OT LH -- before investing in LH, one would want to ask why it sold off so severely from '95-'98
Absolutely. Let's see if we can understand what factors caused it to decline from 35 to 3 over this 3 year period.
Here's one gleaning from Edgar filing
shareholder.com
On April 28, 1995, the Company completed a merger with Roche
Biomedical Laboratories, Inc. ("RBL"), an indirect subsidiary of Roche
Holdings, Inc. ("Roche"), pursuant to an Agreement and Plan of Merger dated as
of December 13, 1994 (the "Merger"). In connection with the Merger, the
Company changed its name from National Health Laboratories Holdings, Inc.
("NHL") to Laboratory Corporation of America Holdings. In June 1994, the
Company acquired Allied Clinical Laboratories, Inc.("Allied"), then the sixth
largest independent clinical laboratory testing company in the United States
(based on 1993 net revenues)(the "Allied Acquisition"). In addition to the
Merger and the Allied Acquisition, since 1993, the Company has acquired a
total of 57 small clinical laboratories with aggregate sales of approximately
$182.4 million.
RECENT DEVELOPMENTS
During 1996 and the early part of 1997, the Company experienced
significant changes in management with Thomas P. Mac Mahon assuming the role
of President and Chief Executive Officer in January 1997 in addition to his
position as Chairman. Prior to such time Mr. Mac Mahon served as Senior Vice
President of Roche and President of Roche Diagnostics Group where he was
responsible for the management of all United States operations of the
diagnostic businesses of Roche. Concurrent with the addition of Mr.
Mac Mahon, the Company promoted a new Chief Financial Officer, Wesley R.
Elingburg, formerly Senior Vice President-Finance, and formed a new management
committee.
As part of an examination of the rapid growth of Federal expenditures for
clinical laboratory services, several Federal agencies, including the Federal
Bureau of Investigation, the Office of Inspector General ("OIG") of the
Department of Health and Human Services ("HHS") and the Department of Justice
("DOJ"), have investigated allegations of fraudulent and abusive conduct by
health care providers. On November 21, 1996, the Company reached a settlement
with the OIG and the DOJ regarding the prior billing practices of various of
its predecessor companies (the "1996 Government Settlement"). Consistent with
this overall settlement, the Company paid $187 million to the Federal
Government in December 1996, with proceeds from a loan from Roche (the "Roche
Loan"). As a result of negotiations related to the 1996 Government
Settlement, the Company recorded a charge of $185 million in the third quarter
of 1996 to increase reserves for the 1996 Government Settlement and other
related expenses of government and private claims resulting therefrom.
During 1996 and continuing into 1997, management began implementing a new
business strategy in response to the Company's declining performance. These
new strategic objectives are as follows: remaining a low cost provider of
clinical testing services; providing high quality service to its clients; and
improving account profitability. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition", "Business-Management
Information Systems" and "-- Sales and Marketing and Client Service". In
addition, the Company is focused on certain growth initiatives beyond the
routine clinical laboratory testing. In particular the Company is focused on
increasing market share in certain sections of the market by providing
innovative services in two primary areas: (i) hospital alliances; and (ii)
specialty and niche businesses. See "Business--Affiliations and Alliances,"
and "--Testing Services."
On May 19, 1997 the Board of Directors of the Company declared a dividend
of 10,000,000 transferable subscription rights which were then issued pro rata
to holders of its common stock on May 29, 1997 entitling them to purchase up
to an aggregate of $500.0 million of convertible preferred stock issuable in
two series at a subscription price of $50 per share (the "Preferred Stock
Offering"). The subscription period ended on June 16, 1997. On that date,
rights were exercised to purchase 4,363,202 shares of Series A 8 1/2%
Convertible Exchangeable Preferred Stock ("Series A") and 5,636,798 shares of
Series B 8 1/2% Convertible Pay-in-Kind Preferred Stock ("Series B"), each at
a subscription price of $50 per share. Roche exercised its basic subscription
privilege in full for 4,988,751 of Series B and other rights holders purchased
the remaining 5,011,249 shares.
