Quest Diagnostics Incorporated , the nation's leading provider of diagnostic testing, information and services, announced that for the second quarter ended June 30, 2003, net income increased to $120.4 million from $87.2 million in the second quarter of 2002. Earnings per diluted share increased 29% to $1.12 from $0.87 in 2002.
Second quarter revenues increased 14% over the prior year level to $1.2 billion and reflect the acquisition of Unilab Corporation, which was completed on February 28, 2003. Clinical testing volume, measured by the number of requisitions, increased 10%. Revenue per requisition increased 3.5% compared to the prior year, driven primarily by improvements in test and payer mix. The remainder of the revenue growth was generated by non-clinical testing businesses. On a pro forma basis for the second quarter, assuming that Unilab had been part of Quest Diagnostics since January 1, 2002, revenues increased 3.4%, revenue per requisition increased 5.1%, and clinical testing volume decreased 2.3%, compared to the prior year period.
"We had another strong quarter," said Kenneth W. Freeman, Chairman and Chief Executive Officer. "Earnings per share increased 29% and cash generation was excellent. EBITDA margins continued to expand, increasing by three percentage points as a result of revenue growth and efficiencies from our Six Sigma and standardization initiatives."
For the second quarter, earnings before interest, taxes, depreciation and amortization (EBITDA), were $259 million, or 21.2% of revenues, compared to $195 million, or 18.2% of revenues in 2002. Bad debt expense improved to 4.8% of revenues compared to 5.2% for the prior year period. Days sales outstanding improved to 47 days from 52 days a year ago and 49 days at the end of the first quarter. Cash flow from operations was $169 million compared to $165 million in 2002. During the quarter, the company repaid $86 million of debt, repurchased $10 million of its common stock and made capital expenditures of $38 million.
For the first half of 2003, net income increased to $208.4 million from $153.8 million in the prior year. Earnings per diluted share increased 29% to $1.98 from $1.54 in the prior year. Revenues increased 14.7% to $2.3 billion. EBITDA was $458 million, or 19.8% of revenues, compared to $350 million, or 17.4% of revenues in 2002. Capital expenditures were $76 million.
For the full year 2003, earnings are expected to increase between 24% and 27% to between $4.00 and $4.10 per diluted share, before charges associated with the Unilab acquisition. Revenues are expected to grow 14% to 15%. Volume is expected to grow 10% to 11% and revenue per requisition is expected to grow 3% to 4%. On a pro forma basis, assuming that the acquisitions of Unilab and American Medical Laboratories had been completed on January 1, 2002, volume is expected to decrease 1% to 2% and revenue per requisition is expected to increase 4% to 5%. EBITDA is expected to approximate 20% of revenues. Cash flow from operations is expected to exceed $600 million. Capital expenditures are expected to be between $170 million and $180 million.
For the third quarter, earnings are expected to increase to between $1.06 and $1.11 per diluted share, before charges associated with the Unilab acquisition. Revenues are expected to grow 13% to 15%, with volume growth of 10% to 11% and revenue per requisition increasing 3% to 4%. On a pro forma basis, assuming that Unilab had been part of Quest Diagnostics since January 1, 2002, volume is expected to decrease 1% to 2% and revenue per requisition is expected to increase 4% to 5%. EBITDA is expected to approximate 21% of revenues.
Quest Diagnostics will hold its second quarter conference call on July 22 at 8:30 A.M. Eastern Time. To hear a simulcast of the call over the Internet or a replay, registered analysts and investors may access StreetEvents at: www.streetevents.com, and all others may access the Quest Diagnostics website at: www.questdiagnostics.com. In addition, a replay of the call will be available from 10 A.M. on July 22 through 5 P.M. on August 31 to investors in the U.S. by dialing 800-664-4219. Investors outside the U.S. may dial 402-220-0260. No password is required for either number.
Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services in the United States through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff. Quest Diagnostics is the leading provider of esoteric testing, including gene-based medical testing, and also empowers healthcare organizations and clinicians with state-of-the-art connectivity solutions that improve patient care. Additional company information is available at: www.questdiagnostics.com. A copy of our earnings press release, together with any information that would be required under Regulation G, will be available in the "Press Room" section of our website.
