TETERBORO, N.J., Jan. 29 /PRNewswire/ -- Quest Diagnostics Incorporated
(NYSE: DGX), the nation's leading provider of diagnostic testing, information
and services, announced that for the fourth quarter ended December 31, 2000,
income before an extraordinary loss and special items increased to
$28.3 million, or $0.59 per diluted share, compared to $9.7 million, or $0.22
per diluted share in 1999. Cash earnings, or earnings before amortization of
intangible assets and special items, increased to $0.77 per diluted share from
$0.45 in 1999. The company prepaid $155 million of bank debt during the fourth
quarter and recorded an extraordinary loss, net of taxes, of $2.9 million, or
$0.06 per diluted share, associated with the write-off of deferred financing
costs, a non-cash charge. After the extraordinary loss, the company reported
net income of $25.4 million, or $0.53 per diluted share, in the quarter.
Fourth-quarter revenues were $836 million compared to $815 million in
1999. Excluding the impact of the company's network management business in
1999, fourth quarter revenues grew approximately 7% from the 1999 period.
Revenue per requisition during the fourth quarter grew approximately 9%
compared to the prior year. Clinical testing volume, measured by the number of
requisitions, grew approximately 1% above the prior year period, after
adjusting for the impact of severe weather and the contribution of business to
unconsolidated joint ventures. Volume was reduced approximately 1.5% due to
severe weather in several parts of the country in December. Additionally,
reported volume was reduced approximately 1.5% due to the contribution of
certain business to unconsolidated joint ventures, as required by existing
joint venture agreements. As a result, reported volume during the fourth
quarter was approximately 2% below the prior year's level.
Earnings before interest, taxes, depreciation, amortization and special
items (adjusted EBITDA) were $112 million, compared to $85 million, for the
prior year period. Adjusted EBITDA as a percentage of revenues, improved to
13.4% from 10.4% in 1999. The increase in adjusted EBITDA was due primarily to
the company's longstanding strategy of shedding unprofitable business,
focusing on higher-value testing services and the realization of synergies
associated with the integration of SmithKline Beecham Clinical Laboratories
(SBCL).
"We had an excellent year," said Kenneth W. Freeman, Chairman and Chief
Executive Officer. "We had strong top line growth and we nearly doubled
earnings per share -- all while integrating the largest acquisition in the
history of our industry. We are now looking beyond integration to drive
performance improvement through three major initiatives: Six Sigma Quality, as
we step up our efforts to drive quality improvements; Profitable Growth, as we
stand ready to benefit from our leading market position, the genomics
revolution and increased interest among consumers in managing their health;
and Standardization, as we drive efficiency by moving our laboratory
operations to common processes and systems company-wide."
Cash generation remained strong during the quarter. Since the completion
of the SBCL acquisition, the company has generated more than $450 million in
cash, which was used to reduce debt by almost $300 million, and build a cash
balance of more than $170 million at the end of the year. Bad debt expense was
6.3% of revenues during the fourth quarter, compared to 6.8% in the third
quarter. Excluding the impact of the company's network management business,
bad debt expense was 7.7% in the fourth quarter of 1999. Days sales
outstanding at year-end were 56 days compared to 54 days at the end of the
third quarter and 57 days a year ago. Capital expenditures totaled $48 million
for the quarter and $116 million for the year.
Income before an extraordinary loss and special items for the year ended
December 31, 2000, increased to $106.2 million, or $2.25 per diluted share,
compared to $41.2 million, or $1.15 per diluted share, in 1999. Cash earnings
were $3.12 per diluted share for 2000, compared to $1.87 in 1999. Revenues
increased to $3.4 billion from $2.2 billion. Adjusted EBITDA increased to
$459 million from $237 million in 1999. After the extraordinary loss and
special items, net income was $102.1 million, or $2.16 per diluted share.
