Quest Diagnostics Incorporated , the nation's leading provider of diagnostic testing, information and services, announced that for the third quarter ended September 30, 2006, income from continuing operations was $164 million, or $0.82 per diluted share compared to $140 million, or $0.68 per diluted share for the prior year. Net income for 2006 was reduced by $13 million of pretax expenses, or $0.04 per share, associated with stock-based compensation recorded in accordance with SFAS 123R.
Third quarter revenues from continuing operations grew 16.3% over the prior year level to $1.6 billion. The acquisition of LabOne, which was completed on November 1, 2005, increased revenues by 9.4%, and the acquisition of Focus Diagnostics, which was completed on July 1, 2006, added 1% to revenues. Clinical testing revenues grew 10.5%, with LabOne contributing 4.6%. Clinical testing volume, measured by the number of requisitions, increased 4.9% and revenue per requisition increased 5.4%.
For the third quarter, operating income was $293 million, or 18.5% of revenues, compared to $250 million, or 18.4% 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) and approximately 1% due to the inclusion of LabOne.
Bad debt expense was 3.8% of revenues, compared to 4.3% a year ago. Days sales outstanding were 48 days. Cash flow from operations increased to $235 million compared to $178 million in 2005. During the quarter the company spent $230 million on acquisitions, repurchased $22 million of its common stock and made capital expenditures of $45 million.
"We had strong performance in the third quarter, driven by our focus on profitable growth and operational efficiencies," said Surya N. Mohapatra, Ph.D., Chairman and Chief Executive Officer. "During the quarter we completed two strategic acquisitions, Focus Diagnostics and Enterix, which are further differentiating us with proprietary new diagnostic tests and products in the areas of infectious disease and colorectal cancer."
During the 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. Loss from discontinued operations was $0.02 per diluted share in the third quarter of 2006, the same as in the prior year.
Year-to-Date Performance
For the first nine months of 2006 income from continuing operations was $474 million, or $2.37 per diluted share compared to $424 million, or $2.06 per diluted share in the prior year. Net income for 2006 included pretax charges of $27 million, or $0.08 per share, primarily associated with integration activities and $53 million of pretax expenses, or $0.16 per share, associated with stock-based compensation recorded in accordance with SFAS 123R.
Revenues from continuing operations increased 17.1% to $4.7 billion. The acquisition of LabOne increased revenues by approximately 10%. Operating income was $849 million, or 18.0% of revenues, in 2006 compared to $747 million, 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), approximately 1% due to the inclusion of LabOne and 0.6% due to integration charges.
Cash from operations increased to $646 million from $548 million in 2005. During the first nine months of 2006, the company repurchased $276 million in common stock, spent $231 million on acquisitions, and made capital expenditures of $134 million.
Discontinued operations contributed a loss of $0.19 per diluted share for the first nine months, compared to a loss of $0.04 per diluted share in the prior year.
Outlook for 2006
For the full year 2006 the company expects results from continuing operations as follows: earnings per diluted share of between $3.05 and $3.10; revenues to grow approximately 15%; and operating income to approximate 17.5% of revenues. Over the same period, the company expects cash from operations to approximate $850 million and capital expenditures to be between $180 million and $200 million. For the full year 2006 the company expects NID, which is being treated as a discontinued operation, to generate pretax losses of approximately $60 million, or $0.20 per diluted share.
Quest Diagnostics will hold its third quarter conference call on October 19 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 October 19 through 11 P.M. on November 16, 2006 to investors in the U.S. by dialing 800-925-4647. Investors outside the U.S. may dial 203-369-3530. 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 the Quest Diagnostics Incorporated 2005 Form 10-K and subsequent filings.
