Quest Diagnostics Incorporated , the nation's leading provider of diagnostic testing, information and services, announced that for the fourth quarter ended December 31, 2006, income from continuing operations was $151 million, or $0.77 per diluted share compared to $149 million, or $0.73 per diluted share for the prior year.
Fourth quarter revenues from continuing operations grew 8.5% over the prior year level to $1.5 billion. The acquisitions of LabOne, which was completed on November 1, 2005, and Focus Diagnostics, which was completed on July 1, 2006, contributed 4% revenue growth. Clinical testing revenues grew 6.9%. Clinical testing volume, measured by the number of requisitions, increased 1% and revenue per requisition increased 5.9%.
For the fourth quarter, operating income was $279 million, or 18.0% of revenues, compared to $260 million, or 18.2% of revenues, in 2005.
Bad debt expense was 3.8% of revenues, unchanged from a year ago. Days sales outstanding were 48 days and cash flow from operations was $306 million. During the quarter the company repurchased $196 million of its common stock and made capital expenditures of $60 million.
"We drove strong results in the fourth quarter, finishing an excellent year in which we grew revenues 15% and generated $952 million of cash from operations," said Surya N. Mohapatra, Ph.D., Chairman and Chief Executive Officer. "While we will face challenges in 2007, our longer-term goals remain unchanged. We intend to grow revenues organically, at or above the industry growth rate; pursue selective acquisitions; expand operating margins to 20%; and further strengthen our position as the undisputed world leader in diagnostic testing, information and services."
Full Year 2006 Performance
Income from continuing operations was $626 million, or $3.14 per diluted share for the full year 2006 compared to $573 million, or $2.79 per diluted share in the prior year. Net income for 2006 included pretax expenses of $55 million, or $0.17 per share, associated with stock-based compensation recorded in accordance with SFAS 123R and pretax charges of $27 million, or $0.08 per share, primarily associated with integration activities.
Revenues from continuing operations increased 14.9% to $6.3 billion. The acquisition of LabOne contributed revenue growth of approximately 8%. Operating income was $1.1 billion, or 18.0% of revenues, in 2006 compared to $1 billion, or 18.5% of revenues in 2005. Operating income as a percentage of revenues compared to the prior year was reduced by approximately 1% due to stock-based compensation (SFAS 123R), 0.6% due to the inclusion of LabOne and 0.4% due to integration charges.
Cash from operations increased to $952 million from $852 million in 2005. During the year, the company repurchased $472 million in common stock, spent $237 million on acquisitions, and made capital expenditures of $193 million.
Discontinued operations contributed a loss of $0.20 per diluted share for the year, compared to a loss of $0.13 per diluted share in the prior year.
Outlook for 2007
For the full year 2007 the company expects results from continuing operations as follows: earnings per diluted share of between $2.70 and $3.00; revenues of $6 billion to $6.2 billion; and operating income of between 16.5% and 17.5% of revenues. Over the same period, the company expects cash from operations to approximate $800 million and capital expenditures to approximate $200 million.
The estimates for 2007 reflect reductions related to the anticipated impact of contract changes. Earnings per share, revenues, operating income as a percentage of revenues and cash from operations have been reduced by between: $0.50 and $0.80; $450 million and $650 million; 1% and 2%; and $150 million and $200 million, respectively, to reflect these changes.
These estimates are before any special charges, including charges related to potential restructuring activities.
