Press Release Details

Quest Diagnostics Reports Strong Financial Results in Fourth Quarter and Full Year 2004 -- Earnings per Share Expected to Grow 14-16% in 2005

01/27/2005

TETERBORO, N.J., Jan 27, 2005 /PRNewswire-FirstCall via COMTEX/ -- 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, 2004, net income increased to $126 million, compared to $108 million in 2003. Earnings per diluted share increased 21% to $1.23, before a required change in accounting for the company's contingent convertible debentures. After the change in accounting, reported earnings per diluted share were $1.20.

Fourth quarter revenues grew 6.6% over the prior year to $1.3 billion. Clinical testing volume, measured by the number of requisitions, increased 4.1%, and revenue per requisition increased 1.9%. The remainder of the revenue growth was contributed by the company's non-clinical testing businesses.

For the fourth quarter, operating income was $221 million, or 17.2% of revenues, compared to $197 million, or 16.4% of revenues, in 2003. Bad debt expense improved to 4.2% of revenues, from 4.7% a year ago. Days sales outstanding improved to 47 days compared to 48 days a year ago. Cash from operations was $264 million. During the quarter the company repurchased 3.8 million common shares for $353 million, including $254 million from GlaxoSmithKline. Capital expenditures were $42 million.

"Our strong financial performance reflects the benefits of ongoing efforts to accelerate organic growth," said Surya N. Mohapatra, Ph.D., Chairman and Chief Executive Officer. "We continue to generate substantial cash flow, which we are investing to further differentiate our services to physicians and patients, and return value to shareholders. We expect 2005 to be another solid year, with earnings per share increasing 14% to 16%."

For the full year 2004, net income increased to $507 million, and earnings per diluted share increased 18% to $4.87, excluding previously disclosed second quarter charges and before the change in accounting for the company's contingent convertible debentures. Diluted earnings per share were $4.77, excluding the second quarter charges and after the change in accounting. Reported net income was $499 million, or $4.69 per diluted share, including the second quarter charges and after the change in accounting.

Revenues for the full year increased 8.2% to $5.1 billion. Unilab, acquired February 28, 2003, accounted for approximately 1.5% of the growth. Operating income, excluding the second quarter charge related to the CEO succession process, was $902 million, or 17.6% of revenues, compared to $796 million, or 16.8% of revenues in 2003. Including the second quarter charge, operating income was $891 million, or 17.4% of revenues. Cash from operations totaled $799 million, compared to $663 million in 2003. During 2004 the company repurchased 8.3 million common shares for $735 million and made capital expenditures of $176 million.

Outlook for 2005

For the full year 2005, revenues are expected to grow between 5% and 6%. Operating income is expected to be between 18% and 19% of revenues; cash from operations is expected to approach $800 million; and capital expenditures are expected to be between $210 million and $230 million. The company expects full year earnings per diluted share of between $5.45 and $5.55, an increase of 14% to 16% compared to 2004 diluted earnings per share of $4.77 before special charges. Estimates for 2005 earnings per diluted share, operating income and cash from operations are before the impact of the accounting change for equity-based compensation, effective July, 2005.

Quest Diagnostics will hold its fourth quarter conference call on January 27 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 January 27 through 11 P.M. on February 25 to investors in the U.S. by dialing 866-481-6893. Investors outside the U.S. may dial 203-369-1572. 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 Twelve Months Ended December 31, 2004 and 2003
             (in millions, except per share and percentage data)


                                 Three Months Ended     Twelve Months Ended
                                    December 31,             December 31,

                                  2004         2003         2004       2003


    Net revenues              $1,283.3     $1,204.0     $5,126.6   $4,737.9

    Operating costs and
     expenses:
    Cost of services             757.4        706.2      2,990.7    2,768.6
    Selling, general and
     administrative              304.6        298.0      1,227.8    1,165.7
    Amortization of
     intangible assets             0.9          2.1          6.7        8.2
    Other operating (income)
     expense, net                 (0.2)         0.7         10.2       (1.0)
      Total operating costs
       and expenses            1,062.7      1,007.0      4,235.4    3,941.5

    Operating income             220.6        197.0        891.2      796.4

    Other income (expense):
    Interest expense, net        (13.3)       (14.5)       (57.9)     (59.7)
    Minority share of income      (5.0)        (4.8)       (19.4)     (17.6)
    Equity earnings in
     unconsolidated
     joint ventures                5.5          4.4         21.0       17.4
    Other income, net              0.2          0.8          0.2        1.3
      Total non-operating
       expenses, net             (12.6)       (14.1)       (56.1)     (58.6)

