Quest Diagnostics Reports First Quarter 2007 Results
23 April 2007
Quest Diagnostics Incorporated (NYSE: DGX), the nation's leading provider of diagnostic testing, information and services, announced that for the first quarter ended March 31, 2007, income from continuing operations was $108 million, or $0.55 per diluted share compared to $155 million, or $0.77 per diluted share in the first quarter of 2006.
Earnings in the first quarter were reduced by an estimated $0.17 per share as a result of the company becoming a non-contracted provider to UnitedHealthcare, as previously announced, effective January 1, 2007. Additionally, earnings were reduced by the following factors: $0.03 per share for costs associated with workforce reductions; $0.03 per share associated with the impact of severe storms in February; and, $0.01 per share to expense in-process research and development acquired in connection with the acquisition of HemoCue in the quarter. Included in the results of the first quarter of 2006 were special charges of $0.08 per share, primarily associated with integration activities, and a pretax gain of $0.05 per share, associated with the sale of an investment.
First quarter revenues were $1.5 billion, a decrease of 1.7% below the prior-year level. Clinical testing revenues decreased by 3.2%. Clinical testing volume, measured by the number of requisitions, decreased 7.3% and revenue per requisition increased 4.4%. The change in status with UnitedHealthcare reduced consolidated revenues by approximately 5% and testing volume by approximately 6%. In addition, severe weather reduced revenues and volume by approximately 1%.
"The change in status with UnitedHealthcare had a significant impact during the quarter; however, doctors within the UnitedHealthcare network exercised choice and continued to send us their discretionary business and some of their UnitedHealthcare work," said Surya N. Mohapatra, Ph.D., Chairman and Chief Executive Officer. "We believe this is due to our superior service levels and the efforts of our sales force. In the first quarter, we experienced slower growth than we had anticipated because we have, for the past two quarters, dedicated significant attention and resources to retaining business. We have now shifted our focus to growing our business and are gaining momentum. Our new agreement with Aetna and the announced acquisition of AmeriPath will further accelerate growth."
For the first quarter, operating income was $201 million, or 13.2% of revenues, compared to $259 million, or 16.7% of revenues in 2006. Operating income, compared to the prior year, was impacted by lower revenues, additional costs associated with retaining business and improving service levels, costs associated with workforce reductions and the expense of in-process research and development. Operating income for 2006 reflected $27 million of special charges, primarily associated with integration activities.
Bad debt expense as a percentage of revenues increased to 4.4% from 4.1% a year ago, principally due to billing complexities associated with the change in contract status with UnitedHealthcare. Days sales outstanding were 47 days, compared to 48 days at the end of 2006. Cash flow from operations was $152 million compared to $241 million in 2006. During the quarter, the company repurchased $105 million of its common stock and made capital expenditures of $40 million.
Outlook for 2007
For the full year 2007 the company currently expects results from continuing operations as follows: adjusted earnings per diluted share of between $2.75 and $2.95; revenues of $6.1 billion to $6.2 billion; and operating income of between 16% and 17% of revenues. Over the same period, the company expects cash from operations to approximate $800 million and capital expenditures to approximate $200 million. These estimates exclude the impact of the planned AmeriPath acquisition, the $0.04 per share in total first quarter charges associated with workforce reductions and the expense of in-process research and development, and are before charges related to potential additional restructuring activities.
Quest Diagnostics will hold its first quarter conference call on April 19, 2007 at 8:30 A.M. Eastern Time. A simulcast of the call and a replay are available via the Internet at: http://www.questdiagnostics.com and registered analysts may access the call at: http://www.streetevents.com. In addition, a replay of the call will be available from 11:30 A.M. on April 19 through 11 P.M. on May 19, 2007 to investors in the U.S. by dialing 888-566-0495. Investors outside the U.S. may dial 203-369-3054. No password is required for either number.
