QUEST DIAGNOSTICS ANNOUNCES RESULTS FOR THIRD QUARTER 1999TETERBORO,
N.J., OCTOBER 26, 1999 Quest Diagnostics Incorporated (NYSE: DGX)
announced today that for the third quarter ended September 30, 1999, net income before an
extraordinary loss and special charges incurred in connection with the acquisition of
SmithKline Beecham Clinical Laboratories (SBCL) increased to $10.9 million, or $0.29 per
diluted share, from $6.1 million, or $0.20 per diluted share, during the 1998 period. The
consolidated results include the operations of SBCL from August 16, 1999, when the
transaction was completed. After special charges of $30.3 million and an extraordinary
loss, net of taxes, of $2.1 million incurred in connection with the transaction, the
company reported a net loss of $9.4 million, or $0.26 per diluted share.
Revenues were $614.8 million compared to $360.7 million for the 1998 third quarter.
Earnings before interest, taxes, depreciation and amortization excluding special items
(adjusted EBITDA) were $67.8 million compared to $37.6 million for the prior year period.
The increase in revenues and adjusted EBITDA was due primarily to the acquisition of SBCL.
Between the closing of the SBCL acquisition and the end of the third quarter, the
company generated approximately $95 million of cash, enabling the repayment of $58 million
of borrowings incurred in connection with the SBCL transaction. The company ended the
quarter with a $37 million cash balance and no borrowings outstanding under its new $250
million revolving credit facility. Capital expenditures totaled $21.5 million for the
quarter and $47.2 million for the nine months ended September 30, 1999.
"We are pleased to report solid results in our first quarter as a combined
company," said Kenneth W. Freeman, Chairman and Chief Executive Officer. "Cash
generation in the third quarter was strong. Quest Diagnostics is well positioned to
continue to create value for shareholders, and we remain confident in our ability to grow
earnings per share over the next several years by at least 30% annually."
For the nine months ended September 30, 1999, net income before an extraordinary loss
and special charges increased to $31.4 million, or $0.95 per diluted share, compared to
$21.5 million, or $0.71 per diluted share, for the prior-year period. Revenues increased
to $1.39 billion from $1.10 billion. Adjusted EBITDA increased to $151.9 million from
$124.7 million last year.
PRO FORMA RESULTS
On a pro forma basis, assuming that SBCL had been part of Quest Diagnostics for the
entire quarter in both years, net income before an extraordinary loss and special charges
was $8.0 million, or $0.18 per diluted share in the third quarter of 1999, compared to
$10.8 million, or $0.25 per diluted share, in 1998. The decline is principally due to $3.2
million of non-recurring, pretax charges incurred by SBCL prior to the acquisition date
which have not been classified as special charges.
Pro forma revenues were $819.3 million, up 7% from the prior year. Clinical testing
volume, measured by the number of requisitions, increased approximately 3%, and average
revenue per requisition improved approximately 2% over the prior-year period. Reflected in
the year-to-year comparisons were the companys laboratory network management
business, for which testing performed by third parties is included in the 1999
consolidated revenues and expenses, partially offset by a reduction in revenues associated
with a contract which was accounted for as a loss contract in 1999. Adjusted to exclude
these items, bad debt expense was 7.6% of revenues during the quarter, compared to 8.8%
for the prior year period and 7.5% for the second quarter.
Pro forma adjusted EBITDA was $86.6 million compared to $84.6 million in 1998. Certain
items reflected in the SBCL results prior to the acquisition date which are of a
non-recurring nature have been excluded for purposes of developing a more meaningful
comparison of pro forma EBITDA. As described in more detail in the notes to the financial
tables, the items excluded to arrive at adjusted EBITDA are $3.2 million in charges in
1999 and $0.6 million of pre-tax profit in 1998.
For the nine month period ended September 30, 1999, pro forma net income before an
extraordinary loss and special charges was $16.9 million, or $0.38 per diluted share,
compared to $32.6 million, or $0.75 per diluted share, for the prior-year period. As
reflected in the notes to the accompanying financial tables, the year-to-date pro forma
results include approximately $24 million of non-recurring expenses in 1999 recorded prior
to the acquisition date and $7.2 million in non-recurring gains recorded in 1998, which
have not been separately classified as special charges or credits. Excluding the impact of
an extraordinary loss, special charges and these items, year-to-date pro forma net income
increased to $31.4 million from $28.3 million. Pro forma revenues increased to $2.48
billion from $2.25 billion; and adjusted EBITDA was $252.3 million in 1999 compared to
$254.4 million last year.