    Income before taxes          208.0        182.9        835.1      737.8
    Income tax expense            81.9         74.6        335.9      301.1
    Net income                  $126.1       $108.3       $499.2     $436.7

    Net income before
     special charges            $126.1       $108.3       $507.1     $436.7

    Basic earnings per
     common share:
    Net income                   $1.26        $1.04        $4.90      $4.22

    Net income before
     special charges             $1.26        $1.04        $4.98      $4.22

    Weighted average common
     shares outstanding
     - basic                     100.4        103.8        102.0      103.4

    Diluted earnings
     per common share:
    Net income                   $1.20        $1.00        $4.69      $4.04

    Net income before
     special charges             $1.20        $1.00        $4.77      $4.04

    Weighted average
     common shares
     outstanding - diluted       105.3        109.2        107.1      108.8

    Operating income
     before special charge
     as a percentage of
     net revenues                17.2%        16.4%        17.6%      16.8%



               Quest Diagnostics Incorporated and Subsidiaries

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


                                              December 31,   December 31,
                                                 2004            2003
    Assets
    Current assets:
    Cash and cash equivalents                    $73.3          $155.0
    Accounts receivable, net                     649.3           609.2
    Inventories                                   75.3            72.5
    Deferred income taxes                         83.0           109.0
    Prepaid expenses and other current assets     50.2            50.1
      Total current assets                       931.1           995.8
    Property, plant and equipment, net           619.5           607.3
    Goodwill, net                              2,506.9         2,518.9
    Intangible assets, net                        11.5            17.0
    Deferred income taxes                         29.4            49.6
    Other assets                                 105.4           112.8
    Total assets                              $4,203.8        $4,301.4


    Liabilities and Stockholders' Equity
    Current liabilities:
    Accounts payable and accrued expenses       $669.0          $649.9
    Short-term borrowings and
     current portion of long-term debt           374.8            73.9
      Total current liabilities                1,043.8           723.8
    Long-term debt                               724.0         1,028.7
    Other liabilities                            147.3           154.2
    Stockholders' equity:
    Common stock, par value $0.01 per share;
     300 shares authorized;
     106.8 shares issued at both
     December 31, 2004 and 2003                    1.1             1.1
    Additional paid-in capital                 2,195.3         2,267.0
    Retained earnings                            818.7           380.5
    Unearned compensation                            -           (2.3)
    Accumulated other comprehensive income         3.9             5.9
    Treasury stock, at cost; 8.7 and 4.0 shares
     at December 31, 2004 and 2003,
     respectively                               (730.3)         (257.5)
    Total stockholders' equity                 2,288.7         2,394.7
    Total liabilities and
     stockholders' equity                     $4,203.8        $4,301.4



               Quest Diagnostics Incorporated and Subsidiaries

                    Consolidated Statements of Cash Flows
            For the Twelve Months Ended December 31, 2004 and 2003
                                (in millions)

                                                Twelve Months Ended
                                                    December 31,
                                                2004             2003

    Cash flows from operating activities:
    Net income                                  $499.2          $436.7
    Adjustments to reconcile net income
     to net cash provided by
     operating activities:
    Depreciation and amortization                168.7           153.9
    Provision for doubtful accounts              226.3           228.2
    Deferred income tax provision                 52.5            33.9
    Minority share of income                      19.4            17.6
    Stock compensation expense                     1.4             5.3
    Tax benefits associated with
     stock-based compensation plans               71.3            30.5
    Other, net                                     4.7            (1.6)
    Changes in operating assets and liabilities:
      Accounts receivable                       (266.4)         (254.9)
      Accounts payable and accrued expenses       22.3            (6.8)
      Integration, settlement and
       other special charges                     (18.3)          (18.9)
      Income taxes payable                         1.1            26.5
      Other assets and liabilities, net           16.5            12.4
    Net cash provided by operating activities    798.7           662.8

    Cash flows from investing activities:
    Business acquisitions, net of cash acquired      -          (237.6)
    Capital expenditures                        (176.1)         (174.6)
    Proceeds from disposition of assets            7.6             9.0
    Increase in investments and other assets      (5.2)          (13.8)
    Net cash used in investing activities       (173.7)         (417.0)

    Cash flows from financing activities:
    Proceeds from borrowings                     304.9           450.0
    Repayments of debt                          (306.0)         (391.7)
    Purchases of treasury stock                 (734.5)         (257.5)
    Exercise of stock options                    109.1            29.9
    Dividends paid                               (61.4)              -
    Distributions to minority partners           (16.7)          (14.3)
    Financing costs paid                          (2.1)           (4.2)
    Other                                            -             0.2
    Net cash used in financing activities       (706.7)         (187.6)

