LABONE INC/, 10-Q, 2000-11-13

LABONE INC/
10-Q, 2000-11-13
MEDICAL LABORATORIES

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended September 30, 2000

Commission file number: 0-16946

LabOne, Inc.

10101 Renner Blvd.

Lenexa, Kansas 66219

(913) 888-1770

Incorporated in Missouri

I.R.S. Employer Identification Number: 43-1039532

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 / /

Number of shares outstanding of only class of Registrant's common stock, $.01 par value, as of October 31, 2000 - 10,715,349 net of 2,334,671 shares held as treasury stock.

LabOne, Inc.

Form 10-Q for the Third Quarter, 2000

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements:

Consolidated Balance Sheets

Consolidated Statements of Earnings

Consolidated Statement of Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Financial Statements

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Selected Financial Data

Third Quarter Analysis

Year-to-Date Analysis

Financial Position, Liquidity and Capital Resources

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

SIGNATURES

PART I. FINANCIAL INFORMATION

ITEM 1 - Financial Statements

LabOne, Inc. and Subsidiaries

Consolidated Balance Sheets

		September 30,	December 31,
		2000	1999
ASSETS
Current assets:
Cash and cash equivalents	$	1,605,796	2,983,644
Accounts receivable - trade, net of allowance for doubtful
accounts of $3,479,097 in 2000 and $1,981,285 in 1999		30,431,093	26,331,960
Income taxes receivable		1,560,943	1,643,520
Inventories		3,007,548	3,186,853
Prepaid expenses and other current assets		4,731,856	1,772,884
Deferred income taxes		1,925,439	1,328,027
Total current assets		43,262,675	37,246,888

Property, plant and equipment		87,475,127	80,910,886
Less accumulated depreciation		42,424,856	38,106,948
Net property, plant and equipment		45,050,271	42,803,938
Other assets:
Intangible assets, net of accumulated amortization		35,383,103	37,868,921
Bond issue costs, net of accumulated amortization of
$36,392 in 2000 and $23,291 in 1999		155,755	168,856
Deferred income taxes - noncurrent		-	93,326
Deposits and other assets		250,755	260,795
Total assets	$	124,102,559	118,442,724

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,945,467	11,852,403
Accrued payroll and benefits		4,668,642	2,793,721
Other accrued expenses		1,505,592	727,241
Other current liabilities		197,265	551,146
Notes payable		81,250	-
Current portion of long-term debt		1,878,253	1,873,577
Total current liabilities		20,276,469	17,798,088

Deferred income taxes - noncurrent		679,467	-
Long-term payable		1,360,000	1,360,000
Long-term debt		35,408,099	28,255,139
Total liabilities		57,724,035	47,413,227

Stockholders' equity:
Preferred stock, $.01 par value per share; 3,000,000
shares authorized, none issued		-	-
Common stock, $.01 par value per share; 40,000,000
shares authorized, 13,050,020 shares issued		130,500	130,500
Additional paid-in capital		31,734,954	32,035,445
Equity adjustment from foreign currency translation		(753,764)	(750,115)
Retained earnings		70,897,637	69,758,872
		102,009,327	101,174,702
Less treasury stock of 2,334,671 shares in 2000 and
1,516,527 shares in 1999		35,630,803	30,145,205
Total stockholders' equity		66,378,524	71,029,497
Total liabilities and stockholders' equity	$	124,102,559	118,442,724

See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.

LabOne, Inc. and Subsidiaries

Consolidated Statements of Earnings

		Three months ended			Nine months ended
		September 30,			September 30,
		2000	1999		2000	1999

Sales	$	43,626,533	28,814,326	$	123,368,602	84,714,563
Cost of sales
Cost of sales expenses		29,086,601	16,518,209		80,317,835	48,018,785
Depreciation expense		596,269	584,004		1,729,335	1,738,729
Total cost of sales		29,682,870	17,102,213		82,047,170	49,757,514
Gross profit		13,943,663	11,712,113		41,321,432	34,957,049
Selling, general and administrative
Selling, general and administrative expenses		9,953,722	8,398,233		30,005,574	24,283,162
Depreciation expense		1,093,831	812,698		3,031,637	2,116,480
Amortization expense		1,045,001	847,498		3,128,422	2,208,018
Total selling, general and administrative		12,092,554	10,058,429		36,165,633	28,607,660
Earnings from operations		1,851,109	1,653,684		5,155,799	6,349,389