The Series A is convertible at the option of the holder after September
30, 1997 into common stock, will pay cash dividends and will be exchangeable
on or after June 30, 2000 at the Company's option for 8 1/2% Convertible
Subordinated Notes due June 30, 2012. The Series B will be convertible at the
option of the holder after June 30, 2000 into common stock, will pay dividends
in kind until June 30, 2003 and in cash thereafter and will not be
exchangeable for notes. The conversion rate for both series of preferred
stock is 18.1818 shares of common stock per share of preferred stock. Each
series of preferred stock will be mandatorily redeemable after June 30, 2012
at $50 per share and will be redeemable at the option of the Company after
July 7, 2000 at prices declining from $52.83 in 2000 to $50.00 in 2006 and
thereafter. Net proceeds from the Preferred Stock Offering were $486.9
million and were used to repay a loan from Roche, including accrued interest,
and to reduce amounts outstanding under the Company's term loan and revolving
credit facilities.
In connection with the Merger, the Company entered into a credit
agreement with the banks named therein and an administrative agent (the
"Existing Credit Agreement"), which made available to the Company a term loan
facility (the "Term Loan Facility") of $800.0 million and a revolving credit
facility (the "Revolving Credit Facility") of $450.0 million.
In March 1997, the Company entered into an amended credit agreement which
became effective upon completion of the Preferred Stock Offering, following
satisfaction of certain conditions precedent (the "Amended and Restated Credit
Agreement"). The Amended and Restated Credit Agreement makes available to the
Company senior unsecured credit facilities in the form of an amended term loan
facility of $693.8 million and an amended revolving credit facility of $450.0
million (the "Amended Term Loan Facility" and "Amended Revolving Credit
Facility," respectively).
The Amended Revolving Credit Facility includes a $50.0 million letter of
credit sublimit. The Amended and Restated Credit Agreement maturity dates are
extended approximately three years for the Amended Term Loan Facility to March
31, 2004 and approximately two years for the Amended Revolving Credit Facility
to March 31, 2002.
Both the Amended Term Loan Facility and the Amended Revolving Credit
Facility bear interest, at the option of the Company, at (i) the base rate
plus the applicable base rate margin or (ii) the eurodollar rate plus the
applicable eurodollar rate margin. The Amended and Restated Credit Agreement
provides that in the event of a reduction of the percentage of Common Stock
held by Roche and its affiliates (other than the Company and its subsidiaries)
below 25%, the applicable interest margins and facility fees on borrowings
outstanding under the Amended and Restated Credit Agreement will increase.
The amount of the increase will depend, in part, on the leverage ratio of the
Company at the time of such reduction. Future interest margins on borrowings
outstanding under the Amended and Restated Credit Agreement will be based upon
the performance level of the Company as defined therein.
Under the Amended and Restated Credit Agreement, maturities under the
Amended Term Loan Facility, after the payment of $50.0 million from proceeds
of the Preferred Stock Offering, aggregate $46.4 million in 1999, $92.8
million in 2000, $139.2 million in 2001 through 2003 and $87.0 million in
2004.
The amounts available under the Amended Revolving Credit Facility are
subject to certain mandatory permanent reduction and prepayment requirements
and the Amended Term Loan Facility is subject to specified mandatory
prepayment requirements. In the Amended and Restated Credit Agreement,
required amounts are first to be applied to repay scheduled Amended Term Loan
Facility payments until the Amended Term Loan Facility is repaid in full and
then to reduce the commitments and advances under the Amended Revolving Credit
Facility. Required payments and reductions include (i) the proceeds of debt
issuances, subject to certain exceptions; (ii) the proceeds of certain asset
sales, unless reinvested within one year of the applicable asset sale in
productive assets of a kind then used or usable in the business of the Company
and its subsidiaries; (iii) the proceeds of sales of equity securities in
excess of certain amounts; and (iv) under certain circumstances, a percentage
of excess cash flow, as calculated annually.
The Amended and Restated Credit Agreement contains financial covenants
with respect to a leverage ratio, an interest coverage ratio and minimum
stockholders' equity.
A portion of the proceeds of the Preferred Stock Offering were used to
repay approximately $50.0 million under the Amended Term Loan Facility and
$242.0 million under the Amended Revolving Credit Facility.
