Quest Diagnostics Incorporated , the nation's leading provider of diagnostic testing, information and services, announced that for the second quarter ended June 30, 2005, net income increased to $149 million, compared to $135 million before special charges of $13.2 million pre-tax, or $0.04 per diluted share, in the second quarter last year. Earnings per diluted share increased 14% to $0.72 in 2005 from $0.63 before special charges in 2004. Including special charges, net income was $127 million, or $0.59 per diluted share in the second quarter of 2004.
Second Quarter Performance
Revenues grew 6.2% over the prior-year level to $1.4 billion. Clinical testing volume, measured by the number of requisitions, increased 5.3%, and revenue per requisition increased 1.2%. Operating income was $261 million, or 19.0% of revenues in 2005. This compares to 2004 operating income, before a special charge, of $240 million, or 18.5% of revenues. Including the special charge, operating income was $230 million, or 17.7% of revenues in 2004. Bad debt expense was 4.3% of revenues, consistent with a year ago. Days sales outstanding improved to 45 days, compared to 47 days a year ago. Cash from operations increased to $234 million from $207 million in 2004. During the quarter, the company repurchased $30 million of its common stock and made capital expenditures of $68 million.
"We reported strong gains during the quarter, with strong revenue growth, improved operating margin and significant cash flow," said Surya N. Mohapatra, Ph.D., Chairman and Chief Executive Officer of Quest Diagnostics. "We continue to differentiate ourselves by improving our products and services and strengthening our position in science and technology."
First Half Performance
For the first half of 2005, net income was $281 million, or $1.36 per diluted share. This compares to net income, before special charges, of $251 million, or $1.17 per diluted share, for the first half of 2004. Including special charges, 2004 net income was $243 million, or $1.13 per diluted share. Revenues increased 5.6% to $2.7 billion. Operating income was $491 million, or 18.2% of revenues. This compares to operating income, before a special charge, of $449 million, or 17.6% of revenues in 2004. Including the special charge, operating income was $439 million, or 17.2% of revenues in 2004. Cash from operations increased to $371 million from $318 million in 2004. During the first half of 2005, the company repurchased $92 million in common stock and made capital expenditures of $124 million.
Outlook for 2005
The company continues to expect full year earnings per diluted share, adjusted for its recent two-for-one stock split, of between $2.73 and $2.78, an increase of 14% to 16% compared to 2004 diluted earnings per share of $2.39 before special charges. 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.
Quest Diagnostics will hold its second quarter conference call on July 25 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 25 through 11 P.M. on August 19 to investors in the U.S. by dialing 800-310-4919. Investors outside the U.S. may dial 402-220-3847. No password is required for either number.
About Quest Diagnostics
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 2004 Form 10-K and subsequent filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2005 and 2004
(in millions, except per share and percentage data)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Net revenues $1,377.5 $1,297.7 $2,697.0 $2,553.4
Operating costs and
expenses:
Cost of services 798.7 747.6 1,578.8 1,484.9
Selling, general and
administrative 315.6 307.4 624.0 614.9
Amortization of
intangible assets 0.9 2.0 1.8 4.1
Other operating
expense, net 1.1 10.6 1.3 10.6
Total operating
costs and
expenses 1,116.3 1,067.6 2,205.9 2,114.5
Operating income 261.2 230.1 491.1 438.9
Other income (expense):
Interest expense, net (12.6) (16.4) (25.4) (31.0)
Minority share of income (5.1) (5.0) (10.1) (9.5)
Equity earnings in
unconsolidated joint
ventures 6.4 5.4 13.6 10.0
Other income (expense),
net (0.6) (1.2) 0.2 -
Total non-operating
expenses, net (11.9) (17.2) (21.7) (30.5)
Income before taxes 249.3 212.9 469.4 408.4
Income tax expense 100.2 86.0 188.7 165.4
Net income $149.1 $126.9 $280.7 $243.0
Net income before