Quest Diagnostics is the nation's leading provider of diagnostic testing, information
and services to physicians, hospitals, managed care organizations, employers and
government agencies with annualized revenues of more than $3 billion. The wide variety of
tests it performs on human tissue and fluids help doctors and hospitals diagnose, treat
and monitor disease. Its Nichols Institute unit conducts research, specializes in esoteric
testing using genetic screening and other advanced technologies, and manufactures and
distributes diagnostic test kits and instruments. Quest Diagnostics is one of the leading
providers of testing to support clinical trials of new pharmaceuticals worldwide. Quest
Informatics collects and analyzes laboratory, pharmaceutical and other data to help large
health care customers better manage the health of their patients. QuestNet is an
innovative new product offering that provides network management services to large buyers
of health care services. Additional company information can be found on the Internet at:
www.questdiagnostics.com.
The statements in this press release which are not historical facts or information may
be forward-looking statements. These forward-looking statements involve risks and
uncertainties that could cause the outcome to be materially different. Certain of these
risks and uncertainties are listed in the Quest Diagnostics Incorporated 1998 Form 10-K
and subsequent filings.
-- Table follows --
Quest Diagnostics
Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 1998
(in millions, except per share data)
|
Three
Months Ended September 30, |
|
Nine
Months Ended September 30, |
|
|
|
|
|
1999 |
1998 |
|
1999 |
1998 |
|
|
|
|
|
|
Net revenues |
$ 614.8 |
$ 360.7 |
|
$ 1,390.7 |
$ 1,095.3 |
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
Cost of services
|
369.4 |
210.9 |
|
822.1 |
646.7 |
Selling, general and administrative
|
192.7 |
122.8 |
|
451.3 |
359.4 |
Interest expense, net
|
19.0 |
8.4 |
|
31.4 |
26.5 |
Amortization of intangible assets
|
7.8 |
5.5 |
|
18.1 |
16.3 |
Special charges
|
30.3 |
- |
|
30.3 |
- |
Other, net
|
1.1 |
1.1 |
|
4.5 |
2.5 |
Total
|
620.3 |
348.7 |
|
1,357.7 |
1,051.4 |
Income (loss) before taxes and
extraordinary loss |
(5.5) |
12.0 |
|
33.0 |
43.9 |
Income tax expense |
1.8 |
5.9 |
|
19.8 |
22.4 |
Income (loss) before extraordinary loss |
(7.3) |
6.1 |
|
13.2 |
21.5 |
Extraordinary loss, net of taxes |
(2.1) |
- |
|
(2.1) |
- |
Net income (loss) |
$ (9.4) |
$ 6.1 |
|
$ 11.1 |
$ 21.5 |
|
|
|
|
|
|
Income before extraordinary
loss and special charges |
$ 10.9 |
$ 6.1 |
|
$ 31.4 |
$ 21.5 |
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
$ (0.26) |
$ 0.20 |
|
$ 0.34 |
$ 0.72 |
Income (loss) before extraordinary loss |
$ (0.20) |
$ 0.20 |
|
$ 0.41 |
$ 0.72 |
Income before extraordinary loss and special
charges |
$ 0.30 |
$ 0.20 |
|
$ 0.98 |
$ 0.72 |
Cash earnings before extraordinary loss and
special charges |
$ 0.49 |
$ 0.36 |
|
$ 1.46 |
$ 1.17 |
|
|
|
|
|
|
Weighted average common shares
outstanding basic |
36.8 |
29.7 |
|
32.1 |
29.7 |
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
Net income (loss) |
$ (0.26) |
$ 0.20 |
|
$ 0.34 |
$ 0.71 |
Income (loss) before extraordinary loss |
$ (0.20) |
$ 0.20 |
|
$ 0.40 |
$ 0.71 |
Income before extraordinary loss and special
charges |
$ 0.29 |
$ 0.20 |
|
$ 0.95 |
$ 0.71 |
Cash earnings before extraordinary
loss and special charges |
$ 0.47 |
$ 0.35 |
|
$ 1.43 |
$ 1.15 |
|
|
|
|
|
|
Weighted average common shares