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2006 and 2005
(in millions, except per share and percentage data)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Net revenues $1,583.2 $1,361.1 $4,719.4 $4,029.4
Operating costs and expenses:
Cost of services 933.7 799.1 2,776.6 2,364.1
Selling, general and
administrative 354.6 303.6 1,061.0 907.2
Amortization of intangible
assets 3.0 0.9 7.6 2.7
Other operating (income)
expense, net (1.0) 7.2 25.3 8.3
Total operating costs and
expenses 1,290.3 1,110.8 3,870.5 3,282.3
Operating income 292.9 250.3 848.9 747.1
Other income (expense):
Interest expense, net (22.8) (11.8) (68.8) (37.2)
Minority share of income (6.1) (4.8) (17.4) (14.9)
Equity earnings in
unconsolidated joint ventures 6.6 5.9 21.2 19.5
Other income (expense), net (3.4) (6.4) 1.4 (6.2)
Total non-operating expenses,
net (25.7) (17.1) (63.6) (38.8)
Income from continuing
operations before taxes 267.2 233.2 785.3 708.3
Income tax expense 103.4 93.4 310.9 284.3
Income from continuing
operations 163.8 139.8 474.4 424.0
Loss from discontinued
operations, net of taxes (3.3) (4.6) (37.3) (8.1)
Net income $ 160.5 $ 135.2 $ 437.1 $ 415.9
Earnings per common share -
basic:
Income from continuing
operations $ 0.83 $ 0.69 $ 2.40 $ 2.10
Loss from discontinued
operations (0.02) (0.02) (0.19) (0.04)
Net income $ 0.81 $ 0.67 $ 2.21 $ 2.06
Earnings per common share -
diluted:
Income from continuing
operations $ 0.82 $ 0.68 $ 2.37 $ 2.06
Loss from discontinued
operations (0.02) (0.02) (0.19) (0.04)
Net income $ 0.80 $ 0.66 $ 2.18 $ 2.02
Weighted average common shares
outstanding:
Basic 197.2 202.7 197.9 202.3
Diluted 200.1 206.1 200.6 206.2
Operating income as a
percentage of net revenues 18.5% 18.4% 18.0% 18.5%
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(in millions, except per share data)
September 30, December 31,
2006 2005
Assets
Current assets:
Cash and cash equivalents $ 105.1 $ 92.1
Accounts receivable, net 857.0 732.9
Inventories 77.3 77.9
Deferred income taxes 122.3 107.4
Prepaid expenses and other current assets 80.2 59.2
Total current assets 1,241.9 1,069.5
Property, plant and equipment, net 741.7 753.7
Goodwill, net 3,389.6 3,197.2
Intangible assets, net 194.8 147.4
Other assets 136.8 138.3
Total assets $5,704.8 $5,306.1
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 860.7 $ 764.5
Short-term borrowings and current portion
of long-term debt 316.9 336.8
Total current liabilities 1,177.6 1,101.3
Long-term debt 1,239.0 1,255.4
Other liabilities 219.6 186.4
Stockholders' equity:
Common stock, par value $0.01 per share;
600 shares and 300 shares authorized
at September 30, 2006 and December 31,
2005, respectively; 213.7 shares issued at
both September 30, 2006 and December 31,
2005 2.1 2.1
Additional paid-in capital 2,188.3 2,175.5
Retained earnings 1,670.4 1,292.5
Unearned compensation - (3.3)
Accumulated other comprehensive income
(loss) 2.4 (6.2)
Treasury stock, at cost; 16.4 and 15.2
shares at September 30, (794.6) (697.6)
2006 and December 31, 2005, respectively
Total stockholders' equity 3,068.6 2,763.0
Total liabilities and stockholders'
equity $5,704.8 $5,306.1
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
(in millions)
Nine Months Ended
September 30,
2006 2005
Cash flows from operating activities:
Net income $437.1 $415.9
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 148.0 129.0
Provision for doubtful accounts 184.6 177.9
Stock-based compensation expense 53.0 1.4
Provision for restructuring and other
special charges 55.8 -
Deferred income tax benefit (40.8) (10.9)
Minority share of income 17.4 14.9
Tax benefits associated with stock-based
compensation plans - 28.4
Excess tax benefits from stock-based
compensation arrangements (30.7) -
Other, net 5.4 8.5
Changes in operating assets and
liabilities:
Accounts receivable (297.0) (222.5)
Accounts payable and accrued expenses 75.2 (6.1)
Integration, settlement and other
special charges (1.7) (1.6)
Income taxes payable 52.2 30.3
Other assets and liabilities, net (12.6) (17.0)
Net cash provided by operating activities 645.9 548.2
Cash flows from investing activities:
Business acquisitions, net of cash acquired (231.4) (20.6)
Capital expenditures (133.5) (178.3)
Decrease (increase) in investments and
other assets 13.6 (40.1)
Net cash used in investing activities (351.3) (239.0)
Cash flows from financing activities:
Repayments of debt (416.2) (100.5)
Proceeds from borrowings 375.0 100.0
Decrease in book overdrafts (13.6) -
Purchases of treasury stock (275.9) (190.5)
Exercise of stock options 91.7 84.9
Excess tax benefits from stock-based
compensation arrangements 30.7 -
Dividends paid (57.4) (51.5)
Distributions to minority partners (15.2) (14.8)
Financing costs paid (0.7) -
Net cash used in financing activities (281.6) (172.4)
Net change in cash and cash equivalents 13.0 136.8
Cash and cash equivalents, beginning of
period 92.1 73.3
Cash and cash equivalents, end of period $105.1 $210.1
Cash paid during the period for:
Interest $ 72.4 $ 47.9
Income taxes $275.4 $231.9
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 Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
(in millions, except per share data)
Income from continuing
operations - basic $163.8 $139.8 $474.4 $424.0
Loss from discontinued
operations - basic (3.3) (4.6) (37.3) (8.1)
Net income available to common
stockholders - basic 160.5 135.2 437.1 415.9
Add: Interest expense
associated with contingent
convertible debentures, net of
related tax effects - - - 0.1
Income available to common
stockholders - diluted $160.5 $135.2 $437.1 $416.0
Weighted average common shares
outstanding - basic 197.2 202.7 197.9 202.3
Effect of dilutive securities:
Stock options, restricted
common shares and performance
share units granted 2.9 3.4 2.7 3.7
Contingent convertible
debentures - - - 0.2
Weighted average common shares
outstanding - diluted 200.1 206.1 200.6 206.2
Earnings per common share -
basic:
Income from continuing
operations $ 0.83 $ 0.69 $ 2.40 $ 2.10
Loss from discontinued
operations (0.02) (0.02) (0.19) (0.04)
Net income $ 0.81 $ 0.67 $ 2.21 $ 2.06
Earnings per common share -
diluted:
Income from continuing
operations $ 0.82 $ 0.68 $ 2.37 $ 2.06
Loss from discontinued
operations (0.02) (0.02) (0.19) (0.04)
Net income $ 0.80 $ 0.66 $ 2.18 $ 2.02
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.