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, unanticipated expenditures, changing relationships with customers, payers, suppliers and strategic partners, competitive environment, changes in government regulations, conditions of the economy and other factors described in the Quest Diagnostics Incorporated 2002 Form 10-K and subsequent filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2003 and 2002
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net revenues $1,219.9 $1,068.8 $2,312.7 $2,015.6
Costs and expenses:
Cost of services 703.1 630.3 1,351.2 1,188.0
Selling, general and
administrative 296.1 276.8 575.3 535.2
Interest expense, net 16.8 14.9 30.7 27.6
Amortization of intangible
assets 2.1 2.1 4.1 4.2
Minority share of income 4.4 3.9 8.2 7.8
Other, net (6.0) (5.7) (9.0) (6.2)
Total 1,016.5 922.3 1,960.5 1,756.6
Income before taxes 203.4 146.5 352.2 259.0
Income tax expense 83.0 59.3 143.8 105.2
Net income $120.4 $87.2 $208.4 $153.8
Basic earnings per common share:
Net income $1.15 $0.90 $2.03 $1.60
Weighted average common shares
outstanding - basic 105.0 96.4 102.5 95.9
Diluted earnings per common share:
Net income $1.12 $0.87 $1.98 $1.54
Weighted average common shares
outstanding - diluted 107.7 100.3 105.1 99.8
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(in millions, except per share data)
June 30, December 31,
2003 2002
Assets
Current assets:
Cash and cash equivalents $88.1 $96.8
Accounts receivable, net 628.4 522.1
Inventories 68.5 60.9
Deferred income taxes 117.5 102.7
Prepaid expenses and other current assets 50.6 41.9
Total current assets 953.1 824.4
Property, plant and equipment, net 583.0 570.1
Goodwill 2,519.3 1,788.9
Intangible assets, net 19.5 22.1
Deferred income taxes 66.8 29.8
Other assets 102.3 88.9
Total assets $4,244.0 $3,324.2
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $594.4 $610.0
Short-term borrowings and current portion of
long-term debt 74.4 26.0
Total current liabilities 668.8 636.0
Long-term debt 1,065.2 796.5
Other liabilities 139.1 122.8
Stockholders' equity:
Common stock, par value $0.01 per share;
300 shares authorized; 105.6 and 98.0 shares
issued at June 30, 2003 and December 31, 2002,
respectively 1.1 1.0
Additional paid-in capital 2,219.6 1,817.5
Retained earnings (accumulated deficit) 167.7 (40.8)
Unearned compensation (5.1) (3.3)
Accumulated other comprehensive loss (2.3) (5.5)
Treasury stock, at cost; 0.2 shares at
June 30, 2003 (10.1) --
Total stockholders' equity 2,370.9 1,768.9
Total liabilities and stockholders' equity $4,244.0 $3,324.2
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(in millions)
Six Months Ended
June 30,
2003 2002
Cash flows from operating activities:
Net income $208.4 $153.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 75.0 63.8
Provision for doubtful accounts 113.5 110.5
Deferred income tax provision 5.9 17.6
Minority share of income 8.2 7.8
Stock compensation expense 2.9 5.0
Tax benefits associated with stock-based
compensation plans 9.5 38.2
Other, net 1.5 (2.1)
Changes in operating assets and liabilities:
Accounts receivable (158.0) (136.8)
Accounts payable and accrued expenses (63.8) (38.0)
Integration, settlement and other
special charges (9.3) (12.7)
Income taxes payable 29.8 9.8
Other assets and liabilities, net 4.1 1.0
Net cash provided by operating activities 227.7 217.9
Cash flows from investing activities:
Business acquisitions, net of cash acquired (237.4) (333.5)
Capital expenditures (75.8) (83.4)
Proceeds from disposition of assets 3.4 1.0
Increase in investments and other assets (11.1) (2.9)
Collection of note receivable -- 10.7
Net cash used in investing activities (320.9) (408.1)
Cash flows from financing activities:
Proceeds from borrowings 450.0 475.2
Repayments of debt (354.5) (333.2)
Financing costs paid (4.2) --
Purchases of treasury stock (10.1) --
Exercise of stock options 9.2 22.1
Distributions to minority partners (6.3) (6.3)
Other 0.4 (0.1)
Net cash provided by financing activities 84.5 157.7
Net change in cash and cash equivalents (8.7) (32.5)
Cash and cash equivalents, beginning of period 96.8 122.3
Cash and cash equivalents, end of period $88.1 $89.8
Cash paid during the period for:
Interest $32.5 $30.5
Income taxes $100.6 $38.8
Notes to Financial Tables
1) Net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding.
Potentially dilutive common shares primarily represent stock options.