Interest expense		(673,127)	(357,906)		(1,771,272)	(947,528)
Interest income and other		18,340	49,665		58,738	305,250
Earnings before income taxes		1,196,322	1,345,443		3,443,265	5,707,111

Income tax expense		838,795	729,782		2,304,500	2,624,933
Earnings before minority interest		357,527	615,661		1,138,765	3,082,178
Minority interest		-	92,362		-	766,375
Net earnings	$	357,527	523,299	$	1,138,765	2,315,803
Basic and diluted earnings per common share	$	0.03	0.05	$	0.10	0.23
Dividends per common share	$	-	0.18	$	-	0.58

Basic weighted average common shares outstanding		10,715,349	10,750,955		10,918,612	10,076,481
Effect of dilutive securities - stock options		8,522	7,114		2,830	15,947
Diluted weighted average common shares outstanding		10,723,871	10,758,069		10,921,442	10,092,428

See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.

LabOne, Inc. and Subsidiaries

Consolidated Statement of Stockholders' Equity

Nine Months Ended September 30, 2000

				Accumulated
			Additional	other			Total
		Common	paid-in	comprehensive	Retained	Treasury	stockholders'	Comprehensive
		stock	capital	income	earnings	stock	equity	income
Balance at December 31, 1999	$	130,500	32,035,445	(750,115)	69,758,872	(30,145,205)	71,029,497
Comprehensive income:
Net earnings					1,138,765		1,138,765	1,138,765
Equity adjustment from
foreign currency translation				(3,649)			(3,649)	(3,649)
Comprehensive income								1,135,116
Directors' stock issued (23,287 shares)			(300,491)			462,895	162,404
Purchase of 841,431 common
shares for treasury stock						(5,948,493)	(5,948,493)
Balance at September 30, 2000	$	130,500	31,734,954	(753,764)	70,897,637	(35,630,803)	66,378,524

See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.

LabOne, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

		Nine months ended September 30,
		2000	1999
Cash provided by (used for) operations:
Net earnings	$	1,138,765	2,315,803
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization		7,909,315	6,083,145
Earnings applicable to minority interests		-	766,375
Provision for loss on accounts receivable		1,802,789	1,984,330
Loss (gain) on disposal of property and equipment		2,364	(785,319)
Directors' stock compensation		162,404	-
Provision for deferred taxes		175,514	2,526,309
Changes in:
Accounts receivable		(5,901,922)	(4,303,691)
Income taxes receivable		82,577	(2,094,051)
Inventories		179,305	708,895
Prepaid expenses and other current assets		(2,958,972)	(212,042)
Accounts payable		93,064	(2,885,228)
Accrued payroll and benefits		1,874,921	(729,790)
Other accrued expenses		778,351	107,003
Other current liabilities		(353,881)	9,309
Net cash provided by operations		4,984,594	3,491,048
Cash provided by (used for) investment transactions:
Property, plant and equipment, net		(7,009,599)	(4,892,513)
Acquisition of intangible assets, net		(642,604)	(16,561)
Acquisition of minority interest		-	(12,581,740)
Other		10,040	43,687
Net cash used for investment transactions		(7,642,163)	(17,447,127)
Cash provided by (used for) financing transactions:
Purchase of treasury stock		(5,948,493)	(1,601)
Dividends paid to minority interest		-	(935,730)
Line of credit, net		9,000,000	9,000,000
Payments on long-term debt		(1,849,183)	(1,859,115)
Notes payable		81,250	-
Cash dividends		-	(5,969,491)
Net cash provided by financing transactions		1,283,574	234,063
Effect of foreign currency translation		(3,853)	57,280
Net decrease in cash and cash equivalents		(1,377,848)	(13,664,736)
Cash and cash equivalents - beginning of period		2,983,644	15,223,336
Cash and cash equivalents - end of period	$	1,605,796	1,558,600
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,724,840	951,348
Income taxes	$	2,427,906	2,251,466

See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.

LabOne, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2000 and 1999
The accompanying consolidated financial statements include the accounts of LabOne, Inc. and its wholly-owned subsidiaries Lab One Canada Inc., Systematic Business Services, Inc. (SBSI) and ExamOne World Wide, Inc. (ExamOne). All significant intercompany transactions have been eliminated in consolidation.

The financial information furnished herein as of September 30, 2000 and for the periods ended September 30, 2000 and 1999 is unaudited; however, in the opinion of management, it reflects all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state the Company's financial position, the results of its operations and cash flows. The balance sheet information as of December 31, 1999 has been derived from the audited financial statements as of that date. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances, and included in the financial statements are certain amounts based on management's estimates and judgments.