special charges $149.1 $134.8 $280.7 $250.9
Earnings per common
share:
Basic $0.74 $0.62 $1.39 $1.18
Diluted $0.72 $0.59 $1.36 $1.13
Diluted before special
charges $0.72 $0.63 $1.36 $1.17
Weighted average common
shares outstanding:
Basic 202.6 206.0 202.2 206.2
Diluted 206.6 216.5 206.3 216.9
Operating income before
special charge as a
percentage of net
revenues 19.0% 18.5% 18.2% 17.6%
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004
(in millions, except per share data)
June 30, December 31,
2005 2004
Assets
Current assets:
Cash and cash equivalents $204.1 $73.3
Accounts receivable, net 693.4 649.3
Inventories 76.3 75.3
Deferred income taxes 104.2 83.0
Prepaid expenses and other current assets 66.6 50.2
Total current assets 1,144.6 931.1
Property, plant and equipment, net 659.0 619.5
Goodwill, net 2,524.6 2,506.9
Intangible assets, net 10.5 11.5
Deferred income taxes 24.3 29.4
Other assets 144.6 105.4
Total assets $4,507.6 $4,203.8
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $710.1 $669.0
Short-term borrowings and current portion
of long-term debt 230.1 374.8
Total current liabilities 940.2 1,043.8
Long-term debt 624.2 724.0
Other liabilities 162.9 147.3
Stockholders' equity:
Common stock, par value $0.01 per share; 300
shares authorized; 213.6 shares issued at
both June 30, 2005 and December 31, 2004 2.1 1.1
Additional paid-in capital 2,187.3 2,195.3
Retained earnings 1,063.0 818.7
Unearned compensation (3.1) -
Accumulated other comprehensive income 0.6 3.9
Treasury stock, at cost; 10.8 and 17.3 shares
at June 30, 2005 and December 31, 2004,
respectively (469.6) (730.3)
Total stockholders' equity 2,780.3 2,288.7
Total liabilities and stockholders' equity $4,507.6 $4,203.8
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2005 and 2004
(in millions)
Six Months Ended
June 30,
2005 2004
Cash flows from operating activities:
Net income $280.7 $243.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 85.5 83.9
Provision for doubtful accounts 119.3 112.3
Deferred income tax provision (benefit) (10.4) 9.7
Minority share of income 10.1 9.5
Stock compensation expense 0.8 1.0
Tax benefits associated with stock-based
compensation plans 19.9 40.0
Other, net (1.1) 2.6
Changes in operating assets and liabilities:
Accounts receivable (163.4) (180.9)
Accounts payable and accrued expenses 14.7 (0.5)
Integration, settlement and other special
charges (1.1) (16.3)
Income taxes payable 30.2 4.9
Other assets and liabilities, net (14.7) 8.9
Net cash provided by operating activities 370.5 318.1
Cash flows from investing activities:
Capital expenditures (123.9) (90.8)
Business acquisition, net of cash acquired (19.3) -
Proceeds from disposition of assets - 4.7
Increase in investments and other assets (23.7) (2.9)
Net cash used in investing activities (166.9) (89.0)
Cash flows from financing activities:
Proceeds from borrowings 100.0 304.9
Repayments of debt (100.5) (305.6)
Purchases of treasury stock (92.0) (271.1)
Exercise of stock options 64.2 66.8
Dividends paid (33.2) (30.9)
Distributions to minority partners (11.3) (8.3)
Financing costs paid - (2.1)
Net cash used in financing activities (72.8) (246.3)
Net change in cash and cash equivalents 130.8 (17.2)
Cash and cash equivalents, beginning of period 73.3 155.0
Cash and cash equivalents, end of period $204.1 $137.8
Cash paid during the period for:
Interest $25.0 $25.9
Income taxes $149.0 $112.4
Notes to Financial Tables
1) On June 20, 2005, the Company effected a two-for-one stock split
through the issuance of a stock dividend of one new share of common
stock for each share of common stock held by stockholders of record on
June 6, 2005. References to the number of common shares and per
common share amounts in the accompanying consolidated balance sheets
and consolidated statements of operations, including earnings per
common share calculations and related disclosures have been restated
to give retroactive effect to the stock split for all periods
presented.
2) 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
earnings per 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 previously reported 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 debentures were redeemed, principally through a conversion into
common shares, as of January 18, 2005. See Note 8.
