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LABORATORY CORP OF AMERICA HOLDINGS - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS The Company has made in this report, and from time to time may otherwise make in its public filings, press releases and discussions by Company management, forward-looking statements concerning the Company's operations, performance and financial condition, as well as its strategic objectives. Some of these forward-looking statements can be identified by the use of forward-looking words such as "believes", "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates", or "anticipates" or the negative of those words or other comparable terminology. Such forward-looking statements are subject to various risks and uncertainties and the Company claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those currently anticipated due to a number of factors in addition to those discussed elsewhere herein and in the Company's other public filings, press releases and discussions with Company management, including: 1. changes in federal, state, local and third party payer regulations or policies or other future reforms in the health care system (or in the interpretation of current regulations), new insurance or payment systems, including state, regional or private insurance cooperatives (Health Insurance Exchanges), new public insurance programs or a single-payer system, affecting governmental and third-party coverage or reimbursement for clinical laboratory testing; 2. significant monetary damages, fines, penalties, assessments, refunds, repayments, and/or exclusion from the Medicare and Medicaid programs resulting from investigations, audits, regulatory examinations, information requests, and other inquiries by the government; 3. loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or interpretations of, the law or regulations of the Clinical Laboratory Improvement Act of 1967, and the Clinical Laboratory Improvement Amendments of 1988, or those of Medicare, Medicaid, the False Claims Act or other federal, state or local agencies; 4. penalties or loss of license arising from the failure to comply with the federal Occupational Safety and Health Administration requirements and the Needlestick Safety and Prevention Act; 5. increased costs, denial of claims and/or significant penalties arising from the failure to comply with HIPAA, including changes to federal and state privacy and security obligations and changes to HITECH and any subsequent amendments; 6. costs due to damage to the Company's reputation and significant litigation exposure arising from the failure to maintain the security of business information or systems or protect against cyber security attacks; 7. negative impact on the Company's reimbursement, cash collections, days sales outstanding and profitability arising from the failure of the Company, third party payers or physicians to comply with the ICD-10-CM Code Set by the compliance date of no earlier than October 1, 2015; 8. increased competition, including competition from companies that do not comply with existing laws or regulations or otherwise disregard compliance standards in the industry; 9. increased price competition, competitive bidding for laboratory tests and/or changes or reductions to fee schedules; 10. changes in payer mix, including an increase in capitated reimbursement mechanisms or the impact of a shift to consumer-driven health plans and adverse changes in payer reimbursement or payer coverage policies related to specific testing procedures or categories of testing; 11. failure to obtain and retain new customers or a reduction in tests ordered or specimens submitted by existing customers; 12. changes in testing guidelines or recommendations by government agencies, medical specialty societies and other authoritative bodies affecting the utilization of laboratory tests; 13. failure to retain or attract managed care business as a result of changes in business models, including new risk based or network approaches, or other changes in strategy or business models by managed care companies; 14. failure to effectively integrate and/or manage newly acquired businesses and the cost related to such integrations; 15. adverse results in litigation matters; 16. inability to attract and retain experienced and qualified personnel; 17. business interruption, increased costs, and other adverse effects on the Company's operations due to the unionization of employees, union strikes, work stoppages, or general labor unrest; 21-------------------------------------------------------------------------------- INDEX 18. business interruption or other impact on the business due to adverse weather (including hurricanes), fires and/or other natural