PRO FORMA COMPARISONS
Revenues increased 3.8% for the year ended December 31, 2000, compared to
pro forma revenues in 1999, assuming that SBCL had been part of Quest
Diagnostics for all of 1999. Revenue growth was partially offset by accounting
for a contract as a loss contract beginning in the second half of 1999 and by
eliminating the gross-up of revenues associated with certain managed care
contracts modified during 2000. Pro forma revenues rose 8.6%, adjusted for
these changes. Average revenue per requisition increased approximately 6%
compared to 1999. For the full year, clinical testing volume grew by 3.0%,
after adjusting for the contribution of business to unconsolidated joint
ventures. Reported volume growth was 2.5% above the 1999 pro forma level.
Income before an extraordinary loss and special items of $106.2 million,
or $2.25 per diluted share, compared to a pro forma amount of $12.6 million,
or $0.28 per diluted share, in 1999. Adjusted EBITDA was $459 million compared
to $337 million on a pro forma basis in the prior year.
Quest Diagnostics will discuss results for the fourth quarter and full
year 2000 during a conference call on January 30 at 8:00 A.M. (Eastern Time).
To hear a simulcast of the call over the Internet, or a replay, registered
analysts may access StreetEvents at: http://www.streetevents.com and all
others may access the Quest Diagnostics website at:
http://www.questdiagnostics.com. In addition, a replay of the call will also
be available from 10 A.M. on January 30 through 5 P.M. on February 2 by
dialing 800-695-4249.
Quest Diagnostics is the nation's leading provider of diagnostic testing,
information and services with $3.4 billion in annual revenues. The company's
diagnostic testing yields information that enables health care professionals
and consumers to make better decisions to improve health. Quest Diagnostics
offers patients and physicians the broadest access to diagnostic testing
services through its national network of approximately 30 full-service
laboratories, 150 rapid response laboratories and more than 1,200 patient
service centers, where specimens are collected. Quest Diagnostics is the
leading provider of esoteric testing, including gene-based testing, and is the
leader in routine medical testing, drugs of abuse testing, and anatomic
pathology testing. Through partnerships with pharmaceutical, biotechnology and
information technology companies, Quest Diagnostics provides support to help
speed the development of health care insights and new therapeutics. Additional
company information can be found on the Internet at:
http://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 1999 Form 10-K and subsequent filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Quarters and Years Ended December 31, 2000 and 1999
(in millions, except per share data)
Quarter Ended December 31, Year Ended December 31,
Historical Historical Pro forma
2000 1999 2000 1999 1999
Net revenues $836.4 $814.5 $3,421.2 $2,205.2 $3,294.8
Costs and expenses:
Cost of services 502.0 520.4 2,056.2 1,380.0 2,132.3
Selling, general
and administrative 247.5 229.6 1,001.4 643.4 948.2
Interest expense, net 23.7 30.1 113.1 61.5 122.6
Amortization of
intangible assets 10.3 11.7 45.7 29.8 45.2
Provisions for restructuring
and other special charges -- 43.1 2.1 73.4 89.2
Minority share of income 1.9 1.6 9.4 5.4 5.4
Other, net (2.6) (3.4) (7.7) (2.7) (13.4)
Total 782.8 833.1 3,220.2 2,190.8 3,329.5
Income (loss) before taxes
and extraordinary loss 53.6 (18.6) 201.0 14.4 (34.7)
Income tax expense
(benefit) 25.3 (4.1) 96.0 15.7 (1.1)
Income (loss) before
extraordinary loss 28.3 (14.5) 105.0 (1.3) (33.6)
Extraordinary loss,
net of taxes (2.9) -- (2.9) (2.1) (2.1)
Net income (loss) $25.4 $(14.5) $102.1 $(3.4) $(35.7)
Income before extraordinary
loss and special items $28.3 $9.7 $106.2 $41.2 $12.6
Basic earnings (loss)
per common share:
Income (loss) before
extraordinary loss $0.62 $(0.33) $2.34 $(0.04) $(0.78)
Net income (loss) 0.56 (0.33) 2.28 (0.10) (0.83)
Income before extraordinary
loss and special items 0.62 0.22 2.37 1.17 0.29
Weighted average common
shares outstanding - basic 45.4 43.7 44.8 35.0 43.3
Diluted earnings (loss)
per common share:
