 
$
4,941.9

Cost of revenues
2,031.2

 
1,750.2

 
4,100.5

 
3,451.4

Gross profit
835.1

 
778.0

 
1,614.1

 
1,490.5

Selling, general and administrative expenses
395.2

 
357.7

 
792.2

 
700.6

Amortization of intangibles and other assets
58.5

 
51.4

 
120.8

 
99.0

Restructuring and other special charges
12.2

 
39.1

 
26.5

 
43.0

Operating income
369.2

 
329.8

 
674.6

 
647.9

Other income (expenses):
 

 
 

 
 

 
 

Interest expense
(63.1
)
 
(55.0
)
 
(126.6
)
 
(107.4
)
Equity method income, net
3.0

 
4.5

 
5.5

 
6.8

Investment income
0.8

 
0.4

 
1.4

 
0.7

Other, net
2.8

 
(0.5
)
 
(0.7
)
 
(3.6
)
Earnings before income taxes
312.7

 
279.2

 
554.2

 
544.4

Provision for income taxes
78.6

 
94.1

 
147.6

 
176.0

Net earnings
234.1

 
185.1

 
406.6

 
368.4

Less: Net (earnings) loss attributable to the noncontrolling interest
(0.3
)
 
(0.3
)
 
0.4

 
(0.6
)
Net earnings attributable to Laboratory Corporation of America Holdings
$
233.8

 
$
184.8

 
$
407.0

 
$
367.8

 
 
 
 
 
 
 
 
Basic earnings per common share
$
2.29

 
$
1.80

 
$
3.99

 
$
3.59

Diluted earnings per common share
$
2.27

 
$
1.78

 
$
3.94

 
$
3.54


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(in millions, except per share data)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
234.1

 
$
185.1

 
$
406.6

 
$
368.4

Foreign currency translation adjustments
(121.9
)
 
157.2

 
(82.6
)
 
215.8

Net benefit plan adjustments
3.3

 
0.5

 
6.2

 
1.1

Other comprehensive earnings (loss) before tax
(118.6
)
 
157.7

 
(76.4
)
 
216.9

(Provision) benefit for income tax related to items of other comprehensive earnings
(7.2
)
 
(14.9
)
 
3.1

 
(20.8
)
Other comprehensive earnings, net of tax
(125.8
)
 
142.8

 
(73.3
)
 
196.1

Comprehensive earnings
108.3

 
327.9

 
333.3

 
564.5

Less: Net (earnings) loss attributable to the noncontrolling interest
(0.3
)
 
(0.3
)
 
0.4

 
(0.6
)
Comprehensive earnings attributable to Laboratory Corporation of America Holdings
$
108.0

 
$
327.6

 
$
333.7

 
$
563.9


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4


LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(in millions)
(unaudited)

 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
BALANCE AT DECEMBER 31, 2016
$
12.1

 
$
2,131.7

 
$
4,969.0

 
$
(1,012.7
)
 
$
(581.9
)
 
$
5,518.2

Net earnings attributable to Laboratory Corporation of America Holdings

 

 
367.8

 

 

 
367.8

Other comprehensive earnings, net of tax

 

 

 

 
196.1

 
196.1

Issuance of common stock under employee stock plans
0.1

 
31.3

 

 

 

 
31.4

Surrender of restricted stock and performance share awards

 

 

 
(46.2
)
 

 
(46.2
)
Conversion of zero-coupon convertible debt

 
12.8

 

 

 

 
12.8

Stock compensation

 
52.7

 

 

 

 
52.7

Purchase of common stock
(0.2
)
 
(255.8
)
 

 

 

 
(256.0
)
BALANCE AT JUNE 30, 2017
$
12.0

 
$
1,972.7

 
$
5,336.8

 
$
(1,058.9
)
 
$
(385.8
)
 
$
5,876.8

 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2017
$
12.0

 
$
1,989.8

 
$
6,196.1

 
$
(1,060.1
)
 
$
(333.7
)
 
$
6,804.1

Net earnings attributable to Laboratory Corporation of America Holdings

 

 
407.0

 

 

 
407.0

Other comprehensive earnings, net of tax

 

 

 

 
(73.3
)
 
(73.3
)
Issuance of common stock under employee stock plans

 
43.0

 

 

 

 
43.0

Surrender of restricted stock and performance share awards

 

 

 
(45.1
)
 

 
(45.1
)
Stock compensation

 
52.0

 

 

 

 
52.0

Purchase of common stock

 
(150.0
)
 

 

 

 
(150.0
)
BALANCE AT JUNE 30, 2018
$
12.0

 
$
1,934.8

 
$
6,603.1

 
$
(1,105.2
)
 
$
(407.0
)
 
$
7,037.7


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
$
406.6

 
$
368.4

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
281.3

 
255.1

Stock compensation
52.0

 
52.7

(Gain) loss on sale of assets
(0.3
)
 
0.6

Accreted interest on zero-coupon subordinated notes
0.1

 
0.2

Cumulative earnings less than distributions from equity method investments

(1.3
)
 
(4.0
)
Asset impairment
2.3

 
15.1

Deferred income taxes
36.0

 
(4.6
)
Change in assets and liabilities (net of effects of acquisitions):
 

 
 

Decrease (increase) in accounts receivable
13.2

 
(50.2
)
Increase in unbilled services
(36.5
)
 
(37.1
)
Increase in inventories
(4.7
)
 
(0.7
)
(Increase) decrease in prepaid expenses and other
(27.2
)
 
4.8

(Decrease) increase in accounts payable
(91.3
)
 
8.6

Increase (decrease) in unearned revenue
8.3

 
(10.0
)
Decrease in accrued expenses and other
(116.5
)
 
(62.5
)
Net cash provided by operating activities
522.0

 
536.4

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(159.7
)
 
(141.5
)
Proceeds from sale of assets
0.7

 
1.0

Proceeds from sale of held for sale assets
49.1

 

Acquisition of licensing technology

 
(2.3
)
Investments in equity affiliates
(7.3
)
 
(26.1
)
Acquisition of businesses, net of cash acquired
(79.1
)
 
(568.0
)
Net cash used for investing activities
(196.3
)
 
(736.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments on term loan
(295.0
)
 