During the fourth quarter of 1997, the Company recorded a provision for
doubtful accounts of $182.0 million, which was approximately $160.0 million
greater than the amount recorded in the fourth quarter of 1996. This pretax
charge was made to increase the allowance for doubtful accounts to a level
that management believes is appropriate to reduce its accounts receivable to
the net amount that management believes will ultimately be collected.
The Company has experienced a deterioration in the timeliness of cash
collections and a corresponding increase in accounts receivable. The primary
causes of this situation are the increased medical necessity and related
diagnosis code requirements from third-party payors and the complexities in
the billing process (data capture) arising from changing requirements of
private insurance companies (managed care). Management previously believed
that this deterioration in the timeliness of cash collections would not have
any significant impact on the ultimate collectability of the receivables.
In late 1996, to address the deteriorating cash collections, management
developed various short-term improvement projects ("initiatives") that it
anticipated would improve the timeliness of collections by the end of 1997.
Initially, it appeared that these initiatives were having a positive impact,
as the growth in the Company's Days' Sales Outstanding (DSO) stabilized in the
first and second quarters of 1997. However, during the third quarter of 1997,
despite continuing focused efforts on the initiatives, the Company's DSO began
increasing again. In response, management intensified its efforts on the
aforementioned initiatives and added new initiatives for the purpose of
significantly lowering the DSO by December 31, 1997.
In the fourth quarter of 1997, management evaluated the initiatives'
overall effect and concluded that, while helpful in improving certain
processes, they had not had any significant impact on improving the Company's
cash collections on aged receivables. In recognition of the Company's
inability to enhance collections on a sustained basis, an increase in the
allowance for doubtful accounts was considered necessary by management.
The Company also recorded pretax charges in the fourth quarter of $22.7
million, related primarily to the downsizing of its Long Island, New York
facility and the future consolidation into its Raritan, New Jersey facility.
In connection with the aforementioned fourth quarter charges, the Company
has successfully negotiated an amendment to the Amended and Restated Credit
Agreement, covering both long-term and revolving credit, of certain covenants
contained in the agreement. The amendment excludes the charges from interest
coverage and leverage ratio calculations applicable to the quarters ended
December 31, 1997 through September 30, 1998. The amendment also excludes the
charges from certain other covenant calculations applicable to the quarter
ending December 31, 1997 and all quarterly periods thereafter.
* * *
1996 GOVERNMENT SETTLEMENT
In August 1993, RBL and Allied each received a subpoena from the OIG
requesting documents and information concerning pricing and billing practices.
In September 1993, NHL received a subpoena from the OIG which required NHL to
provide documents to the OIG concerning its regulatory compliance procedures.
Among other things, the OIG subpoena received by RBL and Allied called for the
production of documents regarding 14 blood chemistry tests which were being or
had been performed by certain independent clinical laboratories in conjunction
with automated chemistry profiles and which were being or had been billed
separately to Medicare or Medicaid. An automated chemistry profile is a
grouping of tests that can be performed together on a single specimen and that
Medicare and Medicaid pay under the Medicare fee schedule. The government's
investigations covered billings for tests performed by NHL, RBL and Allied
from 1988 to 1994. These tests were deemed by regulators to be medically
unnecessary. The investigations were part of a broad-based federal inquiry
into Medicare and related billings that have resulted in financial settlements
with a number of other clinical laboratories. The inquiries have also
prompted the imposition of more stringent regulatory compliance requirements
industry-wide. In November 1996, the Company agreed to enter into a
comprehensive Corporate Integrity Agreement and to pay $182 million to settle
civil claims involving Medicare and related government billings for tests
performed by NHL, RBL and Allied (the "1996 Government Settlement"). These
claims arose out of the government's contention that laboratories offering
profiles containing certain test combinations had the obligation to notify
ordering physicians how much would be billed to the government for each test
performed for a patient whose tests are paid by Medicare, Medicaid or other
government agency. The government contended claims submitted for tests
ordered by physicians and performed by the laboratories were improper. The
Company settled these allegations without an admission of fault. The
Corporate Integrity Agreement, among other things, requires that detailed
notifications be made to physicians. In addition, as part of the overall
settlement, a San Diego laboratory that was formerly part of Allied agreed to
plead guilty to a charge of filing a false claim with Medicare and Medicaid in
1991 and to pay $5 million to the Federal government. The assets of the San
Diego laboratory were sold by Allied in 1992, two years before the Allied
Acquisition. As is customary with asset sales, Allied retained the liability
for conduct preceding the sale - a liability the Company later succeeded to,
following the Allied Acquisition and Merger. As a result of negotiations
related to the 1996 Government Settlement, the Company recorded a charge of
$185 million in the third quarter of 1996 (the "Settlement Charge") to
increase reserves for the 1996 Government Settlement described above and other
related expenses of government and private claims resulting therefrom.