Income (loss) before
extraordinary loss $0.59 $(0.33) $2.22 $(0.04) $(0.78)
Net income (loss) 0.53 (0.33) 2.16 (0.10) (0.83)
Income before extraordinary
loss and special items 0.59 0.22 2.25 1.15 0.28
Cash earnings before
extraordinary loss and
special items 0.77 0.45 3.12 1.87 1.21
Weighted average common
shares outstanding -
diluted 48.1 44.7 47.2 35.8 44.1
Adjusted EBITDA $112.4 $85.1 $459.4 $237.0 $337.4
Quest Diagnostics Incorporated and Subsidiaries
Selected Balance Sheet Information
December 31, 2000 and December 31, 1999
(in millions)
December 31, December 31,
2000 1999
Assets
Cash and cash equivalents $171 $27
Accounts receivable, net 486 539
Intangible assets, net 1,262 1,436
Other assets 946 876
Total assets $2,865 $2,878
Liabilities and Stockholders' Equity
Short-term debt $265 $45
Long-term debt 761 1,171
Other liabilities 808 800
Common stockholders' equity 1,031 862
Total liabilities and stockholders' equity $2,865 $2,878
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
acquisition was accounted for under the purchase method of accounting. As
such, the cost to acquire SmithKline Beecham's clinical laboratory business
("SBCL") has been allocated to the assets and liabilities acquired based on
estimated fair values as of the closing date. The historical consolidated
financial statements include the results of operations of SBCL subsequent to
the closing of the acquisition.
The SBCL acquisition agreements included a provision for a reduction in
the purchase price paid by Quest Diagnostics in the event that the combined
balance sheet of SBCL showed that the net assets acquired, as of the
acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline
Beecham owed Quest Diagnostics $98.6 million. This amount was offset by
$3.6 million separately owed by Quest Diagnostics to SmithKline Beecham,
resulting in a net payment to the Company by SmithKline Beecham of
$95.0 million. This payment from SmithKline Beecham was recorded in the
Company's historical financial statements in the fourth quarter of 2000 as a
reduction in the purchase price of the SBCL acquisition.
The remaining components of the purchase price allocation relating to the
SBCL acquisition were completed during the third quarter of 2000, resulting in
a reduction in the amount of related goodwill recorded of approximately
$35 million.
Note to Selected Balance Sheet Information
(1) The Company maintains zero-balance bank accounts for the majority of
its cash disbursements. Prior to the second quarter of 2000, the
Company maintained its largest disbursement accounts and primary
concentration accounts at the same financial institution, giving
that financial institution the legal right of offset. As such, book
overdrafts related to the disbursement accounts were offset against
cash balances in the concentration accounts for reporting purposes.
During the second quarter of 2000, the Company moved its primary
concentration account to another financial institution such that the
right of offset no longer exists. As a result, book overdrafts in
the amount of $47.4 million at December 31, 2000, representing
outstanding checks, were classified as liabilities and not reflected
as a reduction of cash.
Notes to Consolidated Statements of Operations - Historical
(1) For purposes of determining income and cash earnings before
extraordinary loss and special items, special items included the
provisions for restructuring and other special charges reflected on
the face of the statement of operations, and a $3.0 million gain
recorded on the sale of an investment in the fourth quarter of 1999.
(2) During the second quarter of 2000, the Company recorded a net
special charge of $2.1 million ($1.3 million, net of tax). Of the
special charge, $13.4 million represented the costs to cancel
certain contracts that management believed were not economically
viable as a result of the SBCL acquisition. These costs were
principally associated with the cancellation of a co-marketing
agreement for clinical trials testing services. These charges were
in large part offset by a reduction in reserves attributable to a
favorable resolution of outstanding claims for reimbursements
associated with billings of certain tests.
