LABONE INC/, 10-Q, 2000-08-11

LABONE INC/
10-Q, 2000-08-11
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 June 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 July 31, 2000 - 10,715,349 net of 2,334,671 shares held as treasury stock.

LabOne, Inc.

Form 10-Q for the Second 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

Second 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

		June 30,		December 31,
		2000		1999
ASSETS
Current assets:
Cash and cash equivalents	$	1,369,529	$	2,983,644
Accounts receivable - trade, net of allowance for doubtful
accounts of $2,998,328 in 2000 and $1,981,285 in 1999		26,705,277		26,331,960
Income taxes receivable		2,431,047		1,643,520
Inventories		2,959,241		3,186,853
Prepaid expenses and other current assets		3,108,527		1,772,884
Deferred income taxes		1,715,023		1,328,027
Total current assets		38,288,644		37,246,888

Property, plant and equipment		85,458,101		80,910,886
Less accumulated depreciation		40,943,299		38,106,948
Net property, plant and equipment		44,514,802		42,803,938
Other assets:
Intangible assets, net of accumulated amortization		36,168,793		37,868,921
Bond issue costs, net of accumulated amortization of
$32,025 in 2000 and $23,291 in 1999		160,122		168,856
Deferred income taxes - noncurrent		-		93,326
Deposits and other assets		233,233		260,795
Total assets	$	119,365,594	$	118,442,724

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	12,673,402	$	11,852,403
Accrued payroll and benefits		3,634,388		2,793,721
Other accrued expenses		1,048,605		727,241
Other current liabilities		130,950		551,146
Current portion of long-term debt		1,874,585		1,873,577
Total current liabilities		19,361,930		17,798,088

Deferred income taxes - noncurrent		420,752		-
Long-term payable		1,360,000		1,360,000
Long-term debt		32,247,126		28,255,139
Total liabilities		53,389,808		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		31,792,208		32,035,445
Equity adjustment from foreign currency translation		(776,378)		(750,115)
Retained earnings		70,540,109		69,758,872
		101,686,439		101,174,702
Less treasury stock of 2,338,688 shares in 2000 and
1,516,527 shares in 1999		35,710,653		30,145,205
Total stockholders' equity		65,975,786		71,029,497
Total liabilities and stockholders' equity	$	119,365,594	$	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			Six months ended
		June 30,			June 30,
		2000	1999		2000	1999
Sales	$	39,161,019	28,572,152	$	79,742,069	55,900,237
Cost of sales
Cost of sales expenses		25,186,182	16,398,519		51,231,233	31,500,575
Depreciation expense		594,762	605,442		1,133,067	1,154,725
Total cost of sales		25,780,944	17,003,961		52,364,300	32,655,300
Gross profit		13,380,075	11,568,191		27,377,769	23,244,937
Selling, general and administrative
Selling, general and administrative expenses		9,646,865	7,915,901		20,051,852	15,884,930
Depreciation expense		1,008,215	765,184		1,937,806	1,303,782
Amortization expense		1,047,061	680,260		2,083,420	1,360,520
Total selling, general and administrative		11,702,141	9,361,345		24,073,078	18,549,232
Earnings from operations		1,677,934	2,206,846		3,304,691	4,695,705

Interest expense		(602,866)	(299,945)		(1,098,145)	(589,621)
Interest income and other		15,222	113,906		40,397	255,583
Earnings before income taxes		1,090,290	2,020,807		2,246,943	4,361,667
Income tax expense		726,670	916,199		1,465,706	1,895,151
Earnings before minority interest		363,620	1,104,608		781,237	2,466,516
Minority interest		-	312,044		-	674,013
Net earnings	$	363,620	792,564	$	781,237	1,792,503
Basic and diluted earnings per common share	$	0.03	0.08	$	0.07	0.18
Dividends per common share	$	-	0.20	$	-	0.40

Basic weighted average common shares outstanding		10,721,272	9,733,655		11,021,361	9,733,655
Diluted weighted average common shares outstanding		10,721,341	9,733,655		11,022,643	9,733,655

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

Six Months Ended June 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					781,237		781,237	781,237
Equity adjustment from
foreign currency translation				(26,263)			(26,263)	(26,263)
Comprehensive income								754,974
Directors' stock issued (19,270 shares)			(243,237)			383,045	139,808
Purchase of 841,431 common
shares for treasury stock						(5,948,493)	(5,948,493)
Balance at June 30, 2000	$	130,500	31,792,208	(776,378)	70,540,109	(35,710,653)	65,975,786