The financial information herein is not necessarily representative of a full year's operations because levels of sales, capital additions and other factors fluctuate throughout the year. These same considerations apply to all year-to-year comparisons. See the Company's Annual Report on Form 10-K for the year ended December 31, 1999, for additional information not required by this Quarterly Report on Form 10-Q.

On August 10, 1999, the former LabOne, Inc. was merged into its parent corporation, Lab Holdings, Inc. The combined company's name was then changed to LabOne, Inc. The merger provisions included a 3 for 2 stock split for all Lab Holdings common shares. The Company paid $12.6 million, including transaction costs, to complete the merger and purchase 0.8 million shares of LabOne stock. The remaining minority 1.8 million shares of former LabOne stock were exchanged on a one for one basis for the combined company stock. The transaction was recorded under purchase accounting and resulted in $24.4 million in goodwill which is being amortized over 20 years.

Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc. and World Wide Health Services of New Jersey, a provider of specimen collection and paramedical examination services to life and health insurers. These subsidiaries are operated under the name ExamOne World Wide and are included in the insurance services division of LabOne. This addition allows LabOne to expand the services it offers to its insurance industry clients.

Forward Looking Statements

This Quarterly report on Form 10-Q may contain "forward-looking statements," including, but not limited to: projections of revenues, income or loss, capital expenditures, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements. Forward-looking statements involve known and unknown risks and uncertainties. Many factors could cause actual results to differ materially from those that may be expressed or implied in such forward-looking statements, including, but not limited to, the volume and pricing of laboratory tests performed by the Company, the extent of market acceptance of the Company's testing services in the healthcare and substance abuse testing industries, intense competition, the loss of one or more significant customers, general economic conditions and other factors detailed from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission, including the Cautionary Statement filed as Exhibit 99 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.

Business Segment Information

The company operates in three lines of business: insurance services, healthcare and substance abuse testing. The following table presents selected financial information for each segment:

		Three Months Ended September 30,			Nine Months Ended September 30,
		2000	1999		2000	1999
Sales:
Insurance	$	26,132,055	17,894,206	$	79,784,547	53,952,222
Healthcare		9,758,886	6,329,240		25,524,985	18,022,464
Substance abuse testing		7,735,592	4,590,880		18,059,070	12,739,877
Total sales	$	43,626,533	28,814,326	$	123,368,602	84,714,563

Operating income (loss):
Insurance	$	2,387,731	3,258,506	$	8,585,293	11,068,050
Healthcare		(183,667)	(844,000)		(1,456,819)	(3,111,734)
Substance abuse testing		442,063	(26,833)		345,796	(317,506)
General corporate expense		(795,019)	(733,989)		(2,318,471)	(1,289,421)
Total earnings from operations		1,851,108	1,653,684		5,155,799	6,349,389
Other expense		(654,786)	(308,241)		(1,712,534)	(642,278)
Earnings before income taxes	$	1,196,322	1,345,443	$	3,443,265	5,707,111

The Company's new facility was completed in early 1999, and the portions of the building identifiable to each segment have been allocated to those segments. Effective the second quarter, 1999, the associated depreciation expenses have been charged to the segments and are included in the operating income or loss information stated above. The insurance segment operating income for 2000 includes intersegment charges of $2.9 million year to date from the healthcare segment primarily for hepatitis and other miscellaneous medical testing and $0.9 million from the SAT segment for drug screening and confirmations. Indirect expenses are allocated to the operational segments based on the relative revenue of each segment on a monthly basis. General corporate expense represents unallocated expenses, principally the amortization of goodwill resulting from the merger and acquisitions. There were no other material changes in assets or in the basis of segmentation or measurement of segment operating income or loss.

Contingencies

The Comptroller of the State of Texas has conducted an audit of LabOne for sales and use tax compliance for the years 1991 through 1997 and contends that LabOne's insurance laboratory services are taxable under the Texas tax code. The Texas Comptroller originally issued a tax audit assessment, including interest and penalties, of approximately $1.9 million. The Company filed a petition for redetermination arguing that its services do not fit within the definition of insurance services under the Texas code. The assessment was reduced to only include sales of services for applicants who were residents of Texas. LabOne paid the revised assessment of $521,000 under protest in 2000 and is petitioning the Court for recovery of these amounts.