Pursuant to the 1996 Government Settlement, the Company paid $187 million
in December 1996 (the "Settlement Payment"). The Settlement Payment was paid
from the proceeds of a $187 million loan made by Roche to the Company in
December 1996. See "Management Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
The Company is involved in litigation which purports to be a class action
brought on behalf of certain patients, private insurers and benefit plans that
paid for laboratory testing services during the time frame covered by the 1996
Government Settlement. The Company has also received certain similar claims
brought on behalf of certain other insurance companies, some of which have
been resolved for immaterial amounts. These claims for private reimbursement
are similar to the government claims settled in 1996. However, no amount of
damages has been specified at this time and, with the exception of the above,
no settlement discussions have taken place. The Company is carefully
evaluating these claims, however, due to the early stage of the claims, the
ultimate outcome of these claims cannot presently be predicted.
* * *
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company grew significantly through 1995, substantially through
acquisitions. Prior to April 28, 1995, the Company's name was National Health
Laboratories Holdings Inc. ("NHL"). In April 1995, the Company completed the
Merger with RBL. In connection with the Merger, the Company issued 61,329,256
shares of Common Stock to HLR and Roche in exchange for all outstanding shares
of RBL and $135.7 million in cash. The exchange consideration of
approximately $558.0 million for the purchase of RBL consisted of the value of
the stock issued to HLR and Roche, as well as other cash costs of the Merger,
net of cash received from HLR. In June 1994, the Company acquired Allied for
approximately $191.5 million in cash plus the assumption of $24.0 million of
Allied indebtedness. The Allied Acquisition and the Merger have been
accounted for under the purchase method of accounting; as such, the acquired
assets and liabilities were recorded at their estimated fair values on the
date of acquisition. Allied's and RBL's results of operations have been
included in the Company's results of operations since June 23, 1994 and
April 28, 1995, respectively. See Note 2 of the Notes to Consolidated
Financial Statements. In addition to the Merger and the Allied Acquisition,
since 1993, the Company has acquired a total of 57 small clinical laboratories
with aggregate annual sales of approximately $182.4 million.
Following the Merger in 1995, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where both NHL and RBL facilities or
functions existed at the time of the Merger. The Company recorded
restructuring charges of $65.0 million in connection with these plans in 1995.
In addition, in the second quarter of 1995, the Company recorded an
extraordinary loss of $8.3 million, net of taxes, related to early
extinguishment of debt related to the Merger. In the second quarter of 1996,
the Company recorded certain additional charges related to the restructuring
of operations following the Merger. The Company recorded a restructuring
charge totaling $13.0 million for the shutdown of its La Jolla, California
administrative facility and other workforce reductions and $10.0 million in
non-recurring charges related to the integration of its operations following
the Merger. During the fourth quarter of 1997, the Company recorded pre-tax
charges of $22.7 million, related primarily to the downsizing of its Long
Island, New York facility and the future consolidation into its Raritan, New
Jersey facility. This amount includes approximately $5.2 million for
severance and $12.5 million for the future lease obligation and other
facilities related charges. The net workforce reduction as a result of this
activity is expected to be approximately 260 employees, primarily in the
laboratory's operations. See Note 3 of the Notes to Consolidated Financial
Statements. Future cash payments under restructuring plans are expected to be
$21.8 million in the year ended December 31, 1998 and $16.8 million
thereafter.