    Net change in cash and cash equivalents      (81.7)           58.2
    Cash and cash equivalents,
     beginning of period                         155.0            96.8
    Cash and cash equivalents, end of period     $73.3          $155.0

    Cash paid during the period for:
    Interest                                     $51.8           $59.4

    Income taxes                                $209.2          $212.0


     Notes to Financial Tables

     1)  Basic earnings per common share is calculated by dividing net income
         by the weighted average common shares outstanding.  Due to a required
         change in accounting effective December 31, 2004, the Company
         included the dilutive effect of its contingent convertible debentures
         in its dilutive earnings per common share calculations using the if-
         converted method, regardless of whether or not the holders of these
         securities were permitted to exercise their conversion rights, and
         retroactively restated previously reported diluted earnings per
         common share.  References to the diluted weighted average common
         shares outstanding, including diluted earnings per common share
         calculations and related disclosures, have been restated to give
         effect to the required change in accounting for all periods
         presented.

         The computation of basic and diluted earnings per common share (using
         the if-converted method) is as follows:

                               Three Months Ended       Twelve Months Ended
                                  December 31,              December 31,
                              2004         2003         2004         2003
                                  (in millions, except per share data)

    Net income available to
     common stockholders
     - basic (A)            $126.1       $108.3       $499.2       $436.7
    Add: Interest expense
     associated with
     contingent convertible
     debentures, net of
     related tax effects       0.8          0.8          3.3          3.3
    Income available to
     common stockholders
     - diluted              $126.9       $109.1       $502.5       $440.0

    Weighted average common
     shares outstanding
     - basic, as reported    100.4        103.8        102.0        103.4

    Dilutive effect of stock
     options and restricted
     common shares granted
     under the Company's
     Employee Equity
     Participation Program     2.0          2.5          2.2          2.5

    Weighted average common
     shares outstanding
     - diluted (before the
     required change in
     accounting for the
     Company's contingent
     convertible
     debentures) (B)         102.4        106.3        104.2        105.9

    Dilutive effect of the
     contingent convertible
     debentures                2.9          2.9          2.9          2.9

    Weighted average common
     shares outstanding
     - diluted, as
     reported                105.3        109.2        107.1        108.8

    Basic earnings per
     common share,
     as reported             $1.26        $1.04        $4.90        $4.22

    Diluted earnings
     per common share,
     as reported             $1.20        $1.00        $4.69        $4.04

    Diluted earnings per
     common share, before
     the required change in
     accounting for the
     Company's contingent
     convertible
     debentures *            $1.23        $1.02        $4.79        $4.12

     * Calculated by dividing income available to common stockholders - basic
       (A) by the weighted average common shares outstanding - diluted (before
       the required change in accounting for the Company's contingent
       convertible debentures) (B)


     2) 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         Twelve Months Ended
                                 December 31,               December 31,
                              2004         2003         2004         2003
                                   (in millions, except per share data)
    Net income
    Net income,
     as reported            $126.1       $108.3       $499.2       $436.7
    Add: Stock-based
     compensation
     under APB 25              0.2          1.2          1.4          5.3
    Deduct: Total stock-based
     compensation expense
     determined under fair
     value method for all
     awards, net of related
     tax effects             (11.6)        (12.3)       (45.1)        (52.3)
    Pro forma net income    $114.7        $97.2       $455.5       $389.7

    Earnings per common share
    Basic - as reported      $1.26        $1.04        $4.90        $4.22
    Basic - pro forma        $1.14        $0.94        $4.47        $3.77

    Diluted - as reported    $1.20        $1.00        $4.69        $4.04
    Diluted - pro forma      $1.09        $0.90        $4.27        $3.65


    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        Twelve Months Ended
                                 December 31,               December 31,
                              2004         2003         2004         2003

    Dividend yield            0.6%         0.4%         0.7%         0.0%
    Risk-free interest rate   3.5%         3.2%         3.1%         2.8%
    Expected volatility      46.0%        47.9%        47.2%        48.1%
    Expected holding period,
     in years                   5             5             5            5

    3)Other operating (income) 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 twelve
       months ended December 31, 2004, other operating expense, net includes a
       $10.3 million second quarter charge associated with the acceleration of
       certain pension obligations in connection with the CEO succession
       process.

    4) Interest expense, net for the twelve months ended December 31, 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.

