Why did Quest report a net loss in 1997, and how does it compare with 1996?

The 1997 net loss of $22.3M reflects $48.7M in restructuring and special charges, plus a $6.8M SG&A charge tied to laboratory consolidation. The 1996 loss of $626.0M was far larger because it included a $445M intangible asset write-down and $188M in government-claim reserves. Excluding special items, the business was closer to breakeven, though lower volume weighed on earnings.

Is Quest's revenue growing or shrinking, and why?

Revenue is shrinking. Net revenues fell 5.4% to $1.53B, mainly because base testing volume dropped 7.3%. Volume fell due to payor policies that reduced physician ordering, competition from hospital outreach labs, and Quest's deliberate exit from unprofitable accounts. Price increases of 2.9% partly offset the volume decline, and management expects volume to keep falling in 1998.

What are the main legal and regulatory risks for investors?

The main risks are open government investigations into Nichols Institute and a former Damon joint venture, four former Damon officers indicted in January 1998, and private RICO-type class claims. Reserves total $76.1M, and management says additional facts could push costs above reserves. Corning indemnifies most governmental claims tied to pre-1997 billing, but not private claims unresolved after 2001 or litigation expenses. Medicare fee cuts and a proposed rule on discount pass-through add further downside.

Can Quest reduce debt and return cash to shareholders?

Quest has $482M of long-term debt, including $319M in variable-rate bank term loans and $150M of 10.75% senior subordinated notes due 2006. Cash rose to $161.7M and operating cash flow was $176.3M, giving some flexibility. Dividends are not expected, and the credit agreement prohibits them. A $27M share repurchase program, approved in February 1998, is limited to offsetting dilution from employee plans.

DGX 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 1998. Cited figures are marked; the original filing is the authoritative source.

Quest Diagnostics (DGX), one of the three national independent clinical laboratories in the U.S., reported a 1997 net loss of $22.3 million^a ($0.77 per share), a sharp improvement from the $626.0 million loss in 1996, which was driven by large special charges including a $445 million intangible asset write-down and $188 million in government-claim reserves.

Net revenues fell 5.4% to $1.53 billion^b as base clinical testing volume declined 7.3%, partly offset by a 2.9% rise in average prices, the first average price increase since 1992. Adjusted EBITDA was $153.8 million (10.1% of revenue), down from $166.4 million, and management cites a shift away from low-margin managed care and capitated business as a deliberate trade-off for pricing. The balance sheet improved in liquidity: cash rose to $161.7 million, operating cash flow was $176.3 million, and days sales outstanding fell to 63 from 73.

Long-term debt was $482 million^c, and stockholders' equity was roughly flat at $541.7 million. Management is forecasting continued volume pressure in 1998, plus a Medicare fee-schedule cut to 74% of the 1984 median and an April 1998 switch to new AMA chemistry panels that it expects to hurt revenue, partly offset by expected cost savings from facility consolidations (over $20 million in annual benefits by 1999) and a Year 2000 program estimated at $60 to $70 million, partly capitalized. Investors should weigh the regulatory and legal overhang.

The company remains under open government investigations, including the Nichols Institute matter and a Damon joint venture probe, with a $76 million^d reserve for government and private claims. Corning has agreed to indemnify many pre-1997 government claims, but not private claims after 2001 or litigation expenses. The company does not expect to pay dividends, and its credit agreement restricts them.

02—Key points

Key Highlights

Net loss narrowed to $22.3M ($0.77/share) in 1997 from a $626.0M loss in 1996, which included $668.5M of special charges; 1997 results included $48.7M of restructuring charges plus a $6.8M SG&A charge
Net revenues declined 5.4% to $1,528.7M; base clinical testing volume fell 7.3%, while average prices rose 2.9%, the first average price increase since 1992
Adjusted EBITDA was $153.8M (10.1% of revenue) versus $166.4M in 1996; operating cash flow improved to $176.3M and days sales outstanding fell to 63 from 73
Lab network consolidation (Atlanta, Tampa, St. Louis, several branches) is expected to cost about $40M in cash and deliver over $20M in annual pre-tax savings by early 1999, but volume will decline further
Medicare fee schedule cut to 74% of the 1984 national median effective Jan 1, 1998, and new AMA chemistry panels mandatory April 1, 1998 are expected to hurt revenue
Ongoing government investigations (Nichols Institute, Damon JV) and a $76.1M reserve for government and private claims; Corning indemnifies most pre-1997 governmental claims but not post-2001 private claims or litigation fees
Year 2000 remediation estimated at $60-70M (40-50% capitalized) plus $25-35M in expensed costs for 1998-1999; no dividends expected, and the credit agreement prohibits them

03—Questions

Frequently Asked Questions

Why did Quest report a net loss in 1997, and how does it compare with 1996?
The 1997 net loss of $22.3M reflects $48.7M in restructuring and special charges, plus a $6.8M SG&A charge tied to laboratory consolidation. The 1996 loss of $626.0M was far larger because it included a $445M intangible asset write-down and $188M in government-claim reserves. Excluding special items, the business was closer to breakeven, though lower volume weighed on earnings.
Is Quest's revenue growing or shrinking, and why?
Revenue is shrinking. Net revenues fell 5.4% to $1.53B, mainly because base testing volume dropped 7.3%. Volume fell due to payor policies that reduced physician ordering, competition from hospital outreach labs, and Quest's deliberate exit from unprofitable accounts. Price increases of 2.9% partly offset the volume decline, and management expects volume to keep falling in 1998.
What are the main legal and regulatory risks for investors?
The main risks are open government investigations into Nichols Institute and a former Damon joint venture, four former Damon officers indicted in January 1998, and private RICO-type class claims. Reserves total $76.1M, and management says additional facts could push costs above reserves. Corning indemnifies most governmental claims tied to pre-1997 billing, but not private claims unresolved after 2001 or litigation expenses. Medicare fee cuts and a proposed rule on discount pass-through add further downside.
Can Quest reduce debt and return cash to shareholders?
Quest has $482M of long-term debt, including $319M in variable-rate bank term loans and $150M of 10.75% senior subordinated notes due 2006. Cash rose to $161.7M and operating cash flow was $176.3M, giving some flexibility. Dividends are not expected, and the credit agreement prohibits them. A $27M share repurchase program, approved in February 1998, is limited to offsetting dilution from employee plans.

04—Continue

← View all 10-K filings