10-Q 1 lh201810-qq3.htm 10-Q Document
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 September 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 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 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 [  ]
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 100.9 million shares, net of treasury stock as of October 26, 2018.



INDEX


PART I. FINANCIAL INFORMATION

Item 1.
 
 
 
 
 
 
September 30, 2018 and December 31, 2017
 
 
 
 
 
 
Three months and nine months ended September 30, 2018 and 2017

 
 
 
 
 
 
Three months and nine months ended September 30, 2018 and 2017
 
 
 
 
 
 
Nine months ended September 30, 2018 and 2017


 
 
 
 
 
 
Nine months ended September 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)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
892.6

 
$
316.6

Accounts receivable
1,536.1

 
1,531.0

Unbilled services
320.1

 
316.5

Supplies inventories
233.0

 
227.2

Prepaid expenses and other
292.5

 
308.8

Current assets held for sale
—

 
33.7

Total current assets
3,274.3

 
2,733.8

Property, plant and equipment, net
1,734.3

 
1,706.6

Goodwill, net
7,362.7

 
7,400.9

Intangible assets, net
3,990.9

 
4,166.1

Joint venture partnerships and equity method investments
57.9

 
58.4

Deferred income tax assets
1.9

 
1.9

Other assets, net
239.4

 
217.5

Long-term assets held for sale
—

 
387.8

Total assets
$
16,661.4

 
$
16,673.0

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
497.5

 
$
573.9

Accrued expenses and other
901.5

 
793.3

Unearned revenue
289.4

 
380.8

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

 
417.5

Current liabilities held for sale
—

 
20.2

Total current liabilities
2,106.2

 
2,185.7

Long-term debt, less current portion
6,044.6

 
6,344.6

Deferred income taxes and other tax liabilities
899.1

 
875.5

Other liabilities
343.0

 
376.0

Long-term liabilities held for sale
—

 
66.3

Total liabilities
9,392.9

 
9,848.1

Commitments and contingent liabilities


 


Noncontrolling interest
20.4

 
20.8

Shareholders’ equity:
 

 
 

Common stock, 101.4 and 101.9 shares outstanding at September 30, 2018 and December 31, 2017, respectively
11.9

 
12.0

Additional paid-in capital
1,828.4

 
1,989.8

Retained earnings
6,921.9

 
6,196.1

Less common stock held in treasury
(1,106.3
)
 
(1,060.1
)
Accumulated other comprehensive loss
(407.8
)
 
(333.7
)
Total shareholders’ equity
7,248.1

 
6,804.1

Total liabilities and shareholders’ equity
$
16,661.4

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
2,831.3

 
$
2,621.4

 
$
8,545.9

 
$
7,563.3

Cost of revenues
2,041.4

 
1,837.2

 
6,141.9

 
5,288.6

Gross profit
789.9

 
784.2

 
2,404.0

 
2,274.7

Selling, general and administrative expenses
381.8

 
381.3

 
1,174.0

 
1,081.9

Amortization of intangibles and other assets
54.7

 
54.6

 
175.5

 
153.6

Restructuring and other special charges
10.0

 
21.6

 
36.5

 
64.6

Operating income
343.4

 
326.7

 
1,018.0

 
974.6

Other income (expenses):
 

 
 

 
 

 
 

Interest expense
(59.4
)
 
(59.9
)
 
(186.0
)
 
(167.3
)
Equity method income, net
3.0

 
3.2

 
8.5

 
10.0

Investment income
2.8

 
0.7

 
4.2

 
1.4

Other, net
209.8

 
(3.9
)
 
209.1

 
(7.4
)
Earnings before income taxes
499.6

 
266.8

 
1,053.8

 
811.3

Provision for income taxes
180.6

 
92.5

 
328.1

 
268.6

Net earnings
319.0

 
174.3

 
725.7

 
542.7

Less: Net (earnings) loss attributable to the noncontrolling interest
(0.2
)
 
(2.8
)
 
0.1

 
(3.4
)
Net earnings attributable to Laboratory Corporation of America Holdings
$
318.8

 
$
171.5

 
$
725.8

 
$
539.3

 
 
 
 
 
 
 
 
Basic earnings per common share
$
3.14

 
$
1.68

 
$
7.13

 
$
5.27

Diluted earnings per common share
$
3.10

 
$
1.65

 
$
7.04

 
$
5.19


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
319.0

 
$
174.3

 
$
725.7

 
$
542.7

Foreign currency translation adjustments
0.3

 
63.0

 
(82.2
)
 