disasters, terrorism or other criminal acts, and/or widespread outbreak of influenza or other pandemic illness; 19. failure to maintain the Company's days sales outstanding and/or bad debt expense levels; 20. change in the Company's credit ratings by Standard & Poor's and/or Moody's; 21. discontinuation or recalls of existing testing products; 22. failure to develop or acquire licenses for new or improved technologies, or if customers use new technologies to perform their own tests; 23. substantial costs arising from the inability to commercialize newly licensed tests or technologies or to obtain appropriate coverage or reimbursement for such tests; 24. failure to identify and successfully close and integrate strategic acquisition targets; 25. changes in government regulations or policies, including regulations and policies of the Food and Drug Administration, affecting the approval, availability of, and the selling and marketing of diagnostic tests; 26. inability to obtain and maintain adequate patent and other proprietary rights for protection of the Company's products and services and unsuccessful enforcement of the Company's proprietary rights; 27. the scope, validity and enforceability of patents and other proprietary rights held by third parties which might have an impact on the Company's ability to develop, perform, or market the Company's tests or operate its business; 28. failure in the Company's information technology systems including an increase in testing turnaround time or billing processes or the failure to meet future regulatory or customer information technology, data security and connectivity requirements; 29. failure to meet required financial reporting deadlines arising from a failure of the Company's financial information systems; 30. failure of the Company's disaster recovery plans to provide adequate protection against the interruption of business and/or to permit the recovery of business operations; 31. liabilities that result from the inability to comply with corporate governance requirements; 32. impact on the Company's testing volumes, cash collections and the availability of credit for general liquidity or other financing needs arising from a significant deterioration in the economy or financial markets; 33. changes in reimbursement by foreign governments and foreign currency fluctuations; and 34. expenses and risks associated with international operations, including but not limited to compliance with the Foreign Corrupt Practices Act, the U.K. Bribery Act, as well as laws and regulations that differ from those of the United States, and economic, political, legal and other operational risks associated with foreign markets. 22-------------------------------------------------------------------------------- INDEX GENERAL (dollars in millions, except per share data) Net sales for the three months ended June 30, 2014 increased 3.3% in comparison to the same period in 2013. The increase was the result of test volume measured by requisition and fold-in acquisitions, which was partially offset by test and payer mix. Total test volume increased 5.3% year over year, and revenue per requisition decreased 2.0% year over year due to test and payer mix. The Company manages its operations through two reportable segments: the Clinical diagnostics laboratory segment, which includes core testing as well as genomic and esoteric testing, and the Other segment, which consists of the portion of the Company's non-U.S. clinical diagnostic laboratory operations in Ontario, Canada, which is reviewed separately by corporate management for the purposes of allocation of resources. The Clinical diagnostics laboratory segment results of operations have been negatively impacted by Medicare payment reductions and test mix. Operating results for the Other segment have declined as compared to 2013, primarily due to the impact of the stronger U.S. dollar in 2014 as compared with 2013, along with reductions in government payments. As a result of new molecular pathology codes being implemented beginning in 2013, the Company experienced considerable delays in payer responses on this group of claims. As payments and responses were received and processed and as more specific payer information became known, two trends emerged. First, certain payers stated that they would not pay for or cover the new codes for various reasons. Second, many payers adopted new coverage or approval requirements for the codes, causing delays in payment and higher risk of non-payment. The Company continues to work with payers to address the coverage issues for this valuable testing. Through the second quarter of 2014, the Company has experienced some improvement through its negotiations, but there has been no substantial