Press Release Details

Quest Diagnostics Reports Strong Financial Results in Second Quarter 2004

07/22/2004

TETERBORO, N.J., July 22 /PRNewswire-FirstCall/ -- Quest Diagnostics Incorporated (NYSE: DGX), the nation's leading provider of diagnostic testing, information and services, announced that for the second quarter ended June 30, 2004, net income increased to $135 million, or $1.28 per diluted share, before $13.2 million in special, pre-tax charges, or $0.08 per share, related to the recently completed CEO succession process and the company's debt refinancing, both of which had been previously announced. Including these charges, net income was $127 million, and earnings per diluted share were $1.20. For the second quarter of 2003, net income was $120 million and earnings per diluted share were $1.12.

Second quarter revenues grew 6.4% over the prior-year level to $1.3 billion. Clinical testing volume, measured by the number of requisitions, increased 2.1%, and revenue per requisition increased 3.7%. The remainder of the revenue growth was contributed by the company's non-clinical testing businesses.

For the second quarter, operating income, excluding the charge for the CEO succession process, was $240 million, or 18.5% of revenues, compared to $219 million, or 17.9% of revenues, in 2003. Including the charge, operating income was $230 million, or 17.7% of revenues. Bad debt expense improved to 4.3% of revenues, compared to 4.8% a year ago. Days sales outstanding were 47 days, unchanged from a year ago. Cash from operations increased to $207 million from $169 million in 2003. During the quarter the company repurchased $226 million of its common stock and made capital expenditures of $46 million.

"We continued to improve organic revenue growth and expand our operating margin during the quarter," said Surya N. Mohapatra, Ph.D., President and Chief Executive Officer. "Our ability to generate strong cash flow enabled us to repurchase shares and continue investing to differentiate Quest Diagnostics in the marketplace. These investments have been focused on further improving our customer service, training our sales force to better communicate the medical value of new tests and technologies, and expanding the capabilities of our information technology products. Customers recognize the value of these investments when they select Quest Diagnostics as their laboratory provider."

For the first half of 2004, excluding the second quarter special charges, net income increased to $251 million, and earnings per diluted share increased 20% to $2.38 from $1.98 in 2003. Including the second quarter charges, net income was $243 million and earnings per diluted share were $2.30. Revenues increased 10.4% to $2.6 billion. Operating income, excluding the charge for the CEO succession process, was $449 million, or 17.6% of revenues, compared to $382 million, or 16.5% of revenues in 2003. Including the charge, operating income was $439 million, or 17.2% of revenues. During the first half of 2004, the company repurchased $271 million in common stock and made capital expenditures of $91 million.

Outlook for Third Quarter and Full-Year 2004

For the full year 2004, revenues are expected to grow in excess of 7%, with growth of about 1.5% contributed by Unilab, acquired February 28, 2003. Operating income is expected to approximate 18% of revenues, cash from operations is expected to approximate $700 million, and capital expenditures are expected to be between $180 million and $190 million.

The company continues to expect full year earnings per diluted share of between $4.80 and $4.90, before the second quarter special charges. Including these charges, earnings per diluted share are expected to be between $4.72 and $4.82.

For the third quarter, revenues are expected to grow approximately 6%, operating income is expected to exceed 18% of revenues, and earnings per diluted share are expected to be between $1.25 and $1.30. Quest Diagnostics will hold its second quarter conference call on July 22 at 8:30 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 be available from 10:30 A.M. on July 22 through 11 P.M. on August 20 to investors in the U.S. by dialing 800-294-0997. Investors outside the U.S. may dial 402- 220-9755. No password is required for either number.

Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff. Quest Diagnostics is the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. Additional company information is available 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 actual results and outcomes to be materially different. Certain of these risks and uncertainties may include, but are not limited to, competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors described in the Quest Diagnostics Incorporated 2003 Form 10-K and subsequent filings.