278.7

Net benefit plan adjustments
2.9

 
2.3

 
9.1

 
3.4

Other comprehensive earnings (loss) before tax
3.2

 
65.3

 
(73.1
)
 
282.1

Provision for income tax related to items of other comprehensive earnings
(4.0
)
 
(20.2
)
 
(1.0
)
 
(41.0
)
Other comprehensive earnings (loss), net of tax
(0.8
)
 
45.1

 
(74.1
)
 
241.1

Comprehensive earnings
318.2

 
219.4

 
651.6

 
783.8

Less: Net (earnings) loss attributable to the noncontrolling interest
(0.2
)
 
(2.8
)
 
0.1

 
(3.4
)
Comprehensive earnings attributable to Laboratory Corporation of America Holdings
$
318.0

 
$
216.6

 
$
651.7

 
$
780.4


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
—

 
—

 
539.3

 
—

 
—

 
539.3

Other comprehensive earnings, net of tax
—

 
—

 
—

 
—

 
241.1

 
241.1

Issuance of common stock under employee stock plans
0.1

 
65.1

 
—

 
—

 
—

 
65.2

Net share settlement tax payments from issuance of stock to employees

—

 
—

 
—

 
(46.5
)
 
—

 
(46.5
)
Conversion of zero-coupon convertible debt
—

 
13.6

 
—

 
—

 
—

 
13.6

Stock compensation
—

 
85.8

 
—

 
—

 
—

 
85.8

Purchase of common stock
(0.2
)
 
(297.9
)
 
—

 
—

 
—

 
(298.1
)
BALANCE AT SEPTEMBER 30, 2017
$
12.0

 
$
1,998.3

 
$
5,508.3

 
$
(1,059.2
)
 
$
(340.8
)
 
$
6,118.6

 
 
 
 
 
 
 
 
 
 
 
 
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
—

 
—

 
725.8

 
—

 
—

 
725.8

Other comprehensive earnings, net of tax
—

 
—

 
—

 
—

 
(74.1
)
 
(74.1
)
Issuance of common stock under employee stock plans
—

 
67.4

 
—

 
—

 
—

 
67.4

Net share settlement tax payments from issuance of stock to employees

—

 
—

 
—

 
(46.2
)
 
—

 
(46.2
)
Conversion of zero-coupon convertible debt
—

 
0.3

 
—

 
—

 
—

 
0.3

Stock compensation
—

 
70.8

 
—

 
—

 
—

 
70.8

Purchase of common stock
(0.1
)
 
(299.9
)
 
—

 
—

 
—

 
(300.0
)
BALANCE AT SEPTEMBER 30, 2018
$
11.9

 
$
1,828.4

 
$
6,921.9

 
$
(1,106.3
)
 
$
(407.8
)
 
$
7,248.1


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)
 
Nine Months Ended September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings
$
725.7

 
$
542.7

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

 
 

Depreciation and amortization
414.4

 
388.2

Stock compensation
70.8

 
85.8

(Gain) loss on sale of assets
(1.9
)
 
2.3

Gain on sale of business
(209.4
)
 
—

Accreted interest on zero-coupon subordinated notes
0.1

 
0.3

Cumulative earnings less (more) than distributions from equity method investments

0.3

 
(0.4
)
Asset impairment
5.3

 
23.5

Deferred income taxes
12.1

 
(0.1
)
Change in assets and liabilities (net of effects of acquisitions):
 

 
 

Increase in accounts receivable
(8.5
)
 
(100.5
)
Increase in unbilled services
(5.5
)
 
(24.8
)
Increase in inventories
(8.8
)
 
(6.4
)
(Increase) decrease in prepaid expenses and other
(40.1
)
 
33.4

(Decrease) increase in accounts payable
(79.9
)
 
109.1

Decrease in unearned revenue
(94.4
)
 
(1.1
)
Increase (decrease) in accrued expenses and other
38.8

 
(118.9
)
Net cash provided by operating activities
819.0

 
933.1

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(257.6
)
 
(216.8
)
Proceeds from sale of assets
50.1

 
1.2

Net proceeds from sale of held for sale assets
654.5

 
—

Acquisition of licensing technology
—

 
(2.3
)
Investments in equity affiliates
(14.3
)
 
