Press Release Details

Quest Diagnostics Reports Growth in Revenue and Earnings for Third Quarter 2008

10/21/2008
  • Total revenues of $1.8 billion, up 3.4%
  • Adjusted diluted earnings per share of $0.86, up 12%
  • Cash flow from operations improved to $329 million
  • 2008 adjusted EPS guidance increased to $3.17 - $3.22 per diluted share
  • Agreement in principle reached regarding previously disclosed NID-related matter

MADISON, N.J., Oct. 21 /PRNewswire-FirstCall/ -- , 2008-- Quest Diagnostics Incorporated (NYSE: DGX), the world's leading provider of diagnostic testing, information and services, announced that for the third quarter ended September 30, 2008, adjusted income from continuing operations increased to $0.86 per diluted share, before $0.03 per share associated with a non-cash charge to write down an equity investment, and $0.02 per share associated with the impact of hurricanes. Including these items, net income from continuing operations was $160 million, or $0.81 per diluted share. For the third quarter 2007, net income was $150 million, or $0.77 per diluted share.

Third quarter revenues increased 3.4% to $1.8 billion. The impact of hurricanes reduced revenues by approximately half a percent. Clinical testing revenues increased by 3.0% compared to the prior year. Revenue per requisition increased 2.3% and clinical testing volume, measured by the number of requisitions, increased 0.7%.

"During the quarter, we grew revenues, increased adjusted earnings per share 12% and generated $329 million in cash," said Surya N. Mohapatra, Ph.D., Chairman and Chief Executive Officer. "Our strong cash flows and prudent capital management position us well for these turbulent times. We are successfully executing our plan, focusing on providing a differentiated service to our customers, and continuing to drive strong results."

For the third quarter, operating income increased to $317 million, or 17.4% of revenues, from $306 million, or 17.3% of revenues in 2007. The impact of hurricanes reduced operating income as a percentage of revenues by approximately half a percent. Bad debt expense, as a percentage of revenues, improved to 4.4%, compared to 4.8% in 2007. Days sales outstanding improved to 45 days, compared to 46 days at the end of the second quarter of 2008 and 50 days a year ago. Cash flow from operations increased to $329 million from $291 million in the third quarter of 2007. During the quarter, the company reduced debt by $131 million, and made capital expenditures of $45 million. Cash and cash equivalents increased to $287 million at the end of the third quarter, compared to $143 million at the end of the second quarter.

Year-to-Date Performance

For the first nine months of 2008, adjusted income from continuing operations increased to $2.41 per diluted share, before $0.03 per share associated with the write-down of an equity investment and $0.02 per share associated with the impact of hurricanes in the third quarter. Including these items, income from continuing operations increased to $463 million, or $2.36 per diluted share, from $400 million, or $2.05 per diluted share in 2007. Revenues increased 10.4% to $5.4 billion. The acquisition of AmeriPath increased consolidated revenues by 6.8%.

Operating income for the first nine months of 2008 increased to $905 million, or 16.6% of revenues, compared to $779 million, or 15.8% of revenues, in 2007. Cash from operations increased to $700 million from $572 million in 2007. Through September 2008, the company reduced debt by $412 million, and made capital expenditures of $140 million.

Agreement in Principle Regarding Previously Disclosed NID-Related Matter

The company and NID, the company's former test-kit manufacturing subsidiary, reached an agreement in principle with the Office of the United States Attorney for the Eastern District of New York to settle the previously disclosed federal government investigation. The agreement in principle provides for a comprehensive settlement of federal claims. NID, which was closed in 2006, is expected to enter a guilty plea to a single count of felony misbranding. The terms of the settlement are subject to the final negotiation and execution of definitive agreements.

As a result of the agreement in principle, during the third quarter, the company recorded a charge of $73 million in discontinued operations to increase its reserves for the settlement and related matters, bringing the total reserve for these matters to $314 million, the company's best estimate of the expected probable loss. The company reported a loss from discontinued operations, net of taxes, of $49 million or $0.25 per diluted share for the quarter. See footnote 6 to the attached tables.

Outlook for 2008

For the full year 2008, the company now expects results from continuing operations as follows: adjusted earnings per diluted share of between $3.17 and $3.22, compared to the previous range of $3.10 to $3.20; revenue growth of greater than 8%, and operating income to approach 17% of revenues. Over the same period, the company expects cash from operations to approximate $900 million and capital expenditures of between $200 million and $220 million. These estimates exclude the third quarter impact of an equity investment write-down and hurricanes, and potential special charges.