Quest Diagnostics will hold its fourth quarter conference call on January 25 at 8:30 A.M. Eastern Time. A simulcast of the call and a replay are available via the Internet at: www.questdiagnostics.com and registered analysts may access the call at: www.streetevents.com. In addition, a replay of the call will be available from 11:30 A.M. on January 25 through 11 P.M. on February 23, 2007 to investors in the U.S. by dialing 866-361-4939. Investors outside the U.S. may dial 203-369-0187. 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: 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 Quest Diagnostics Incorporated's most recent Form 10-K and subsequent SEC filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Twelve Months Ended December 31, 2006 and 2005
(in millions, except per share and percentage data)
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited)
Net revenues $1,549.3 $1,427.3 $6,268.7 $5,456.7
Operating costs
and expenses:
Cost of services 919.4 856.6 3,696.0 3,220.7
Selling, general
and administrative 349.7 308.6 1,410.7 1,215.8
Amortization of
intangible assets 3.2 1.9 10.8 4.6
Other operating (income)
expense, net (2.2) (0.3) 23.1 8.0
Total operating
costs and
expenses 1,270.1 1,166.8 5,140.6 4,449.1
Operating income 279.2 260.5 1,128.1 1,007.6
Other income (expense):
Interest expense, net (22.6) (20.2) (91.4) (57.4)
Minority share of income (6.5) (4.6) (23.9) (19.5)
Equity earnings in
unconsolidated joint
ventures 7.2 6.7 28.4 26.2
Other expense, net (9.3) (0.7) (7.9) (6.9)
Total non-operating
expenses, net (31.2) (18.8) (94.8) (57.6)
Income from continuing
operations before
taxes 248.0 241.7 1,033.3 950.0
Income tax expense 96.7 92.5 407.6 376.8
Income from continuing
operations 151.3 149.2 625.7 573.2
Loss from discontinued
operations, net of
taxes (2.0) (18.8) (39.3) (26.9)
Net income $149.3 $130.4 $586.4 $546.3
Earnings per common
share - basic:
Income from
continuing
operations $0.78 $0.74 $3.18 $2.84
Loss from discontinued
operations (0.01) (0.09) (0.20) (0.13)
Net income $0.77 $0.65 $2.98 $2.71
Earnings per common
share - diluted:
Income from continuing
operations $0.77 $0.73 $3.14 $2.79
Loss from discontinued
operations (0.01) (0.09) (0.20) (0.13)
Net income $0.76 $0.64 $2.94 $2.66
Weighted average
common shares
outstanding:
Basic 194.5 200.3 197.0 201.8
Diluted 196.5 203.5 199.5 205.5
Operating income
as a percentage
of net revenues 18.0% 18.2% 18.0% 18.5%
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31, 2006 and 2005
(in millions, except per share data)
December 31, December 31,
2006 2005
(unaudited)
Assets
Current assets:
Cash and cash equivalents $149.6 $92.1
Accounts receivable, net 774.4 732.9
Inventories 78.6 77.9
Deferred income taxes 120.5 107.4
Prepaid expenses and other current assets 67.9 59.2
Total current assets 1,191.0 1,069.5
Property, plant and equipment, net 752.4 753.7
Goodwill, net 3,391.0 3,197.2
Intangible assets, net 193.4 147.4
Other assets 133.7 138.3
Total assets $5,661.5 $5,306.1
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $834.0 $764.5
Short-term borrowings and current portion
of long-term debt 316.9 336.8
Total current liabilities 1,150.9 1,101.3
Long-term debt 1,239.1 1,255.4
Other liabilities 252.3 186.4
Stockholders' equity:
Common stock, par value $0.01 per share; 600
shares and 300 shares authorized at December
31, 2006 and 2005, respectively; 213.8 and
213.6 shares issued at December 31, 2006 and
2005 respectively 2.1 2.1
Additional paid-in capital 2,185.1 2,175.5
Retained earnings 1,800.3 1,292.5
Unearned compensation - (3.3)
Accumulated other comprehensive loss (0.1) (6.2)
Treasury stock, at cost; 19.8 and 15.2 shares
at December 31, 2006 and 2005, respectively (968.2) (697.6)
Total stockholders' equity 3,019.2 2,763.0
Total liabilities and stockholders' equity $5,661.5 $5,306.1
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Twelve Months Ended December 31, 2006 and 2005
(in millions)
Twelve Months Ended
December 31,
2006 2005
(unaudited)
Cash flows from operating activities:
Net income $586.4 $546.3
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 197.4 176.1
Provision for doubtful accounts 243.4 233.6
Stock-based compensation expense 55.5 2.0
Provision for restructuring and other
special charges 55.8 -
Deferred income tax (benefit) provision (46.3) 0.7
Minority share of income 23.9 19.5
Tax benefits associated with stock-based
compensation plans - 33.8
Excess tax benefits from stock-based
compensation arrangements (32.7) -
Other, net 20.2 21.7
Changes in operating assets and liabilities:
Accounts receivable (273.2) (238.4)
Accounts payable and accrued expenses 81.3 36.0
Integration, settlement and other special
charges (4.2) (5.4)
Income taxes payable 45.3 15.4
Other assets and liabilities, net (0.9) 10.3
Net cash provided by operating activities 951.9 851.6
Cash flows from investing activities:
Business acquisitions, net of cash acquired (236.5) (814.2)
Capital expenditures (193.4) (224.3)
Decrease (increase) in investments and other
assets 15.5 (41.3)
Net cash used in investing activities (414.4) (1,079.8)
Cash flows from financing activities:
Repayments of debt (416.2) (497.3)
Proceeds from borrowings 375.0 1,100.2
(Decrease) increase in book overdrafts (1.7) 33.4
Purchases of treasury stock (472.3) (390.2)
Exercise of stock options 102.3 98.3
Excess tax benefits from stock-based
compensation arrangements 32.7 -
Dividends paid (77.1) (69.7)
Distributions to minority partners (21.9) (21.4)
Financing costs paid (0.8) (6.3)
Net cash (used in) provided by financing
activities (480.0) 247.0
Net change in cash and cash equivalents 57.5 18.8
Cash and cash equivalents, beginning of period 92.1 73.3
Cash and cash equivalents, end of period $149.6 $92.1
Cash paid during the period for:
Interest $102.1 $50.0
Income taxes $381.3 $314.5
Notes to Financial Tables
1) On April 19, 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 accompanying
consolidated statements of operations and related disclosures have
been restated to report the results of NID as discontinued operations
for all periods presented.