(33.2
)
Acquisition of businesses, net of cash acquired
(79.1
)
 
(1,799.3
)
Net cash provided by (used for) investing activities
353.6

 
(2,050.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from senior note offerings
—

 
1,200.0

Proceeds from term loan
—

 
750.0

Payments on term loan
(295.0
)
 
(50.0
)
Proceeds from revolving credit facilities
449.2

 
1,323.7

Payments on revolving credit facilities
(449.2
)
 
(1,323.7
)
Payments on senior notes
—

 
(500.0
)
Payments on zero-coupon subordinated notes
(0.3
)
 
(25.1
)
Payment of debt issuance costs
—

 
(13.6
)
Noncontrolling interest distributions
(6.1
)
 
(0.8
)
Deferred payments on acquisitions
—

 
(1.6
)
Payments on long-term lease obligations
(6.8
)
 
(6.0
)
Net share settlement tax payments from issuance of stock to employees

(46.2
)
 
(46.5
)
Net proceeds from issuance of stock to employees
67.4

 
65.2

Purchase of common stock
(300.0
)
 
(298.1
)
Net cash (used for) provided by financing activities
(587.0
)
 
1,073.5

Effect of exchange rate changes on cash and cash equivalents
(9.6
)
 
19.3

Net increase (decrease) in cash and cash equivalents
576.0

 
(24.5
)
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
$
892.6

 
$
409.3


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. During the third quarter of 2018, the Company divested its forensic testing services business in the United Kingdom (U.K.) and its Food Solutions business.
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 September 30, 2018, LCD and CDD contributed approximately 62% and 38%, respectively, of net revenues to the Company, and for the nine months ended September 30, 2018, contributed approximately 62% and 38%, 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

7
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


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.
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 $82.5 and $238.7 for the three and nine months ended September 30, 2017, respectively, as a reduction in revenue rather than as a selling, general and administrative expense.
CDD
The primary impacts of the new standard to the CDD segment were 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 nine months ended September 30, 2017, was an increase of $71.0 and $197.4, 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 nine months ended September 30, 2017, was a decrease of $15.6 and $33.8, 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

8
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


significant to CDD’s consolidated financial statements. The financial impact of this change on selling, general, and administrative expenses for the three and nine months ended September 30, 2017, was a decrease of $2.0 and $0.8, respectively.
The total quantitative impact of the new standard on retained earnings as of January 1, 2017, was an increase of $13.2.
New Accounting Pronouncements
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 adopt the standard using a modified retrospective transition approach and will not restate its comparative periods. The Company will implement a new module into the current leasing software solution which will facilitate compliance with the new standard. Given the size of the Company's lease portfolio, the adoption of this standard is expected to have a material impact on the Company's gross balance sheet with the recording of the right-to-use asset and a corresponding lease liability.
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 September 30, 2018.
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 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.
In August 2018, the FASB issued a new accounting standard to remove, modify, and add to the disclosure requirements on fair value measurements. The standard 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.

9
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


In August 2018, the FASB issued a new accounting standard to remove, modify, and add to the disclosure requirements on defined benefit pension and other postretirement plans. The standard is effective on January 1, 2021, with early adoption permitted. The Company is currently evaluating the impact this new standard will have on the consolidated financial statements.
In August 2018, the FASB issued a new accounting standard to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard 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.
Reclassifications and Revisions
The Company adopted Accounting Standard Update 2016-09 Compensation - Stock Compensation (Topic 718) during 2016 and incorrectly classified payments made to tax authorities for withheld shares from an employee’s equity award as cash flows from operating activities versus cash flows from financing activities. As a result, the Company has revised the consolidated statement of cash flows for these tax payments of $45.1 for the six months ended June 30, 2018 and $46.5 for the nine months ended September 30, 2017, from operating activities to financing activities. The Company concluded that these errors were not material individually or in the aggregate to any of the periods impacted.
Adoption of the standards related to revenue recognition, pension accounting and cash receipts and payments as well as the revision for payments made to tax authorities for withheld shares from equity awards impacted previously reported results as follows:
 
Condensed Consolidated Statement of Operations
 
For the Three Months Ended September 30, 2017
 
As Previously Reported
 
ASC 606 Revenue Adjustments
 
Pension Adjustments
 
As Adjusted
Total revenues
$
2,655.2

 
$
(33.8
)
 