Quest Diagnostics will hold its third quarter conference call on October 21, 2008 at 8:30 A.M. Eastern Time. A simulcast of the call is available by dialing 415-228-4961, passcode 3214469 and via the Internet at: www.questdiagnostics.com. Registered analysts may access the call at: www.streetevents.com. In addition, a replay of the call will be available from 10:30 A.M. on October 21 through midnight on November 18, 2008 to investors in the U.S. by dialing 866-431-7950. Investors outside the U.S. may dial 203-369-0981. No password is required for either number.

About Quest Diagnostics

Quest Diagnostics is the world's leading provider of diagnostic testing, information and services that patients and doctors need to make better healthcare decisions. The company offers the broadest access to diagnostic testing services through its network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff. Quest Diagnostics is a pioneer in developing innovative diagnostic tests and advanced healthcare information technology solutions that help improve patient care.

Quest Diagnostics maintains one of the largest private clinical laboratory databases in the United States. The data is used to generate Quest Diagnostics Health Trends(TM), which identifies and tracks disease and wellness benchmarks, and the Drug Testing Index(R), which is published as a public service for government, media and industry and has been considered a benchmark for national drugs-of-abuse trends since its inception in 1988. Additional company information is available at www.questdiagnostics.com.

The statements in this press release which are not historical facts may be forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that they are made and which reflect management's current estimates, projections, expectations or beliefs and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors discussed in "Business" in Part I, Item 1, "Risk Factors" and "Cautionary Factors that May Affect Future Results" in Part I, Item 1A, "Legal Proceedings" in Part I, Item 3, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and "Quantitative and Qualitative Disclosures About Market Risk" in Part II, Item 7A in the company's 2007 Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk" in the company's 2008 Quarterly Reports on Form 10-Q and other items throughout the Form 10-K and the company's 2008 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Adjusted diluted earnings per common share is presented because management believes it is a useful adjunct to 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. Adjusted 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 diluted earnings per common share or estimated diluted earnings per common share. See footnotes 7 and 8 to the attached tables.

This earnings release, including the attached financial tables, is available online in the Press Room section at www.questdiagnostics.com.

-Table Follows-

    Quest Diagnostics Incorporated and Subsidiaries
    Consolidated Statements of Operations
    For the Three and Nine Months Ended September 30, 2008 and 2007
    (in millions, except per share and percentage data)
    (unaudited)

                               Three Months Ended   Nine Months Ended
                                  September 30,       September 30,

                                 2008      2007      2008       2007
    Net revenues              $1,826.6  $1,767.0   $5,449.1    $4,934.4

    Operating costs and
     expenses:
     Cost of services          1,073.1   1,026.6    3,215.2     2,927.1
     Selling, general and
      administrative             428.2     424.3    1,301.3     1,204.2
     Amortization of
      intangible assets            8.8       8.8       28.0        18.7
     Other operating
      (income) expense, net       (0.4)      1.3       (0.7)        5.1
                                  -----      ---       -----        ---
       Total operating costs
        and expenses           1,509.7   1,461.0     4,543.8    4,155.1
                               -------   -------     -------    -------

    Operating income             316.9     306.0       905.3      779.3

    Other income (expense):
     Interest expense, net       (43.1)    (58.7)     (136.1)    (124.4)
     Minority share of
      income                      (8.6)     (6.6)      (23.5)     (19.1)
     Equity earnings in
       unconsolidated joint
       ventures                    7.5       6.6        23.1       20.1
     Other income
      (expense), net             (12.4)      0.5       (12.9)       2.8
                                 ------      ---       ------       ---
       Total non-operating
        expenses, net            (56.6)    (58.2)     (149.4)    (120.6)
                                 ------    ------     -------    -------

    Income from continuing
     operations before
     taxes                       260.3     247.8       755.9      658.7
    Income tax expense           100.6      97.4       293.3      258.9
                                 -----      ----       -----      -----
    Income from continuing
     operations                  159.7     150.4       462.6      399.8
    Loss from discontinued
     operations, net of taxes    (48.9)    (52.4)      (50.9)     (54.6)
                                 ------    ------      ------     ------
    Net income                  $110.8     $98.0      $411.7     $345.2
                                ======     =====      ======     ======