During the third and fourth quarters of 1999, the Company recorded
provisions for restructuring and other special charges totaling
$30.3 million ($18.2 million, net of tax) and $43.1 million
($26.1 million, net of tax), respectively, principally incurred in
connection with the acquisition and planned integration of SBCL.
Of the total special charge recorded in the third quarter of 1999,
$19.8 million represented stock-based employee compensation related
to special one-time grants of the Company's common stock to certain
individuals of the combined company and accelerated vesting, due to
the completion of the SBCL acquisition, of restricted stock grants
made in previous years. In addition, during the third quarter of
1999, the Company incurred $9.2 million of professional and
consulting fees related to integration planning activities. The
remainder of the third quarter charge was related to costs incurred
by the Company in conjunction with its planned offering of new
senior subordinated notes, the proceeds of which were expected to be
used to repay the Company's existing 10-3/4% senior subordinated
notes due 2006. During the third quarter of 1999, the Company
decided not to proceed with the offering due to unsatisfactory
market conditions.
Of the total special charge recorded in the fourth quarter of 1999,
$36.4 million represented costs related to planned integration
activities affecting Quest Diagnostics' operations and employees.
The majority of these costs related to employee severance, lease
obligations for facilities and equipment and the write-off of
certain assets that management plans to dispose of in conjunction
with the integration of SBCL. The remainder of the fourth quarter
special charge was primarily attributable to professional and
consulting fees incurred in connection with integration related
planning activities and special recognition awards granted in the
fourth quarter of 1999 to certain employees involved in the
transaction and integration planning processes of the SBCL
acquisition.
(3) During the fourth quarter of 2000, the Company prepaid
$155.0 million of the term loans under the Company's Credit
Agreement. The extraordinary loss in the fourth quarter of 2000
represented $4.8 million ($2.9 million, net of tax) of deferred
financing costs which were written off in connection with the
prepayment of the term loans under the Company's Credit Agreement.
During 1999, in conjunction with the acquisition of SBCL, Quest
Diagnostics repaid the entire amount outstanding under its then
existing credit agreement. The extraordinary loss in the third
quarter of 1999 represented $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.
(4) Depreciation expense totaled $23.2 million and $21.9 million for the
quarter ended December 31, 2000 and 1999, respectively, and
$88.6 million and $61.0 million for the year ended December 31, 2000
and 1999, respectively.
(5) Net income for the year ended December 31, 1999 included a
$1.9 million interest refund ($1.2 million, net of tax) associated
with a favorable tax settlement.
(6) Results for 2000 and 1999 included the effects of testing performed
by third parties under the Company's laboratory network management
arrangements. As laboratory network manager, Quest Diagnostics
included in its consolidated revenues and expenses the cost of
testing performed by third parties. This treatment added
$32.6 million to both reported revenues and cost of services for the
quarter ended December 31, 1999 and $48.8 million and $91.6 million
for the year ended December 31, 2000 and 1999, respectively. This
treatment also served to increase cost of services as a percentage
of net revenues and decrease selling, general and administrative
expenses as a percentage of net revenues. During 2000, the Company
modified certain managed care contracts to remove the financial risk
associated with testing performed by third parties. As such, the
accounting requirement, to include in consolidated revenues and
costs of services the cost of testing performed by third parties
under two of the Company's laboratory network management agreements,
was eliminated. The impact, as a result of these changes to the
laboratory management agreements, serves to reduce reported revenues
and costs of services on an annual basis by approximately
$150 million.
(7) 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. During periods in which net income available to
common stockholders is negative, diluted weighted average common
shares outstanding will equal basic weighted average common shares
outstanding since, under these circumstances, the incremental shares
would have an anti-dilutive effect.