2) 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,
2006 2005 2006 2005
(in millions, except per share data)
Income from continuing
operations - basic $151.3 $149.2 $625.7 $573.2
Loss from discontinued
operations - basic (2.0) (18.8) (39.3) (26.9)
Net income available to common
stockholders - basic 149.3 130.4 586.4 546.3
Add: Interest expense
associated with contingent
convertible debentures, net
of related tax effects - - - 0.1
Income available to common
stockholders - diluted $149.3 $130.4 $586.4 $546.4
Weighted average common
shares outstanding - basic 194.5 200.3 197.0 201.8
Effect of dilutive securities:
Stock options, restricted
common shares and performance
share units granted 2.0 3.2 2.5 3.5
Contingent convertible
debentures - - - 0.2
Weighted average common shares
outstanding - diluted 196.5 203.5 199.5 205.5
Earnings per common share -
basic:
Income from continuing
operations $0.78 $0.74 $3.18 $2.84
Loss from discontinued
operations (0.01) (0.09) (0.20) (0.13)
Net income $0.77 $0.65 $2.98 $2.71
Earnings per common share -
diluted:
Income from continuing
operations $0.77 $0.73 $3.14 $2.79
Loss from discontinued
operations (0.01) (0.09) (0.20) (0.13)
Net income $0.76 $0.64 $2.94 $2.66
3) In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, revised
2004, "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires that
companies recognize compensation cost relating to share-based payment
transactions based on the fair value of the equity or liability
instruments issued. SFAS 123R is effective for annual periods
beginning after January 1, 2006. The Company adopted SFAS 123R
effective January 1, 2006 using the modified prospective approach and
therefore has not restated results for prior periods. Under this
approach, awards that are granted, modified or settled after January
1, 2006 will be measured and accounted for in accordance with SFAS
123R. Unvested awards that were granted prior to January 1, 2006 will
continue to be accounted for in accordance with SFAS 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"), except that compensation costs
will be recognized in the Company's results of operations.
Stock-based compensation expense associated with performance share
units is recognized based on management's best estimates of the
achievement of the performance goals specified in such awards and the
resulting number of shares that will be earned. In the fourth quarter
of 2006, the Company revised its estimate of the number of performance
share units expected to be earned at the end of the performance
periods as a result of revising its estimates of projected performance
and reduced stock based compensation expense associated with
performance share units by approximately $8 million.
The fair value of each stock option award was estimated on the date of
grant using a lattice-based option valuation model that uses the
assumptions in the following table. 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 dividend yield was based on the approved annual dividend
rate in effect and current market price of the underlying common stock
at the time of grant. The risk-free interest rate was based on the
U.S. Treasury yield curve in effect at the time of grant for bonds
with maturities ranging from one month to seven years. The expected
life of the options granted was estimated using the historical
exercise behavior of employees.
Three Months Ended Twelve Months Ended
December 31, December 31,
2006 2005 2006 2005
Weighted average fair
value of options at
grant date $14.87 $13.71 $13.91 $14.17
Expected volatility 21.6% 21.8% 18.2% 23.0%
Dividend yield 0.7% 0.7% 0.7% 0.7%
Risk-free interest rate 4.6% - 4.7% 4.3% 4.6% 3.9% - 4.0%
Expected holding period,
in years 5.5 - 6.2 5.1 - 6.2 5.6 - 6.2 5.4 - 5.9
The fair value of restricted stock awards and performance share units
is the average market price of our common stock at the date of grant.
For the three and twelve months ended December 31, 2006, the stock-
based compensation expense recorded in accordance with SFAS 123R
totaled $2.5 million ($1.5 million, net of tax, or $0.01 per share)
and $55.5 million ($33.5 million, net of tax, or $0.17 per share),
respectively. In addition, in connection with the adoption of SFAS
123R, net cash provided by operating activities decreased and net cash
provided by financing activities increased for the twelve months ended
December 31, 2006 by $33 million, related to the classification of
excess tax benefits from stock-based compensation arrangements.