    Earnings per common
     share - basic:
    Income from continuing
     operations                  $0.82     $0.78       $2.38      $2.07
    Loss from discontinued
     operations                  (0.25)    (0.27)      (0.26)     (0.28)
                                 ------    ------      ------     ------
    Net income                   $0.57     $0.51       $2.12      $1.79
                                 =====     =====       =====      =====


    Earnings per common
     share   - diluted:
    Income from continuing
     operations                  $0.81     $0.77       $2.36      $2.05
    Loss from discontinued
     operations                  (0.25)    (0.27)      (0.26)     (0.28)
                                 ------    ------      ------     ------
    Net income                   $0.56     $0.50       $2.10      $1.77
                                 =====     =====       =====      =====


    Weighted average common
     shares outstanding:
       Basic                     195.0     193.4       194.5      193.1
       Diluted                   197.2     195.6       196.4      195.1


    Operating income as a
     percentage of net
     revenues                    17.4%     17.3%        16.6%      15.8%
    Quest Diagnostics Incorporated and Subsidiaries
    Consolidated Balance Sheets
    September 30, 2008 and December 31, 2007
    (in millions, except per share data)


                                       September 30,       December 31,
                                          2008                2007
                                        (unaudited)         (audited)

    Assets
    ------
    Current assets:
    Cash and cash equivalents                $286.7           $167.6
    Accounts receivable, net                  888.1            882.0
    Inventories                                98.8             95.2
    Deferred income taxes                     182.1            149.8
    Prepaid expenses and other
     current assets                            95.9             79.8
                                               ----             ----
      Total current assets                  1,551.6          1,374.4
    Property, plant and equipment, net        873.4            912.0
    Goodwill, net                           5,133.7          5,220.1
    Intangible assets, net                    846.0            886.7
    Other assets                              164.0            172.5
                                              -----            -----
    Total assets                           $8,568.7         $8,565.7
                                           ========         ========


    Liabilities and Stockholders'
     Equity
    ------------------------------------
    Current liabilities:
    Accounts payable and accrued
     expenses                              $1,190.9         $1,124.7
    Short-term borrowings and current
     portion of long-term debt                 49.9            163.6
                                               ----            -----
      Total current liabilities             1,240.8          1,288.3
    Long-term debt                          3,078.4          3,377.2
    Other liabilities                         517.5            576.0
    Stockholders' equity:
      Common stock, par value $0.01 per
       share; 600 shares authorized at
       both September 30, 2008 and
       December 31, 2007; 214.1 and
       213.7 shares issued at September
       30, 2008 and December 31, 2007,
       respectively                             2.1              2.1
    Additional paid-in capital              2,247.1          2,210.8
    Retained earnings                       2,410.9          2,057.7
    Accumulated other comprehensive
      (loss) income                           (14.5)            25.3
    Treasury stock, at cost; 18.5 and
       19.7 shares at September 30,
       2008 and December 31, 2007,
       respectively                          (913.6)          (971.7)
                                             -------          -------
      Total stockholders' equity            3,732.0          3,324.2
                                            -------          -------
    Total liabilities and
     stockholders' equity                  $8,568.7         $8,565.7
                                           ========         ========
    Quest Diagnostics Incorporated and Subsidiaries
    Consolidated Statements of Cash Flows
    For the Nine Months Ended September 30, 2008 and 2007
    (in millions)
    (unaudited)

                                                    Nine Months Ended
                                                      September 30,
                                                   2008            2007


    Cash flows from operating activities:
    Net income                                   $411.7          $345.2
    Adjustments to reconcile net income
      to net cash provided by
       operating activities:
    Depreciation and amortization                 198.8           169.3
    Provision for doubtful accounts               248.0           223.0
    Stock-based compensation expense               49.6            46.2
    Provision for special charge                   72.7            51.0
    Deferred income tax (benefit) provision       (21.1)            4.1
    Minority share of income                       23.5            19.1
    Excess tax benefits from stock-based
     compensation arrangements                     (2.1)          (11.7)
    Other, net                                      2.0            (3.0)
    Changes in operating assets and
     liabilities:
      Accounts receivable                        (259.7)         (264.4)
      Accounts payable and accrued expenses        (0.5)          (13.3)
      Integration, settlement and other
       special charges                             (6.1)           (8.9)
      Income taxes payable                          8.7            12.2
      Other assets and liabilities, net           (25.4)            2.9
                                                  ------            ---
    Net cash provided by operating activities     700.1           571.7
                                                  -----           -----