(8) Cash earnings per common share is calculated as cash earnings less
preferred dividends, divided by the diluted weighted average common
shares outstanding. Cash earnings represents income before
extraordinary loss, special items and amortization of all intangible
assets, net of applicable taxes.
(9) Adjusted EBITDA represents income before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special
items. For the quarter and year ended December 31, 2000, special
items included the special charges reflected on the face of the
statement of operations, and $1.7 million and $8.9 million,
respectively, of costs related to the integration of SBCL which were
included in operating costs and expensed as incurred. For the
quarter and year ended December 31, 1999, special items included the
special charges reflected on the face of the statement of operations
and a $3.0 million gain on sale of an investment in the fourth
quarter of 1999.
Notes to the Pro Forma Combined Statement of Operations
Basis of Presentation
The pro forma combined statement of operations assumes that the SBCL
acquisition and borrowings under the Company's credit facility were effected
on January 1, 1999. The SBCL acquisition agreements included a provision for
a reduction in the purchase price paid by Quest Diagnostics in the event that
the combined balance sheet of SBCL showed that the net assets acquired, as of
the acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline
Beecham owed Quest Diagnostics $98.6 million. This amount was offset by
$3.6 million separately owed by Quest Diagnostics to SmithKline Beecham,
resulting in a net payment to the Company by SmithKline Beecham of
$95.0 million. This payment from SmithKline Beecham was recorded in the
Company's historical financial statements in the fourth quarter of 2000 as a
reduction in the purchase price of the SBCL acquisition.
The remaining components of the purchase price allocation relating to the
SBCL acquisition were completed during the third quarter of 2000, resulting in
a reduction in the amount of related goodwill recorded of approximately
$35 million.
In connection with finalizing the purchase price adjustment with
SmithKline Beecham, Quest Diagnostics filed a Form 8-K on October 31, 2000
with the Securities and Exchange Commission to revise and update certain pro
forma combined financial information previously reported by the Company. The
unaudited pro forma combined financial information included in this press
release reflects the revised pro forma combined financial information included
in the Form 8-K referred to above.
The unaudited pro forma combined financial information is presented for
illustrative purposes only to assist in analyzing the financial implications
of the SBCL acquisition and borrowings under the Credit Agreement. The
unaudited pro forma combined financial information 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 unaudited pro forma combined financial information is not
necessarily indicative of the future results that the combined company will
experience.
Significant pro forma adjustments reflected in the unaudited pro forma
combined financial information 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 Company's 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. 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
(1) For purposes of determining income and cash earnings before
extraordinary loss and special items, special items for the year
ended December 31, 1999 included the special charges reflected on
the face of the pro forma statement of operations, a $3.0 million
gain recorded on the sale of an investment in the fourth quarter of
1999 and a $9.7 million gain recognized by SBCL on the sale of its
physician office-based teleprinter assets and network in the first
quarter of 1999 which was recorded in other, net.
(2) During the second, third and fourth quarters of 1999, the Company
recorded provisions for restructuring and other special charges
totaling $15.8 million, $30.3 million and $43.1 million,
respectively, principally incurred in connection with the
acquisition and planned integration of SBCL.
The special charge in the second quarter of 1999 of $15.8 million
was primarily to record a provision in the results of SBCL to
reflect a customer contract as a loss contract.
Of the total special charge recorded in the third quarter of 1999,
$19.8 million represented stock-based employee compensation related
to special one-time grants of the Company's common stock to certain
individuals of the combined company and accelerated vesting, due to
the completion of the SBCL acquisition, of restricted stock grants
made in previous years. In addition, during the third quarter of
1999, the Company incurred $9.2 million of professional and
consulting fees related to integration planning activities. The
remainder of the third quarter charge related to costs incurred by
the Company in conjunction with its planned offering of new senior
subordinated notes, the proceeds of which were expected to be used
to repay the Company's existing 10-3/4% senior subordinated notes
due 2006. During the third quarter of 1999, management decided not
to proceed with the offering due to unsatisfactory market
conditions.