Prior to the adoption of SFAS 123R, the Company accounted 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 chose
to adopt the disclosure-only provisions of SFAS 123, as amended by
SFAS 148. Under this approach, the cost of restricted stock awards
was expensed over their vesting period, while the imputed cost of
stock option grants and discounts offered under the Company's Employee
Stock Purchase Plan was disclosed, based on the vesting provisions of
the individual grants, but not charged to expense. Stock-based
compensation expense recorded in accordance with APB 25, relating to
restricted stock awards, was $0.6 million and $2.0 million for the
three and twelve months ended December 31, 2005, respectively. The
following pro forma information is presented for comparative purposes
and illustrates the pro forma effect on net income and earnings per
share for the periods presented, as if the Company had 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 (in millions, except per share data):
Three Months Twelve Months
Ended Ended
December 31, December 31,
2005 2005
Net income
Net income, as reported $130.4 $546.3
Add: Stock-based compensation under APB 25 0.6 2.0
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (5.2) (32.6)
Pro forma net income $125.8 $515.7
Earnings per common share
Basic - as reported $0.65 $2.71
Basic - pro forma $0.63 $2.56
Diluted - as reported $0.64 $2.66
Diluted - pro forma $0.61 $2.50
4) 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.
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 that primarily related to actions that impact Quest
Diagnostics' employees and operations and was 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 its operations in California into a new facility. The
costs were comprised primarily of employee severance costs and the
write-off of certain operating assets.
For the twelve months ended December 31, 2005, other operating
(income) expense, net includes a $6.2 million charge primarily related
to forgiving amounts owed by patients and physicians, and related
property damage as a result of hurricanes in the Gulf Coast.
5) Other 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 twelve months ended December 31, 2006 other expense, net
includes a $10.0 million charge recorded in the fourth quarter
associated with the write-down of an investment. In addition, for the
twelve months ended December 31, 2006, other expense, net includes
$16.3 million in charges related to the write-down of investments and
a gain of $15.8 million on the sale of an investment.
For the twelve months ended December 31, 2005, other expense, net
includes a $7.1 million charge associated with the write-down of an
investment.
6) For the three and twelve months ended December 31, 2006, the Company
repurchased approximately 3.9 million shares of its common stock at an
average price of $50.31 per share for $196.4 million and 8.9 million
shares of its common stock at an average price of $53.23 per share
for $472.3 million, respectively. For the three and twelve months
ended December 31, 2006, the Company reissued 0.5 million and 4.3
million shares, respectively, for employee benefit plans. Since the
inception of the share repurchase program in May 2003, the Company has
repurchased 41.3 million shares of its common stock at an average
price of $44.89 for $1.9 billion. At December 31, 2006, $250 million
of the share repurchase authorizations remained available.
7) The following table summarizes the approximate impact of various items
on period-over-period comparisons for certain financial metrics
reported for the three and twelve months ended December 31, 2006 and
is included for informational purposes only:
Continuing Operations
Three Months Ended Twelve Months Ended
December 31, 2006 December 31, 2006
Operating Diluted Operating Diluted
Income as Earnings Income as Earnings
Revenue a % of per Revenue a % of per
Growth Revenues Share Growth Revenues Share
Reported: 8.5% 18.0% $0.77 14.9% 18.0% $3.14
Impact on
comparisons to
prior year of:
LabOne acquisition 3.1% - 0.01 8.1% (0.6)% 0.01
Focus Diagnostics
acquisition 0.9% - - 0.5% - -
SFAS 123R stock-
based
compensation
expense - (0.2)% (0.01) - (0.9)% (0.17)
First quarter
special charges - - - - (0.4)% (0.08)
8) In the third quarter, the Company completed the wind down of NID, a
test kit manufacturing subsidiary. The results of operations for NID
have been classified as discontinued operations for all periods
presented. For the twelve months ended December 31, 2006, the Company
recorded pretax charges of $32 million comprised of: $7 million
related to the write-off of inventories; asset impairment charges of
$6 million; employee severance costs of $6 million; contract
termination costs of $6 million; $2 million related to facility
closure charges and $5 million of costs to support activities to wind-
down the business, principally comprised of employee costs and
professional fees.
SOURCE: Quest Diagnostics Incorporated
CONTACT: Laure Park, Investors, +1-201-393-5030; or Gary Samuels, Media,
+1-201-393-5700
Web site: http://www.questdiagnostics.com/