For the three and nine months ended September 30, 2006, the stock-based
compensation expense recorded in accordance with SFAS 123R totaled
$13.5 million ($8.1 million, net of tax, or $0.04 per share) and $53
million ($32 million, net of tax, or $0.16 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 nine months ended September 30,
2006 by $31 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 $1.4 million for the
three and nine months ended September 30, 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 Ended Nine Months Ended
September 30, September 30,
2005 2005
Net income
Net income, as reported $135.2 $415.9
Add: Stock-based compensation
under APB 25 0.6 1.4
Deduct: Total stock-based
compensation expense determined
under fair value
method for all awards, net of
related tax effects (8.3) (27.5)
Pro forma net income $127.5 $389.8
Earnings per common share
Basic - as reported $ 0.67 $ 2.06
Basic - pro forma $ 0.63 $ 1.93
Diluted - as reported $ 0.66 $ 2.02
Diluted - pro forma $ 0.62 $ 1.88
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 Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Weighted average fair value
of options at grant date $18.11 $13.80 $13.91 $14.17
Expected volatility 21.8% 22.4% 18.2% 23.2%
Dividend yield 0.7% 0.7% 0.7% 0.7%
Risk-free interest rate 4.8% 3.8%-4.2% 4.6% 3.8%-4.2%
Expected holding period, in
years 5.5-6.2 4.9-6.2 5.6-6.2 4.9-6.2
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.
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 three and nine months ended September 30, 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 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, 2006, other income (expense),
net includes a $4.0 million charge recorded in the third quarter
associated with the write-down of an investment. In addition, for the
nine months ended September 30, 2006, other income (expense), net
includes a $12.3 million charge recorded during the second quarter
related to a write-down of an investment and a first quarter gain of
$15.8 million on the sale of an investment.
For the three and nine months ended September 30, 2005, other income
(expense), net includes a $7.1 million charge associated with the
write-down of an investment.
6) For the three and nine months ended September 30, 2006, the Company
repurchased approximately 0.4 million shares of its common stock at an
average price of $60.59 per share for $22.0 million and 5.0 million
shares of its common stock at an average price of $55.53 per share for
$275.9 million, respectively. For the three and nine months ended
September 30, 2006, the Company reissued 0.7 million and 3.8 million
shares, respectively, for employee benefit plans. Since the inception
of the share repurchase program in May 2003, the Company has
repurchased 37.4 million shares of its common stock at an average price
of $44.32 for $1.7 billion. At September 30, 2006, $446 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 nine months ended September 30, 2006 and is
included for informational purposes only:
Continuing Operations
Three Months Ended
September 30, 2006
Operating
Income as Diluted
Revenue a % of Earnings
Growth Revenues per Share
Reported: 16.3% 18.5% $0.82
Impact on comparisons to prior year of:
LabOne acquisition 9.4% (0.9)% -
Focus Diagnostics acquisition 1.1% - -
Impact of business days (1.0)% (0.4)% (0.03)
Weather / impact of hurricanes 0.4% 0.7% 0.03
SFAS 123R stock-based compensation
expense - (0.9)% (0.04)
First quarter special charges - - -
Nine Months Ended
September 30, 2006
Operating
Income as Diluted
Revenue a % of Earnings
Growth Revenues per Share
Reported: 17.1% 18.0% $2.37
Impact on comparisons to prior year of:
LabOne acquisition 9.9% (0.8)% -
Focus Diagnostics acquisition 0.4% - -
Impact of business days (0.3)% (0.1)% (0.03)
Weather / impact of hurricanes 0.3% 0.3% 0.04
SFAS 123R stock-based compensation
expense - (1.1)% (0.16)
First quarter special charges - (0.6)% (0.08)
8) During the 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.
In connection with the Company's wind-down of NID's operations, the
Company recorded pretax charges of $2.7 million during the quarter
ended September 30, 2006, primarily related to charges for facility
closure and employee severance costs. For the nine months ended
September 30, 2006, the Company recorded pretax charges of $31 million
comprised of: $7 million related to the write-off of inventories; asset
impairment charges of $5 million; employee severance costs of $6
million; estimated 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; Gary Samuels, Media,
+1-201-393-5700
Web site: http://www.questdiagnostics.com/