improvement to the overall financial impact on net sales and accounts receivable write-offs during the first half of 2014 as compared to the same period in 2013. A significant portion of the Company's bad debt expense is related to accounts receivable from patients. The Company has seen growth in the amount of its patient accounts receivable, although this trend has begun to moderate as more uninsured individuals gain access to healthcare insurance as part of the Affordable Care Act ("ACA"). Due to the relative newness of the health plan offerings under the ACA and the lack of visibility by the Company into the membership composition of these new plans, the impact on patient responsibility is not clear at the present time. The Company believes its current allowance for doubtful accounts is sufficient to properly record its accounts receivable at their estimated net realizable value. Should there be, however, a shift towards increased patient responsibility, the Company may need to increase its allowance for doubtful accounts and bad debt expense in future periods. RESULTS OF OPERATIONS (amounts in millions except Revenue Per Requisition info) Three months ended June 30, 2014 compared with three months ended June 30, 2013 Net Sales Three Months Ended June 30, 2014 2013 Change Net sales Clinical diagnostics laboratory: Core Testing $ 925.4 $ 873.1 6.0 % Genomic and Esoteric Testing 505.9 508.5 (0.5 )% Other 85.1 86.6 (1.7 )% Total $ 1,516.4 $ 1,468.2 3.3 % 23-------------------------------------------------------------------------------- INDEX Three Months Ended June 30, 2014 2013 Change Volume (Number of Requisitions) Clinical diagnostics laboratory: Core Testing 23.7 22.4 5.5 % Genomic and Esoteric Testing 8.3 7.9 4.9 % Other 2.7 2.6 4.9 % Total 34.7 32.9 5.3 % Three Months Ended June 30, 2014 2013 Change Revenue Per Requisition Clinical diagnostics laboratory: Core Testing $ 39.06 $ 38.88 0.5 % Genomic and Esoteric Testing 61.30 64.66 (5.2 )% Other 30.93 32.99 (6.2 )% Total $ 43.70 $ 44.57 (2.0 )% The increase in net sales for the three months ended June 30, 2014 as compared with the corresponding period in 2013 was driven by growth in test volume measured by requisitions and fold-in acquisitions. The decline in revenue per requisition in genomic and esoteric testing is a primarily the result of a change in the mix of tests within those categories. Net sales of the Other segment were $85.1 for the three months ended June 30, 2014 compared to $86.6 in the corresponding period in 2013, a decrease of $1.5, or 1.7%. Net sales in this segment were negatively impacted by a stronger U.S. dollar in 2014 as compared with 2013, along with reductions in government payments. In local currency, net sales of the Other segment increased by 4.8% driven primarily by fold-in acquisitions, partially offset by government payment reductions. Cost of Sales Three Months Ended June 30, 2014 2013 Change Cost of sales $ 947.8 $ 890.9 6.4 % Cost of sales as a % of sales 62.5 % 60.7 % Cost of sales (primarily laboratory and distribution costs) increased 6.4% during the three months ended June 30, 2014 as compared with the corresponding period in 2013 period primarily due to increased test volumes, test mix changes and cost inflation. As a percentage of net sales, cost of sales increased to 62.5% in 2014 from 60.7% in 2013 due to test and payer mix. Selling, General and Administrative Expenses Three Months Ended June 30, 2014 2013 Change Selling, general and administrative expenses $ 297.9 $ 280.9 6.1 % Selling, general and administrative expenses as a % of sales 19.6 % 19.1 % Selling, general and administrative expenses as a percentage of net sales increased to 19.6% during the three months ended June 30, 2014 as compared to 19.1% during the corresponding period in 2013. The increase in selling, general and administrative expenses as a percentage of net sales is primarily due to an increase in the Company's bad debt rate. Bad debt expense was 4.7% of net sales during the three months ended June 30, 2014 as compared to 4.3% during the corresponding period in 2013. In addition, during the three months ended June 30, 2014, the Company recorded $4.7 in consulting expenses (recorded in selling, general and administrative expenses) relating to fees incurred as part of its business process improvement initiative as well as one-time CFO transition costs. 