"The Dark Index"

1-For-10 Reverse Stock Split Boosts LabCorp’s Share Price

MAY PROVED TO BE an auspicious time for Laboratory Corporation of America to restructure its equity base. In the process, it’s positioning itself to be a tougher competitor in the lab testing marketplace.

Ever since the company was first created by the merger of Roche Biomedical Laboratories and National Health Laboratories (NHL) in 1995, LabCorp’s equity composition of common stock and preferred stock has been a financial handicap. But that situation is now changing.

Restructuring Equity Base

LabCorp launched two initiatives to restructure its equity base. First, after gaining shareholder approval at its annual meeting, LabCorp announced a 1-for-10 reverse split for its common stock. The split was effective on May 3, 2000 and the readjusted price became $63.00 per share. It also reduced the number of common stock shares outstanding to 13.34 million.

LabCorp followed the reverse stock split with a call to redeem its Series A and Series B Convertible Preferred Stock. These shares will convert to common stock at the rate of 1.81818 common shares per preferred share. The redemption will be completed by July 9, 2000.

To convert 100% of the outstanding preferred stock, LabCorp will issue 20.93 million shares of common stock. Once completed, this redemption will increase to 34.27 million the number of common stock shares outstanding.

Laboratory executives and pathologists should remember that, as a publicly-traded company, LabCorp’s primary goal is to increase shareholder value. The reverse stock split and the preferred stock redemption programs are designed to make it easier for LabCorp to boost the price of its common stock.

In recent years, a portion of LabCorp’s net profits were earmarked to pay dividends on preferred shares. This reduced the money available to pay dividends on common stock, thus depressing the market value of LabCorp’s common stock. It was a situation that restricted the company’s ability to use its common stock in beneficial ways.

For LabCorp, future sustained increases to the price of its common stock would give it more financial power and make it a tougher competitor in the laboratory marketplace.

Striking Difference

In fact, LabCorp’s complicated equity arrangements have been one striking difference between LabCorp and Quest Diagnostics Incorporated since Quest’s founding on January 1, 1997. Quest Diagnostic’s balance sheet and equity structure has been much stronger than LabCorp’s in recent years.

This worked to Quest’s benefit in a number of ways. For example, because it had the financial strength to absorb the write-down losses associated with closing labs, Quest Diagnostics was able to restructure several of its marginally profitable laboratory operations in 1997 and 1998. For Quest Diagnostics, these writedown charges were as much as $60 million in a single year.

LabCorp, on the other hand, did not have the balance sheet capability to absorb such writedowns. As a result, in several markets, it continues to operate a legacy system of laboratories created by Roche and NHL before the merger. An improved balance sheet and equity structure will give LabCorp’s executive team more options to address both internal cost-cutting projects as well as external profit-building opportunities.

After LabCorp restructures its common stock and equity base, it must next address its balance sheet. The company needs increased flexibility to raise capital for short term and long term needs, while reducing the amount of money it pays to service its debt. It is reasonable to expect that LabCorp will take significant steps to improve its balance sheet in the coming year.

Two Blood Brothers Continue To Report Increased Revenues

Specimen Volume Jumps at LabCorp

For first quarter 2000, Laboratory Corporation of America saw an 8.1% increase in volume. This is the largest volume increase posted by LabCorp since it was formed in 1995.

More significantly, net sales for first quarter totaled $462.7 million. At this rate, LabCorp will do as much as $1.85 billion in sales for 2000. Earnings before taxes almost doubled from one year earlier, from $22.8 million to $47.6 million. The company was also able to pay down its term loan by $28.9 million during the quarter.

LabCorp’s sales growth was paced by an average increase in pricing of 2.6% over quarter one in 1999. Taken collectively, the financial results posted by LabCorp for the first quarter demonstrate the the company’s sales and marketing efforts are generating new volumes of business. The higher pricing indicates discipline in resisting payer’s attempts to further depress contract pricing for laboratory testing services.

Quest Diagnostics Absorbing SBCL

There was good financial news at Quest Diagnostics Incorporated for first quarter 2000. On a pro forma basis, both specimen volume and average revenues per requisition were up, by 6% and 2%, respectively.

The impact of Quest Diagnostics’ acquisition of SmithKline Beecham Clinical Laboratories (SBCL) last year is becoming visible. Quest’s revenues for the quarter were $857 million, which is an annual run rate of $3.42 billion.

It appears that Quest Diagnostics’ efforts to retain SBCL client accounts is succeeding. On a pro forma basis, which assumes that SBCL had been part of Quest Diagnostics for all of 1999, total revenues increased by 4%, along with the healthy 6% increase in the number of patient requisitions.

Other financial measures, such as EBITDA, showed strong improvement. The investment community is responding favorably to these results by bidding Quest’s stock to over $60 per share.

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