Proceeds from revolving credit facilities
394.7

 
749.7

Payments on revolving credit facilities
(394.7
)
 
(440.7
)
Payments on zero-coupon subordinated notes

 
(23.2
)
Noncontrolling interest distributions
(5.9
)
 
(0.5
)
Deferred payments on acquisitions

 
(1.5
)
Payments on long-term lease obligations
(5.1
)
 
(4.3
)
Net proceeds from issuance of stock to employees
43.0

 
31.4

Purchase of common stock
(150.0
)
 
(256.0
)
Net cash (used for) provided by financing activities
(413.0
)
 
54.9

Effect of exchange rate changes on cash and cash equivalents
(7.9
)
 
11.8

Net (decrease) increase in cash and cash equivalents
(95.2
)
 
(133.8
)
Cash and cash equivalents at beginning of period
316.6

 
433.6

Cash and cash equivalents included in assets held for sale

 
(0.2
)
Cash and cash equivalents at end of period
$
221.4

 
$
299.6


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)



1.  
BASIS OF FINANCIAL STATEMENT PRESENTATION
Laboratory Corporation of America® Holdings together with its subsidiaries (the Company) is a leading global life sciences company that is deeply integrated in guiding patient care, providing comprehensive clinical laboratory and end-to-end drug development services. The Company’s mission is to improve health and improve lives by delivering world-class diagnostic solutions, bringing innovative medicines to patients faster and using technology to provide better care. The Company serves a broad range of customers, including managed care organizations (MCOs), biopharmaceutical companies, governmental agencies, physicians and other healthcare providers (e.g., physician assistants and nurse practitioners, generally referred to herein as physicians), hospitals and health systems, employers, patients and consumers, contract research organizations, food and nutritional companies and independent clinical laboratories. The Company believes that it generated more revenue from laboratory testing than any other company in the world in 2017.
The Company reports its business in two segments, LabCorp Diagnostics (LCD) and Covance Drug Development (CDD). For further financial information about these segments, see Note 15 (Business Segment Information). During the three months ended June 30, 2018, LCD and CDD contributed approximately 63% and 37%, respectively, of net revenues to the Company, and for the six months ended June 30, 2018, contributed approximately 63% and 37%, respectively.
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries for which it exercises control. Long-term investments in affiliated companies in which the Company exercises significant influence, but which it does not control, are accounted for using the equity method. Investments in which the Company does not exercise significant influence (generally, when the Company has an investment of less than 20.0% and no representation on the investee's board of directors) are accounted for at fair value or at cost minus impairment for those investments that do not have readily determinable fair values. All significant inter-company transactions and accounts have been eliminated. The Company does not have any variable interest entities or special purpose entities whose financial results are not included in the condensed consolidated financial statements.
The financial statements of the Company's operating foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average monthly exchange rates prevailing during the period. Resulting translation adjustments are included in “Accumulated other comprehensive income.”
The accompanying condensed consolidated financial statements of the Company are unaudited. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows and financial position have been made. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.
The condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States (U.S.) Securities and Exchange Commission (SEC) and do not contain certain information included in the Company’s 2017 Annual Report on Form 10-K. Therefore, the interim statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report.
Recently Adopted Guidance Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued the converged standard on revenue recognition with the objective of providing a single, comprehensive model for all contracts with customers to improve comparability in the financial statements of companies reporting using International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). The standard contains principles that an entity must apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity must recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.
The standard was effective for the Company beginning January 1, 2018. The Company elected to adopt the standard using the full retrospective approach, which resulted in a recasting of revenue and the related financial statement items for 2016 and 2017. During transition to the new standard, the Company also elected several practical expedients, as provided by the standard. Contracts that began and ended within the same annual reporting period were not restated. Contracts that were completed by December 31, 2017 that had variable consideration were estimated using the transaction price at the date the contract was completed. The amount of the transaction price allocated to the remaining performance obligations will not be disclosed for prior reporting periods. Contracts that were modified prior to the earliest reporting period will be reflected in the earliest reporting period with an aggregate adjustment for prior modifications.

7

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


As a result of the new standard, the Company has changed its accounting policies for revenue recognition. The significant changes under the new standard, and the quantitative impact of these changes, are detailed below.
LCD
The primary impact of the new standard to the LCD segment was classifying bad debt expense of $78.0 and $156.2 for the three and six months ended June 30, 2017, respectively, as a reduction in revenue rather than as a selling, general and administrative expense.
CDD
The primary impact of the new standard to the CDD segment was as follows:
Investigator fees: Prior to the new standard, reimbursements of investigator fees by clients were netted against the amounts paid to investigators in net revenues, on the basis that CDD was acting as the agent in arranging the investigator services. Under the new standard, revenue for investigator services and other reimbursable activities is recognized gross of fees paid to the investigators and other vendors, on the basis that a clinical study is considered a single, combined performance obligation for which CDD acts as a principal. Where CDD assumes the obligations by contract in studies involving patients, CDD is the principal because CDD may contract directly with third party clinical trial sites and investigators for investigator services and other reimbursable activities, which are combined with other CDD services in the management of a clinical study. Where CDD has assumed certain clinical trial sponsor obligations by contract in studies involving patients, CDD has primary responsibility for fulfilling its obligations associated with the full management of a clinical study, has inventory risk since it may be obligated to compensate investigators and other vendors for reimbursable activities regardless of payment by the customer, and has discretion within the framework agreed upon with the customer in setting the price of the study, including the budget for all pass-through costs, including investigator grants. 
The financial impact of this change on revenue for the three and six months ended June 30, 2017 was an increase of $69.0 and $126.5, respectively. Revenue and expenses from reimbursable out-of-pocket costs were previously recognized gross as separate line items from Net revenues and Net cost of revenue in the Consolidated Statement of Operations. Under the new standard, reimbursable out-of-pocket costs continue to be recognized gross, but are no longer presented separately (i.e., expenses are included in Cost of revenues and reimbursements are included in Revenues). In the statement of financial position, unbilled investigator fees and reimbursable out of pocket costs were reclassified from “Prepaid expenses and other” to “Unbilled services” and billed investigator grants and reimbursable out-of-pocket costs were reclassified from “Prepaid expenses and other” to “Accounts receivable, net.”
Measure of progress: Prior to the new standard, service fee revenue in clinical studies was recognized on a proportional-performance basis, generally using output measures that are specific to the service provided (e.g., number of investigators enrolled, number of sites initiated, number of trial subjects enrolled and number of monitoring visits completed), while reimbursable out-of-pocket revenue was recognized when the associated expense was incurred. Changes in contract value from changes in scope were reflected once the customer agreed to the changes in scope and renegotiated pricing terms. Under the new standard, revenue in a clinical study (inclusive of budgeted reimbursable pass-through costs) is recognized using an input-based measure of progress based on costs incurred (including pass-through costs such as investigator services and reimbursable out-of-pocket expenses). If a customer’s approval of a work scope change creates an enforceable right to payment, the related revenue will be estimated and included in the measure of progress before a formal change order is executed, which results in recognition of revenue as services are provided. The financial impact of this change on revenue for the three and six months ended June 30, 2017 was a decrease of $5.7 and $18.3, respectively.
Sales commissions: Prior to the new standard, sales commissions were recorded as an expense each quarter when incurred. Under the new standard, CDD amortizes sales commissions according to the expected service period to which the commissions relate on the basis that they are recoverable through the margin inherent in the contracts and recognizes the unamortized commissions as current and long-term assets.
CDD applied the portfolio practical expedient in the new standard to determine the amortization period for assets recognized from sales commissions. Under the portfolio approach, CDD determined the weighted average contract term for groups of contracts with similar characteristics, and then amortized the capitalized sales commissions for that group over that term. CDD believes that any difference between the amortization patterns under the specific identification approach and the portfolio approach are not significant to CDD’s consolidated financial statements. The financial impact of this change on selling, general, and administrative expenses for the three and six months ended June 30, 2017 was a decrease of $0.1 and an increase of $1.2, respectively.
The total quantitative impact of the new standard on retained earnings as of January 1, 2017 was an increase of $13.2.