Of the total special charge recorded in the fourth quarter of 1999,
$36.4 million represented costs related to planned integration
activities affecting Quest Diagnostics' operations and employees.
The majority of these costs related to employee severance, lease
obligations for facilities and equipment and the write-off of
certain assets that management plans to dispose of in conjunction
with the integration of SBCL. The remainder of the fourth quarter
special charge was primarily attributable to professional and
consulting fees incurred in connection with integration related
planning activities and special recognition awards granted in the
fourth quarter of 1999 to certain employees involved in the
transaction and integration planning processes of the SBCL
acquisition.
A special review of the SBCL pre-closing financial statements,
called for in the SBCL acquisition agreements, was conducted to
assess the recoverability of assets and the adequacy of liabilities
existing prior to the closing date of the acquisition. This special
review resulted in adjustments, primarily related to the
recoverability of SBCL receivables and accrued liabilities during
various periods prior to the closing of the SBCL acquisition.
Management believes that the adjustments resulting from the special
review, which have not been reflected on the face of the pro forma
combined financial information, are of a non-recurring nature and
limit the comparability of results between the periods presented.
For the year ended December 31, 1999, pro forma results included
$46.6 million of these discrete expense items including: bad debt
charges of $22.4 million to reflect the reduced recoverability of
SBCL receivables, as a result of the special review of the SBCL
financial statements; $11.5 million of expenses recorded by SBCL
prior to the acquisition, primarily to record liabilities necessary
to properly present the closing balance sheet of SBCL; $7.1 million
of losses related to a customer contract accounted for as a loss
contract beginning in the third quarter of 1999; and $5.6 million of
costs for which SmithKline Beecham is obligated to indemnify the
Company, associated with two incidents, the most significant of
which related to a SBCL employee who allegedly reused certain
needles when drawing blood from patients.
(3) Pro forma results for the year ended December 31, 1999 included the
effects of testing performed by third parties under the Company's
laboratory network management arrangements. As laboratory network
manager, Quest Diagnostics included in its pro forma consolidated
revenues and expenses the cost of testing performed by third
parties. This treatment added $154.4 million to both pro forma
revenues and pro forma cost of services for the year ended
December 31, 1999. This treatment also serves to increase cost of
services as a percentage of net revenues and decrease selling,
general and administrative expenses as a percentage of net revenues.
(4) Pro forma net income (loss) for the year ended December 31, 1999
included a $9.7 million ($5.8 million, net of tax) non-recurring
gain recorded by SBCL related to the sale of its physician
office-based teleprinter assets and network in the first quarter of
1999 which was recorded in other, net.
(5) Pro forma depreciation expense totaled $81.0 million for the year
ended December 31, 1999.
(6) Pro forma net income per common share is computed by dividing pro
forma 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 shares granted
at closing to certain employees.
(7) Pro forma cash earnings per common share is calculated as pro forma
cash earnings less preferred dividends, divided by pro forma diluted
weighted average common shares outstanding. Cash earnings
represents income before extraordinary loss, special items, and
amortization of all intangible assets, net of applicable taxes,
presented on a pro forma basis.
(8) Pro forma Adjusted EBITDA represents income before extraordinary
loss, income taxes, net interest expense, depreciation, amortization
and special items. For the year ended December 31, 1999, special
items included the provisions for restructuring and other special
charges reflected on the face of the pro forma combined financial
information; $46.6 million of discrete expense items, which are
discussed above in Note 2; a $9.7 million gain recognized by SBCL on
the sale of its physician office-based teleprinter assets and
network in the first quarter of 1999; and a $ 3.0 million gain on
sale of an investment in the fourth quarter of 1999.
SOURCE Quest Diagnostics Incorporated
CONTACT: Investors - Cathy Doherty, 201-393-5030, Media - Gary Samuels,
201-393-5700, both for Quest Diagnostics Incorporated/