    Cash flows from investing activities:
    Business acquisitions,
     net of cash acquired                          19.3        (1,503.4)
    Capital expenditures                         (140.2)         (142.9)
    Decrease (increase) in investments
     and other assets                               4.4            (3.8)
                                                    ---            -----
    Net cash used in investing activities        (116.5)       (1,650.1)
                                                 -------       ---------

    Cash flows from financing activities:
    Repayments of debt                           (434.9)       (2,399.9)
    Proceeds from borrowings                       21.5         3,674.5
    Increase (decrease) in book overdrafts          1.4           (21.1)
    Purchases of treasury stock                     -            (145.7)
    Exercise of stock options                      27.9            69.4
    Excess tax benefits from stock-based
     compensation arrangements                      2.1            11.7
    Dividends paid                                (58.4)          (58.0)
    Distributions to minority partners            (23.6)          (16.3)
    Financing costs paid                           (0.5)          (21.2)
                                                  -----           ------
    Net cash (used in) provided by
     financing activities                        (464.5)        1,093.4
                                                 -------        -------

    Net change in cash and cash equivalents       119.1            15.0

    Cash and cash equivalents, beginning
     of period                                    167.6           149.6
                                                  -----           -----

    Cash and cash equivalents, end of
     period                                      $286.7          $164.6
                                                 ======          ======

    Cash paid during the period for:
    Interest                                     $151.7          $107.6
    Income taxes                                 $277.4          $231.4

Notes to Financial Tables

    1. The computation of basic and diluted earnings per common share is as
       follows:
                                Three Months Ended    Nine Months Ended
                                   September 30,         September 30,
                                2008         2007       2008       2007
                                 (in millions, except per share data)
    Income from continuing
     operations                  $159.7     $150.4     $462.6    $399.8
    Loss from discontinued
       operations                 (48.9)     (52.4)     (50.9)    (54.6)
                                  ------     ------     ------    ------
    Net income available to
     common stockholders -
      basic and diluted          $110.8      $98.0     $411.7    $345.2
                                 ======      =====     ======    ======


    Weighted average common
     shares outstanding -
      basic                       195.0      193.4      194.5     193.1

    Effect of dilutive
     securities:
    Stock options, restricted
     common shares,
     restricted stock units
     and performance share
     units                          2.2        2.2        1.9       2.0
                                    ---        ---        ---       ---

    Weighted average common
     shares outstanding -
      diluted                      197.2     195.6      196.4     195.1
                                   =====     =====      =====     =====


    Earnings per common share
       - basic:
    Income from continuing
     operations                    $0.82     $0.78      $2.38     $2.07
    Loss from discontinued
     operations                    (0.25)    (0.27)     (0.26)    (0.28)
                                   ------    ------     ------    ------
    Net income                     $0.57     $0.51      $2.12     $1.79
                                    =====    =====      =====     =====

    Earnings per common share
     - diluted:
    Income from continuing
     operations                    $0.81     $0.77      $2.36     $2.05
    Loss from discontinued
     operations                    (0.25)    (0.27)     (0.26)    (0.28)
                                   ------    ------     ------    ------
    Net income                     $0.56     $0.50      $2.10     $1.77
                                   =====     =====      =====     =====

2) Results for the three and nine months ended September 30, 2008 include an estimated reduction to operating income of approximately $8 million associated with the impact of hurricanes in the third quarter. Results for the nine months ended September 30, 2007 include pre-tax charges of $10.7 million recorded in the first quarter of 2007 associated with workforce reductions in response to reduced volume levels. Of these costs, $3.9 million and $6.8 million, respectively, were included in cost of services and selling, general and administrative expenses.

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 and provisions for restructurings and other special charges. For the nine months ended September 30, 2007, other operating (income) expense, net includes a $4.0 million charge recorded in the first quarter of 2007 related to in-process research and development expense associated with HemoCue, which the Company acquired on January 31, 2007.

4) Other income (expense), net represents miscellaneous income and expense items related to non-operating activities such as gains and losses associated with investments and other non-operating assets. For the three and nine months ended September 30, 2008, other income (expense), net includes a third quarter charge of $8.9 million associated with the write-down of an equity investment.