8

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


New Accounting Pronouncements
In January 2016, the FASB issued a new accounting standard that addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. A financial instrument is defined as cash, evidence of ownership interest in a company or other entity, or a contract that both: (i) imposes on one entity a contractual obligation either to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right either to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity. The Company adopted this standard effective January 1, 2018. As a result of adoption, investments in which the Company does not exercise significant influence (generally, when the Company has an investment of less than 20.0% and no representation on the investee's board of directors) are accounted for at fair value or at cost minus impairment for those investments that do not have readily determinable fair values. The adoption of this standard did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued a new accounting standard that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for based on guidance similar to current guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company will implement a new module into the current leasing software solution which will facilitate compliance with the new standard and is currently evaluating the impact that this new standard will have on the consolidated financial statements.
In June 2016, the FASB issued a new accounting standard intended to provide financial statement users with more decision-useful information about expected credit losses and other commitments to extend credit held by the reporting entity. The standard replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2016, the FASB issued a new accounting standard that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard on a retrospective basis effective January 1, 2018. As a result, the Company reclassified accreted interest paid upon conversion of its zero-coupon subordinated notes from a financing activity to an operating activity.
In January 2017, the FASB issued a new accounting standard that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The Company adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on the consolidated financial statements as of June 30, 2018.
In March 2017, the FASB issued a new accounting standard that requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses with other employee compensation costs. The other components of net benefit cost, including amortization of prior service cost/credit and settlement and curtailment effects are to be included in other, net non-operating expenses. The Company adopted this standard effective January 1, 2018. The adoption of this standard reduced operating margin due to the service cost remaining in operating expenses with no offset from the other components of net pension cost and has been applied retrospectively. The adoption of this standard had no impact on net earnings.
In May 2017, the FASB issued a new accounting standard that amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Company adopted this standard effective January 1, 2018. The adoption of this standard did not have a material impact on the consolidated financial statements.
In July 2017, the FASB issued a new accounting standard intended to reduce the complexity associated with the issuer's accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a free-standing equity-linked financial instrument (or embedded conversion option) to be accounted for as a

9

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


derivative liability at fair value with changes in fair value recognized in current earnings. This update is effective on January 1, 2019, with early adoption permitted and the option to use the retrospective or modified retrospective adoption method. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2017, the FASB issued a new accounting standard intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. As a result, more hedging strategies are eligible for hedge accounting. The Company early adopted this standard effective January 1, 2018, and as allowed by the standard, elected to change the methodology for assessing hedge effectiveness of net investment hedges from a method based on changes in forward exchange rates to a method based on changes in spot exchange rates. The spot methodology under this standard allows the interest accrual components of hedge instruments to be reported directly in earnings while the changes in the fair value of hedge instruments attributable to changes in the spot rate are reported in the cumulative translation adjustment section of other comprehensive income.
Reclassifications
Adoption of the standards related to revenue recognition, pension accounting and cash receipts and payments impacted previously reported results as follows:
 
Condensed Consolidated Statement of Operations
 
For the Three Months Ended June 30, 2017
 
As Previously Reported
 
ASC 606 Revenue Adjustments
 
Pension Adjustments
 
As Adjusted
Total revenues
$
2,542.9

 
$
(14.7
)
 
$

 
$
2,528.2

Total cost of revenue
1,681.1

 
68.9

 
0.2

 
1,750.2

Gross profit
861.8

 
(83.6
)
 
(0.2
)
 
778.0

Selling, general and administrative expenses
435.3

 
(78.1
)
 
0.5

 
357.7

Other operating and non-operating expenses, net
141.4

 
0.4

 
(0.7
)
 
141.1

Provision for income taxes
96.2

 
(2.1
)
 

 
94.1

Net earnings
188.9

 
(3.8
)
 

 
185.1

Less: Net earnings attributable to noncontrolling interest
(0.3
)
 

 

 
(0.3
)
Net earnings attributable to Laboratory Corporation of America Holdings
$
188.6

 
$
(3.8
)
 
$

 
$
184.8

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.84

 
 
 
 
 
$
1.80

Diluted earnings per share
$
1.82

 
 
 
 
 
$
1.78

 
Condensed Consolidated Statement of Operations
 
For the Six Months Ended June 30, 2017
 
As previously reported
 
ASC 606 Revenue Adjustments
 
Pension Adjustments
 
As Adjusted
Total revenues
$
4,989.9

 
$
(48.0
)
 
