10-QPeriod: Q3 FY2002

QUEST DIAGNOSTICS INC Quarterly Report for Q3 Ended Sep 30, 2002

Filed October 31, 2002For Securities:DGX

Summary

Quest Diagnostics Incorporated (DGX) reported solid financial performance for the third quarter and the first nine months of 2002. The company saw significant revenue growth driven by both increased clinical testing volumes and a favorable shift in test mix towards higher-value services, including gene-based testing. The acquisition of American Medical Laboratories, Inc. (AML) in April 2002 was a major contributor to this revenue growth, integrating new operations and expanding service capabilities. Profitability also saw a substantial increase, with net income rising considerably year-over-year. This improvement was supported by revenue growth, cost efficiencies from ongoing Six Sigma and Standardization initiatives, and a notable reduction in net interest expense. The company also benefited from the adoption of SFAS 142, which eliminated goodwill amortization, positively impacting reported earnings. Quest Diagnostics continues to manage its capital resources effectively, with a focus on debt reduction and strategic growth opportunities, including the pending acquisition of Unilab Corporation.

Key Highlights

  • 1Net revenues increased by 17.2% for the three months ended September 30, 2002, and 13.1% for the nine months ended September 30, 2002, compared to the prior year periods.
  • 2The acquisition of American Medical Laboratories, Inc. (AML) on April 1, 2002, significantly contributed to revenue growth, accounting for approximately 55% and 45% of the increase in net revenues for the three and nine-month periods, respectively.
  • 3Clinical testing volume (requisitions) increased by 13.7% for the three months and 9.4% for the nine months ended September 30, 2002, compared to the prior year.
  • 4Net income for the three months ended September 30, 2002, increased to $87 million from $50 million in the prior year period. For the nine months, net income rose to $240 million from $111 million.
  • 5The adoption of SFAS 142 (effective January 1, 2002) eliminated goodwill amortization, which positively impacted reported net income and earnings per share.
  • 6Selling, general, and administrative expenses as a percentage of net revenues decreased to 25.7% for the three months and 26.3% for the nine months, down from 27.8% and 28.0% respectively in the prior year, due to efficiencies.
  • 7The company is pursuing a pending acquisition of Unilab Corporation, which would expand its market presence in California and Arizona, subject to regulatory approval.

Frequently Asked Questions

The acquisition of AML, completed on April 1, 2002, significantly contributed to Quest Diagnostics' financial results. It was a primary driver of the substantial increase in net revenues for both the third quarter and the first nine months of 2002. The acquisition also expanded the company's laboratory network and service capabilities, particularly in esoteric testing.

The adoption of SFAS 142, 'Goodwill and Other Intangible Assets,' effective January 1, 2002, eliminated the amortization of goodwill. This change positively impacted reported net income and earnings per share by removing a non-cash expense that was previously recognized. The filing provides pro forma adjustments showing how net income and EPS would have been higher in prior periods if SFAS 142 had been in effect.

Quest Diagnostics entered into a definitive agreement to acquire Unilab Corporation in April 2002. The transaction is subject to customary conditions, including regulatory review (specifically, a second request from the FTC under the HSR Act) and tender of Unilab shares. The companies have extended the termination date of their merger agreement and are continuing discussions with the FTC, hoping to close the transaction in the fourth quarter of 2002.

Quest Diagnostics is implementing Six Sigma and Standardization initiatives to improve operational efficiency. These efforts have contributed to revenue growth, better average revenue per requisition, and reductions in certain expenses like selling, general, and administrative costs and bad debt expense. The integration of AML is also expected to yield approximately $15 million in annual synergies by the end of 2003.