$
—

 
$
2,621.4

Total cost of revenue
1,772.4

 
64.6

 
0.2

 
1,837.2

Gross profit
882.8

 
(98.4
)
 
(0.2
)
 
784.2

Selling, general and administrative expenses
465.3

 
(84.5
)
 
0.5

 
381.3

Other operating and non-operating expenses, net
136.4

 
0.4

 
(0.7
)
 
136.1

Provision for income taxes
97.7

 
(5.2
)
 
—

 
92.5

Net earnings
183.4

 
(9.1
)
 
—

 
174.3

Less: Net earnings attributable to noncontrolling interest
(2.8
)
 
—

 
—

 
(2.8
)
Net earnings attributable to Laboratory Corporation of America Holdings
$
180.6

 
$
(9.1
)
 
$
—

 
$
171.5

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.77

 
 
 
 
 
$
1.68

Diluted earnings per share
$
1.74

 
 
 
 
 
$
1.65

 
Condensed Consolidated Statement of Operations
 
For the Nine Months Ended September 30, 2017
 
As previously reported
 
ASC 606 Revenue Adjustments
 
Pension Adjustments
 
As Adjusted
Total revenues
$
7,645.1

 
$
(81.8
)
 
$
—

 
$
7,563.3

Total cost of revenue
5,096.9

 
191.3

 
0.4

 
5,288.6

Gross profit
2,548.2

 
(273.1
)
 
(0.4
)
 
2,274.7

Selling, general and administrative expenses
1,320.0

 
(239.4
)
 
1.3

 
1,081.9

Other operating and non-operating expenses, net
382.3

 
0.9

 
(1.7
)
 
381.5

Provision for income taxes
281.1

 
(12.5
)
 
—

 
268.6

Net earnings
564.8

 
(22.1
)
 
—

 
542.7

Less: Net earnings attributable to noncontrolling interest
(3.4
)
 
—

 
—

 
(3.4
)
Net earnings attributable to Laboratory Corporation of America Holdings
$
561.4

 
$
(22.1
)
 
$
—

 
$
539.3

 
 
 
 
 
 
 
 
Basic earnings per share
$
5.48

 

 

 
$
5.27

Diluted earnings per share
$
5.40

 

 

 
$
5.19


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 Nine Months Ended September 30, 2017
 
As Previously Reported
 
Tax Payments for Equity Awards Revision
ASC 606 Revenue Adjustments
 
Zero-Coupon Notes Adjustments
 
As Adjusted
Net cash provided by operating activities
$
895.3

 
$
46.5

$
—

 
$
(8.7
)
 
$
933.1

Net cash used for investing activities
(2,050.4
)
 
—

—

 
—

 
(2,050.4
)
Net cash provided by financing activities
1,111.3

 
(46.5
)
—

 
8.7

 
1,073.5

Effect of exchange rate changes on cash and cash equivalents
19.4

 
—

(0.1
)
 
—

 
19.3

Net decrease in cash and cash equivalents
$
(24.4
)
 
 
 
 
 
 
$
(24.5
)
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 nine months ended September 30, 2018, and 2017 is as follows:
 
For the Three Months Ended September 30, 2018
 
U.S.
 
Canada
 
U.K.
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 

   Clients
17
%
 
1
%
 
—
%
 
—
%
 
—
%
 
—
%
 
18
%
   Patients
8
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
8
%
   Medicare and Medicaid
9
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
9
%
   Third-party
25
%
 
2
%
 
—
%
 
—
%
 
—
%
 
—
%
 
27
%
Total LCD revenues by payer
59
%
 
3
%
 
—
%
 
—
%
 
—
%
 
—
%
 
62
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
24
%
 
—
%
 
3
%
 
4
%
 
2
%
 
5
%
 
38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
83
%
 
3
%
 
3
%
 
4
%
 
2
%
 
5
%
 
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 September 30, 2017
 
U.S.
 
Canada
 
U.K.
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Clients
19
%
 
1
%
 
—
%
 
—
%
 
—
%
 
—
%
 
20
%
   Patients
9
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
9
%
   Medicare and Medicaid
10
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
10
%
   Third-party
27
%
 
2
%
 
—
%
 
—
%
 
—
%
 
—
%
 
29
%
Total LCD revenues by payer
65
%
 
3
%
 
—
%
 
—
%
 
—
%
 
—
%
 
68
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
15
%
 
—
%
 
3
%
 
4
%
 
3
%
 
7
%
 
32
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
80
%
 
3
%
 
3
%
 
4
%
 
3
%
 
7
%
 
100
%
 
For the Nine Months Ended September 30, 2018
 
U.S.
 