The following table presents net income and basic and diluted
earnings per common share, had the Company elected to recognize
compensation cost based on the fair value at the grant dates for
stock option awards and discounts granted for stock purchases under
the Company's Employee Stock Purchase Plan, consistent with the
method prescribed by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation", as amended by
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment
of FASB Statement No. 123":
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(in millions, except per share data)
Net income
Net income, as reported $120.4 $87.2 $208.4 $153.8
Add: Stock-based compensation
under APB25 1.4 2.5 2.9 5.0
Deduct: Total stock-based
compensation expense
determined under fair value
method for all awards, net
of related tax effects (13.2) (12.5) (27.9) (22.9)
Pro forma net income $108.6 $77.2 $183.4 $135.9
Earnings per common share
Basic - as reported $1.15 $0.90 $2.03 $1.60
Basic - pro forma $1.03 $0.80 $1.79 $1.42
Diluted - as reported $1.12 $0.87 $1.98 $1.54
Diluted - pro forma $1.02 $0.77 $1.77 $1.36
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Dividend yield 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 2.6% 4.3% 2.8% 4.2%
Expected volatility 48.5% 45.2% 48.1% 45.2%
Expected holding period,
in years 5 5 5 5
2) Other, net, which represents income for each of the periods presented,
includes equity earnings from our unconsolidated joint ventures and
miscellaneous gains and losses.
3) EBITDA represents income before net interest expense, income taxes,
depreciation and amortization. The following table reconciles net
income, representing the most comparable measure under accounting
principles generally accepted in the United States, to EBITDA. In
addition, the calculations to determine net income as a percentage of
net revenues and EBITDA as a percentage of net revenues are presented.
A reconciliation of net income to net cash provided by operating
activities is presented on the face of the statement of cash flows.
EBITDA is presented and discussed because management believes it is a
useful adjunct to net income and other measurements under accounting
principles generally accepted in the United States since it is a
meaningful measure of a company's performance and ability to meet its
future debt service requirements, fund capital expenditures and meet
working capital requirements. EBITDA 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
(i) net income (or any other measure of performance under accounting
principles generally accepted in the United States) as a measure of
performance or (ii) cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(in millions, except percentage data)
Net revenues $1,219.9 $1,068.8 $2,312.7 $2,015.6
Net income $120.4 $87.2 $208.4 $153.8
Add:
Interest expense, net 16.8 14.9 30.7 27.6
Income tax expense 83.0 59.3 143.8 105.2
Depreciation 36.2 31.4 70.9 59.6
Amortization of
intangible assets 2.1 2.1 4.1 4.2
EBITDA $258.5 $194.9 $457.9 $350.4
Net income as a percentage
of net revenues A 9.9% 8.2% 9.0% 7.6%
EBITDA as a percentage of
net revenues B 21.2% 18.2% 19.8% 17.4%
A. Calculated by dividing net income by net revenues.
B. Calculated by dividing EBITDA by net revenues.
4) Free cash flow represents net cash provided by operating activities
less capital expenditures. Free cash flow is presented because
management believes it is a useful adjunct to cash flow from operating
activities and other measurements under accounting principles
generally accepted in the United States since it is a meaningful
measure of a company's ability to fund investing activities and meet
its future debt service requirements. Free cash flow is not a measure
of financial performance under accounting principles generally
accepted in the United States and should not be considered as an
alternative to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
The following table reconciles net cash provided by operating
activities to free cash flow:
Six Months Ended
June 30,
2003 2002
(in millions)
Net cash provided by operating activities $227.7 $217.9
Less: Capital expenditures 75.8 83.4
Free cash flow $151.9 $134.5
5) The following table presents management's estimates of various
financial measures for the twelve months ended December 31, 2003 and
the three months ended September 30, 2003 and excludes charges
associated with the Unilab acquisition. The table also reconciles
estimated net income to estimated EBITDA and presents the calculation
of each as a percentage of estimated net revenues:
Twelve Months Three Months
Ended Ended
December 31, September 30,
2003 2003
(in millions, except per share and
percentage data)
Net revenues $4,685 - $4,725 $1,196 - $1,218
Diluted earnings per common share $4.00 - $4.10 $1.06 - $1.11
Weighted average common shares outstanding
- diluted 106 107
Net income $424 - $434 $113 - $119
Effective income tax rate 40.8% 40.8%
Reconciliation of net income to EBITDA
Net income $424 - $434 $113 - $119
Add:
Interest expense, net 60 15
Income tax expense 292 - 299 78 - 82
Depreciation 146 37
Amortization of intangible assets 8 2
EBITDA $930 - $947 $245 - $255
Net income as a percentage of net
revenues A 9.1% 9.6%
EBITDA as a percentage of net revenues B 19.9% 20.7%
A. Calculated by dividing the mid-point of estimated net income by the
mid-point of estimated net revenues.
B. Calculated by dividing the mid-point of estimated EBITDA by the
mid-point of estimated net revenues.
SOURCE: Quest Diagnostics Incorporated
CONTACT: Laure Park, Investors, +1-201-393-5030, or Gary Samuels, Media,
+1-201-393-5700, both of Quest Diagnostics
Web site: http://www.questdiagnostics.com/