$

 
$
4,941.9

Total cost of revenue
3,324.5

 
126.7

 
0.2

 
3,451.4

Gross profit
1,665.4

 
(174.7
)
 
(0.2
)
 
1,490.5

Selling, general and administrative expenses
854.7

 
(154.9
)
 
0.8

 
700.6

Other operating and non-operating expenses, net
245.9

 
0.6

 
(1.0
)
 
245.5

Provision for income taxes
183.4

 
(7.4
)
 

 
176.0

Net earnings
381.4

 
(13.0
)
 

 
368.4

Less: Net earnings attributable to noncontrolling interest
(0.6
)
 

 

 
(0.6
)
Net earnings attributable to Laboratory Corporation of America Holdings
$
380.8

 
$
(13.0
)
 
$

 
$
367.8

 
 
 
 
 
 
 
 
Basic earnings per share
$
3.71

 

 

 
$
3.59

Diluted earnings per share
$
3.66

 

 

 
$
3.54


10

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


 
Condensed Consolidated Statement of Cash Flows
 
For the Six Months Ended June 30, 2017
 
As Previously Reported
 
Zero-Coupon Notes Adjustments
 
As Adjusted
Net cash provided by operating activities
$
544.4

 
$
(8.0
)
 
$
536.4

Net cash used for investing activities
(736.9
)
 

 
(736.9
)
Net cash provided by financing activities
46.9

 
8.0

 
54.9

Effect of exchange rate changes on cash and cash equivalents
11.8

 

 
11.8

Net decrease in cash and cash equivalents
$
(133.8
)
 
 
 
$
(133.8
)
The below adjustments have been made to the December 31, 2017 balance sheet and are all the result of the implementation of ASC 606. The adjustments include a cumulative catch-up adjustment, reclassification of unbilled services, and the capitalization of contract acquisition costs.
 
Condensed Consolidated Balance Sheets
 
December 31, 2017
 
As Previously Reported
 
ASC 606 Revenue Adjustments
 
As Adjusted
Current assets
$
2,682.6

 
$
51.2

 
$
2,733.8

Long-term assets
13,885.4

 
53.8

 
13,939.2

Total assets
$
16,568.0

 
$
105.0

 
$
16,673.0

 
 
 
 
 
 
Current liabilities
$
2,046.1

 
$
139.6

 
$
2,185.7

Long-term liabilities
7,671.1

 
(8.7
)
 
7,662.4

Noncontrolling interest
20.8

 

 
20.8

Shareholders' equity
6,830.0

 
(25.9
)
 
6,804.1

Total liabilities and shareholders' equity
$
16,568.0

 
$
105.0

 
$
16,673.0

2.  
REVENUE
Description of Revenue
The Company's revenue by segment payers/customer groups for the three and six months ended June 30, 2018 and 2017 is as follows:
 
For the Three Months Ended June, 2018
 
U.S.
 
Canada
 
United Kingdom
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 

   Clients
18
%
 
1
%
 
%
 
%
 
%
 
%
 
19
%
   Patients
9
%
 
%
 
%
 
%
 
%
 
%
 
9
%
   Medicare and Medicaid
10
%
 
%
 
%
 
%
 
%
 
%
 
10
%
   Third-party
23
%
 
2
%
 
%
 
%
 
%
 
%
 
25
%
Total LCD revenues by payer
60
%
 
3
%
 
%
 
%
 
%
 
%
 
63
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
16
%
 
%
 
5
%
 
5
%
 
4
%
 
7
%
 
37
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
76
%
 
3
%
 
5
%
 
5
%
 
4
%
 
7
%
 
100
%

11

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


 
For the Three Months Ended June 30, 2017
 
U.S.
 
Canada
 
United Kingdom
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Clients
19
%
 
1
%
 
1
%
 
%
 
%
 
%
 
21
%
   Patients
10
%
 
%
 
%
 
%
 
%
 
%
 
10
%
   Medicare and Medicaid
10
%
 
%
 
%
 
%
 
%
 
%
 
10
%
   Third-party
25
%
 
2
%
 
%
 
%
 
%
 
%
 
27
%
Total LCD revenues by payer
64
%
 
3
%
 
1
%
 
%
 
%
 
%
 
68
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
15
%
 
%
 
3
%
 
5
%
 
3
%
 
6
%
 
32
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
79
%
 
3
%
 
4
%
 
5
%
 
3
%
 
6
%
 
100
%
 
For the Six Months Ended June, 2018
 
U.S.
 
Canada
 
United Kingdom
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Clients
18
%
 
1
%
 
%
 
%
 
%
 
%
 
19
%
   Patients
9
%
 
%
 
%
 
%
 
%
 
%
 
9
%
   Medicare and Medicaid
10
%
 
%
 
%
 
%
 
%
 
%
 
10
%
   Third-party
23
%
 
2
%
 
%
 
%
 
%
 
%
 
25
%
Total LCD revenues by payer
60
%
 
3
%
 
%
 
%
 
%
 
%
 
63
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
18
%
 
%
 
4
%
 
5
%
 
4
%
 
6
%
 
37
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
78
%
 
3
%
 
4
%
 
5
%
 
4
%
 
6
%
 
100
%
 
For the Six Months Ended June 30, 2017
 
U.S.
 
