-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EfC97WhkHpJ8kbcLKo5VEsETUGTYVbZ04ICBMhPceOUM631MMyBr/kCW5LnHvzxr DstvKkmA3BWkOeBYa5Ex9Q== 0000950146-97-000747.txt : 19970512 0000950146-97-000747.hdr.sgml : 19970512 ACCESSION NUMBER: 0000950146-97-000747 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970509 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEST DIAGNOSTICS INC CENTRAL INDEX KEY: 0001022079 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 161387862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12215 FILM NUMBER: 97598931 BUSINESS ADDRESS: STREET 1: ONE MALCLOM AVE CITY: TETERBORO STATE: NJ ZIP: 07608 BUSINESS PHONE: 2013935143 MAIL ADDRESS: STREET 1: ONE MALCOLM AVE CITY: TETERBORO STATE: NJ ZIP: 07601 FORMER COMPANY: FORMER CONFORMED NAME: CORNING CLINICAL LABORATORIES INC DATE OF NAME CHANGE: 19960903 10-Q 1 QUEST DIAGNOSTICS FOR 10-Q EDGAR FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 - -------------------------------------------------------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended March 31, 1997 Commission file number 1-12215 Quest Diagnostics Incorporated (formerly known as Corning Clinical Laboratories Inc.) One Malcolm Avenue Teterboro, NJ 07608 (201) 393-5000 Delaware (State of Incorporation) 16-1387862 (I.R.S. Employer Identification Number) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of April 30, 1997, there were outstanding 29,495,755 shares of Common Stock, $.01 par value. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Index to consolidated financial statements filed as part of this report: Page Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996 2 Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 4 Notes to Consolidated Financial Statements 5 1 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (in thousands, except per share data) (unaudited) 1997 1996 -------- -------- Net revenues ....................................... $388,103 $401,395 Costs and expenses: Cost of services............................... 239,314 247,118 Selling, general and administrative ........... 123,973 126,044 Interest expense, net ......................... 10,613 20,142 Amortization of intangible assets ............. 6,042 10,789 Other, net .................................... (256) (1,056) -------- -------- Total ....................................... 379,686 403,037 -------- -------- Income (loss) before taxes.......................... 8,417 (1,642) Income tax expense (benefit)........................ 4,370 (131) -------- -------- Net income (loss)................................... $ 4,047 $ (1,511) ======== ======== Net income per common share......................... $ 0.14 Weighted average common shares outstanding.......... 28,870 The accompanying notes are an integral part of these statements. 2 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND DECEMBER 31, 1996 (in thousands, except per share data)
March 31, December 31, 1997 1996 ----------- ------------- (unaudited) ASSETS Current Assets: Cash and cash equivalents ....................................................... $ 67,914 $ 41,960 Accounts receivable, net of allowance of $110,979 and $115,018 at March 31, 1997 and December 31, 1996, respectively............... 291,427 297,743 Inventories ..................................................................... 28,604 28,524 Deferred taxes on income ........................................................ 90,209 98,162 Due from Corning Incorporated.................................................... 22,400 30,894 Prepaid expenses and other assets ............................................... 15,957 13,682 ----------- ----------- Total current assets ........................................................ 516,511 510,965 Property, plant and equipment, net ................................................... 279,168 287,749 Intangible assets, net ............................................................... 540,421 546,457 Other assets.......................................................................... 49,453 49,895 ----------- ----------- TOTAL ASSETS.......................................................................... $1,385,553 $1,395,066 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses............................................ $ 214,716 $ 206,701 Short-term borrowings............................................................ 8,827 20,785 Income taxes payable ............................................................ 16,514 21,946 ----------- ----------- Total current liabilities.................................................... 240,057 249,432 Long-term debt........................................................................ 506,912 515,008 Other liabilities..................................................................... 92,149 91,907 ----------- ----------- Total liabilities............................................................ 839,118 856,347 ----------- ----------- Commitments and Contingencies Stockholders' Equity: Preferred stock.................................................................. 1,000 1,000 Common stock, par value $0.01 per share; 100,000 shares authorized; 29,363 and 28,822 shares issued at March 31, 1997 and December 31, 1996, respectively.......................................... 294 288 Additional paid-in capital....................................................... 1,178,675 1,170,152 Accumulated deficit.............................................................. (623,886) (627,892) Cumulative translation adjustment ............................................... (804) (619) Market valuation adjustment...................................................... (3,796) (4,210) Unearned compensation............................................................ (5,048) -- ----------- ----------- Total stockholders' equity................................................... 546,435 538,719 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $1,385,553 $1,395,066 =========== ===========
The accompanying notes are an integral part of these statements. 3 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (in thousands) (unaudited)