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

		Six months ended June 30,
		2000	1999
Cash provided by (used for) operations:
Net earnings	$	781,237	1,792,503
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization		5,167,572	3,832,306
Earnings applicable to minority interests		-	674,013
Provision for loss on accounts receivable		1,281,312	1,281,495
Loss (gain) on disposal of property and equipment		2,756	(842,975)
Directors' stock compensation		139,808	72,013
Provision for deferred taxes		126,041	1,750,721
Changes in:
Accounts receivable		(1,654,629)	(1,082,935)
Income taxes receivable		(787,527)	(2,058,676)
Inventories		227,612	638,364
Prepaid expenses and other current assets		(1,335,643)	(42,647)
Prepaid merger expense		-	(1,290,911)
Accounts payable		820,999	(2,233,361)
Accrued payroll & benefits		840,667	(402,401)
Other accrued expenses		321,364	40,557
Other current liabilities		(420,196)	101,402
Net cash provided by operations		5,511,373	2,229,468
Cash provided by (used for) investment transactions:
Property, plant and equipment, net		(4,785,121)	(3,510,988)
Acquisition of intangible assets, net		(383,292)	-
Other		27,562	(974,625)
Net cash used for investment transactions		(5,140,851)	(4,485,613)
Cash provided by (used for) financing transactions:
Purchase of treasury stock		(5,948,493)	-
Proceeds from long-term debt		7,000,000	-
Payments on long-term debt		(3,011,551)	(6,003)
Cash dividends		-	(3,893,462)
Net cash used for financing transactions		(1,960,044)	(3,899,465)
Effect of foreign currency translation		(24,593)	80,363
Net decrease in cash and cash equivalents		(1,614,115)	(6,075,247)

Cash and cash equivalents - beginning of period		2,983,644	15,223,336
Cash and cash equivalents - end of period	$	1,369,529	9,148,089
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,071,863	651,691
Income taxes	$	2,394,000	2,227,700

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

June 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. All significant intercompany transactions have been eliminated in consolidation.

The financial information furnished herein as of June 30, 2000 and for the periods ended June 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.

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 June 30,			Six Months Ended June 30,
		2000	1999		2000	1999
Sales:
Insurance	$	25,452,714	18,473,769	$	53,652,492	36,058,016
Healthcare		8,258,524	5,735,698		15,766,099	11,693,224
Substance abuse testing (SAT)		5,449,781	4,362,685		10,323,478	8,148,997
Total sales	$	39,161,019	28,572,152	$	79,742,069	55,900,237

Operating income (loss):
Insurance	$	3,022,608	3,795,318	$	6,197,562	7,809,544
Healthcare		(697,694)	(1,308,956)		(1,273,152)	(2,267,734)
Substance abuse testing		115,525	(171,734)		(96,267)	(290,674)
General corporate expense		(762,505)	(107,782)		(1,523,452)	(555,431)
Total earnings from operations		1,677,934	2,206,846		3,304,691	4,695,705
Other income (expense)		(587,644)	(186,039)		(1,057,748)	(334,038)
Earnings before income taxes	$	1,090,290	2,020,807	$	2,246,943	4,361,667

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 includes intersegment charges of $1.9 million year to date from the healthcare segment primarily for hepatitis and other miscellaneous medical testing and $0.6 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 and is petitioning the Court for recovery of these amounts.

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

RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

		Three months ended June 30,		% Inc.		Six months ended June 30,		% Inc.
		2000	1999	(Dec)		2000	1999	(Dec)

Sales	$	25,452,714	18,473,769	38%	$	53,652,492	36,058,016	49%
Net earnings		363,620	792,563	(54%)		781,237	1,792,503	(56%)
Diluted earnings per
common share	$	0.03	0.08		$	0.07	0.18
Cash dividends per
common share	$	0.00	0.20		$	0.00	0.40

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.

SECOND QUARTER ANALYSIS

YEAR-TO-DATE ANALYSIS

Revenue in the six month period ended June 30, 2000 was $79.7 million as compared to $55.9 million in the same period last year. The increase of $23.8 million or 43% is due to increases in insurance revenue of $17.6 million, healthcare revenue of $4.1 million and SAT revenue of $2.2 million.

Insurance revenue increased from $36.1 million to $53.7 million year to date primarily due to the addition of ExamOne revenue of $12.6 million and SBSI revenue growth of $3.3 million. The total number of laboratory tested insurance applicants in the six month period increased by 46,000 or 2% as compared to the last year. Average revenue per applicant declined 2% from $12.96 during 1999, to $12.75 in 2000. Kit and container revenue increased $1.3 million due primarily to an increase in the number of kits sold and an increase in the full blood kit pricing.