Canada
 
United Kingdom
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Clients
19
%
 
1
%
 
%
 
%
 
%
 
%
 
20
%
   Patients
10
%
 
%
 
%
 
%
 
%
 
%
 
10
%
   Medicare and Medicaid
10
%
 
%
 
%
 
%
 
%
 
%
 
10
%
   Third-party
26
%
 
2
%
 
%
 
%
 
%
 
%
 
28
%
Total LCD revenues by payer
65
%
 
3
%
 
%
 
%
 
%
 
%
 
68
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
15
%
 
%
 
3
%
 
5
%
 
3
%
 
6
%
 
32
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
80
%
 
3
%
 
3
%
 
5
%
 
3
%
 
6
%
 
100
%
The following is a description of the current revenue recognition policies of the Company:
LCD
LCD is an independent clinical laboratory business. It offers a comprehensive menu of frequently requested and specialty diagnostic tests through an integrated network of primary and specialty laboratories across the U.S. In addition to diagnostic testing, LCD also offers a range of other testing services, including forensic DNA analysis, food safety and integrity services, as well as occupational and wellness testing for employers.
Within the LCD segment, with the exception of nutritional chemistry testing, a revenue transaction is initiated when LCD receives a requisition order to perform a diagnostic test. The information provided on the requisition form is used to determine the

12

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


party that will be billed for the testing performed and the expected reimbursement. LCD recognizes revenue and satisfies its performance obligation for services rendered when the testing process is complete and the associated results are reported. Sales are distributed among four payer portfolios - clients, patients, Medicare and Medicaid and third-party. LCD considers negotiated discounts and anticipated adjustments, including historical collection experience for the payer portfolio, when sales are recorded.
The following are descriptions of the LCD payer portfolios:
Clients
Client payers represent the portion of LCD’s revenue related to physicians, hospitals, health systems, accountable care organizations (ACOs), employers and other entities where payment is received exclusively from the entity ordering the testing service. Generally, client sales are recorded on a fee-for-service basis at LCD’s client list price, less any negotiated discount. A portion of client billing is for laboratory management services, collection kits and other non-testing services or products. In these cases, revenue is recognized when services are rendered or delivered.
This portfolio also includes LCD's nutritional chemistry services. LCD offers a broad range of services to the food and nutraceutical and animal feed industries. Revenue is recognized using an output-based measure of progress based on the volume of activities in each period.
Patients
This portfolio includes revenue from uninsured patients and member cost-share for insured patients (e.g., coinsurance, deductibles and non-covered services). Uninsured patients are billed based upon LCD’s patient fee schedules, net of any discounts negotiated with physicians on behalf of their patients. LCD bills insured patients as directed by their health plan and after consideration of the fees and terms associated with an established health plan contract.
Medicare and Medicaid
This portfolio relates to fee-for-service revenue from traditional Medicare and Medicaid programs. Net revenue from these programs is based on the fee schedule established by the related government authority. In addition to contractual discounts, other adjustments including anticipated payer denials are considered when determining net revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to LCD’s results of operations in any period presented.
Third-Party
Third-party includes revenue related to MCOs. The majority of LCD's third-party revenue is reimbursed on a fee-for-service basis. These payers are billed at LCD's established list price and revenue is recorded net of contractual discounts. The majority of LCD’s MCO sales are recorded based upon contractually negotiated fee schedules with sales for non-contracted MCOs recorded based on historical reimbursement experience.
In addition to contractual discounts, other adjustments including anticipated payer denials are considered when determining revenue. Any remaining adjustments to revenue are recorded at the time of final collection and settlement. These adjustments are not material to LCD’s results of operations in any period presented.
Third-party reimbursement is also received through capitation agreements with MCOs and independent physician associations (IPAs). Under capitated agreements, revenue is recognized based on a negotiated per-member, per-month payment for an agreed upon menu of tests, or based upon the proportionate share earned by LCD from a capitation pool. When the agreed upon reimbursement is based solely on an established rate per member, revenue is not impacted by the volume of testing performed. Under a capitation pool arrangement, the aggregate value of an established rate per member is distributed based on the volume and complexity of the procedures performed by laboratories participating in the agreement. LCD recognizes revenue monthly, based upon the established capitation rate or anticipated distribution from a capitated pool.
CDD
CDD is a contract research organization (CRO) business that provides end-to-end drug development services from early-stage research to clinical trial management and beyond. CDD provides these services predominantly to biopharmaceutical and medical device companies across the world. Because the CDD client base generally consumes these drug development services across the entire portfolio of CDD pre-clinical and clinical services offerings, there is little variability in the customer base of any particular CDD service offering. The nature of CDD’s obligations include agreements to manage a full clinical trial, provide services for a specific phase of a trial, or provide research products to the customer. Generally, the amount of the transaction price estimated at the beginning of the contract is equal to the amount expected to be billed to the customer. Other payments may also factor into the calculation of transaction price, such as volume-based rebates that are retroactively applied to prior transactions in the period.

13

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


Historically, a majority of CDD’s net revenues have been earned under contracts that range in duration from a few months to a few years, but can extend in duration up to five years or longer. Occasionally, CDD also has entered into minimum volume arrangements with certain customers. Under these types of arrangements, if the annual minimum dollar value of a service commitment is not reached, the customer is required to pay CDD for the shortfall. Annual minimum commitment shortfalls are not recognized until the end of the period when the amount has been determined and agreed to by the customer.
CDD recognizes revenue either as services are performed or as products are delivered, depending on the nature of the work contracted. If performance is completed at a specific point in time, the Company evaluates the nature of the agreement to determine when the good or service is transferred into the customer’s control.
Service contracts generally take the form of fee-for-service or fixed-price arrangements subject to pricing adjustments based on changes in scope. In cases where performance spans multiple accounting periods, revenue is recognized as services are performed, measured on a proportional-performance basis, using either input or output methods that are specific to the service provided. In an output method, revenue is determined by dividing the actual units of output achieved by the total units of output required under the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of the agreed upon services to be provided. When using an input method, revenue is recognized by dividing the actual units of input incurred by the total units of input budgeted in the contract, and multiplying that percentage by the total contract value. In each situation, the Company believes that the methods used most accurately depict the progress of the Company towards completing its obligations. Billing schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, CDD bills the customer for the total contract value in progress-based installments as certain non-contingent billing milestones are reached over the contract duration. These milestones include, but are not limited to, contract signing, initial dosing, investigator site initiation, patient enrollment and/or database lock. The term “billing milestone” relates only to a billing trigger in a contract whereby amounts become billable and payable in accordance with a negotiated predetermined billing schedule throughout the term of a project. These billing milestones are generally not performance-based (i.e., there is no potential additional consideration tied to specific deliverables or performance). In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract value and aggregate amounts billed to the customer would be the same at the end of the project.
Proportional performance contracts typically contain a single service (e.g., management of a clinical study) and therefore no allocation of the contract price is required. Fee-for-service contracts are typically priced based on transaction volume. Since the volume of activities in a fee-for-service contract is unspecified, the contract price is entirely variable and is allocated to the time period in which it is earned. For contracts that include multiple distinct goods and services, CDD allocates the contract price to the goods and services based on a customer price list, if available. If a price list is not available, CDD will estimate the transaction price using either market prices or an “expected cost plus margin” approach.
While CDD attempts to negotiate terms that provide for billing and payment of services prior or within close proximity to the provision of services, this is not always possible. While a project is ongoing, cash payments are not necessarily representative of aggregate revenue earned at any particular point in time, as revenues are recognized when services are provided, while amounts billed and paid are in accordance with the negotiated billing and payment terms.
In some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide for an upfront payment of 10% of the full contract value upon contract signing, but at the time of signing performance of services has not yet begun. Payments received in advance of services being provided are deferred as contract liabilities on the balance sheet. As the contracted services are subsequently performed and the associated revenue is recognized, the contract liability balance is reduced by the amount of revenue recognized during the period.
In other cases, services may be provided and revenue recognized before the customer is invoiced. In these cases, revenue recognized will exceed amounts billed, and the difference, representing a contract asset, is recorded for the amount that is currently not billable to the customer pursuant to contractual terms. Once the customer is invoiced, the contract asset is reduced for the amount billed, and a corresponding account receivable is recorded. All contract assets are billable to customers within one year from the respective balance sheet date.
Most contracts are terminable with or without cause by the customer, either immediately or upon notice. These contracts often require payment to CDD of expenses to wind-down the study or project, fees earned to date and, in some cases, a termination fee or a payment to CDD of some portion of the fees or profits that could have been earned by CDD under the contract if it had not been terminated early. Termination fees are included in net revenues when services are performed and realization is assured.
The following are descriptions of the full range of drug development services provided by CDD:

14

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


Preclinical services include the sale of research models, fee-for-service activities such as bioanalytical testing services, and proportional performance activities such as toxicology studies. Revenue for sale of research models is recognized at a point in time, typically upon shipment, when control transfers to the customer. Revenue for bioanalytical testing services is recognized at a point in time upon communication of results to the customer. Revenue for proportional performance activities, including toxicology studies, is recognized using an input-based measure of progress in which revenue is recognized as expenses are incurred for the research models, labor hours, and other costs attributable to the study.
Through its central laboratory, CDD produces and supplies specimen collection kits that are utilized in clinical studies, and provides transportation, project management, data management, and laboratory testing services on an as-needed basis throughout the duration of its customers’ clinical studies. Revenue for central laboratory services is recognized using an output-based measure of progress based on volume of activities in each period. CDD also provides long-term specimen storage services, for which revenue is recognized using an input-based measure of progress based on costs incurred.
CDD provides clinical development and commercialization services, including clinical pharmacology services, full management of Phase II through IV clinical studies, and market access solutions. Revenue for clinical pharmacology services, which includes first-in-human trials, is recognized using an output-based measure of progress based on bed nights. Revenue for full service clinical studies is recognized using an input-based measure of progress based on costs incurred (including pass-through costs such as investigator grants and reimbursable out-of-pocket expenses). Revenue for market access solutions is recognized using various methods. Revenue for fee-for-service arrangements, such as reimbursement consulting hotlines and patient assistance programs, is recognized using an output method based on transaction volume which corresponds to the amount charged to the customer. For consulting services billed based on time and materials, revenue is recognized using the right to invoice practical expedient.
Contract costs
The Company incurs sales commissions in the process of obtaining contracts with customers, which are recoverable through the service fees in the contract. Sales commissions that are payable upon contract award are recognized as assets and amortized over the expected contract term, along with related payroll tax expense. The amortization of commission expense is based on the weighted average contract duration for all commissionable awards in the respective business in which the commission expense is paid, which approximates the period over which goods and services are transferred to the customer. The amortization period of sales commissions ranges from approximately 12 months to 57 months, depending on the business. For businesses that enter primarily short-term contracts, the Company applies the practical expedient which allows costs to obtain a contract to be expensed when incurred if the amortization period of the assets that would otherwise have been recognized is one year or less. Amortization of assets from sales commissions is included in selling, general, and administrative expense.
The Company incurs costs to fulfill contracts with customers, which are recoverable through the service fees in the contract. Contract fulfillment costs include software implementation costs and setup costs for certain market access solutions. These costs are recognized as assets and amortized over the expected term of the contract to which the implementation relates, which is the period over which services are expected to be provided to the customer. This period typically ranges from 24-60 months. Amortization of deferred contract fulfillment costs is included in cost of goods sold.
 
June 30, 2018
 
December 31, 2017
Sales commission assets
$
23.1

 
$
24.0

Deferred contract fulfillment costs
10.7

 
1.7

Total
$
33.8

 
$
25.7

Amortization related to sales commission assets and associated payroll taxes for the three-month periods ended June 30, 2018 and 2017 was $4.4 and $3.4, respectively, and for the six-month periods ended June 30, 2018 and 2017 was $8.6 and $7.1, respectively. Amortization related to deferred contract fulfillment costs for the three-month periods ended June 30, 2018 and 2017 was $1.9 and $0.1, respectively, and for the six-month periods ended June 30, 2018 and 2017 was $2.5 and $0.2, respectively. Impairment expense related to contract costs was immaterial to the Company’s consolidated statement of operations. The Company applies the practical expedient to not recognize the effect of financing in its contracts with customers, when the difference in timing of payment and performance is one year or less.
Contract Assets and Liabilities
The following table provides information about receivables, contract assets (unbilled services), and contract liabilities (unearned revenue) from contracts with customers. While CDD attempts to negotiate terms that provide for billing and payment of services prior or in close proximity to the provision of services, this is not always possible and there are fluctuations in the level of unbilled services and unearned revenue from period to period.