24-------------------------------------------------------------------------------- INDEX Amortization of Intangibles and Other Assets Three Months Ended June 30, 2014 2013 Change Amortization of intangibles and other assets $ 22.0 $ 20.5 7.3 % The increase in amortization of intangibles and other assets primarily reflects the impact of acquisitions that closed during the last six months of 2013 and the first six months of 2014. Restructuring and Other Special Charges Three Months Ended June 30, 2014 2013 Change Restructuring and other special charges $ 2.0 $ 6.6 (69.7 )% During the three months ended June 30, 2014, the Company recorded net restructuring charges of $2.0. These charges were comprised of $2.5 related to severance and other personnel costs along with $0.1 in costs associated with facility closures and general integration initiatives. These charges were partially offset by the reversal of previously established reserves of $0.1 in unused severance and other personnel costs and $0.5 in unused facility-related costs. From time to time, the Company implements cost savings initiatives. These initiatives may result from the integration of recently acquired businesses and from reducing the number of facilities and employees in an effort to balance the Company's cost of operations with current test volume trends while maintaining the high quality of its services that the marketplace demands. It is difficult to determine the nature, timing and extent of these activities until adequate planning has been completed and reviewed. The economic conditions being experienced in the United States and globally have had an impact on the Company's volume. The Company believes that any restructuring costs which may be incurred in 2014 will be more than offset by subsequent savings realized from these potential cost saving actions and that any related restructuring charges will not have a material impact on the Company's operations or liquidity. Interest Expense Three Months Ended June 30, 2014 2013 Change Interest expense $ 25.8 $ 23.1 11.7 % The increase in interest expense for the three months ended June 30, 2014 as compared with corresponding period in 2013 is primarily due to the issuance of $700.0 of senior notes in November 2013. The net proceeds from the senior notes were used to repay outstanding amounts on the Company's Revolving Credit Facility. The senior notes have an effective weighted-average interest rate of 3.5%, compared to the effective rate of 1.24% on the Company's Revolving Credit Facility outstanding during the second quarter of 2013. This increase was also partially offset by a decrease in interest expense on the senior notes due 2020 as a result of entering into two fixed-to-variable interest rate swap agreements in the third quarter of 2013. Equity Method Income Three Months Ended June 30, 2014 2013 Change Equity method income $ 3.7 $ 4.4 (15.9 )% Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the healthcare industry. The decrease in income during the three months ended June 30, 2014 compared with the corresponding period in 2013 is primarily the result of a decline in profitability of one of the Company's joint venture partnerships due to a challenging business climate. 25-------------------------------------------------------------------------------- INDEX Other, net Three Months Ended June 30, 2014 2013 Change Other, net $ 7.5 $ (0.8 ) 1,037.5 % Other, net for the three months ended June 30, 2014, represents the Company's gain on the sale of its remaining investment in an equity security. Income Tax Expense Three Months Ended June 30, 2014 2013 Change Income tax expense $ 90.8 $ 97.7 (7.1 )% Income tax expense as a % of income before tax 39.1 % 39.1 % Income tax expense for the three months ended June 30, 2014 was $6.9 lower than the comparable period in 2013 due to lower earnings before income taxes in the 2014 period. The effective income tax rate remained comparable for both periods. Six months ended June 30, 2014 compared with six months ended June 30, 2013 Net Sales Six Months Ended June 30, 2014 2013 Change Net sales Clinical diagnostics laboratory: Routine Testing $ 1,790.5 $ 1,699.9 5.3 % Genomic and Esoteric Testing 991.1 1,035.7 (4.3 )% Other 165.5 173.5 (4.6 )% Total $ 2,947.1 $ 2,909.1 1.3 % Number of Requisitions Six Months Ended June 30, 2014 2013 Change Volume Clinical diagnostics laboratory: Routine Testing 46.2 44.5 4.0 % Genomic and Esoteric Testing 16.0 15.4 3.8 % Other 5.3 5.0 5.0 % Total 67.5 64.9 4.0 % 26-------------------------------------------------------------------------------- INDEX Six Months Ended June 30, 2014 2013 Change Revenue Per Requisition Clinical diagnostics laboratory: Routine Testing $ 38.72 $ 38.22 1.3 % Genomic and Esoteric Testing 61.84 67.07 (7.8 )% Other 31.52 34.70 (9.2 )% Total $ 43.65 $ 44.81 (2.6 )% The increase in net sales for the six months ended June 30, 2014 as compared with the corresponding period in 2013 was driven primarily by growth in test volume measured by requisition and fold-in acquisitions, partially offset by test and payer mix. The decline in revenue per