               Quest Diagnostics Incorporated and Subsidiaries

                    Consolidated Statements of Operations
          For the Three and Six Months Ended June 30, 2004 and 2003
                     (in millions, except per share data)

                                     Three Months Ended     Six Months Ended
                                           June 30,              June 30,
                                       2004       2003       2004       2003

    Net revenues                   $1,297.7   $1,219.9   $2,553.4   $2,312.7

    Operating costs and expenses:
    Cost of services                  747.6      703.1    1,484.9    1,351.2
    Selling, general and
     administrative                   307.4      296.1      614.9      575.3
    Amortization of intangible
     assets                             2.0        2.1        4.1        4.1
    Other operating expense, net       10.6         --       10.6        0.2
    Total operating costs and
     expenses                       1,067.6    1,001.3    2,114.5    1,930.8

    Operating income                  230.1      218.6      438.9      381.9

    Other income (expense):
    Interest expense, net             (16.4)     (16.8)     (31.0)     (30.7)
    Minority share of income           (5.0)      (4.4)      (9.5)      (8.2)
    Equity earnings in
     unconsolidated joint ventures      5.4        4.6       10.0        8.6
    Other income (expense), net        (1.2)       1.4         --        0.6
     Total non-operating expenses,
      net                             (17.2)     (15.2)     (30.5)     (29.7)

    Income before taxes               212.9      203.4      408.4      352.2
    Income tax expense                 86.0       83.0      165.4      143.8
    Net income                       $126.9     $120.4     $243.0     $208.4

    Net income before
     special charges                 $134.8     $120.4     $250.9     $208.4


    Basic earnings per common share:
    Net income                        $1.23      $1.15      $2.36      $2.03

    Net income before special charges $1.31      $1.15      $2.43      $2.03

    Weighted average common shares
     outstanding - basic              103.0      105.0      103.1      102.5


    Diluted earnings per common
     share:
    Net income                        $1.20      $1.12      $2.30      $1.98

    Net income before special charges $1.28      $1.12      $2.38      $1.98

    Weighted average common shares
     outstanding - diluted            105.4      107.7      105.6      105.1


    Operating income before special
     charge as a percentage of
     net revenues                     18.5 %     17.9 %     17.6 %     16.5 %


               Quest Diagnostics Incorporated and Subsidiaries

                         Consolidated Balance Sheets
                     June 30, 2004 and December 31, 2003
                     (in millions, except per share data)

                                               June 30, December 31,
                                                  2004         2003

    Assets
    Current assets:
    Cash and cash equivalents                   $137.8       $155.0
    Accounts receivable, net                     677.7        609.2
    Inventories                                   72.8         72.5
    Deferred income taxes                         97.8        109.0
    Prepaid expenses and other current assets     58.0         50.1
        Total current assets                   1,044.1        995.8
    Property, plant and equipment, net           615.3        607.3
    Goodwill, net                              2,517.3      2,518.9
    Intangible assets, net                        12.8         17.0
    Deferred income taxes                         54.7         49.6
    Other assets                                 102.7        112.8
    Total assets                              $4,346.9     $4,301.4


    Liabilities and Stockholders' Equity
    Current liabilities:
    Accounts payable and accrued expenses       $639.7       $649.9
    Short-term borrowings and current
     portion of long-term debt                   130.4         73.9
        Total current liabilities                770.1        723.8
    Long-term debt                               971.7      1,028.7
    Other liabilities                            165.7        154.2
    Common stockholders' equity:
    Common stock, par value $0.01 per
     share; 300 shares authorized;
     106.8 shares issued at both
     June 30, 2004 and December 31, 2003           1.1          1.1
    Additional paid-in capital                 2,231.7      2,267.0
    Retained earnings                            592.7        380.5
    Unearned compensation                         (0.4)        (2.3)
    Accumulated other comprehensive income         1.0          5.9
    Treasury stock, at cost; 5.1 and 4.0
     shares at June 30, 2004 and
     December 31, 2003, respectively            (386.7)      (257.5)
        Total common stockholders' equity      2,439.4      2,394.7
    Total liabilities and stockholders'
     equity                                   $4,346.9     $4,301.4


