-----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, G63WWABgn4SwuKyfNgFDekP10oPXEVFiDNjvz0EiCqAheqpqv7bT9Mo5UNHM5mEO qKj+IYIWQ67JuTYGcKCMzA== 0000950146-98-000811.txt : 19980512 0000950146-98-000811.hdr.sgml : 19980512 ACCESSION NUMBER: 0000950146-98-000811 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980511 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUEST DIAGNOSTICS INC CENTRAL INDEX KEY: 0001022079 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 161387862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12215 FILM NUMBER: 98615593 BUSINESS ADDRESS: STREET 1: ONE MALCOLM 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 FORM 10-Q 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, 1998 Commission file number 1-12215 Quest Diagnostics Incorporated 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, 1998, there were outstanding 30,207,094 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, 1998 and 1997 2 Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 4 Notes to Consolidated Financial Statements 5
1 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (in thousands, except per share data) (unaudited)
1998 1997 ---- ---- Net revenues.................................................. $367,875 $388,103 Costs and expenses: Cost of services............................................ 218,040 239,314 Selling, general and administrative......................... 120,446 123,973 Interest expense, net....................................... 9,114 10,613 Amortization of intangible assets........................... 5,380 6,042 Other, net.................................................. 1,225 (256) -------- -------- Total..................................................... 354,205 379,686 -------- -------- Income before taxes........................................... 13,670 8,417 Income tax expense ........................................... 7,039 4,370 -------- -------- Net income ................................................... $ 6,631 $ 4,047 ======== ======== Basic and diluted net income per common share................. $ 0.22 $ 0.14 Basic weighted average common shares outstanding.............. 29,688 28,870 Diluted weighted average common shares outstanding............ 30,007 29,138
The accompanying notes are an integral part of these statements. 2 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1998 AND DECEMBER 31, 1997 (in thousands, except per share data)
March 31, December 31, 1998 1997 (unaudited) ASSETS Current assets: Cash and cash equivalents................................. $ 172,584 $ 161,661 Accounts receivable, net of allowance of $75,150 and $89,870 at March 31, 1998 and December 31, 1997, respectively............................................ 242,646 238,369 Inventories............................................... 29,958 30,360 Deferred taxes on income.................................. 88,108 97,471 Due from Corning Incorporated............................. 31,600 31,600 Prepaid expenses and other assets......................... 16,722 12,423 ---------- ---------- Total current assets.................................. 581,618 571,884 Property, plant and equipment, net............................ 247,690 250,223 Intangible assets, net........................................ 508,602 513,779 Other assets.................................................. 65,668 65,042 ---------- ---------- TOTAL ASSETS.................................................. $1,403,578 $1,400,928 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 248,290 $ 244,885 Short-term borrowings..................................... 37,654 32,648 Income taxes payable...................................... 13,504 17,613 ---------- ---------- Total current liabilities............................. 299,448 295,146 Long-term debt................................................ 469,397 482,161 Other liabilities............................................. 83,274 81,961 ---------- ---------- Total liabilities..................................... 852,119 859,268 Commitments and contingencies Stockholders' equity: Preferred stock........................................... 1,000 1,000 Common stock, par value $0.01 per share; 100,000 shares authorized; 30,194 (excluding 3 shares held in treasury) and 29,986 shares issued at March 31, 1998 and December 31, 1997, respectively ............. 302 300 Additional paid-in capital................................ 1,201,532 1,198,194 Accumulated deficit....................................... (643,679) (650,281) Accumulated other comprehensive loss...................... (2,059) (2,515) Unearned compensation..................................... (5,637) (5,038) ---------- ---------- Total stockholders' equity............................ 551,459 541,660 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $1,403,578 $1,400,928 ========== ==========
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, 1998 AND 1997 (in thousands) (unaudited)