New Accounting Pronouncements

LabOne implemented the Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation effective July 1, 2000. Application of this interpretation will not have a significant impact on the Company's financial position or results of operations.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

		Three months ended September 30,		% Inc.		Nine months ended September 30,		% Inc.
		2000	1999	(Dec)		2000	1999	(Dec)

Sales	$	43,626,533	28,814,326	51%	$	123,368,602	84,714,563	46%
Net earnings		357,527	523,299	(32%)		1,138,765	2,315,803	(51%)
Diluted earnings per
common share	$	0.03	0.05		$	0.10	0.23
Cash dividends per
common share	$	0.00	0.18		$	0.00	0.58

The Company provides high-quality laboratory testing services to insurance companies, managed care organizations, physicians and employers.

LabOne provides risk-appraisal laboratory services to the insurance industry. The tests performed by the Company are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. The Company also provides testing services on specimens of individuals applying for individual and group medical and disability policies. Through its subsidiaries, SBSI and ExamOne, the Company provides paramedical services, telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services to life and health insurers nationwide.

LabOne's services to the healthcare industry involve clinical testing to aid in the diagnosis and treatment of patients. LabOne operates only one highly automated and centralized laboratory, which the Company believes has significant economic advantages over other conventional laboratory competitors. LabOne markets its clinical testing services to the payers of healthcare (insurance companies and self-insured groups) and physicians. The Company does this through exclusive arrangements with managed care organizations and through Lab Cardâ, a Laboratory Benefits Management (LBM) program.

LabOne is certified by the Substance Abuse and Mental Health Services Administration (SAMHSA) to perform substance abuse testing services for federally regulated employers and is currently marketing these services to both regulated and nonregulated employers. The Company's rapid turnaround times and multiple testing options help clients reduce downtime for affected employees and meet mandated drug screening guidelines.

THIRD QUARTER ANALYSIS

YEAR-TO-DATE ANALYSIS

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

LabOne's working capital position increased by $3.5 million to $23.0 million at September 30, 2000 from $19.4 million at December 31, 1999. This increase is primarily due to working capital provided by operations and net borrowings exceeding capital additions and treasury stock repurchases.

Net additions to property, plant and equipment in the first nine months of 2000 were $7.0 million primarily due to investment in information systems infrastructure and SAT laboratory growth. Additions in 1999, excluding the sale of the former administrative and laboratory facilities, were $8.4 million, primarily related to construction and fixtures for the new facility.

Net long-term debt increased $3.2 million during the quarter, with borrowings on the line of credit increasing to $21 million and the outstanding balance of the industrial revenue bond being reduced to $16.3 million. The total line of credit available is $25 million. The current interest rate, plus financing fees, on the line of credit is approximately 7.4% and is based on a 30 day LIBOR rate. Interest on the bond is based on a taxable seven-day variable rate and is currently approximately 7.4%. The Company expects to repay the bond over the remaining nine years at $1.85 million per year plus interest.

During the third quarter 2000, the Company did not repurchase any shares of common stock. The total number of shares of LabOne stock held in treasury at September 30, 2000 was approximately 2.3 million at a total cost of $35.6 million or $15.26 per share.

At September 30, 2000, LabOne had total cash and investments of $1.6 million as compared to $3.0 million at December 31, 1999. The Company expects to fund operations from a combination of cash flows from operations, cash reserves and short term borrowings.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

A foreign currency risk exposure exists due to billing Canadian subsidiary revenue in Canadian dollars and the direct laboratory expenses associated with this revenue being incurred in US dollars. This exposure is not considered to be material. Any future material Canadian currency fluctuations against the US$ could result in a decision to hedge future foreign currency cash flows, or to increase Canadian prices.

An interest rate risk exposure exists due to LabOne's liability of $16 million in industrial revenue bonds and $21 million line of credit borrowings. Interest expense incurred on these credit facilities is based on short-term rates which may fluctuate in the future. The interest rate, including all associated borrowing costs, is approximately 7.4% per annum as of November 1, 2000.

PART II. OTHER INFORMATION

Item 6. - Exhibits and Reports on Form 8-K

(a) Exhibits

10. LabOne, Inc. 2000 Stock Purchase Loan Program

27. Financial Data Schedule - as filed electronically by the Registrant in conjunction with this third quarter 2000 Form 10-Q.

(b) Reports on Form 8-K

None

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LabOne, Inc.

Date: November 10, 2000	By /s/ John W. McCarty John W. McCarty Executive V.P. and Chief Financial Officer

Date: November 10, 2000	By /s/ Kurt E. Gruenbacher Kurt E. Gruenbacher V.P. Finance, Chief Accounting Officer and Treasurer