    5) In 2003, the Board of Directors authorized a share repurchase program,
       which permitted the Company to purchase up to $600 million of its
       common stock.In July 2004, the Board of Directors authorized the
       Company to purchase up to an additional $300 million of its common
       stock.Under a separate authorization from the Board of Directors, in
       December 2004 the Company repurchased 2.7 million shares of its common
       stock for approximately $254 million from GlaxoSmithKline plc.For the
       three months ended December 31, 2004, the Company repurchased
       approximately 3.8 million shares of its common stock at an average
       price of $93.47 per share for $353 million.For the twelve months ended
       December 31, 2004, the Company repurchased approximately 8.3 million
       shares of its common stock at an average price of $88.21 per share for
       $735 million.Since the inception of the share repurchase program, the
       Company has repurchased approximately 12.3 million shares of its common
       stock at an average price of $80.54 for $992 million.For the three and
       twelve months ended December 31, 2004, the Company has reissued
       approximately 0.9 million shares and 3.6 million shares, respectively,
       primarily in connection with employee benefit plans.At December 31,
       2004, $162 million of the share repurchase authorizations remained
       available.In January 2005, the Board of Directors expanded the share
       repurchase authorization by an additional $350 million, bringing the
       total amount authorized and available for repurchases to $512 million.

    6) 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:

                                             Twelve Months Ended December 31,
                                                      2004            2003
                                                          (in millions)

    Net cash provided by operating activities         $798.7         $662.8
    Less: Capital expenditures                         176.1          174.6
    Free cash flow                                    $622.6         $488.2


    7) Net income before special charges excludes the second quarter 2004
       charges associated with the acceleration of certain pension obligations
       in connection with the CEO succession process and the 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 they are useful adjuncts to other measurements under
       accounting principles generally accepted in the United States,
       including reported operating income and net income since they are
       meaningful measures of the Company's on-going operating performance and
       are 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 alternatives 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 Twelve Months Ended December 31, 2004
                             (in millions, except per share amounts)


                                       Special Charges Related to:

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

    Net revenues          $5,126.6           $-           $-     $5,126.6

    Operating income        $901.5      $(10.3)           $-       $891.2
    Interest expense, net   (55.0)            -        (2.9)       (57.9)


    Income before taxes     $848.3      $(10.3)       $(2.9)       $835.1
    Income tax expense
     (benefit)               341.2        (4.1)        (1.2)        335.9
    Net income              $507.1       $(6.2)       $(1.7)       $499.2

    Basic earnings
     per common share        $4.98      $(0.06)      $(0.02)        $4.90
    Diluted earnings
     per common share        $4.77      $(0.06)      $(0.02)        $4.69

    Diluted earnings per
     common share, before
     the required change in
     accounting for the
     Company's contingent
     convertible
     debentures (A)          $4.87

    Operating income as
     a percentage of net
     revenues (B)            17.6%                                  17.4%

    (A)Calculated by dividing net income before special charges by the
        weighted average common shares outstanding - diluted (before the
        required change in accounting for the Company's contingent convertible
        debentures) in footnote 1
    (B)Calculated by dividing operating income by net revenues


     8) Before the impact of the accounting change for equity-based
        compensation, the Company expects 2005 diluted earnings per common
        share to be between $5.45 and $5.55, operating income to be between
        18% and 19% of revenues and cash from operations to approach $800
        million.  The Company has not finalized what, if any, changes may be
        made to its equity compensation plans in light of the accounting
        change, and therefore is not yet in a position to quantify its impact.
        The Company expects to announce the impact in connection with
        reporting its second quarter 2005 financial results.  Assuming there
        are no changes to the Company's equity compensation plans, and an
        adoption date of July 1, 2005 for the new accounting standard, the
        Company estimates that the adoption of the new accounting standard
        will reduce diluted earnings per common share by up to $0.23 per share
        and operating income, as a percentage of revenues, by up to
        approximately 1%.  The impact on cash from operations of adopting the
        new accounting standard cannot be estimated at this time.

     9) In December 2004, the Company called for redemption all of its
        outstanding contingent convertible debentures due November 2021.
        Under the terms of the debentures, the holders of the debentures had
        an option to submit their debentures for redemption at par plus
        accrued and unpaid interest or convert their debentures into shares of
        the Company's common stock at a conversion price of $87.50 per share.
        The outstanding principal of the debentures at December 31, 2004 is
        classified as a current liability within short-term borrowings and
        current portion of long-term debt on the Company's consolidated
        balance sheet at December 31, 2004.  As of January 18, 2005, the
        redemption was completed and $0.4 million of principal was redeemed
        for cash and $249.6 million of principal was converted into
        approximately 2.9 million shares of the Company's common stock.

SOURCE Quest Diagnostics Incorporated

Laure Park, Investors, +1-201-393-5030, or Gary Samuels, Media, +1-201-
393-5700, both
of Quest Diagnostics