Canada
 
U.K.
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Clients
17
%
 
1
%
 
—
%
 
—
%
 
—
%
 
—
%
 
18
%
   Patients
9
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
9
%
   Medicare and Medicaid
9
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
9
%
   Third-party
24
%
 
2
%
 
—
%
 
—
%
 
—
%
 
—
%
 
26
%
Total LCD revenues by payer
59
%
 
3
%
 
—
%
 
—
%
 
—
%
 
—
%
 
62
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
20
%
 
—
%
 
3
%
 
5
%
 
3
%
 
7
%
 
38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
79
%
 
3
%
 
3
%
 
5
%
 
3
%
 
7
%
 
100
%
 
For the Nine Months Ended September 30, 2017
 
U.S.
 
Canada
 
U.K.
 
Switzerland
 
Other Europe
 
Other
 
Total
Payer/Customer
 
 
 
 
 
 
 
 
 
 
 
 
 
LCD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Clients
19
%
 
1
%
 
—
%
 
—
%
 
—
%
 
—
%
 
20
%
   Patients
9
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
9
%
   Medicare and Medicaid
10
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
10
%
   Third-party
26
%
 
2
%
 
—
%
 
—
%
 
—
%
 
—
%
 
28
%
Total LCD revenues by payer
64
%
 
3
%
 
—
%
 
—
%
 
—
%
 
—
%
 
67
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDD
 
 
 
 
 
 
 
 
 
 
 
 
 
   Biopharmaceutical and medical
device companies
15
%
 
—
%
 
3
%
 
5
%
 
3
%
 
7
%
 
33
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
79
%
 
3
%
 
3
%
 
5
%
 
3
%
 
7
%
 
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, along with occupational and wellness testing for employers and forensic DNA analysis, LCD has also offered a range of other testing services, including food solutions services.
Within the LCD segment, with the exception of food solutions services, 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 party

12
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


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.
CDD attempts to negotiate terms that provide for billing and payment of services prior or within close proximity to the provision of services, but this is not always possible. During an ongoing project, cash payments are not necessarily representative of aggregate revenue earned at any particular point in time because 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 full range of drug development services provided by CDD are as follows:

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 upon communication of results to the customer. Revenue for proportional performance activities, including toxicology studies, is recognized using an input-based measure of progress 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 into 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.
 
September 30, 2018
 
December 31, 2017
Sales commission assets
$
22.8

 
$
24.0

Deferred contract fulfillment costs
12.5

 
1.7

Total
$
35.3

 
$
25.7

Amortization related to sales commission assets and associated payroll taxes for the three-month periods ended September 30, 2018, and 2017, was $4.2 and $3.5, respectively, and for the nine-month periods ended September 30, 2018, and 2017, was $12.8 and $10.6, respectively. Amortization related to deferred contract fulfillment costs for the three-month periods ended September 30, 2018, and 2017, was $0.8 and $0.1, respectively, and for the nine-month periods ended September 30, 2018, and 2017, was $3.3 and $0.3, 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)


 
September 30, 2018
 
December 31, 2017
Receivables, which are included in Accounts Receivable, net
$
665.7

 
$
694.4

Unbilled services
322.6

 
318.2

Unearned revenue
286.2

 
377.4

Revenue recognized during the period, that was included in the unearned revenue balance at the beginning of the period for the nine-month period ended September 30, 2018, was $144.8. Bad debt expense on receivables for the nine-month period ended September 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 September 30, 2018, was $4,199.6. The Company expects to recognize approximately 39% 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 $10.9 and $20.5 was recognized during the three and nine months ended September 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 final valuation of acquired assets and assumed liabilities as of September 1, 2017, include the following:
Consideration Transferred
 
 
Cash consideration
 
$
1,224.5

 
 