Healthcare laboratory revenue increased 35% from $11.7 million during the first six months of 1999 to $15.8 million for the same period in 2000 primarily due to increased testing volumes. SAT revenue increased 27% from $8.1 million in 1999 to $10.3 million in 2000 due to an increase in testing volumes.

Cost of sales increased $19.7 million year to date as compared to the prior year. This increase is due primarily to increases in paramedical services, payroll expenses, kit and lab supplies, insurance information services and inbound freight. Insurance cost of sales expenses increased from $18.7 million to $34.3 million in 2000 due to the above factors. Healthcare cost of sales expenses were $10.7 million as compared to $8.0 million during the first six months of 1999. SAT cost of sales expenses were $7.4 million as compared to $6.0 million during 1999.

As a result of the above factors, gross profit for the first six months increased from $23.2 million in 1999 to $27.4 million in 2000. Insurance gross profit, including ExamOne and SBSI, increased $1.9 million. Healthcare gross profit increased $1.4 million on an increase in revenue of $4.1 million. SAT gross profit increased $0.8 million on an increase in revenue of $2.2 million.

Selling, general and administrative expenses increased $4.7 million (24%) in the six month period ended June 30, 2000 as compared to the prior year due to the addition of ExamOne and increases in depreciation and amortization expense. Healthcare expenditures were $6.4 million as compared to $6.0 million in 1999. SAT expenses increased from $2.5 million in 1999 to $3.1 million in 2000. The overhead allocation to the healthcare and SAT segments for the period was $3.3 million as compared to an allocation of $3.1 million in 1999. Insurance overhead expenditures increased from $9.6 million to $13.1 million in 2000, primarily due to the acquisition of ExamOne.

Operating income decreased from $4.7 million in the first six months of 1999 to $3.3 million in 2000 due primarily to an increase in depreciation and amortization. The insurance segment had operating income of $6.2 million as compared to $7.8 million in the first six months last year. On a fully allocated basis, the healthcare segment had an operating loss of $1.3 million for the six month period ended June 30, 2000 as compared to an operating loss of $2.3 million in 1999. The SAT segment had operating loss of $0.1 million in 2000 as compared to an operating loss of $0.3 million in 1999. Unallocated operating expenses for the corporate segment were $1.5 million for the first six months related to corporate and merger expenses as compared to unallocated operating expenses of $0.6 million in 1999 which included gains on sale of the former laboratory and administrative facilities.

Interest expense increased $0.5 million in the first six months of 2000 due to increased borrowings and higher interest rates. Investment income decreased $0.2 million primarily due to less funds available for investment. The effective income tax rate increased from 43% in 1999 to 65% in 2000 primarily due to the nondeductibility of amortization expense.

The combined effect of the above factors resulted in net earnings of $0.8 million or $0.07 per share in the six month period ended June 30, 2000 as compared to $1.8 million or $0.18 per share in the same period last year. The weighted average number of shares outstanding in the first six months of 2000 and 1999 were 11,021,361 and 9,733,655, respectively. The August 1999 merger of LabOne, Inc. and Lab Holdings, Inc. resulted in an increase of 1.8 million shares, offset by year to date repurchases of 0.8 million shares.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

LabOne's working capital position decreased by $0.5 million to $18.9 million at June 30, 2000 from $19.4 million at December 31, 1999. This decrease is primarily due to capital additions and treasury stock repurchases exceeding cash provided by operations.

Net additions to property, plant and equipment in the first six months of 2000 were $4.8 million. Additions in 1999, net of the sale of the former laboratory and administrative facilities, were $3.5 million, primarily related to construction and fixtures for the new facility. Proceeds from an industrial revenue bond were used to finance the construction of the Company's new facility. 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 11 years at $1.85 million per year plus interest. The second principal payment of $1.85 million is due September 1, 2000.

The Company borrowed $1 million during the quarter, increasing the borrowings on the line of credit to $16 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.

During the second quarter 2000, the Company repurchased 38,800 shares of common stock for $0.2 million, for an average price of $5.32. The total number of shares of LabOne stock held in treasury at June 30, 2000 was approximately 2.3 million at a total cost of $35.7 million or $15.27 per share.

At June 30, 2000, LabOne had total cash and investments of $1.4 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 $18 million in industrial revenue bonds and $16 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 August 1, 2000.

PART II. OTHER INFORMATION

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

(a) Exhibits

27. Financial Data Schedule - as filed electronically by the Registrant in conjunction with this second 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: August 11, 2000	By /s/ John W. McCarty John W. McCarty Executive V.P. and Chief Financial Officer

Date: August 11, 2000	By /s/ Kurt E. Gruenbacher Kurt E. Gruenbacher V.P. Finance, Chief Accounting Officer and Treasurer