                 Quest Diagnostics Incorporated and Subsidiaries

                      Consolidated Statements of Cash Flows
                 For the Six Months Ended June 30, 2004 and 2003
                                  (in millions)

                                                   Six Months Ended
                                                       June 30,
                                                  2004          2003

    Cash flows from operating activities:
    Net income                                  $243.0        $208.4
    Adjustments to reconcile net income to
     net cash provided by operating activities:
    Depreciation and amortization                 83.9          75.0
    Provision for doubtful accounts              112.3         113.5
    Deferred income tax provision                  9.7           5.9
    Minority share of income                       9.5           8.2
    Stock compensation expense                     1.0           2.9
    Tax benefits associated with stock-based
     compensation plans                           40.0           9.5
    Other, net                                     2.6           1.5
    Changes in operating assets and
     liabilities:
        Accounts receivable                     (180.9)       (158.0)
        Accounts payable and accrued expenses     (0.5)        (63.8)
        Integration, settlement and other
         special charges                         (16.3)         (9.3)
        Income taxes payable                       4.9          29.8
        Other assets and liabilities, net          8.9           4.1
    Net cash provided by operating activities    318.1         227.7

    Cash flows from investing activities:
    Business acquisitions, net of cash acquired     --        (237.4)
    Capital expenditures                         (90.8)        (75.8)
    Proceeds from disposition of assets            4.7           3.4
    Increase in investments and other assets      (2.9)        (11.1)
    Net cash used in investing activities        (89.0)       (320.9)

    Cash flows from financing activities:
    Proceeds from borrowings                     304.9         450.0
    Repayments of debt                          (305.6)       (354.5)
    Purchases of treasury stock                 (271.1)        (10.1)
    Exercise of stock options                     66.8           9.2
    Dividends paid                               (30.9)           --
    Distributions to minority partners            (8.3)         (6.3)
    Financing costs paid                          (2.1)         (4.2)
    Other                                           --           0.4
    Net cash (used in) provided by
     financing activities                       (246.3)         84.5

    Net change in cash and cash equivalents      (17.2)         (8.7)

    Cash and cash equivalents,
     beginning of period                         155.0          96.8

    Cash and cash equivalents, end of period    $137.8         $88.1

    Cash paid during the period for:
    Interest                                     $25.9         $32.5
    Income taxes                                $112.4        $100.6


    Notes to Financial Tables

     1) Net income per common share is computed by dividing net income
        by the weighted average number of common shares outstanding.
        Potentially dilutive common shares primarily represent stock
        options.

        The following table presents net income and basic and
        diluted earnings per common share, had the Company elected to
        recognize compensation cost based on the fair value at the grant
        dates for stock option awards and discounts granted for stock
        purchases under the Company's Employee Stock Purchase Plan, consistent
        with the method prescribed by Statement of Financial Accounting
        Standards No. 123, "Accounting for Stock-Based Compensation," as
        amended by Statement of Financial Accounting Standards No. 148,
        "Accounting for Stock-Based Compensation -- Transition and Disclosure
        -- an amendment of FASB Statement No. 123":


                                     Three Months Ended    Six Months Ended
                                           June 30,             June 30,
                                       2004       2003      2004        2003
                                       (in millions, except per share data)
    Net income
    Net income, as reported          $126.9     $120.4    $243.0      $208.4
    Add:  Stock-based compensation
     under APB 25                       0.5        1.4       1.0         2.9
    Deduct:  Total stock-based
     compensation expense determined
     under fair value method for all
     awards, net of related tax
     effects                          (11.0)     (13.2)    (21.8)      (27.9)
    Pro forma net income             $116.4     $108.6    $222.2      $183.4

