10-QPeriod: Q2 FY2007

QUEST DIAGNOSTICS INC Quarterly Report for Q2 Ended Jun 30, 2007

Filed July 31, 2007For Securities:DGX

Summary

Quest Diagnostics Incorporated (DGX) reported its financial results for the quarter and six months ended June 30, 2007. The company experienced a year-over-year decrease in net income from continuing operations for both periods, primarily attributed to the loss of its contract with UnitedHealthcare (UNH) and subsequent shift to a non-contracted provider status. This change impacted clinical testing volumes and necessitated adjustments to revenue per requisition. Despite these challenges, Quest Diagnostics completed significant acquisitions during the period, notably AmeriPath for approximately $2 billion and HemoCue for approximately $450 million, which contributed to revenue growth and expanded the company's service offerings in anatomic pathology and point-of-care testing. Financially, the company saw increased interest expense due to new borrowings to finance these acquisitions. Operating efficiency initiatives are underway to mitigate the impact of lower volumes and pricing pressures. The company's balance sheet reflects a substantial increase in goodwill and intangible assets following these acquisitions, alongside a significant increase in long-term debt. Management remains focused on integration and cost-saving measures to drive future profitability.

Key Highlights

  • 1Net income from continuing operations decreased to $142.0 million ($0.73/diluted share) for the three months ended June 30, 2007, down from $156.0 million ($0.78/diluted share) in the prior year.
  • 2For the six months ended June 30, 2007, net income from continuing operations was $249.5 million ($1.28/diluted share), down from $310.6 million ($1.55/diluted share) in the prior year.
  • 3Net revenues increased by 3.7% to $1.64 billion for the quarter and by 1% to $3.17 billion for the six months, largely due to acquisitions.
  • 4The company completed the significant acquisitions of AmeriPath for approximately $2.0 billion and HemoCue for approximately $450 million during the period.
  • 5Volume, measured by requisitions, declined 6.0% for the quarter and 6.6% for the six months, primarily due to the loss of the UnitedHealthcare (UNH) contract.
  • 6Operating income margin decreased to 16.6% for the quarter and 14.9% for the six months, impacted by lower volumes and increased costs.
  • 7Total assets significantly increased from $5.66 billion to $8.49 billion, driven by acquisitions which substantially increased goodwill and intangible assets.

Frequently Asked Questions

The primary driver for the decrease in net income from continuing operations was the change in contract status with UnitedHealthcare (UNH), which moved from a contracted provider to a non-contracted provider. This resulted in a significant decline in clinical testing volumes and necessitated adjustments to revenue per requisition.

Quest Diagnostics completed two major acquisitions: AmeriPath for approximately $2.0 billion and HemoCue for approximately $450 million. These acquisitions contributed to revenue growth and expanded the company's presence in anatomic pathology and point-of-care testing. However, they also significantly increased long-term debt and goodwill on the balance sheet, and contributed to higher interest expenses.

Quest Diagnostics is implementing operating efficiency initiatives aimed at improving cost structure and mitigating the profit impact of reduced volumes and pricing pressure. The company has taken actions to reduce workforce size and is identifying further opportunities for operational cost reductions. These initiatives are expected to offset the negative impacts and potentially expand margins.

Quest Diagnostics is now a non-contracted provider for UNH. While they expect some continued loss of business, they are encouraged by physicians' continued choice of Quest Diagnostics when given an option. In most cases where they serve UNH members as a non-contracted provider, they are entitled to reimbursement at rates often exceeding previous contracted rates. The company estimates a significant reduction in clinical testing volume for 2007 due to this contract change and the loss of a contract with Horizon Blue Cross Blue Shield of New Jersey.