In the last several years, the Company's business has been affected by
significant government regulation, price competition and increased influence
of managed care organizations resulting from payors' efforts to control the
cost, utilization and delivery of health care services. As a result of these
factors, the Company's profitability has been impacted by changes in the
volume of testing, the prices and costs of its services, the mix of payors and
the level of bad debt expense.
Many market-based changes in the clinical laboratory business have
occurred, most involving the shift away from traditional, fee-for-service
medicine to managed-cost health care. The growth of the managed care sector
presents various challenges to the Company and other independent clinical
laboratories. Managed care providers typically contract with a limited number
of clinical laboratories and negotiate discounts to the fees charged by such
laboratories in an effort to control costs. Such discounts have resulted in
price erosion and have negatively impacted the Company's operating margins.
In addition, managed care organizations have used capitated payment contracts
in an attempt to promote more efficient use of laboratory testing services.
Under a capitated payment contract, the clinical laboratory and the managed
care organization agree to a per month payment to cover all laboratory tests
during the month, regardless of the number or cost of the tests actually
performed. Such contracts also shift the risks of additional testing beyond
that covered by the capitated payment to the clinical laboratory. The
increase in managed care has also resulted in declines in the utilization of
laboratory testing services. For the three years ended December 31, 1997,
such contracts accounted for approximately $88.8, $64.5 and $58.8 million in
net sales, respectively.
In addition, Medicare (which principally serves patients 65 and older)
and Medicaid (which principally serves indigent patients) and insurers, have
increased their efforts to control the cost, utilization and delivery of
health care services. Measures to regulate health care delivery in general
and clinical laboratories in particular have resulted in reduced prices, added
costs and decreasing test utilization for the clinical laboratory industry by
increasing complexity and adding new regulatory and administrative
requirements. From time to time, Congress has also considered changes to the
Medicare fee schedules in conjunction with certain budgetary bills. Any
future changes to the Medicare fee schedules cannot be predicted at this time
and management, therefore, cannot predict the impact, if any, such proposals,
if enacted, would have on the results of operations or financial condition of
the Company.
These market-based factors have had a significant adverse impact on the
clinical laboratory industry, and on the Company's profitability. Management
expects that price erosion and utilization declines will continue to
negatively impact net sales and results of operations for the foreseeable
future. The Company has expanded its efforts to improve the profitability of
new and existing business. To date this effort has focused primarily on
reviewing existing contracts, including those with managed care organizations,
and selectively repricing or discontinuing business with existing accounts
which perform below Company expectations. In 1997, the Company initiated price
increases across most of its business lines, including specialty and niche
testing, which have not seen price increases since the Merger. While such
increases may adversely affect volumes, the Company believes that such
measures, along with other cost reduction programs, will improve its overall
profitability. There can be no assurance, however, of the timing or success
of such measures or that the Company will not lose market share as a result of
these measures. Finally, the Company is reviewing its sales organization and
expects to modify its commission structure so that compensation is tied more
directly to the profitability of retained and new business instead of the
current practice of basing commissions primarily on revenue generated. The
Company is also reviewing alternatives relating to regions of the country and
certain businesses where profitability is not reaching internal goals and may
enter into joint ventures, alliances, or asset swaps with interested parties
in order to maximize regional operating efficiencies.
As a result of the Merger, the Company realized substantial savings in
operating costs through the consolidation of certain operations and the
elimination of redundant expenses. Such savings have been realized over time
as the consolidation process was completed. The realization of the savings was
partially offset by increased temporary help and overtime expenses during the
consolidation process. In addition, these savings were largely offset by price
erosion and utilization declines resulting from the increase in managed care
and, to a lesser extent, from increases in other expenses such as bad debt
expense as discussed below. The Company is focused on additional initiatives
which are expected to achieve incremental cost savings in 1998. These plans
include further regional laboratory consolidation, a new agreement with a
supplier of telecommunications services and additional supply savings
primarily due to changes in supply inventory management procedures. There can
be no assurance that the estimated additional cost savings expected to be
achieved will be realized or achieved in a timely manner or that improvements,
if any, in profitability will be achieved or that such savings will not be
offset by increases in other expenses.
Hope this helps,
Sam |