15

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


 
June 30, 2018
 
December 31, 2017
Receivables, which are included in Accounts Receivable, net
$
674.6

 
$
694.4

Unbilled services
354.0

 
318.2

Unearned revenue
389.8

 
377.4

Revenue recognized during the period, that was included in the unearned revenue balance at the beginning of the period, for the six-month period ended June 30, 2018 was $135.6. Bad debt expense on receivables, for the six-month period ended June 30, 2018 was immaterial to the Company’s consolidated statement of operations.
Performance Obligations Under Long-Term Contracts
Long-term contracts at the Company consist primarily of fully managed clinical studies within the CDD segment. The amount of existing performance obligations under such long-term contracts unsatisfied as of June 30, 2018 was $4,071.7. The Company expects to recognize approximately 41% of the remaining performance obligations as revenue over the next 12 months, and the balance thereafter.
The Company applied the practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The Company also did not disclose information about remaining performance obligations when the variable consideration was related to a wholly unsatisfied performance obligation within a series of obligations.
Within CDD, revenue of $(12.5) and $9.6 was recognized during the three and six months ended June 30, 2018, respectively, from performance obligations that were satisfied in previous periods. This revenue comes from adjustments related to changes in scope and estimates in full service clinical studies.
3.
BUSINESS ACQUISITIONS AND DISPOSITIONS
On September 1, 2017, the Company completed the acquisition of Chiltern International Group Limited (Chiltern), a specialty CRO, pursuant to a definitive agreement to acquire all of the share capital of Chiltern, in an all-cash transaction valued at approximately $1,224.5. The Company funded the acquisition through a combination of bank financing and the issuance of bonds. Chiltern is part of the Company's CDD segment.
The valuation of acquired assets and assumed liabilities as of September 1, 2017, include the following:
Consideration Transferred
 
 
 
 
 
 
Cash consideration
 
 
 
 
 
$
1,224.5

 
 
 
 
 
 
 
 
 
Preliminary
 
Measurement Period Adjustments
 
As of June 30, 2018
Net Assets Acquired
 
 
 
 
 
 
Cash and cash equivalents
 
$
30.7

 
$

 
$
30.7

Accounts receivable
 
116.9

 
(13.3
)
 
103.6

Unbilled services
 
32.6

 

 
32.6

Prepaid expenses and other
 
57.9

 

 
57.9

Property, plant and equipment
 
12.1

 

 
12.1

Goodwill
 
676.6

 
85.9

 
762.5

Customer relationships
 
629.0

 
(27.0
)
 
602.0

Trade names and trademarks
 
24.1

 
(13.5
)
 
10.6

Technology
 
47.0

 
(21.0
)
 
26.0

Total assets acquired
 
1,626.9

 
12.0

 
1,638.9

Accounts payable
 
18.1

 
27.0

 
45.1

Accrued expenses and other
 
51.0

 
(27.6
)
 
23.4

Unearned revenue
 
124.2

 

 
124.2

Deferred income taxes
 
208.0

 
12.6

 
220.6

Other liabilities
 
1.1

 

 
1.1

Total liabilities acquired
 
402.4

 
12.0

 
414.4

Net assets acquired
 
$
1,224.5

 
$

 
$
1,224.5

 The amortization periods for intangible assets acquired are 21 years for customer relationships, 7 years for trade names and trademarks, and 9 years for technology.
The purchase price allocation for the Chiltern acquisition is still preliminary and subject to change. The areas of the purchase price allocation that are not yet finalized relate primarily to intangible assets, goodwill and the impact of finalizing deferred taxes.

16

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


Accordingly, adjustments may be made as additional information is obtained about the facts and circumstances that existed as of the valuation date. The Company expects these purchase price allocations to be finalized during the third quarter of 2018. Any adjustments will be recorded in the period in which they are identified.
Unaudited Pro Forma Information
The Company completed the Chiltern acquisition on September 1, 2017. Had the Chiltern acquisition been completed as of January 1, 2016, the Company's pro forma results would have been as follows:
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
Net revenues
$
2,728.1

 
$
5,339.4

Operating income
321.5

 
662.2

Net income
172.5

 
363.2

Earnings per share:
 
 
 
   Basic
$
1.68

 
$
3.54

   Diluted
$
1.66

 
$
3.49

The unaudited pro forma results reflect certain adjustments related to past operating performance and acquisition accounting adjustments, such as increased amortization expense and decreased depreciation expense based on the estimated fair value of assets acquired, the impact of the Company’s new financing arrangements, and the related tax effects. The pro forma results do not include any anticipated synergies which may be achievable subsequent to the Chiltern acquisition. To produce the unaudited pro forma financial information, the Company adjusted Chiltern’s assets and liabilities to their estimated fair value based on a valuation as of September 1, 2017. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition of Chiltern occurred on the date indicated or that may result in the future.
During the six months ended June 30, 2018, the Company also acquired various businesses and related assets for approximately $79.1 in cash (net of cash acquired). The purchase consideration for all acquisitions year to date has been allocated to the estimated fair market value of the net assets acquired, including approximately $48.5 in identifiable intangible assets and a residual amount of goodwill of approximately $54.9. These acquisitions were made primarily to extend the Company's geographic reach in important market areas and/or enhance the Company's scientific differentiation.
On April 30, 2018, the Company entered into a definitive agreement to sell the Covance Food Solutions business, a global provider of innovative product design and product integrity services for end-user segments that span the global food supply chain, for an all-cash purchase price of $670.0. The Company believes that the opportunities for creating lasting value from the 2015 Covance Inc. (Covance) acquisition come from its laboratory diagnostic business, the CRO business, and the enterprise-wide combination of the two. In addition, the Company concluded that, given the competitive dynamics of the food testing market, Covance Food Solutions would be unlikely to achieve sufficient scale to be a top global business. The sale of Covance Food Solutions allows the Company to focus on its primary growth opportunities and at the same time better positions Covance Food Solutions to serve the global food supply industry. The transaction is expected to close in the third quarter of 2018. For the three and six months ended June 30, 2018, Covance Food Solutions recorded operating income of $5.0 and $8.4, respectively. Operating income for the three and six months ended June 30, 2017, was $5.6 and $11.0, respectively. Total assets and total liabilities held for sale for the Covance Food Solutions business as of June 30, 2018, and December 31, 2017, include the following:

17

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
Cash and cash equivalents
$

 
$
0.1

Accounts receivable
20.9

 
24.4

Unbilled services
9.5

 
7.6

Supplies inventories
0.4

 
0.4

Prepaid expenses and other
1.1

 
1.2

Property, plant and equipment, net
39.1

 
42.3

Goodwill, net
170.5

 
170.5

Intangible assets, net
169.7

 
174.7

Other assets, net
0.2

 
0.3

Total assets held for sale
$
411.4

 
$
421.5

 
 