outstanding diluted |
37.6 |
30.2 |
|
32.9 |
30.3 |
|
|
|
|
|
|
|
Adjusted EBITDA |
$ 67.8 |
$ 37.6 |
|
$ 151.9 |
$ 124.7 |
Quest Diagnostics Incorporated and Subsidiaries
Selected Balance Sheet Information
September 30, 1999 and December 31, 1998
(in millions)
|
September 30, 1999 |
December 31,
1998 |
Assets |
|
|
|
|
|
Cash and cash equivalents |
$ 37 |
$ 203 |
Accounts receivable, net |
554 |
221 |
Intangible assets, net |
1,385 |
495 |
Other assets |
851 |
441 |
|
|
|
Total assets |
$ 2,827 |
$ 1,360 |
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
Short-term debt |
$ 37 |
$ 51 |
Long-term debt |
1,230 |
413 |
Other liabilities |
705 |
329 |
Common stockholders equity |
855 |
567 |
|
|
|
Total liabilities and stockholders
equity |
$ 2,827 |
$ 1,360 |
Quest Diagnostics Incorporated and Subsidiaries
Pro Forma Combined Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 1998
(in millions, except per share data)
PRO FORMAS |
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
1999 |
1998 |
|
1999 |
1998 |
|
|
|
|
|
|
Net revenues |
$ 819.3 |
$ 766.6 |
|
$ 2,480.3 |
$ 2,248.1 |
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
Cost of services
|
501.2 |
452.7 |
|
1,543.0 |
1,349.7 |
Selling, general and administrative
|
254.4 |
248.5 |
|
765.1 |
706.3 |
Interest expense, net
|
31.2 |
31.7 |
|
92.6 |
95.1 |
Amortization of intangible assets
|
11.2 |
11.3 |
|
33.0 |
33.6 |
Special charges
|
30.3 |
- |
|
46.1 |
- |
Other, net
|
.4 |
.3 |
|
3.2 |
(6.1) |
Total
|
828.7 |
744.5 |
|
2,483.0 |
2,178.6 |
Income (loss) before taxes and
extraordinary loss |
(9.4) |
22.1 |
|
(2.7) |
69.5 |
Income tax expense |
.8 |
11.3 |
|
8.1 |
36.9 |
Income (loss) before extraordinary loss |
(10.2) |
10.8 |
|
(10.8) |
32.6 |
Extraordinary loss, net of taxes |
(2.1) |
- |
|
(2.1) |
- |
Net income (loss) |
$ (12.3) |
$ 10.8 |
|
$ (12.9) |
$ 32.6 |
|
|
|
|
|
|
Income before extraordinary
loss and special charges |
$ 8.0 |
$ 10.8 |
|
$ 16.9 |
$ 32.6 |
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
Net income (loss) |
$ (0.28) |
$ 0.25 |
|
$ (0.30) |
$ 0.75 |
Income (loss) before extraordinary loss |
$ (0.23) |
$ 0.25 |
|
$ (0.25) |
$ 0.75 |
Income before extraordinary loss and special
charges |
$ 0.18 |
$ 0.25 |
|
$ 0.39 |
$ 0.75 |
Cash earnings before extraordinary loss and
special charges |
$ 0.42 |
$ 0.49 |
|
$ 1.08 |
$ 1.46 |
|
|
|
|
|
|
Weighted average common shares
outstanding basic |
43.4 |
43.0 |
|
43.2 |
43.1 |
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
Net income (loss) |
$ (0.28) |
$ 0.25 |
|
$ (0.30) |
$ 0.75 |
Income (loss) before extraordinary loss |
$ (0.23) |
$ 0.25 |
|
$ (0.25) |
$ 0.75 |
Income before extraordinary loss and special
charges |
$ 0.18 |
$ 0.25 |
|
$ 0.38 |
$ 0.75 |
Cash earnings before extraordinary
loss and special charges |
$ 0.41 |
$ 0.48 |
|
$ 1.06 |
$ 1.44 |
|
|
|
|
|
|
Weighted average common shares
outstanding diluted |
44.2 |
43.4 |
|
43.9 |
43.5 |
|
|
|
|
|
|
|
Adjusted EBITDA |
$ 86.6 |
$ 84.6 |
|
$ 252.3 |
$ 254.4 |
Notes to Financial Tables
Acquisition of SmithKline Beecham Clinical Laboratories
On August 16, 1999, Quest Diagnostics Incorporated (the "Company") completed
the acquisition of the clinical laboratory business of SmithKline Beecham plc
("SmithKline Beecham") for approximately $1.3 billion. The purchase price was
paid through the issuance of 12,564,336 shares of common stock of the Company,
representing approximately 29% of the Company's outstanding common stock, and the payment
of $1.025 billion in cash.