1997 1996 -------- --------- Cash flows from operating activities: Net income (loss) .................................................................... $ 4,047 $ (1,511) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................................................... 19,563 24,949 Provision for doubtful accounts ................................................. 29,077 27,784 Deferred income tax provision.................................................... 8,183 8,261 Other, net....................................................................... 1,086 1,288 Changes in operating assets and liabilities: Accounts receivable ......................................................... (22,762) (34,045) Accounts payable and accrued expenses ....................................... 13,652 (23,775) Restructuring, integration and other special charges ........................ (3,400) (13,398) Due from/to Corning Incorporated and affiliates ............................. 8,494 5,546 Other assets and liabilities, net............................................ (7,940) (4,091) --------- -------- Net cash provided by (used in) operating activities................................... 50,000 (8,992) --------- -------- Cash flows from investing activities: Capital expenditures ............................................................ (5,948) (19,975) Proceeds from disposition of assets ............................................. 775 6,081 Decrease (increase) in investments .............................................. 979 (1,849) --------- -------- Net cash used in investing activities ................................................ (4,194) (15,743) --------- -------- Cash flows from financing activities: Repayments under Working Capital Facility........................................ (19,300) -- Proceeds from borrowings......................................................... -- 34,576 Repayment of long-term debt ..................................................... (552) (1,457) --------- -------- Net cash (used in) provided by financing activities .................................. (19,852) 33,119 --------- -------- Net change in cash and cash equivalents .............................................. 25,954 8,384 Cash and cash equivalents, beginning of year ......................................... 41,960 36,446 --------- -------- Cash and cash equivalents, end of period.............................................. $ 67,914 $ 44,830 ========= ======== Cash paid during the period for: Interest......................................................................... $ 6,753 $ 22,616 Income taxes..................................................................... $ 1,963 $ 2,125
The accompanying notes are an integral part of these statements. 4 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) 1. BASIS OF PRESENTATION Background Prior to January 1, 1997, Quest Diagnostics Incorporated and its subsidiaries (the "Company") was a wholly-owned subsidiary of Corning Incorporated ("Corning"). On December 31, 1996, Corning distributed all of the outstanding shares of common stock of the Company to the stockholders of Corning, with one share of common stock of the Company being distributed for each eight shares of outstanding common stock of Corning (the "Spin-Off Distribution"). Basis of Presentation The interim consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods presented. All such adjustments are of a normal recurring nature. The interim consolidated financial statements have been compiled without audit and are subject to year-end adjustments. Operating results for the interim period are not necessarily indicative of the results that may by expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 1996. Earnings Per Share Earnings per share are computed by dividing net income less dividends on the Company's Preferred Stock (approximately $30) by the weighted average number of common shares outstanding during the period. Historical earnings per share for 1996 is not meaningful as the Company's capital structure in 1996 is not comparable to the capital structure subsequent to the Spin-Off Distribution. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings per Share." The statement is effective for financial statements for periods ending after December 15, 1997, and changes the method in which earnings per share will be determined. Adoption of this statement by the Company is not expected to have a material impact on earnings per share in 1997. 2. COMMITMENTS AND CONTINGENCIES The Company has entered into several settlement agreements with various governmental and private payors during recent years relating primarily to industry-wide billing and marketing practices that had been substantially discontinued by early 1993. At present, a government investigation of certain practices by Nichols Institute prior to its acquisition by the Company in 1994 is ongoing. As part of the Spin-Off Distribution, Corning has agreed to indemnify the Company against all settlements for any governmental claims relating to billing practices of the Company and its predecessors that were pending on December 31, 1996. Corning also agreed to indemnify the Company for 50% of the aggregate of all settlement payments made by the Company that are in excess of $42 million to private parties that relate to indemnified or previously settled governmental claims for services provided prior to January 1, 1997; however, the indemnification of private party claims will not exceed $25 million and will be paid to the Company net of anticipated tax benefits to be realized by the Company. Such indemnification does not cover any non-governmental claims settled after December 31, 2001. Coincident with the Spin-Off Distribution, the Company recorded a receivable from Corning of $22.4 million which is equal to management's best estimate of amounts which are probable of being received from Corning to satisfy the remaining indemnified governmental claims on an after-tax basis. 