The computation of basic and diluted earnings per common share (using
the if-converted method) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in millions, except per share data)
Net income available to
common stockholders
- basic $149.1 $126.9 $280.7 $243.0
Add: Interest expense
associated with
contingent
convertible
debentures, net of
related tax effects - 0.7 0.1 1.6
Income available to
common stockholders
- diluted $149.1 $127.6 $280.8 $244.6
Weighted average common
shares outstanding
- basic 202.6 206.0 202.2 206.2
Effect of dilutive
securities:
Stock options and
restricted common
shares granted under
the Company's Employee
Equity Participation
Program 4.0 4.8 3.8 5.0
Contingent convertible
debentures - 5.7 0.3 5.7
Weighted average common
shares outstanding
- diluted 206.6 216.5 206.3 216.9
Basic earnings per
common share $0.74 $0.62 $1.39 $1.18
Diluted earnings per
common share $0.72 $0.59 $1.36 $1.13
3) The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations and has chosen to adopt the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), 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" ("SFAS 148"). The following table presents net
income and earnings per share, had the Company elected to recognize
compensation cost associated with stock option awards and employee
stock purchases under the Company's Employee Stock Purchase Plan,
consistent with the method prescribed by SFAS 123, as amended by SFAS
148:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
(in millions, except per share data)
Net income
Net income, as reported $149.1 $126.9 $280.7 $243.0
Add: Stock-based
compensation under APB 25 0.6 0.5 0.8 1.0
Deduct: Total stock-based
compensation expense
determined under fair
value method for all
awards, net of related
tax effects (8.6) (11.0) (19.2) (21.8)
Pro forma net income $141.1 $116.4 $262.3 $222.2
Earnings per common share
Basic - as reported $0.74 $0.62 $1.39 $1.18
Basic - pro forma $0.70 $0.57 $1.30 $1.08
Diluted - as reported $0.72 $0.59 $1.36 $1.13
Diluted - pro forma $0.68 $0.54 $1.27 $1.03
The fair value of each stock option award granted prior to January 1, 2005 was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each stock option award granted subsequent to January 1, 2005 was estimated on the date of grant using a lattice-based option valuation model. Management believes a lattice-based option valuation model provides a more accurate measure of fair value. The expected volatility in connection with the Black-Scholes option-pricing model was based on the historical volatility of the Company's stock, while the expected volatility under the lattice-based option-valuation model was based on the current and the historical implied volatilities from traded options of the Company's stock. The weighted average assumptions used in valuing options granted in the periods presented are noted in the following table.
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Dividend yield 0.7% 0.7% 0.7% 0.7%
Risk-free interest rate 4.0% 3.7% 4.0% 3.1%
Expected volatility 22.4% 47.1% 23.0% 47.2%
Expected holding period,
in years 6 5 6 5
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. 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 succession of the
Company's prior CEO.
5) 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.
6) For the three months ended June 30, 2005, the Company repurchased
approximately 0.6 million shares of its common stock at an average
price of $53.03 per share for $30 million. For the six months ended
June 30, 2005, the Company repurchased approximately 1.8 million shares
of its common stock at an average price of $50.64 per share for $92
million. For the three and six months ended June 30, 2005, the Company
reissued approximately 1.2 million and 2.7 million shares for employee
benefit plans, respectively. For the six months ended June 30, 2005,
the Company has reissued approximately 5.6 million shares in connection
with the conversion of its contingent convertible debentures. Since
the inception of the share repurchase program in May 2003, the Company
has repurchased approximately 26.5 million shares of its common stock
at an average price of $40.98 for approximately $1.1 billion. At June
30, 2005, $420 million of the share repurchase authorizations remained
available.
7) 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 and certain financing activities.
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,
2005 2004
(in millions)
Net cash provided by operating activities $370.5 $318.1
Less: Capital expenditures 123.9 90.8
Free cash flow $246.6 $227.3
8) 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 $43.75 per share. The
outstanding principal of the debentures at December 31, 2004 was
classified as a current liability within short-term borrowings and
current portion of long-term debt on the Company's consolidated balance
sheet. 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 5.7 million shares of the
Company's common stock.
9) Net income before special charges excludes the charges associated with
the acceleration of certain pension obligations in connection with the
succession of the Company's prior CEO 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
succession of the Company's prior CEO. 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 tables reconcile 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
Before of Certain
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
Earnings per common share:
Basic $0.66 $(0.03) $(0.01) $0.62
Diluted $0.63 $(0.03) $(0.01) $0.59
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
Before of Certain
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
Earnings per common share:
Basic $1.22 $(0.03) $(0.01) $1.18
Diluted $1.17 $(0.03) $(0.01) $1.13
Operating income as a
percentage of net
revenues(A) 17.6% 17.2%
(A) Calculated by dividing operating income by net revenues
SOURCE: Quest Diagnostics Incorporated
CONTACT: Investors - Laure Park, +1-201-393-5030, or Media - Gary
Samuels, +1-201-393-5700, both of Quest Diagnostics
Web site: http://www.questdiagnostics.com/