 
 
Liabilities:
 
 
 
Accounts Payable
$
1.1

 
$
2.4

Accrued expenses and other
13.0

 
15.2

Unearned revenue
2.0

 
2.6

Deferred income taxes and other tax liabilities
64.1

 
64.1

Other liabilities
2.2

 
2.2

Total liabilities held for sale
$
82.4

 
$
86.5

 
 
 
 
Net assets held for sale
$
329.0

 
$
335.0

4.  
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings attributable to Laboratory Corporation of America Holdings by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings including the impact of dilutive adjustments by the weighted average number of common shares outstanding plus potentially dilutive shares, as if they had been issued at the earlier of the date of issuance or the beginning of the period presented. Potentially dilutive common shares result primarily from the Company’s outstanding stock options, restricted stock awards, restricted stock units, performance share awards, and shares issuable upon conversion of zero-coupon subordinated notes.
The following represents a reconciliation of basic earnings per share to diluted earnings per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Earnings
 
Shares
 
Per
Share
Amount
 
Earnings
 
Shares
 
Per
Share
Amount
 
Earnings
 
Shares
 
Per
Share
Amount
 
Earnings
 
Shares
 
Per
Share
Amount
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
233.8

 
101.9

 
$
2.29

 
$
184.8

 
102.4

 
$
1.80

 
$
407.0

 
101.9

 
$
3.99

 
$
367.8

 
102.5

 
$
3.59

Dilutive effect of employee stock options and awards

 
1.0

 
 

 

 
1.2

 
 

 

 
1.3

 
 

 

 
1.4

 
 

Effect of convertible debt

 
0.1

 
 

 

 
0.1

 
 

 

 
0.1

 
 

 

 
0.1

 
 

Diluted earnings per share:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net earnings including impact of dilutive adjustments
$
233.8

 
103.0

 
$
2.27

 
$
184.8

 
103.7

 
$
1.78

 
$
407.0

 
$
103.3

 
$
3.94

 
$
367.8

 
$
104.0

 
$
3.54

The following table summarizes the potential common shares not included in the computation of diluted earnings per share because their impact would have been antidilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Stock options
0.1

 
0.1

 
0.1

 
0.1

5.  
RESTRUCTURING AND OTHER SPECIAL CHARGES
During the six months ended June 30, 2018, the Company recorded net restructuring and other special charges of $26.5: $9.1 within LCD and $17.4 within CDD. The charges were comprised of $23.1 related to severance and other personnel costs, $2.5 in costs associated with facility closures and general integration initiatives, and $2.3 in impairment to land held for sale. The charges

18

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


were offset by the reversal of previously established reserves of $0.9 and $0.5 in unused facility reserves and unused severance reserves, respectively.
The Company incurred integration and other costs of $37.6 primarily relating to the Chiltern acquisition and planned sale of the Company's Covance Food Solutions business. The Company also recorded $4.5 in consulting expenses relating to the Chiltern integration and management integration costs along with a special one-time bonus of $31.0 to its non-bonus eligible employees in recognition of the benefits the Company is receiving from the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). In addition, the Company incurred $4.2 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative.
During the six months ended June 30, 2017, the Company recorded net restructuring and other special charges of $43.0: $8.9 within LCD and $34.1 within CDD. The charges were comprised of $22.5 related to severance and other personnel costs along with $5.9 in costs associated with facility closures and general integration initiatives. The Company reversed previously established reserves of $0.4 in unused severance reserves and $0.1 in unused facility reserves. Also included in the net restructuring and other special charges is an impairment loss of $15.1 related to the termination of a software development project.
The Company incurred legal and other costs of $6.6 relating to the recently completed acquisitions. The Company also recorded $4.9 in consulting expenses relating to fees incurred as part of its integration and compensation analysis, along with $0.9 in short-term equity retention arrangements relating to the Covance Inc. acquisition. In addition, the Company incurred $5.5 of non-capitalized costs associated with the implementation of a major system as part of LaunchPad (all recorded in selling, general and administrative expenses).
The following represents the Company’s restructuring reserve activities for the period indicated:
 
LCD
 
CDD
 
 
 
Severance and Other
Employee Costs
Lease and Other
Facility Costs
 
Severance and Other
Employee Costs
Lease and Other
Facility Costs
 
Total
Balance as of December 31, 2017
$
1.7

$
10.1

 
$
8.3

$
34.6

 
$
54.7

Restructuring charges
7.4

2.2

 
15.7

2.6

 
27.9

Reduction of prior restructuring accruals

(0.5
)
 
(0.9
)

 
(1.4
)
Cash payments and other adjustments
(7.1
)
(4.1
)
 
(11.2
)
(5.7
)
 
(28.1
)
Balance as of June 30, 2018
$
2.0

$
7.7

 
$
11.9

$
31.5

 
$
53.1

Current
 

 

 
 
 
 
$
25.5

Non-current
 

 

 
 
 
 
27.6

 
 

 

 
 
 
 
$
53.1

6.  
GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six-month period ended June 30, 2018 and for the year ended December 31, 2017 are as follows:
 
LCD
 
CDD
 
Total
 
June 30,
2018
 
December 31, 2017
 
June 30,
2018
 
December 31, 2017
 
June 30,
2018
 
December 31, 2017
Balance as of January 1
$
3,673.9

 
$
3,644.8

 
$
3,727.0

 
$
2,779.6

 
$
7,400.9

 
$
6,424.4

Goodwill acquired during the period
3.9

 
198.5

 
51.0

 
811.3

 
54.9

 
1,009.8

Reclassification of goodwill as held for sale

 
(170.5
)
 

 

 

 
(170.5
)
Adjustments to goodwill
(3.4
)
 
1.1

 
(29.1
)
 
136.1

 
(32.5
)
 
137.2

Balance at end of period
$
3,674.4

 
$
3,673.9

 
$
3,748.9

 
$
3,727.0

 
$
7,423.3

 
$
7,400.9

 The components of identifiable intangible assets are as follows:

19

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


 
June 30, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
$
4,138.5

 
$
(1,075.5