1998 1997 ---- ---- Cash flows from operating activities: Net income.................................................... $ 6,631 $ 4,047 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 17,321 19,563 Provision for doubtful accounts........................... 23,830 29,077 Deferred income tax provision............................. 9,348 8,183 Other, net................................................ 1,911 1,086 Changes in operating assets and liabilities: Accounts receivable................................... (28,107) (22,762) Accounts payable and accrued expenses................. 9,401 13,652 Restructuring, integration and other special charges.. (3,670) (3,400) Due from Corning Incorporated and affiliates.......... -- 8,494 Other assets and liabilities, net..................... (8,058) (7,940) -------- -------- Net cash provided by operating activities..................... 28,607 50,000 -------- -------- Cash flows from investing activities: Capital expenditures...................................... (10,012) (5,948) Proceeds from disposition of assets....................... 238 775 Decrease in investments................................... -- 979 -------- -------- Net cash used in investing activities......................... (9,774) (4,194) -------- --------- Cash flows from financing activities: Repayment of long-term debt............................... (7,836) (552) Repayments under Working Capital Facility................. -- (19,300) Purchase of treasury stock................................ (45) -- Preferred stock dividends paid............................ (29) -- -------- -------- Net cash used in financing activities......................... (7,910) (19,852) -------- -------- Net change in cash and cash equivalents....................... 10,923 25,954 Cash and cash equivalents, beginning of year.................. 161,661 41,960 -------- -------- Cash and cash equivalents, end of period...................... $172,584 $ 67,914 ======== ======== Cash paid during the period for: Interest.................................................. $ 6,974 $ 6,753 Income taxes.............................................. $ 2,386 $ 1,963
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, 1997. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income, net unrealized capital gains or losses on available-for-sale securities and foreign currency translation adjustments. Comprehensive income was $7.1 million and $4.3 million for the three months ended March 31, 1998 and 1997, respectively. 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. 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, a clinical laboratory company acquired in 1994, and a former joint venture of Damon Corporation, a clinical laboratory acquired in 1993, are 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 December 31, 1996; 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. At March 31, 1998, the receivable from Corning totaled $31.6 million, representing 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, 1998, settlement reserves totaled $75.9 million, including $27.5 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. In April 1998, the Company entered into a settlement agreement with the U.S. Attorney's office in Baltimore approximating $6.9 million related to the billing on certain tests performed for which the Company had incomplete or missing order forms from the physician. This settlement is covered by the indemnification from Corning discussed above and was fully reserved for at March 31, 1998. 3. RESTRUCTURING RESERVES The Company has recorded charges for restructuring plans in previous years. Reserves relating to these programs totaled $29.8 million and $33.4 million at March 31, 1998 and December 31, 1997, 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. STOCKHOLDERS' EQUITY Stock Purchase Program In February 1998, the Board of Directors authorized the Company to repurchase up to $27 million of common stock through 1999. The shares will be reissued in connection with certain employee plans. In the first quarter, the Company paid $45 for approximately three thousand shares under the program. Unearned Compensation Under the Company's Employees Equity Participation Program, approximately 300 thousand shares of restricted stock were granted in 1998, 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. 5. 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"). The non-guarantor subsidiaries are foreign and less than wholly-owned subsidiaries. The following condensed consolidating financial data illustrates the composition of the combined guarantors. The Company believes that separate complete financial statements of the respective guarantors would not provide additional material information which would be useful in assessing the financial composition of the Subsidiary Guarantors. 6 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) Condensed Consolidating Statement of Operations Three Months Ended March 31, 1998
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ Net revenues........................ $ 154,208 $ 206,834 $ 6,833 $ -- $ 367,875 Costs and expenses: Cost of services.................. 91,387 122,900 3,753 -- 218,040 Selling, general and administrative.................... 67,003 50,922 2,521 -- 120,446 Interest expense, net............. 2,619 6,341 154 -- 9,114 Amortization of intangible assets. 1,696 3,562 122 -- 5,380 Royalty (income) expense.......... (18,405) 18,405 -- -- -- Other, net........................ 163 2 1,060 -- 1,225 --------- --------- --------- --------- --------- Total........................... 144,463 202,132 7,610 -- 354,205 --------- --------- --------- --------- --------- Income (loss) before taxes.......... 9,745 4,702 (777) -- 13,670 Income tax expense (benefit)........ 6,659 469 (89) -- 7,039 Equity income from affiliates....... 3,545 -- -- (3,545) -- --------- --------- --------- --------- --------- Net income (loss)................... $ 6,631 $ 4,233 $ (688) $ (3,545) $ 6,631 ========= ========= ========= ========= =========