requisition in genomic and esoteric testing is a result of a change in the mix of tests within those categories. Net sales of the Other segment were $165.5 for the six months ended June 30, 2014 compared to $173.5 in the corresponding period in 2013, a decrease of $8.0, or 4.6%. Net sales in this segment were negatively impacted by a stronger U.S. dollar in 2014 as compared with 2013, along with reductions in government payments. In local currency, net sales of the Other segment increased by 3.0% driven primarily by fold-in acquisitions, offset by government payment reductions. Cost of Sales Six Months Ended June 30, 2014 2013 Change Cost of sales $ 1,861.7 $ 1,759.6 5.8 %Cost of sales as a % of sales 63.2 % 60.5 % Cost of sales (primarily laboratory and distribution costs) increased 5.8% during the six months ended June 30, 2014 as compared with the corresponding period in 2013 period primarily due to increased test volumes, test mix changes and cost inflation. As a percentage of net sales, cost of sales increased to 63.2% during the six months ended June 30, 2014 from 60.5% during the corresponding period in 2013 due to government payment reductions and test and payer mix. Selling, General and Administrative Expenses Six Months Ended June 30, 2014 2013 Change Selling, general and administrative expenses $ 582.8 $ 564.1 3.3 % Selling, general and administrative expenses as a % of sales 19.8 % 19.4 % Selling, general and administrative expenses as a percentage of net sales increased to 19.8% during the six months ended June 30, 2014 compared to 19.4% during the corresponding period in 2013. The increase in selling, general and administrative expenses as a percentage of net sales is primarily due to an increase in the Company's bad debt rate. Bad debt expense increased to 4.7% of net sales during the six months ended June 30, 2014 as compared with 4.3% during the corresponding period in 2013. In addition, during the six months ended June 30, 2014, the Company recorded $4.7 in consulting expenses (recorded in selling, general and administrative) relating to fees incurred as part of its business process improvement initiative as well as one-time CFO transition costs. Amortization of Intangibles and Other Assets Six Months Ended June 30, 2014 2013 Change Amortization of intangibles and other assets $ 43.0 $ 40.0 7.5 % The increase in amortization of intangibles and other assets primarily reflects the impact of acquisitions that closed during the last six months of 2013 and the first six months of 2014. 27-------------------------------------------------------------------------------- INDEX Restructuring and Other Special Charges Six Months Ended June 30, 2014 2013 Change Restructuring and other special charges $ 9.6 $ 14.1 (31.9 )% During the six months ended June 30, 2014, the Company recorded net restructuring charges of $9.6. The charges were comprised of $5.2 in severance and other personnel costs along with $5.1 in costs associated with facility closures and general integration initiatives. These charges were partially offset by the reversal of previously established reserves of $0.2 in unused severance and other personnel costs and $0.5 in unused facility-related costs. During the six months ended June 30, 2013, the Company recorded net restructuring charges of $14.1. The charges were comprised of $10.1 in severance and other personnel costs along with $6.3 in costs associated with facility closures and general integration initiatives. These charges were partially offset by the reversal of previously established reserves of $0.6 in unused severance and $1.7 in unused facility-related costs. Interest Expense Six Months Ended June 30, 2014 2013 Change Interest expense $ 51.5 $ 47.6 8.2 % The increase in interest expense for the six months ended June 30, 2014 as compared with the corresponding period in 2013 is primarily due to the issuance of $700.0 of senior notes in November 2013. The net proceeds from the senior notes were used to repay outstanding amounts on the Company's Revolving Credit Facility. The senior notes have an effective weighted-average interest rate of 3.5%, compared to the effective rate of 1.24% on the Company's Revolving Credit Facility outstanding during the second quarter of 2013. This increase was also partially offset by a decrease in interest expense on the senior notes due 2020 as a result of entering into two fixed-to-variable interest rate swap agreements in the third quarter of 2013. Equity Method Income Six Months Ended June 30, 2014 2013 Change Equity method income $ 6.7 $ 8.7 (23.0 )% Equity method income represents the Company's ownership share in joint venture partnerships along with equity investments in other companies in the healthcare industry. The