10-QPeriod: Q2 FY2008

QUEST DIAGNOSTICS INC Quarterly Report for Q2 Ended Jun 30, 2008

Filed July 24, 2008For Securities:DGX

Summary

Quest Diagnostics Incorporated (DGX) reported solid financial performance for the second quarter and first six months of 2008, demonstrating revenue growth and improved profitability. Net revenues increased by 12% and 14% for the respective periods, driven by the integration of the AmeriPath acquisition and underlying volume growth in its core clinical testing business. Despite a decline in pre-employment drug testing, overall requisition volume saw a modest increase, supported by a positive test mix and higher revenue per requisition. The company also achieved improved operating income and margins, reflecting successful cost-saving initiatives and operational efficiencies. Net income from continuing operations saw a significant rise, with diluted EPS reaching $0.83 for the quarter and $1.55 for the six-month period. Quest Diagnostics also provided updates on its debt management, capital expenditures, and liquidity, indicating a stable financial position to support ongoing operations and future growth opportunities.

Financial Highlights

27 data points
Beta

Revenue

$1.84B

41.0% Gross Margin

Net Income

$161.33M

8.8% Net Margin

EPS (Diluted)

$0.82

Cash & Equivalents

$143.40M

Free Cash Flow

$371.21M

Financial Statements
Beta
Revenue$1.84B
Cost of Revenue$1.08B
Gross Profit$754.42M
SG&A Expenses$438.04M
Operating Expenses$1.53B
Operating Income$308.12M
Net Income$161.33M
EPS (Basic)$0.83
EPS (Diluted)$0.82
Shares Outstanding (Basic)194.53M
Shares Outstanding (Diluted)196.12M

Key Highlights

  • 1Net revenues increased by 12% to $1.84 billion for the three months ended June 30, 2008, and by 14% to $3.62 billion for the six months ended June 30, 2008.
  • 2Income from continuing operations grew to $162.2 million ($0.83/diluted share) for the quarter and $302.9 million ($1.55/diluted share) for the six months, up from $142.0 million ($0.73/diluted share) and $249.5 million ($1.28/diluted share) respectively, in the prior year.
  • 3AmeriPath acquisition contributed significantly to revenue growth, accounting for approximately 8.1% and 10.5% of revenue growth for the three and six-month periods, respectively.
  • 4Underlying volume growth, after adjusting for the UNH contract change and pre-employment drug testing decline, was estimated to be between 1-2% for both periods.
  • 5Operating income margin improved to 16.8% for the quarter and 16.2% for the six months, compared to 16.6% and 14.9% in the prior year, respectively.
  • 6Amortization of intangible assets increased due to the AmeriPath acquisition, and interest expense rose due to increased borrowings to fund acquisitions.
  • 7The company had no borrowings outstanding under its Secured Receivables Credit Facility as of June 30, 2008, and $1.2 billion in borrowing capacity available under its credit facilities.

Frequently Asked Questions

The acquisition of AmeriPath significantly contributed to Quest Diagnostics' financial performance in the second quarter and first six months of 2008. It accounted for approximately 8.1% and 10.5% of revenue growth for the respective periods and contributed 8.9% to the clinical testing business's revenue growth for the quarter and 11.5% for the six months. The acquisition also led to an increase in amortization of intangible assets and related interest expenses due to increased borrowings.

The loss from discontinued operations, net of taxes, was $0.9 million for the quarter and $2.0 million for the six months ended June 30, 2008. These results reflect expenses associated with the ongoing government investigation of NID. Quest Diagnostics has established a reserve of $241 million in connection with these claims, estimated to represent the minimum expected probable loss. The company is actively engaged in settlement discussions with the U.S. Attorney's Office, but there is no assurance of a resolution or its terms.

Quest Diagnostics became a non-contracted provider to UNH as of January 1, 2007. While this change significantly impacted revenues and earnings in the first quarter and full year of 2007, the company took actions to mitigate the ongoing profit impact by the end of 2007. For the three and six months ended June 30, 2008, the company estimates that the carry-over impact of this change reduced revenue growth by just over 1% and volume growth by approximately 0.8% for the quarter and 1.2% for the six months.

Quest Diagnostics' liquidity and capital resources appear robust. Cash flows from operating activities were $371 million for the six months ended June 30, 2008, and the company had $143 million in cash and cash equivalents. They also had $1.2 billion in borrowing capacity available under their credit facilities. The company expects cash from operations and borrowing capacity to be sufficient to meet its needs for capital expenditures, debt service, dividends, share repurchases, and growth opportunities.