Condensed Consolidating Statement of Operations Three Months Ended March 31, 1997
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ Net revenues........................ $ 168,066 $ 214,557 $ 5,480 $ -- $ 388,103 Costs and expenses: Cost of services.................. 99,772 136,664 2,878 -- 239,314 Selling, general and administrative.................... 69,233 52,360 2,380 -- 123,973 Interest expense, net............. 4,198 6,266 149 -- 10,613 Amortization of intangible assets. 2,230 3,810 2 -- 6,042 Royalty (income) expense.......... (17,945) 17,945 -- -- -- Other, net........................ (596) (113) 453 -- (256) --------- --------- --------- --------- --------- Total........................... 156,892 216,932 5,862 -- 379,686 --------- --------- --------- --------- --------- Income (loss) before taxes.......... 11,174 (2,375) (382) -- 8,417 Income tax expense (benefit)........ 6,105 (1,963) 228 -- 4,370 Equity loss from affiliates......... (1,022) -- -- 1,022 -- --------- --------- --------- --------- --------- Net income (loss)................... $ 4,047 $ (412) $ (610) $ 1,022 $ 4,047 ========= ========= ========= ========= =========
7 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) Condensed Consolidating Balance Sheet March 31, 1998
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------------------- Current assets: Cash and cash equivalents........... $ 123,385 $ 47,135 $ 2,064 $ -- $ 172,584 Accounts receivable, net............ 77,076 161,592 3,978 -- 242,646 Other current assets................ 114,969 49,193 2,226 -- 166,388 ---------- -------- --------- --------- ---------- Total current assets.............. 315,430 257,920 8,268 -- 581,618 Property, plant and equipment, net.. 100,007 143,739 3,944 -- 247,690 Intangible assets, net ............. 155,671 352,616 315 -- 508,602 Intercompany (payable) receivable... 11,817 382 (12,199) -- -- Investment in subsidiaries.......... 414,327 -- -- (414,327) -- Other assets........................ 40,663 10,423 14,582 -- 65,668 ---------- -------- --------- --------- ---------- Total assets...................... $1,037,915 $765,080 $ 14,910 $(414,327) $1,403,578 ========== ======== ========= ========= ========== Current liabilities: Accounts payable and accrued expenses............................ $ 184,470 $ 74,876 $ 2,448 $ -- $ 261,794 Short-term borrowings............... 17,983 19,305 366 -- 37,654 ---------- -------- --------- --------- ---------- Total current liabilities......... 202,453 94,181 2,814 -- 299,448 Long-term debt...................... 219,321 245,664 4,412 -- 469,397 Other liabilities................... 64,682 16,589 2,003 -- 83,274 ---------- -------- --------- --------- ---------- Total liabilities................... 486,456 356,434 9,229 -- 852,119 Stockholders' equity................ 551,459 408,646 5,681 (414,327) 551,459 ---------- -------- --------- --------- ---------- Total liabilities and stockholders' equity............ $1,037,915 $765,080 $ 14,910 $(414,327) $1,403,578 ========== ======== ========= ========= ==========
Condensed Consolidating Balance Sheet December 31, 1997
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ Current assets: Cash and cash equivalents........... $ 123,052 $ 35,527 $ 3,082 $ -- $ 161,661 Accounts receivable, net............ 87,231 148,618 2,520 -- 238,369 Other current assets................ 119,751 48,865 3,238 -- 171,854 ---------- --------- --------- --------- ---------- Total current assets.............. 330,034 233,010 8,840 -- 571,884 Property, plant and equipment, net.. 101,700 144,849 3,674 -- 250,223 Intangible assets, net ............. 165,068 348,391 320 -- 513,779 Intercompany (payable) receivable... (14,134) 24,103 (9,969) -- -- Investment in subsidiaries.......... 412,413 -- -- (412,413) -- Other assets........................ 40,474 9,290 15,278 -- 65,042 ---------- --------- --------- --------- ---------- Total assets...................... $1,035,555 $ 759,643 $ 18,143 $(412,413) $1,400,928 ========== ========= ========= ========= ========== Current liabilities: Accounts payable and accrued expenses............................ $ 188,966 $ 70,542 $ 2,990 $ -- $ 262,498 Short-term borrowings............... 15,688 16,640 320 -- 32,648 ---------- --------- --------- --------- ---------- Total current liabilities......... 204,654 87,182 3,310 -- 295,146 Long-term debt...................... 225,145 252,480 4,536 -- 482,161 Other liabilities................... 64,096 15,568 2,297 -- 81,961 ---------- --------- --------- --------- ---------- Total liabilities................. 493,895 355,230 10,143 -- 859,268 Stockholders' equity................ 541,660 404,413 8,000 (412,413) 541,660 ---------- --------- --------- --------- ---------- Total liabilities and stockholders' equity............ $1,035,555 $ 759,643 $ 18,143 $(412,413) $1,400,928 ========== ========= ========= ========= ==========