decrease in incomes during the six months ended June 30, 2014 compared with the corresponding period in 2013 is primarily the result of a decline in profitability of one of the Company's joint venture partnerships due to a challenging business climate. Other, net Six Months Ended June 30, 2014 2013 Change Other, net $ 14.4 $ (1.4 ) 1,128.6 % Other, net for the six months ended June 30, 2014, represents the Company's gain on the sale of its investment in an equity security, partially offset by the impairment of another investment. Income Tax Expense Six Months Ended June 30, 2014 2013 Change Income tax expense $ 165.0 $ 191.4 (13.8 )% Income tax expense as a % of income before tax 39.3 % 39.0 % 28-------------------------------------------------------------------------------- INDEX The increase in the effective rate for 2014 compared with 2013 is primarily the result of the R&D tax credit. The 2013 effective tax rate included a favorable full year R&D tax credit adjustment relating to calendar year 2012 under The American Taxpayer Relief Act of 2012, which was signed into law on January 3, 2013 and which reinstated the expired R&D tax credit, as well as the impact of the estimated 2013 R&D tax credit. The R&D tax credit expired on December 31, 2013, which was one factor impacting the increase in the 2014 effective tax rate. Additionally, the 2014 effective tax rate increased due to a full valuation allowance for a write-off of one of the Company's investment, which is offset by a lower state and local income tax rate compared to the six months ended June 30, 2013. LIQUIDITY AND CAPITAL RESOURCES (dollars and shares in millions) The Company's strong cash-generating capability and financial condition typically have provided ready access to capital markets. The Company's principal source of liquidity is operating cash flow, supplemented by proceeds from debt offerings. This cash-generating capability is one of the Company's fundamental strengths and provides substantial financial flexibility in meeting operating, investing and financing needs. The Company's senior unsecured Revolving Credit Facility is further discussed in Note 5 (Debt) to the Company's Unaudited Condensed Consolidated Financial Statements. In February, 2013, the Company repaid its 5 1/2% $350.0 senior notes due 2013 with cash on hand and $30.0 of borrowings on its Revolving Credit Facility. On November 1, 2013, the Company issued $700.0 in new senior notes pursuant to the Company's effective shelf registration on Form S-3. The senior notes consisted of $400.0 aggregate principal amount of 2.50% senior notes due 2018 and $300.0 aggregate principal amount of 4.00% senior notes due 2023. The net proceeds were first used to repay all of the outstanding borrowings under the Company's Revolving Credit Facility and the remainder was used for general corporate purposes. During the third quarter of 2013, the Company entered into fixed-to-variable interest rate swap agreements for the 4.625% senior notes due 2020 with an aggregate notional amount of $600.0 and variable interest rates based on one-month LIBOR plus 2.298% to hedge against changes in the fair value of a portion of the Company's long term debt. These derivative financial instruments are accounted for as fair value hedges of the senior notes due 2020. These interest rate swaps are included in other long term assets and added to the value of the senior notes, with an aggregate fair value of $13.4 and $0.0 at June 30, 2014 and December 31, 2014, respectively. As the specific terms and notional amounts of the derivative financial instruments match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges and accordingly, there is no impact to the Company's Consolidated Statements of Operations. The Company has discussed its intention to increase its ratio of total debt to consolidated EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) over time from 2.0 to 1.0, as of December 2012, to 2.5 to 1.0. As of June 30, 2014, the ratio of total debt to consolidated EBITDA was 2.51 to 1.0. Based upon current market conditions, the Company believes that it can maintain this ratio through the use of its Revolving Credit Facility and its ready access to debt capital markets. The Company believes that its cash from operations, in combination with cash on hand and borrowing capacity, will be sufficient to satisfy its obligations in 2014 and beyond. Operating Activities During the six months ended June 30, 2014 and 2013, the Company's operations provided $349.7 and $335.8 of cash, respectively, reflecting the Company's solid business results. The increase in cash provided from operations in 2014 as compared with the corresponding 2013 period is primarily due to timing of certain working