5) The following table summarizes the approximate impact of various items on year-over-year comparisons for certain revenue metrics reported for the three and nine months ended September 30, 2008, and is included for informational purposes only:

                                         Continuing Operations
                                           Three Months Ended
                                           September 30, 2008

                                Consolidated                  Revenue
                                  Revenue        Volume         per
                                  Growth         Growth      Requisition
    Reported:                       3.4%          0.7%           2.3%

    Impact on comparisons
      to prior year of:
    Acquisitions:
       AmeriPath                      -             -              -
       Other                          -             -              -
    Drugs of abuse testing        (0.1)%        (0.7)%           0.6%
    Hurricanes                    (0.5)%        (0.5)%             -
                                         Continuing Operations
                                           Nine Months Ended
                                           September 30, 2008
                                Consolidated                  Revenue
                                  Revenue        Volume         per
                                  Growth         Growth      Requisition
    Reported:                      10.4%          3.7%           6.5%

    Impact on comparisons
     to prior year of:
    Acquisitions:
       AmeriPath                    6.8%          3.2%           4.0%
       Other                        0.2%            -              -
    Drugs of abuse testing        (0.1)%        (0.8)%           0.6%
    Hurricanes                    (0.2)%        (0.2)%             -

6) During the third quarter of 2008, the Company and NID, a former test kit manufacturing subsidiary of the Company, reached an agreement in principle with the United States Attorney's Office to settle the previously disclosed federal government investigation involving NID and the Company regarding NID test kits and tests performed using those test kits.

The agreement in principle provides for a comprehensive settlement of federal claims. As part of the agreement, NID, which was closed in 2006, is expected to enter a guilty plea to a single count of felony misbranding. The terms of the settlement are subject to the final negotiation and execution of definitive agreements, which may include a corporate integrity agreement, and the approval by the United States Department of Justice and the United States Department of Health and Human Services and satisfactory resolution of related state claims. There can be no assurance, however, when or whether a settlement may be finalized, or as to its terms. If a settlement is not finalized, the Company would defend itself and NID and could incur significant costs in doing so.

As a result of the agreement in principle, during the third quarter, the Company recorded a charge of $73 million in discontinued operations to increase its reserves for the settlement and related matters, bringing the total reserve for these matters to $314 million as of September 30, 2008. The Company has recorded deferred tax benefits of $57 million on the proposed settlement amount, including $24 million recorded during the third quarter of 2008, reflecting the Company's current estimate of the portion of the reserve expected to be deductible for tax purposes. The reserve reflects the Company's current estimate of the expected probable loss with respect to these matters, assuming the settlement is finalized. If a settlement is not finalized, the eventual losses related to these matters could be materially different than the amount reserved and could be material to the Company's results of operations, cash flows and financial condition in the period that such matters are determined or paid.

7) Adjusted diluted earnings per common share represents diluted earnings per common share from continuing operations for the three and nine months ended September 30 2008, before a charge associated with the write-down of an equity investment and the impact of hurricanes which occurred in the third quarter. Adjusted diluted earnings per common share is presented because management believes it is a useful adjunct to 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. Adjusted 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 diluted earnings per common share. The following table reconciles diluted earnings per common share to adjusted diluted earnings per common share:

                                          Three Months    Nine Months
                                              Ended          Ended
                                          September 30,   September 30,
                                               2008          2008

    Diluted earnings per common share         $0.81         $2.36

    Add:
       Charge associated with write-down
        of an equity investment                0.03          0.03
       Impact associated with hurricanes       0.02          0.02
                                               ----          ----

    Adjusted diluted earnings per common
     share                                    $0.86         $2.41
                                              =====         =====

8) Estimated adjusted diluted earnings per common share represents management's estimate of diluted earnings per common share from continuing operations for the full year 2008, before a charge associated with the write-down of an equity investment and the impact of hurricanes which occurred in the third quarter. Adjusted diluted earnings per common share is presented because management believes it is a useful adjunct to 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. Adjusted 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 diluted earnings per common share. The following table reconciles estimated diluted earnings per common share to estimated adjusted diluted earnings per common share:

                                                     Twelve Months
                                                         Ended
                                                     December 31,
                                                          2008

    Estimated diluted earnings per common
     share                                           $3.12 - $3.17

    Add:
       Charge associated with write-down of an
        equity investment                                0.03
       Impact associated with hurricanes                 0.02
                                                         ----

       Estimated adjusted diluted earnings per
        common share                                 $3.17 - $3.22
                                                     =============

SOURCE Quest Diagnostics Incorporated