5 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) At March 31, 1997, settlement reserves totaled $79.7 million, including $41.2 million in other long-term liabilities. Although management believes that established reserves for both indemnified and non-indemnified claims are sufficient, it is possible that additional information may become available which may cause the final resolution of these matters to exceed established reserves by an amount which could be material to the Company's results of operations and, for non-indemnified claims, the Company's cash flows in the period in which such claims are settled. The Company does not believe that these issues will have a material adverse effect on its overall financial condition. 3. RESTRUCTURING RESERVES The Company has recorded charges for restructuring plans in previous years. Reserves relating to these programs totaled $13.8 million and $16.1 million at March 31, 1997 and December 31, 1996, respectively. Management believes that the costs of the restructuring plans will be financed through cash from operations and does not anticipate any significant impact on its liquidity as a result of the restructuring plans. 4. SUMMARIZED FINANCIAL INFORMATION The Company's 10.75% senior subordinated notes due 2006 are guaranteed, fully, jointly and severally, and unconditionally, on a senior subordinated basis by substantially all of the Company's wholly-owned, domestic subsidiaries ("Subsidiary Guarantors"). Non-guarantor subsidiaries, individually and in the aggregate, are inconsequential to the Company. The following is summarized financial information of the Subsidiary Guarantors as of March 31, 1997 and December 31, 1996 and for the three months ended March 31, 1997 and 1996. Full financial statements of the Subsidiary Guarantors are not presented because management believes they are not material to investors. March 31, 1997 December 31, 1996 -------------- ----------------- Current assets................... $229,207 $230,024 Noncurrent assets................ 550,548 547,219 Current liabilities.............. 66,766 61,383 Noncurrent liabilities........... 288,521 290,980 Stockholder's equity............. 424,468 424,880 For the three months ended March 31, 1997 1996 -------- -------- Net revenues..................... $214,557 $224,214 Cost of services................. 136,664 143,311 Net loss......................... (412) (10,047) 6 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) 5. STOCKHOLDERS' EQUITY Unearned Compensation Under the Company's Employees Equity Participation Program, approximately 400 thousand shares of restricted stock were granted in 1997, primarily to executive employees. These shares are contingent on achievement of financial performance goals and are subject to forfeiture if employment terminates prior to the end of the prescribed period. The market value of the shares awarded under the plan is recorded as unearned compensation. The unearned amounts are amortized to compensation expense as earned. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended March 31, 1997 Compared with Three Months Ended March 31, 1996. Net income for the three months ended March 31, 1997 increased from the prior year primarily as a result of reduced interest and amortization expense. This was partially offset by reduced operating income due to the Company's increased selectiveness in retaining and pursuing new business, which has reduced volume at a rate greater than that at which costs have been reduced, and an increase in bad debt expense. Net Revenues Net revenues decreased by $13.3 million, or 3.3% from the prior year level, principally due to a 5.1% decline in clinical testing volume partially offset by an improvement in average prices of 1.6%. The volume decline is primarily attributable to the Company's increased selectiveness in retaining and pursuing new business, as well as exiting certain small non-strategic businesses. Costs and Expenses Total operating costs for the quarter declined $9.9 million from the year earlier period. The Company's efforts to reduce its operating cost structure have had a favorable impact on costs as a percentage of net revenue. However, this benefit was offset by lower volume. Plans are currently being implemented which are expected to further adjust the Company's cost structure and are expected to reduce costs as a percentage of revenue in the second half of the year.* Cost of services, which includes the costs of obtaining, transporting and testing specimens, decreased $7.8 million in the quarter from the prior year, but remained relatively flat as a percentage of net revenues. Selling, general and administrative expenses, which includes the costs of the sales force, billing operations, bad debt expense and general management and administrative support, decreased $2.1 million in the quarter from the prior year, but increased to 31.9% of net revenues from 31.4% of net revenues in the prior year. This increase was principally due to bad debt expense which increased from 6.9% of net revenues to 7.5% of net revenues. Bad debt expense as a percentage of net revenues remained at approximately the same level as the fourth quarter of 1996. The Company continues to be impacted by Medicare medical necessity documentation requirements imposed during the past year. In the first quarter of 1997, additional medical necessity requirements were imposed by various state agencies and carriers, slowing the progress the Company had been making in certain of its billing operations. These requirements, when initially imposed or subsequently expanded, increase the backlog of unbilled requisitions and further complicate the billing process. The Company has successfully dealt with these requirements in a number of its billing sites where they were imposed earlier and is leveraging the processes and experiences from those locations in addressing the impact of additional requirements across its billing operations. Net interest expense decreased by $9.5 million from the prior year level primarily due to reduced debt levels as a result of Corning forgiving in excess of $700 million of intercompany debt in connection with the Spin-Off Distribution. Amortization of intangible assets decreased by $4.7 million compared to the prior year principally due to the write-down of intangible assets coincident with the Spin-Off Distribution, as well as certain other intangible assets having become fully amortized. - ---------- *This is a forward looking statement and is based on current expectations. Forward looking statements involve risks and uncertainties that could