The acquisition was accounted for under the purchase method of accounting. As such, the
cost to acquire SmithKline Beechams clinical laboratory business has been allocated
on a preliminary basis to the assets and liabilities acquired based on estimated fair
values as of the closing date. The estimated costs associated with severance and other
integration-related activities for 1999 and 2000, including the elimination of excess
capacity, operational realignment and related workforce reductions are expected to be
finalized and recorded during the fourth quarter of 1999.
The Stock and Asset Purchase Agreement includes a provision for a purchase price
adjustment based on an audit of the August 16, 1999 combined balance sheet of SBCL and
certain affiliates. Adjustments resulting from this audit, which are subject to resolution
as set forth in the Stock and Asset Purchase Agreement, have been reflected in the pro
forma combined statements of operations to the extent that the Company believes they are
applicable. Additionally, these adjustments have been recorded in the September 30, 1999
consolidated balance sheet. However, amounts due from SmithKline Beecham, as a result of
the purchase price adjustment, have not been reflected in the September 30, 1999
consolidated balance sheet of Quest Diagnostics.
The financial statements reflect the preliminary allocation of the purchase price. The
allocation will be finalized after completion of the valuation of certain assets and
liabilities, the recording of the integration costs and the final resolution of the
purchase price adjustment. There can be no assurances that the amounts reflected in the
pro forma combined statements of operations will not be subject to change as a result of
the resolution of the purchase price adjustment.
Liabilities for which the obligation is being retained by SmithKline Beecham through an
indemnity to Quest Diagnostics, are recoverable from SmithKline Beecham on an after-tax
basis. Quest Diagnostics has recorded an estimate for the indemnified liabilities, which
primarily relate to taxes and billing and professional liability claims, in its September
30, 1999 consolidated balance sheet with a net receivable due from SmithKline Beecham.
Notes to Consolidated Statements of Operations - Historical
- In conjunction with the acquisition of SBCL, Quest Diagnostics repaid the entire amount
outstanding under its then existing credit agreement. The extraordinary loss represents
$3.6 million ($2.1 million, net of tax) of deferred financing costs which were written off
in connection with the extinguishment of the credit agreement.
- Net income (loss) for the three and nine months ended September 30, 1999 includes
special charges totaling $30.3 million ($18.2 million, net of tax), incurred in
conjunction with the acquisition of SBCL. Of the total, $19.8 million represents stock
based employee compensation related to special one-time grants of the Companys
common stock, and accelerated vesting, due to the completion of the SBCL acquisition, of
stock grants made in previous years. The remainder of the charge is primarily attributable
to professional and consulting fees incurred in connection with integration related
planning activities.
- Net income per common share is computed by dividing net income less dividends on
preferred stock (approximately $30 thousand per quarter) by the weighted average number of
common shares outstanding. Potentially dilutive common shares primarily represent stock
options.
- Cash earnings represents income before extraordinary loss, special charges and
amortization of intangible assets, net of applicable taxes. Cash earnings per common share
is calculated as cash earnings less preferred dividends, divided by the diluted weighted
average common shares outstanding.
- Depreciation expense totaled $16.3 million and $11.7 million for the three months ended
September 30, 1999 and 1998, respectively, and $39.1 million and $35.4 million for the
nine months ended September 30, 1999 and 1998, respectively.
- Net income for the nine months ended September 30, 1998 includes a $2.5 million charge
($1.2 million, net of tax) included in selling, general and administrative expenses
related to the Companys consolidation of its laboratory network which was announced
in December 1997.
- Net income for the nine months ended September 30, 1999 includes a $1.9 million interest
refund ($1.2 million, net of tax) associated with a favorable tax settlement.
- Results for the three and nine months ended September 30, 1999 include the effects of
the Companys laboratory network management service. As laboratory network manager,
Quest Diagnostics includes in its consolidated revenues and expenses the cost of testing
performed by third parties. This accounting requirement added $26.2 million and $59.0
million to reported revenues and expenses for the three and nine months ended September
30, 1999, respectively.
Notes to the Pro Forma Combined Statements of Operations
Basis of Presentation
The pro forma combined statements of operations assume that the SBCL acquisition and
borrowings under the new credit facility were effected on the earliest period presented.
The pro forma combined statements of operations are presented for illustrative purposes
only to analyze the financial implications of the SBCL acquisition and borrowings under
the new credit facility. The pro forma combined statements of operations may not be
indicative of the combined financial results of operations that would have been realized
had Quest Diagnostics and SBCL been a single entity during the periods presented. In
addition, the pro forma combined statements of operations are not necessarily indicative
of the future results that the combined company will experience.