capital items. The Company continues to focus on efforts to increase cash collections from all payers and to generate ongoing improvements to the claim submission processes. Investing Activities Capital expenditures were $104.6 and $90.5 for the six months ended June 30, 2014 and 2013, respectively. The Company expects capital expenditures of approximately $185.0 to $205.0 in 2014. The Company's projected capital expenditures are higher than historical levels due to the carryover impact of chemistry platform replacements begun in 2013. The Company will continue to pursue acquisitions to fund growth and will also continue to make important investments in its business, including in information technology, to improve efficiency and enable the execution of the Company's strategic vision. Such expenditures are expected to be funded by cash flow from operations, as well as borrowings under the Company's Revolving Credit Facility, as needed. 29-------------------------------------------------------------------------------- INDEX During the first six months of 2014, the Company received cash proceeds of $30.3 and recorded a net gain of $20.3 on the sale of an investment. The investment was one of several strategic investments the Company has made in the area of diagnostics. Financing Activities On December 21, 2011, the Company entered into a Credit Agreement (the "Credit Agreement") providing for a five-year $1,000.0 senior unsecured revolving credit facility (the "Revolving Credit Facility") with Bank of America, N.A., acting as Administrative Agent, Barclays Capital as Syndication Agent, and a group of financial institutions as lending parties. The balances outstanding on the Company's Revolving Credit Facility at June 30, 2014 and December 31, 2013 were $0.0 and $0.0, respectively. The Revolving Credit Facility bears interest at varying rates based upon a base rate or LIBOR plus (in each case) a percentage based on the Company's debt rating with Standard & Poor's and Moody's Ratings Services. As of June 30, 2014, the effective interest rate on the Revolving Credit Facility was 1.13%. The Revolving Credit Facility is available for general corporate purposes, including working capital, capital expenditures, acquisitions, funding of share repurchases and other restricted payments permitted under the Credit Agreement. The Credit Agreement also contains limitations on aggregate subsidiary indebtedness and a debt covenant requiring that the Company maintain on the last day of any period for four consecutive fiscal quarters, in each case taken as one accounting period, a ratio of total debt to consolidated EBITDA of not more than 3.0 to 1.0. The Company was in compliance with all covenants in the Credit Agreement at June 30, 2014. As of June 30, 2014, the ratio of total debt to consolidated EBITDA was 2.51 to 1.0. In February 2013, the Company repaid its 5.50% $350.0 senior notes due 2013 with cash on hand and $30.0 of borrowings on its Revolving Credit Facility. During the six months ended June 30, 2014, the Company settled notices to convert $18.5 aggregate principal amount at maturity of its zero-coupon subordinated notes with a conversion value of $24.0. The total cash used for these settlements was $15.9. On November 1, 2013, the Company issued $700.0 in new senior notes pursuant to the Company's effective shelf registration on Form S-3. The new senior notes consisted of $400.0 aggregate principal amount of 2.50% senior notes due 2018 and $300.0 aggregate principal amount of 4.00% Senior Notes due 2023. The net proceeds were used to repay all of the outstanding borrowings under the Company's Revolving Credit Facility and for general corporate purposes. The senior notes due 2018 and senior notes due 2023 bear interest at the rate of 2.50% per annum and 4.00% per annum, respectively, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2014. As of December 31, 2013, the Company had outstanding authorization from the Board of Directors to purchase up to $1,058.5 of Company common stock based on settled trades as of that date. During the six months ended June 30, 2014, the Company repurchased $164.2 of stock representing 1.7 shares. As of June 30, 2014, the Company had outstanding authorization from the Board of Directors to purchase up to $894.4 of Company common stock based on settled trades as of that date. As of June 30, 2014, the Company provided letters of credit aggregating $42.5, primarily in connection with certain insurance programs. Letters of credit provided by the Company are secured by the Company's senior credit facilities and are renewed annually, around mid-year. The Company had a $35.3 and $34.9 reserve for unrecognized income tax benefits, including interest and penalties