8 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, unless otherwise indicated) (unaudited) Condensed Consolidating Statement of Cash Flows Three Months Ended March 31, 1998
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ Cash flows from operating activities: Net income (loss)..................... $ 6,631 $ 4,233 $ (688) $ (3,545) $ 6,631 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization....... 7,290 9,652 379 -- 17,321 Provision for doubtful accounts..... 13,609 10,035 186 -- 23,830 Other, net.......................... 10,578 124 557 -- 11,259 Changes in operating assets and liabilities........................... (26,637) (4,071) (1,358) 1,632 (30,434) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities.................. 11,471 19,973 (924) (1,913) 28,607 Net cash used in investing activities. (7,448) (4,218) (21) 1,913 (9,774) Net cash used in financing activities. (3,690) (4,147) (73) -- (7,910) --------- --------- --------- --------- --------- Net change in cash and cash equivalents........................... 333 11,608 (1,018) -- 10,923 Cash and cash equivalents, beginning of year............................... 123,052 35,527 3,082 -- 161,661 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period................................ $ 123,385 $ 47,135 $ 2,064 $ -- $ 172,584 ========= ========= ========= ========= =========
Condensed Consolidating Statement of Cash Flows Three Months Ended March 31, 1997
Non- Subsidiary Guarantor Parent Guarantors Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ Cash flows from operating activities: Net income (loss)..................... $ 4,047 $ (412) $ (610) $ 1,022 $ 4,047 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization....... 8,817 10,293 453 -- 19,563 Provision for doubtful accounts..... 16,108 12,814 155 -- 29,077 Other, net.......................... 12,957 (5,095) 1,407 -- 9,269 Changes in operating assets and liabilities........................... (8,139) (4,252) (271) 706 (11,956) --------- --------- --------- --------- --------- Net cash provided by operating activities............................ 33,790 13,348 1,134 1,728 50,000 Net cash provided by (used in) investing activities.................. 414 (1,935) (945) (1,728) (4,194) Net cash used in financing activities. (11,300) (8,131) (421) -- (19,852) --------- --------- --------- --------- --------- Net change in cash and cash equivalents........................... 22,904 3,282 (232) -- 25,954 Cash and cash equivalents, beginning of year............................... 26,975 12,882 2,103 -- 41,960 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period................................ $ 49,879 $ 16,164 $ 1,871 $ -- $ 67,914 ========= ========= ========= ========= =========
9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended March 31, 1998 Compared with Three Months Ended March 31, 1997. Net income for the three months ended March 31, 1998 increased from the prior year primarily as a result of operating cost reductions and improved pricing. This was partially offset by lower volume resulting from intensified competition, changes in physician ordering patterns and actions taken on unprofitable accounts. 1998 net income includes a $2.5 million charge ($1.2 million, net of tax) included in selling, general and administrative expenses representing the final costs associated with the Company's consolidation plan announced in December 1997. Effective April 1, 1998, the Company implemented a new order form for Medicare and Medicaid patients reflecting disease-oriented test panels developed by the Health Care Financing Administration in conjunction with the American Medical Association. These panels are likely to result in fewer tests ordered per requisition and may put additional pressure on revenue and earnings. Net Revenues Net revenues decreased by $20.2 million, or 5.2% from the prior year level, principally due to an 8.1% decline in clinical testing volume partially offset by an improvement in average prices of 3.1%. The volume decline is primarily attributable to intensified competition, changes in physician ordering patterns and actions taken on unprofitable accounts. Costs and Expenses Total operating costs for the quarter declined $24.8 million from the year earlier period. The Company's continued efforts to reduce its cost structure have had a favorable impact on costs as a percentage of net revenue. However, this benefit was partially offset by a $2.5 million charge representing the final costs associated with the Company's consolidation plan announced in December 1997. Additional actions are being taken to further reduce the Company's cost structure. * Cost of services, which includes the costs of obtaining, transporting and testing specimens, decreased $21.3 million from the prior year, and as a percentage of net revenues decreased to 59.3% from 61.7% a year ago, reflecting the Company's progress in reducing its cost structure. Selling, general and administrative expenses, which includes the costs of the sales force, billing operations, bad debt expense and general management and administrative support, increased as a percentage of net revenues to 32.7% from 31.9% in the prior year. This increase was principally due to the $2.5 million charge related to the Company's consolidation of its laboratory network, an increase in information technology expenditures primarily related to preparation for the Year 2000 and reduced revenues partially offset by a reduction in bad debt expense from 7.5% of net revenues in the prior year to 6.5% of net revenues in the current year. - -------------- * This is a forward looking statement within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 27E of the Securities Act of 1934, as amended, and is based on current expectations. Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statement. These risks and uncertainties include computer or other system failures, development of technologies that substantially alter the practice of medicine, and the failure of third party payors and suppliers to adequately address the Year 2000 problem. 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 1997 Annual Report on Form 10-K. 10 Net interest expense decreased by $1.5 million from the prior year level primarily due to an increase in interest income resulting from higher average cash balances. Amortization of intangible assets decreased by $0.7 million compared to the prior year principally due to the write-down of intangible assets in the fourth quarter of 1997 in connection with the Company's consolidation plan. The change in other, net compared with the prior year is primarily the result of the prior year including a gain on the sale of an investment and the current year including equity losses from a joint venture. The Company's effective tax rate is significantly impacted by goodwill amortization, a majority of which is not deductible for tax purposes, and has the effect of increasing the overall tax rate. Liquidity and Capital Resources Cash increased by $10.9 million over the year end balance, to $172.6 million at March 31, 1998, due to operating activities which provided cash of $28.6 million, partially offset by investing and financing activities which used cash of $17.7 million. Net cash provided by operating activities for the quarter declined by $21.4 million compared to the same period in the prior year. The decline is primarily the result of changes in accounts receivable, accounts payable and accrued expenses and 1997 including $8.5 million received from Corning related to the final spin-off cash adjustment. The number of days sales outstanding, a measure of billing and collection efficiency, declined to 58 days from 63 days at year end and 68 days a year earlier. Capital spending for the quarter was $10.0 million compared to $5.9 million for the same period in the prior year. The Company estimates that it will invest approximately $60 million to $70 million during 1998 for capital expenditures, principally related to investments in information technology infrastructure and equipment and facility upgrades. * During the quarter the Company paid down $7.8 million of debt. Other than for the reduction for outstanding letters of credit, which currently approximate $6.4 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, 1998 was $40.1 million, or 10.9% of net revenues, compared to $38.6 million, or 9.9% of net revenues, in the prior year period. The improvement reflects the Company's continued progress in reducing its cost structure. - -------------- * This is a forward looking statement within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 27E of the Securities Act of 1934, as amended, and is based on current expectations. Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statement. 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 1997 Annual Report on Form 10-K. 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings In its 1997 Annual Report on Form 10-K, the Company reported that it had reached a tentative settlement of an investigation commenced by the Office of the Inspector General of the Department of Health and Human Services (see Item 1. "Business-Ongoing Government Investigations-Other Government Investigations" contained in the Company's Annual Report on Form 10-K). The settlement agreement was completed April 13, 1998 and the total amount paid in the settlement was $6.9 million. This settlement is covered by the indemnification from Corning Incorporated as described in the Company's Annual Report on Form 10-K (see Item 1. "Business-Corning Indemnity" contained in the Company's Annual Report on Form 10-K) and was fully reserved for at March 31, 1998. There have been no material developments in any other of the government investigations or private claims reported. 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 12 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 8, 1998 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 13 EX-27 2 FDS QUEST DIAGNOSTIC INC.
5 0001022079 Quest Diagnostics Incorporated 1000 US 3-MOS Dec-31-1998 Jan-01-1998 Mar-31-1998 1.000 172,584 0 242,646 75,150 29,958 581,618 247,690 335,681 1,403,578 299,448 0 0 1,000 1,201,834 (651,375) 1,403,578 367,875 367,875 218,040 338,486 1,225 23,830 9,114 13,670 7,039 6,631 0 0 0 6,631 0.22 0.22
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