cause the outcome to be materially different. These risks and uncertainties include heightened competition, impact of changes in payor mix, the impact upon the Company's collection rates or general and administrative expenses resulting from compliance with Medicare administrative policies, and reduction in tests ordered by existing customers. See Item 1. "Business--Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" contained in the Company's 1996 Annual Report on Form 10-K. 8 The change in other, net compared with the prior year is primarily the result of the favorable settlement of a contractual obligation in the prior year. The Company's effective tax rate is significantly impacted by goodwill amortization which is not deductible for tax purposes, and has the effect of increasing the overall tax rate or reducing the tax benefit rate. The change in the effective tax rate is due principally to a reduction in non-deductible amortization expense associated with the write down of intangible assets coincident with the Spin-Off Distribution. Liquidity and Capital Resources Cash increased by $26.0 million over the year end balance, to $67.9 million at March 31, 1997, due to operating activities which provided cash of $50.0 million, partially offset by investing and financing activities which used cash of $24.0 million. Net cash provided by operating activities for the quarter improved by $59.0 million compared to the same period in the prior year. The improvement is primarily the result of improvements in the billing operations, changes in accounts payable and accrued expense levels and a reduction in restructuring spending. Improvements in the billing operations have led to an improvement in the number of days sales outstanding. The number of days sales outstanding, a measure of billing efficiency, was 68 days at March 31, 1997 compared to 70 days at year end and 73 days a year earlier. Capital spending for the quarter was $5.9 million compared to $20.0 million for the same period in the prior year. The Company estimates that it will invest approximately $60 million during 1997 for capital expenditures, principally related to equipment and facility upgrades and investments in information technology.* During the quarter the Company paid down the entire balance of $19.3 million on its revolving working capital credit facility. Other than for the reduction for outstanding letters of credit, which currently approximates $7.5 million, all of the revolving working capital credit facility is currently available for borrowing. Adjusted EBITDA Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization and non-recurring charges. Adjusted EBITDA for the three months ended March 31, 1997 was $38.6 million, or 9.9% of net revenues, compared to $43.5 million, or 10.8% of net revenues, in the prior year period. The decline was principally due to the Company's increased selectiveness in retaining and pursuing new business, which has reduced volume at a rate greater than that at which costs have been reduced, and an increase in bad debt expense. - ---------- *This is a forward looking statement and is based on current expectations. Forward looking statements involve risks and uncertainties that could cause the outcome to be materially different. These risks and uncertainties include computer or other system failures, development of technologies that substantially alter the practice of medicine, and the impact upon the Company's collection rates or general and administrative expenses resulting from compliance with Medicare administrative policies. See Item 1. "Business--Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" contained in the Company's 1996 Annual Report on Form 10-K. 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company, together with SmithKline Beecham Clinical Laboratories Inc. and Laboratory Corporation of America Holdings, has been served with a complaint in a purported class action brought in the Northern District of Alabama. The complaint asserts claims for private reimbursement of billings by Damon Corporation that are similar to those that were the subject of the plea agreement and civil settlement and release that was signed in October 1996 between the Department of Justice and Damon Clinical Laboratories, a subsidiary of the Company. The ultimate outcome of the claim cannot be presently predicted. At March 31, 1997, the Company had an aggregate reserve of $79.7 million with respect to all governmental and private claims that are either presently pending or anticipated as a consequence of settlements and self-reported matters described in the Company's 1996 Annual Report on Form 10-K. The Company believes that these reserves are adequate. In addition, Corning Incorporated has agreed to indemnify the Company with respect to governmental claims pending at December 31, 1996 and (to the extent that such claims exceed $42 million) 50% of the aggregate of all judgments or settlement payments in respect of private claims, such as the class action, that are settled prior to January 1, 2001 and that relate to previously settled governmental claims (subject to a maximum indemnification of $25 million in the aggregate as to private claims and after taking into account any tax benefits realized by the Company). See Item 1. "Business--Government Investigations and Related Claims" contained in the Company's Annual Report on Form 10-K. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description 27 Financial Data Schedule (b) Reports on Form 8-K: None 10 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. May 9, 1997 Quest Diagnostics Incorporated By /s/ Kenneth W. Freeman Chairman of the Board, ----------------------- Chief Executive Officer Kenneth W. Freeman and President By /s/ Robert A. Carothers Vice President and ----------------------- Chief Financial Officer Robert A. Carothers EX-27 2 FDS -- QUEST DIAGNOSTICS INC Q1 '97
5 0001022079 Quest Diagnostics Inc. 1000 US 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1.00 67,914 0 291,427 110,979 28,604 516,511 279,168 298,629 1,385,553 240,057 0 0 1,000 1,178,969 (633,534) 1,385,553 388,103 388,103 239,314 363,287 (256) 29,077 10,613 8,417 4,370 4,047 0 0 0 4,047 0.14 0.14
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