as of June 30, 2014 and December 31, 2013, respectively. Substantially all of these tax reserves are classified in other long-term liabilities in the Company's Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013. Zero-coupon Subordinated Notes On March 11, 2014, the Company announced that for the period from March 12, 2014 to September 11, 2014, the zero-coupon subordinated notes will accrue contingent cash interest at a rate of no less than 0.125% of the average market price of a zero-coupon subordinated note for the five trading days ended March 6, 2014, in addition to the continued accrual of the original issue discount. On July 1, 2014, the Company announced that its zero-coupon subordinated notes may be converted into cash and common stock at the conversion rate of 13.4108 per $1,000.0 principal amount at maturity of the notes, subject to the terms of the zero-coupon subordinated notes and the Indenture, dated as of October 24, 2006 between the Company and The Bank of New York Mellon, as trustee and conversion agent. In order to exercise the option to convert all or a portion of the zero-coupon subordinated 30-------------------------------------------------------------------------------- INDEX notes, holders are required to validly surrender their zero-coupon subordinated notes at any time during the calendar quarter beginning July 1, 2014, through the close of business on the last business day of the calendar quarter, which is 5:00 p.m., New York City time, on Tuesday, September 30, 2014. If notices of conversion are received, the Company plans to settle the cash portion of the conversion obligation (i.e., the accreted principal amount of the securities to be converted) with cash on hand and/or borrowings under the Revolving Credit Facility. The remaining amount, if any, will be settled with shares of common stock. Credit Ratings The Company's debt ratings of Baa2 from Moody's and BBB+ from Standard & Poor's contribute to its ability to access capital markets. New Accounting Pronouncements In February 2013, the FASB issued a new accounting standard on joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Under this new standard, obligations resulting from joint and several liability arrangements are to be measured as the sum of: (a) the amount the reporting entity agreed with its co-obligors that it will pay and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This standard, which applies prospectively, became effective for the Company beginning January 1, 2014. The adoption of this standard does not have a material effect on the consolidated financial statements. In March 2013, the FASB issued a new accounting standard on foreign currency matters that clarifies the guidance of a parent company's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. Under this new standard, a parent company that ceases to have a controlling financial interest in a foreign subsidiary or group of assets within a foreign entity shall release any related cumulative translation adjustment into net income only if a sale or transfer results in complete or substantially complete liquidation of the foreign entity. This standard, which applies prospectively, became effective for the Company beginning January 1, 2014. The adoption of this standard does not have a material effect on the consolidated financial statements. In April 2014, the FASB issued a new accounting standard on discontinued operations that significantly changes criteria for discontinued operations and disclosures for disposals. Under this new standard, to be a discontinued operation, a component or group of components must represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. Expanded disclosures for discontinued operations include more details about earnings and balance sheet accounts, total operating and investing cash flows, and cash flows resulting from continuing involvement. The guidance is to be applied prospectively to all new disposals of components and new classifications as held for sale beginning in 2015, with early adoption allowed in 2014. The adoption of this standard is not expected to have a material impact on the consolidated financial statements. In May 2014, the FASB issued the converged standard on revenue recognition with the objective to provide a single, comprehensive model for all contracts with customers to improve comparability. The standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will 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. An entity can apply the revenue standard retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings. The revenue standard is effective for the Company beginning January 1, 2017. The Company is currently evaluating the expected impact of the standard. |