IPO Is Major Strategy For American Med Labs

AML wants to raise $115 million from its initial public offering

CEO SUMMARY: Since its acquisition in 1997, American Medical Laboratories’ fast growth was funded by heavy borrowing. Now this Virginia-based lab company needs to raise additional capital so it can restructure its debt and lay a foundation for the next cycle of growth. Its initial public offering of common stock will need to compete with similar offerings by Specialty Laboratories and Dynacare.

NEXT IN LINE for an initial public offering (IPO) is American Medical Laboratories, Inc.,(AML) based in Chantilly, Virginia.

AML filed its stock registration statement with the Securities and Exchange Commission (SEC) on Friday, September 29, 2000. It hopes to raise as much as $115 million from the investment community.

Since its acquisition by new owners in May 1997, American Medical Labs has been operated around the strategic goal of becoming a public company. (See TDR, May 12, 1997 and April 5, 1999.)

When AML was acquired, the commercial laboratory industry was in the financial doldrums. Experienced lab owners did not believe it was an auspicious time to enter the lab business. But AML’s buyers, Tim Brodnik, Jack Bergstrom, and Jerry Glick represent the next generation of commercial laboratory owners.

Even in 1997, these individuals were convinced that the commercial laboratory business was still viable and could be financially lucrative. They believed AML, as a long-established, respected commercial lab company, was an underutilized asset.

Purchasing AML gave these new owners a solid operational base. Their goal was to transform the laboratory into a high-growth revenue engine. They believed two specific business strategies could accomplish this goal.

Aggressive Sales Program

First, AML would fashion a high-powered and aggressively-managed sales and marketing program. AML’s owners believed well-trained sales reps could deliver profitable new client accounts.

Second, new management philosophies and methods would be intro- duced into AML’s laboratory operations. This would improve customer service performance and productivity while at the same time controlling costs in the laboratory.

Effectively, the new owners wanted to turbocharge AML and create a dynamic, fast-growing laboratory company. After three years under new ownership, AML’s recent public filings provide a first look at the results of this business strategy.

Acquisition Closed in 1997

When the acquisition closed in May 1997, AML’s 1996 revenues were $67.3 million with a net loss of $1.2 million. By the end of 1998, the first full year of operations under new management, revenues topped $102.7 million and net income grew to almost $4 million.

That pace of revenue growth continued, reaching $143.4 million in 1999. It is estimated that AML’s revenues will exceed $250 million in 2000. Net income sagged to $1.2 million in 1999, but seems to be on track to reach as high as $5 million for 2000.

However, not all of this revenue growth is the result of AML’s sales and marketing efforts. In October 1999, AML acquired Las Vegas-based Associated Healthcare Group, Inc., owners of Associated Pathologists Laboratories (APL). At the time of this acquisition, APL’s revenues were about $110 million. American Medical Labs paid over $107 million for APL, including $64.3 million in cash.

AML also made a smaller acquisition. In June 1998, it purchased Providence Laboratory Associates (PLA) in Washington D.C. for $4.2 million. PLA’s annual revenues were in the range of $5 million.

AML’s Sales Program

The effectiveness of AML’s sales pro- gram can be estimated by backing out the revenues from acquisitions. This reduces the estimated $255 million for 2000 by $115 million, leaving $140 million. Compared to pre-acquisition revenues for 1996 of $67.3 million, this shows an overall revenue gain of 108%, or $72.7 million from testing revenues generated by new clients and year-to-year price increases during these 48 months.

Of course, the $72.7 million generated by AML’s expanded sales program came with its own price tag. As reported by AML, “selling, general and administrative” (SG&A) expenses for the pre-merger year of 1996 was $37.8 million, or 48.4% of total revenues. For 2000, it is estimated that SG&A expenses will be around $54.1 million, or 27.7% of total revenue.

It is easy to understand why American Medical Labs wants to close an IPO before the end of this year. AML’s existing credit lines require sizeable principal reductions during the next 14 months. It’s the classic situation when borrowed money is used to buy a business. Leverage is a great tool to get into deals, but sooner or later the lender must be repaid.

Upcoming Loan Paydowns

At mid-year, AML’s long term debt, with current maturities, totaled $145.8 million. Its loan agreements specify that principal reductions of $4.7 million and $9.2 million must be made by year-end 2000 and 2001, respectively.

To fund these principal payments, AML only has $1.0 million in cash, plus $23.4 million in non-cash working capital. It also has $14.2 million of “unused borrowing capacity.”

As these numbers demonstrate, although AML is operating a fast-growing and profitable laboratory testing business, it has not generated enough liquid assets to meet the upcoming timetable of principal and interest payments.

That is why AML now wants to offer its stock to the public. It intends to use the expected $115 million in IPO proceeds to refinance existing debt obligations. AML feels that its track record of year-to-year increases in revenues and operating profits should allow it to successfully recast its debt structure. AML will use the proceeds from its common stock offering to amend or refinance existing senior credit facilities on what it believes will be “improved terms.”

Days Sales Outstanding

One interesting factor in the management of AML’s growth is its days sales outstanding (DSO). AML reports a total accounts receivables of $58.7 million on June 30, 2000. Calculated against expected revenues of $255 million for the year, this yields a DSO of 55 days.

For comparison, the DSO at Quest Diagnostics Incorporated for the most recent quarter is 54. Laboratory Corporation of America’s DSO is 70. Dynacare reports a DSO of 78 days.

As many hospital laboratory administrators know, American Medical Laboratories is pushing hard to generate business from hospital reference send-out testing. Currently it serves 380 hospital labs and 160 independent clinical labs. Esoteric testing makes up 52.9% of AML’s total revenues.

Since declaring its IPO, AML managers are now bound by SEC “quiet period” rules. Until the stock offering is completed, AML officials will be unavailable for interviews and will generally decline to discuss their company in public forums.

New Account Profitability

Despite this news blackout, AML’s public filings demonstrate to the lab industry that a professional sales and market- ing program is still capable of generating substantial increases in specimen volume and revenues. The question is whether the cost of acquiring this new business can be offset by the profitability of the resulting new client accounts, particularly at the relatively low prices AML is reported to be offering to prospective new clients.

Also, with the Internet developing into a useful business tool, AML is racing to create and introduce competitive laboratory information products for its clients. To accomplish this, AML recently allied itself with LabPortal.com, another portfolio company of Golder Thoma Rauner & Cressy.

THE DARK REPORT has long predicted that AML’s ambitions to become a major player in the national market for esoteric and reference test- ing would intensify an already competitive marketplace for send-out testing. Certainly any objective reading of AML’s recent public filings would indicate that, in at least this first cycle of growth, AML has made important progress toward that goal.

American Med Labs At-A-Glance

  • Main lab in Chantilly, Virginia is 250,000 sq. ft.
  • Lab in Las Vegas, Nevada is 124,000 sq. ft.
  • 22 remote service centers for logistics and courier operations
  • 53 patient service centers in Washington D.C. and Nevada areas
  • 8 rapid response labs
  • 2,700 employees
  • 62 Sales/Marketing employees
  • 24 esoteric/reference sales reps
    15 routine testing sales reps
    7 toxicology sales reps
    16 marketing support staff
  • Test volume breakdown, weekly: 123,000 Esoteric (52.9% of total) 164,000 Routine (36.8% of total) 43,500 Forensic (10.3% of total)
  • AML invested in, and has a business relationship with LabPortal.com for advanced lab information products and services.

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