    Earnings per common share
    Basic - as reported               $1.23      $1.15     $2.36       $2.03
    Basic - pro forma                 $1.13      $1.03     $2.16       $1.79

    Diluted - as reported             $1.20      $1.12     $2.30       $1.98
    Diluted - pro forma               $1.11      $1.02     $2.12       $1.77

    The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:


                                     Three Months Ended     Six Months Ended
                                          June 30,               June 30,
                                      2004       2003        2004       2003

    Dividend yield                    0.7 %      0.0 %       0.7 %      0.0 %
    Risk-free interest rate           3.7 %      2.6 %       3.1 %      2.8 %
    Expected volatility              47.1 %     48.5 %      47.2 %     48.1 %
    Expected holding period,
     in years                           5          5           5          5

     2) Other operating expense, net represents miscellaneous income and
        expense items related to operating activities including gains and
        losses associated with the disposal of operating assets.  For the
        three and six months ended June 30, 2004, other operating expense, net
        includes a $10.3 million charge associated with the acceleration of
        certain pension obligations in connection with the recently completed
        CEO succession process.

     3) Interest expense, net for both the three and six months ended June
        30, 2004, includes a $2.9 million charge representing the write-off of
        deferred financing costs associated with the second quarter 2004
        refinancing of the Company's bank debt and credit facility.

     4) In 2003, the Board of Directors authorized a share repurchase
        program, which permits the Company to purchase up to $600 million of
        its common stock.  For the three months ended June 30, 2004, the
        Company repurchased approximately 2.7 million shares of its common
        stock at an average price of $85.34 per share for a total of $226
        million.  For the six months ended June 30, 2004, the Company
        repurchased approximately 3.2 million shares of its common stock at an
        average price of $84.76 per share for a total of $271 million.
        Since the inception of the share repurchase program, the Company has
        repurchased approximately 7.2 million shares of its common stock at an
        average price of $73.54 for a total of $529 million.  For the six
        months ended June 30, 2004, the Company has reissued approximately 2.1
        million of these shares in connection with employee benefit plans.  At
        June 30, 2004, $71 million of the share repurchase authorization
        remained available.  In July 2004, the Board of Directors authorized
        the Company to purchase up to an additional $300 million of its common
        stock, bringing the total available under the combined authorizations
        to $371 million.

     5) Free cash flow represents net cash provided by operating activities
        less capital expenditures.  Free cash flow is presented because
        management believes it is a useful adjunct to cash flow from operating
        activities and other measurements under accounting principles
        generally accepted in the United States since it is a meaningful
        measure of a company's ability to fund investing activities and meet
        its future debt service requirements.  Free cash flow is not a measure
        of financial performance under accounting principles generally
        accepted in the United States and should not be considered as an
        alternative to cash flows from operating, investing or financing
        activities as an indicator of cash flows or as a measure of liquidity.
        The following table reconciles net cash provided by operating
        activities to free cash flow:


                                                      Six Months Ended
                                                          June 30,
                                                   2004             2003
                                                       (in millions)

    Net cash provided by operating activities     $318.1           $227.7
    Less:  Capital expenditures                     90.8             75.8
    Free cash flow                                $227.3           $151.9

     6) Net income before special charges excludes the charges associated with
        the acceleration of certain pension obligations in connection with the
        recently completed CEO succession process and the second quarter 2004
        refinancing of the Company's bank debt and credit facility.  Operating
        income before special charge excludes the charge associated with the
        CEO succession process.  Both operating income and net income before
        special charges, including per common share amounts, are presented
        because management believes that it is a useful adjunct to other
        measurements under accounting principles generally accepted in the
        United States, including reported operating income and net income
        since it is a meaningful measure of the Company's on-going operating
        performance and is on a basis consistent with prior reported results.
        Operating income before special charge and net income before special
        charges, including per common share amounts, are not measures of
        financial performance under accounting principles generally accepted
        in the United States and should not be considered as an alternative to
        reported operating income and net income as an indicator of
        performance.  The following table reconciles operating income and net
        income before special charges to reported results:


                                  For the Three Months Ended June 30, 2004
                                  (in millions, except per share amounts)

                                        Special Charges Related to:

                                         Acceleration
                                          of Certain
                         Before Special    Pension       Debt
                            Charges      Obligations  Refinancing  As Reported

    Net revenues          $ 1,297.7        $    --      $   --      $ 1,297.7

    Operating income      $   240.4        $ (10.3)     $   --      $   230.1
    Interest expense, net     (13.5)            --        (2.9)         (16.4)


    Income before taxes   $   226.1        $ (10.3)     $ (2.9)     $   212.9
    Income tax expense
     (benefit)                 91.3           (4.1)       (1.2)          86.0
    Net income            $   134.8        $  (6.2)     $ (1.7)     $   126.9


    Basic earnings per
     common share:
    Net income            $    1.31        $ (0.06)     $(0.02)     $    1.23

    Diluted earnings
     per common share:
    Net income            $    1.28        $ (0.06)     $(0.02)     $    1.20


    Operating income as
     a percentage of
     net revenues A           18.5 %                                    17.7 %

    A Calculated by dividing
     operating income by net
     revenues


                                  For the Six Months Ended June 30, 2004
                                  (in millions, except per share amounts)

                                        Special Charges Related to:

                                         Acceleration
                                          of Certain
                         Before Special    Pension       Debt
                            Charges      Obligations  Refinancing  As Reported

    Net revenues          $ 2,553.4        $    --      $   --      $ 2,553.4

    Operating income      $   449.2        $ (10.3)     $   --      $   438.9
    Interest expense, net     (28.1)            --        (2.9)         (31.0)


    Income before taxes   $   421.6        $ (10.3)     $ (2.9)     $   408.4
    Income tax expense
     (benefit)                170.7           (4.1)       (1.2)         165.4
    Net income            $   250.9        $  (6.2)     $ (1.7)     $   243.0


    Basic earnings per
     common share:
    Net income            $    2.43        $ (0.06)     $(0.02)     $    2.36

    Diluted earnings
     per common share:
    Net income            $    2.38        $ (0.06)     $(0.02)     $    2.30


    Operating income as
     a percentage of
     net revenues A           17.6 %                                    17.2 %

    A Calculated by dividing
     operating income by net
     revenues

     7) Estimated comparable diluted earnings per common share represents
        management's estimate of diluted earnings per common share for the
        full year 2004 before charges associated with the acceleration of
        certain pension obligations in connection with the recently completed
        CEO succession process and the second quarter refinancing of the
        Company's bank debt and credit facility.  Estimated comparable diluted
        earnings per common share is presented because management believes it
        is a useful adjunct to estimated diluted earnings per common share and
        other measurements under accounting principles generally accepted in
        the United States since it is a meaningful measure of the Company's
        ongoing operating performance and is on a basis consistent with
        previous estimates of diluted earnings per common share.  Estimated
        comparable diluted earnings per common share is not a measure of
        financial performance under accounting principles generally accepted
        in the United States and should not be considered as an alternative to
        estimated diluted earnings per common share.  The following table
        reconciles estimated diluted earnings per common share to estimated
        comparable diluted earnings per common share:


                                                              Twelve Months
                                                                 Ended
                                                              December 31,
                                                                  2004

    Estimated diluted earnings per common share              $ 4.72 - $ 4.82

    Add:
    Charge related to acceleration of certain pension
     obligations                                                   0.06
    Refinancing charge                                             0.02

    Estimated comparable diluted earnings per common share   $ 4.80 - $4.90

SOURCE Quest Diagnostics Incorporated
-0- 07/22/2004
/CONTACT: Laure Park (Investors): +1-201-393-5030 and Gary Samuels
(Media): +1-201-393-5700, both of Quest Diagnostics Incorporated /
/Web site: http://www.questdiagnostics.com /
(DGX)