 
Net Assets Acquired
 
 
Cash and cash equivalents
 
$
30.7

Accounts receivable
 
103.6

Unbilled services
 
32.6

Prepaid expenses and other
 
57.9

Property, plant and equipment
 
12.1

Goodwill
 
735.9

Customer relationships
 
602.0

Trade names and trademarks
 
10.6

Technology
 
26.0

Total assets acquired
 
1,612.3

Accounts payable
 
45.1

Accrued expenses and other
 
19.6

Unearned revenue
 
124.2

Deferred income taxes
 
196.5

Other liabilities
 
2.4

Total liabilities acquired
 
387.8

Net assets acquired
 
$
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.
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:

16
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
Net revenues
$
2,747.3

 
$
8,086.6

Operating income
313.2

 
975.0

Net income
158.1

 
521.2

Earnings per share:
 
 
 
   Basic
$
1.55

 
$
5.09

   Diluted
$
1.52

 
$
5.02

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 nine months ended September 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 $49.5. 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 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 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, Food Solutions would be unlikely to achieve sufficient scale to be a top global business. The sale of Food Solutions allows the Company to focus on its primary growth opportunities and at the same time better positions Food Solutions to serve the global food supply industry. The transaction closed on August 1, 2018, and a net gain of $258.3 was recorded in Other, net in the consolidated statement of operations. Total assets and total liabilities held for sale for the Food Solutions business as of December 31, 2017, include the following:
 
 
December 31, 2017
Assets:
 
 
Cash and cash equivalents
 
$
0.1

Accounts receivable
 
24.4

Unbilled services
 
7.6

Supplies inventories
 
0.4

Prepaid expenses and other
 
1.2

Property, plant and equipment, net
 
42.3

Goodwill, net
 
170.5

Intangible assets, net
 
174.7

Other assets, net
 
0.3

Total assets held for sale
 
$
421.5

 
 
 
Liabilities:
 
 
Accounts payable
 
$
2.4

Accrued expenses and other
 
15.2

Unearned revenue
 
2.6

Deferred income taxes and other tax liabilities
 
64.1

Other liabilities
 
2.2

Total liabilities held for sale
 
$
86.5

 
 
 
Net assets held for sale
 
$
335.0

The Company also divested its forensic testing services business in the U.K. on August 7, 2018, resulting in a loss of $48.9 recorded in Other, net in the consolidated statement of operations.

17
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


Operating income for the divested businesses was $2.4 and $6.1, for the three and nine months ended September 30, 2018, (which includes divested operations through their respective disposal dates in early August) and $2.2 and $10.3, for the three and nine months ended September 30, 2017.
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 September 30,
 
Nine Months Ended September 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
$
318.8

 
101.6

 
$
3.14

 
$
171.5

 
102.2

 
$
1.68

 
$
725.8

 
101.8

 
$
7.13

 
$
539.3

 
102.4

 
$
5.27

Dilutive effect of employee stock options and awards
—

 
1.0

 
 

 
—

 
1.4

 
 

 
—

 
1.2

 
 

 
—

 
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
$
318.8

 
102.7

 
$
3.10

 
$
171.5

 
103.7

 
$
1.65

 
$
725.8

 
$
103.1

 
$
7.04

 
$
539.3

 
$
103.9

 
$
5.19

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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
0.1

 
0.1

 
0.1

 
0.1

5.  
RESTRUCTURING AND OTHER SPECIAL CHARGES
During the nine months ended September 30, 2018, the Company recorded net restructuring and other special charges of $36.5: $13.2 within LCD and $23.3 within CDD. The charges were comprised of $30.0 related to severance and other personnel costs and $8.8 in costs associated with facility closures and general integration initiatives. The charges were offset by the reversal of previously established reserves of $1.2 and $1.1 in unused facility reserves and unused severance reserves, respectively. The Company also recorded $5.3 in impairment to land held for sale which is included in amortization expense.
The Company incurred integration and other costs of $43.1 primarily relating to the Chiltern acquisition and the sale of the Food Solutions business. On July 16, 2018, the Company reported that it had detected suspicious activity on its information technology network and was taking steps to respond to and contain the activity. The activity was subsequently determined to be a new variant of ransomware affecting certain LCD information technology systems. As a direct result of the ransomware attack experienced during July, the Company incurred $12.6 in consulting fees and employee overtime during the recovery period following the attack. The Company also recorded $4.3 in consulting expenses relating to the Chiltern integration and management integration costs along with a special one-time bonus of $31.1 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 $7.3 of non-capitalized costs associated with the implementation of a major system as part of its LaunchPad business process improvement initiative.
During the nine months ended September 30, 2017, the Company recorded net restructuring and other special charges of $64.6: $14.0 within LCD and $50.6 within CDD. The charges were comprised of $27.2 related to severance and other personnel costs along with $18.0 in costs associated with facility closures and general integration initiatives. The Company reversed previously established reserves of $1.4 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 $20.9 related to the termination of a software development project within the