Significant pro forma adjustments include reductions in employee benefit costs, and
general corporate overhead allocated to the historical results of SBCL by SmithKline
Beecham, offset by an increase in net interest expense to reflect the Companys new
credit facility which was used to finance the SBCL acquisition. Amortization of the
goodwill, which accounts for a majority of the acquired intangible assets, is calculated
on the straight-line basis over forty years. Other, net has been adjusted to remove
SBCLs non-recurring gains from the sale and license of certain technology and its
physician office-based teleprinter assets and network. Income taxes have been adjusted for
the estimated income tax impact of the pro forma adjustments at the incremental tax rate
of 40%. A significant portion of the intangible assets acquired in the SBCL acquisition is
not deductible for tax purposes which has the overall impact of increasing the effective
tax rate.
Pro Forma Combined Results of Operations
- Pro forma net income (loss) for the three and nine months ended September 30, 1999
includes special charges totaling $30.3 million ($18.2 million, net of tax) and $46.1
million ($27.7 million, net of tax), respectively, primarily incurred in conjunction with
the acquisition of SBCL. During the three months ended September 30, 1999, the Company
recorded special charges of $19.8 million representing stock based compensation related to
special one-time grants of the Companys common stock to employees, and the
accelerated vesting, due to the completion of the SBCL acquisition, of stock grants made
in previous years. The remaining charge in the third quarter of 1999 is primarily
attributable to professional and consulting fees incurred in connection with integration
planning activities. The nine months ended September 30, 1999 includes an additional
charge of $15.8 million in the second quarter, primarily to record (on a pro forma basis)
a loss provision to the results of SBCL to reflect a contract as a loss contract.
In addition, the pro forma combined results for the three and nine months ended
September 30, 1999 and 1998, include other income and expense items recorded in
SBCLs historical results which are not separately disclosed on the face of the pro
forma combined statements of operations. These other income and expense items impact the
overall comparability of the pro forma results for 1999 and 1998. The three months ended
September 30, 1999 includes $3.2 million of charges, principally associated with
cumulative adjustments under certain customer contracts. The 1998 period included $.6
million of non-recurring income. The nine months ended September 30, 1999 and 1998
includes incremental expense and pre-tax profits of $24.2 million and $7.2 million,
respectively. Approximately $11 million of the incremental expenses resulted from
adjustments, recorded by SBCL prior to the close, to accrued liabilities necessary to
properly present the closing balance sheet of SBCL. These adjustments impact comparability
because they resulted in an overstatement of expenses for the period presented.
Additionally, approximately $7 million related to losses incurred under the loss contract
noted above, and approximately $6 million related to charges associated with two
incidents, the costs of which SmithKline Beecham is obligated to indemnify Quest
Diagnostics. The most significant of these incidents related to an SBCL employee who
allegedly reused certain needles when drawing the blood from patients. The pre-tax profit
of $7.2 million included in the nine months ended September 30, 1998 primarily represents
the favorable settlement of a contract dispute. Excluding the impact of these items in
both years would result in income before an extraordinary loss and special charges of
$31.4 million for the nine months ended September 30, 1999, and $28.3 million for the nine
months ended September 30, 1998.
- Net income per common share is computed by dividing net income less dividends on
preferred stock (approximately $30 thousand per quarter) by the weighted average number of
common shares outstanding. Potentially dilutive common shares primarily represent stock
options. Both basic and diluted weighted average shares outstanding have been presented on
a pro forma basis giving effect to the shares issued to SmithKline Beecham and the shares
granted at closing to employees.
- Cash earnings represents income before extraordinary loss, special charges and
amortization of intangible assets, net of applicable taxes. Cash earnings per common share
is calculated as cash earnings less preferred dividends, divided by diluted weighted
average common shares outstanding.
- Depreciation expense totaled $20.1 million and $20.2 million for the three months ended
September 30, 1999 and 1998, respectively, and $59.1 million and $61.0 million for the
nine months ended September 30, 1999 and 1998, respectively.
- Results for the three and nine months ended September 30, 1999 include the effects of
the Companys laboratory network management service. As laboratory network manager,
Quest Diagnostics includes in its consolidated revenues and expenses the cost of testing
performed by third parties. This accounting requirement added $37.5 million and $121.8
million to reported revenues and expenses for the three and nine months ended September
30, 1999, respectively.
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