Quest Diagnostics is the 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 national 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 new diagnostic tests and advanced healthcare information technology solutions that help 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 2006 Form 10-K and subsequent filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 2007 and 2006
(in millions, except per share and percentage data)
(unaudited)
Three Months Ended
March 31,
2007 2006
Net revenues $1,526.2 $1,553.1
Operating costs and expenses:
Cost of services 931.8 916.2
Selling, general and administrative 384.8 348.5
Amortization of intangible assets 4.5 2.3
Other operating expense, net 4.2 27.4
Total operating costs and expenses 1,325.3 1,294.4
Operating income 200.9 258.7
Other income (expense):
Interest expense, net (26.5) (23.5)
Minority share of income (6.1) (5.4)
Equity earnings in unconsolidated joint
ventures 6.9 8.0
Other income, net 1.9 17.5
Total non-operating expenses, net (23.8) (3.4)
Income from continuing operations before taxes 177.1 255.3
Income tax expense 69.6 100.7
Income from continuing operations 107.5 154.6
Loss from discontinued operations, net of taxes (1.6) (10.0)
Net income $105.9 $144.6
Earnings per common share - basic:
Income from continuing operations $0.56 $0.78
Loss from discontinued operations (0.01) (0.05)
Net income $0.55 $0.73
Earnings per common share - diluted:
Income from continuing operations $0.55 $0.77
Loss from discontinued operations (0.01) (0.05)
Net income $0.54 $0.72
Weighted average common shares outstanding:
Basic 193.4 198.4
Diluted 195.3 201.0
Operating income as a percentage of net revenues 13.2% 16.7%
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
March 31, 2007 and December 31, 2006
(in millions, except per share data)
March 31, December 31,
2007 2006
(unaudited)
Assets
Current assets:
Cash and cash equivalents $158.4 $149.6
Accounts receivable, net 810.6 774.4
Inventories 87.7 78.6
Deferred income taxes 107.5 120.5
Prepaid expenses and other current assets 82.7 67.9
Total current assets 1,246.9 1,191.0
Property, plant and equipment, net 760.9 752.4
Goodwill, net 3,724.8 3,391.0
Intangible assets, net 312.0 193.4
Other assets 141.9 133.7
Total assets $6,186.5 $5,661.5
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $800.7 $834.0
Short-term borrowings and current portion
of long-term debt 767.0 316.9
Total current liabilities 1,567.7 1,150.9
Long-term debt 1,238.3 1,239.1
Other liabilities 351.3 252.3
Stockholders' equity:
Common stock, par value $0.01 per share;
600 shares authorized; 213.7 and 213.8
shares issued at March 31, 2007 and
December 31, 2006, respectively 2.1 2.1
Additional paid-in capital 2,183.7 2,185.1
Retained earnings 1,881.7 1,800.3
Accumulated other comprehensive income (loss) 0.6 (0.1)
Treasury stock, at cost; 21.2 and 19.8 shares
at March 31, 2007 and December 31, 2006,
respectively (1,038.9) (968.2)
Total stockholders' equity 3,029.2 3,019.2
Total liabilities and stockholders' equity $6,186.5 $5,661.5
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006
(in millions)
(unaudited)
Three Months Ended
March 31,
2007 2006
Cash flows from operating activities:
Net income $105.9 $144.6
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 50.3 49.0
Provision for doubtful accounts 67.5 63.4
Stock-based compensation expense 16.1 19.4
Provision for restructuring and other
special charges - 24.8
Deferred income tax benefit (8.8) (11.6)
Minority share of income 6.1 5.4
Excess tax benefits from stock-based
compensation arrangements (4.2) (12.7)
Other, net 1.3 (17.6)
Changes in operating assets and liabilities:
Accounts receivable (94.0) (106.2)
Accounts payable and accrued expenses (45.4) (1.9)
Integration, settlement and other special
charges (2.1) -
Income taxes payable 67.9 98.9
Other assets and liabilities, net (9.1) (14.8)
Net cash provided by operating activities 151.5 240.7
Cash flows from investing activities:
Business acquisitions, net of cash acquired (306.6) -
Capital expenditures (40.1) (42.2)
Decrease in investments and other assets 0.8 14.2
Net cash used in investing activities (345.9) (28.0)
Cash flows from financing activities:
Repayments of debt (128.3) (60.0)
Proceeds from borrowings 450.0 -
Decrease in book overdrafts (10.2) (14.3)
Purchases of treasury stock (105.0) (104.0)
Exercise of stock options 17.6 38.8
Excess tax benefits from stock-based
compensation arrangements 4.2 12.7
Dividends paid (19.4) (17.9)
Distributions to minority partners (4.7) (3.1)
Financing costs paid (1.0) (0.5)
Net cash provided by (used in) financing
activities 203.2 (148.3)
Net change in cash and cash equivalents 8.8 64.4
Cash and cash equivalents, beginning of period 149.6 92.1
Cash and cash equivalents, end of period $158.4 $156.5
Cash paid during the period for:
Interest $20.3 $21.9
Income taxes $9.3 $8.6
Notes to Financial Tables
1) In April 2006, the Company decided to discontinue the operations of a
test kit manufacturing subsidiary, NID. During the third quarter of
2006, the Company completed its wind down of NID and classified the
operations of NID as discontinued operations. The results of
operations for NID have been reported as discontinued operations in
the accompanying consolidated statement of operations. The prior year
period consolidated statement of operations and related disclosures
have been restated to report the results of NID as discontinued
operations.