18
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


CDD segment and the forgiveness of certain indebtedness for LCD customers in areas heavily impacted by hurricanes during the third quarter.
The Company incurred legal and other costs of $29.8 relating to the recently completed acquisitions. The Company also recorded $8.0 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 $8.2 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
10.7

3.0

 
19.3

5.8

 
38.8

Reduction of prior restructuring accruals
—

(0.5
)
 
(1.2
)
(0.6
)
 
(2.3
)
Cash payments and other adjustments
(11.1
)
(5.3
)
 
(16.3
)
(10.4
)
 
(43.1
)
Balance as of September 30, 2018
$
1.3

$
7.3

 
$
10.1

$
29.4

 
$
48.1

Current
 

 

 
 
 
 
$
22.6

Non-current
 

 

 
 
 
 
25.5

 
 

 

 
 
 
 
$
48.1

6.  
GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2018, and for the year ended December 31, 2017, are as follows:
 
LCD
 
CDD
 
Total
 
September 30,
2018
 
December 31, 2017
 
September 30,
2018
 
December 31, 2017
 
September 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

 
45.6

 
811.3

 
49.5

 
1,009.8

Reclassification of goodwill as held for sale
—

 
(170.5
)
 
—

 
—

 
—

 
(170.5
)
Dispositions
(24.1
)
 
—

 
—

 
—

 
(24.1
)
 
—

Adjustments to goodwill
(4.2
)
 
1.1

 
(59.4
)
 
136.1

 
(63.6
)
 
137.2

Balance at end of period
$
3,649.5

 
$
3,673.9

 
$
3,713.2

 
$
3,727.0

 
$
7,362.7

 
$
7,400.9

 The components of identifiable intangible assets are as follows:
 
September 30, 2018
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
$
4,115.7

 
$
(1,106.5
)
 
$
3,009.2

 
$
4,118.1

 
$
(992.8
)
 
$
3,125.3

Patents, licenses and technology
454.6

 
(207.8
)
 
246.8

 
457.9

 
(188.6
)
 
269.3

Non-compete agreements
75.8

 
(53.0
)
 
22.8

 
75.8

 
(48.3
)
 
27.5

Trade names
405.0

 
(183.3
)
 
221.7

 
407.9

 
(167.9
)
 
240.0

Land use right
10.8

 
(3.7
)
 
7.1

 
10.8

 
(2.5
)
 
8.3

Canadian licenses
483.3

 
—

 
483.3

 
495.7

 
—

 
495.7

 
$
5,545.2

 
$
(1,554.3
)
 
$
3,990.9

 
$
5,566.2

 
$
(1,400.1
)
 
$
4,166.1

Amortization of intangible assets for the three-month periods ended September 30, 2018, and 2017, was $54.7 and $54.6, respectively, and $175.5 and $153.6 for the nine-month periods ended September 30, 2018, and 2017. Amortization expense for the net carrying amount of intangible assets is estimated to be $51.3 for the remainder of fiscal 2018, $222.5 in fiscal 2019, $214.4 in fiscal 2020, $208.1 in fiscal 2021, $202.5 in fiscal 2022 and $2,522.8 thereafter.


19
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)


7.  
DEBT
Short-term borrowings and the current portion of long-term debt at September 30, 2018, and December 31, 2017, consisted of the following:
 
September 30,
2018
 
December 31, 2017
Zero-coupon convertible subordinated notes
$
8.6

 
$
8.8

2.50% senior notes due 2018
400.0

 
400.0

Debt issuance costs
(0.6
)
 
(1.4
)
Current portion of capital leases
8.0

 
8.3

Current portion of note payable
1.8

 
1.8

Total short-term borrowings and current portion of long-term debt
$
417.8

 
$
417.5

Long-term debt at September 30, 2018, and December 31, 2017, consisted of the following:
 
September 30,
2018
 
December 31, 2017
2.625% senior notes due 2020
$
500.0

 
$
500.0

4.625% senior notes due 2020
599.5

 
604.1

3.20% senior notes due 2022
500.0

 
500.0