2) The computation of basic and diluted earnings per common share is as
follows:
Three Months Ended
March 31,
2007 2006
(in millions, except
per share data)
Income from continuing operations $107.5 $154.6
Loss from discontinued operations (1.6) (10.0)
Net income available to common
stockholders - basic and diluted $105.9 $144.6
Weighted average common shares outstanding
- basic 193.4 198.4
Effect of dilutive securities:
Stock options, restricted common shares and
performance share units 1.9 2.6
Weighted average common shares outstanding
- diluted 195.3 201.0
Earnings per common share - basic:
Income from continuing operations $0.56 $0.78
Loss from discontinued operations (0.01) (0.05)
Net income $0.55 $0.73
Earnings per common share - diluted:
Income from continuing operations $0.55 $0.77
Loss from discontinued operations (0.01) (0.05)
Net income $0.54 $0.72
3) During the first quarter of 2007, the Company initiated plans to
adjust its cost structure to match its new volume levels and recorded
$10.7 million of costs associated with workforce reductions. Of these
costs, $3.9 million were included in costs of services and $6.8
million were included in selling, general and administrative expense.
4) 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 and provisions
for restructurings and other special charges. For the three months
ended March 31, 2007, other operating expense, net includes a $4.0
million charge related to in-process research and development expense
associated with HemoCue, which the Company acquired on January 31,
2007.
During the first quarter of 2006, the Company finalized its plan
related to the integration of LabOne, Inc. and recorded a charge of
$20.7 million associated with executing the integration plan. The
$20.7 million charge relates to actions that impact Quest Diagnostics'
employees and operations and is comprised principally of employee
severance costs. In addition, during the first quarter of 2006, the
Company recorded a $4.1 million charge related to consolidating our
operations in California into a new facility. The costs were
comprised primarily of employee severance costs and the write-off of
certain operating assets.
5) Other income, 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 months ended March 31, 2006, other income, net includes
a $15.8 million gain on the sale of an investment.
6) For the three months ended March 31, 2007, the Company repurchased
approximately 2.1 million shares of its common stock at an average
price of $50.98 per share for $105 million. For the three months
ended March 31, 2007, the Company reissued 0.7 million shares for
employee benefit plans. Since the inception of the share repurchase
program in May 2003, the Company has repurchased 43.4 million shares
of its common stock at an average price of $45.18 for $2.0 billion.
At March 31, 2007, $145 million of the share repurchase authorizations
remained available.
7) The following table summarizes the approximate impact of various items
on year-over-year comparisons for certain revenue metrics reported for
the quarter ended March 31, 2007, and is included for informational
purposes only:
Continuing Operations
Three Months Ended
March 31, 2007
Consolidated Revenue
Revenue Volume per
Growth Growth Requisition
Reported: (1.7)% (7.3)% 4.4 %
Impact on comparisons to prior
year of:
Impact of contract change (4.8)% (6.1)% 1.0 %
Slower growth due to retention
efforts (2.0)% (2.0)% (0.2)%
Acquisitions 1.8 % 0.2 % 0.4 %
Weather (0.6)% (0.6)% -
8) Adjusted diluted earnings per common share represents management's
estimate of diluted earnings per common share for the full year 2007
before charges associated with workforce reductions and in-process
research and development. Adjusted 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. 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 estimated 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, 2007
Estimated diluted earnings per
common share $2.71 - $2.91
Add charges associated with:
Workforce reductions 0.03
In-process research & development 0.01
Estimated adjusted diluted earnings
per common share $2.75 - $2.95
Source: prnewswire
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