Quest Diagnostics Reports Fourth Quarter 2011 Financial Results; Provides Guidance for 2012

TABLES FOLLOW

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Twelve Months Ended December 31, 2011 and 2010

(in millions, except per share and percentage data)

(unaudited)

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2011

2010

2011

2010

Net revenues

$  1,879.3

$  1,824.0

$  7,510.5

$  7,368.9

Operating costs and expenses:

Cost of services

1,077.3

1,080.4

4,395.3

4,317.2

Selling, general and administrative

457.1

431.0

1,814.3

1,707.7

Amortization of intangible assets

19.2

10.7

67.0

39.2

Other operating expense, net

0.6

7.7

238.9

9.3

Total operating costs and expenses

1,554.2

1,529.8

6,515.5

6,073.4

Operating income

325.1

294.2

995.0

1,295.5

Other income (expense):

Interest expense, net

(42.7)

(37.6)

(170.6)

(146.1)

Equity earnings in unconsolidated joint ventures

6.1

7.0

29.0

29.6

Other income, net

3.8

3.3

2.9

5.3

Total non-operating expenses, net

(32.8)

(27.3)

(138.7)

(111.2)

Income from continuing operations before taxes

292.3

266.9

856.3

1,184.3

Income tax expense

92.9

91.6

349.0

425.5

Income from continuing operations

199.4

175.3

507.3

758.8

Loss from discontinued operations, net of taxes

(0.4)

(1.1)

(1.6)

(1.8)

Net income

199.0

174.2

505.7

757.0

Less:  Net income attributable to noncontrolling interests

9.5

8.5

35.1

36.1

Net income attributable to Quest Diagnostics

$     189.5

$     165.7

$     470.6

$     720.9

Amounts attributable to Quest Diagnostics'

  common stockholders:

Income from continuing operations

$     189.9

$     166.8

$     472.2

$     722.7

Loss from discontinued operations, net of taxes

(0.4)

(1.1)

(1.6)

(1.8)

Net income

$     189.5

$     165.7

$     470.6

$     720.9

Earnings per share attributable to Quest Diagnostics'

  common stockholders - basic:

Income from continuing operations

$       1.20

$       0.97

$       2.96

$       4.09

Loss from discontinued operations

-

(0.01)

(0.01)

(0.01)

Net income

$       1.20

$       0.96

$       2.95

$       4.08

Earnings per share attributable to Quest Diagnostics'

  common stockholders – diluted:

Income from continuing operations

$       1.19

$       0.97

$       2.93

$       4.06

Loss from discontinued operations

-

(0.01)

(0.01)

(0.01)

Net income

$       1.19

$       0.96

$       2.92

$       4.05

Weighted average common shares outstanding:

Basic

157.8

170.4

158.7

175.7

Diluted

159.1

171.8

160.2

177.3

Operating income as a percentage of net revenues

17.3%

16.1%

13.2%

17.6%

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

December 31, 2011 and 2010

(in millions, except per share data)

December 31, 

December 31,

2011

2010

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$     164.9

$    449.3

Accounts receivable, net

906.5

845.3

Inventories

89.1

76.6

Deferred income taxes

153.3

142.5

Prepaid expenses and other current assets

87.4

91.7

    Total current assets

1,401.2

1,605.4

Property, plant and equipment, net

799.8

834.4

Goodwill

5,795.8

5,101.9

Intangible assets, net

1,035.6

796.4

Other assets

281.0

189.5

Total assets

$  9,313.4

$ 8,527.6

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$     906.8

$    865.3

Short-term borrowings and current portion of long-term debt

654.4

349.0

    Total current liabilities

1,561.2

1,214.3

Long-term debt

3,370.5

2,641.2

Other liabilities

666.7

618.1

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares

  authorized at both December 31, 2011 and 2010; 214.6

  shares and 214.2 shares issued at December 31, 2011 and

  2010, respectively

2.1

2.1

Additional paid-in capital

2,347.5

2,311.4

Retained earnings

4,263.6

3,867.4

Accumulated other comprehensive (loss) income

(8.0)

10.6

Treasury stock, at cost; 57.2 shares and 43.5 shares at

  December 31, 2011 and 2010, respectively

(2,912.3)

(2,158.1)

Total Quest Diagnostics stockholders' equity

3,692.9

4,033.4

Noncontrolling interests

22.1

20.6

    Total stockholders' equity

3,715.0

4,054.0

Total liabilities and stockholders' equity

$  9,313.4

$ 8,527.6

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Twelve Months Ended December 31, 2011 and 2010

(in millions)

(unaudited)

Twelve Months Ended

December 31,

2011

2010

Cash flows from operating activities:

Net income

$     505.7

$     757.0

Adjustments to reconcile net income to net cash provided by

  operating activities:

Depreciation and amortization

281.1

254.0

Provision for doubtful accounts

279.6

291.7

Deferred income tax provision (benefit)

28.6

(18.9)

Stock-based compensation expense

71.9

53.9

Excess tax benefits from stock-based compensation arrangements

(4.5)

(0.9)

Provision for special charge

236.0

-

Other, net

8.6

23.0

Changes in operating assets and liabilities:

    Accounts receivable

(306.7)

(309.9)

    Accounts payable and accrued expenses

(17.6)

18.2

    Settlement of special charge

(241.0)

-

    Income taxes payable

39.1

33.7

    Other assets and liabilities, net

14.7

16.2

Net cash provided by operating activities

895.5

1,118.0

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(1,298.6)

-

Sale of securities acquired in business acquisition

213.5

-

Capital expenditures

(161.5)

(205.4)

Decrease (increase) in investments and other assets

3.2

(11.1)

Net cash used in investing activities

(1,243.4)

(216.5)

Cash flows from financing activities:

Proceeds from borrowings

2,689.4

-

Repayments of debt

(1,710.3)

(169.5)

Purchases of treasury stock

(935.0)

(750.0)

Exercise of stock options

136.8

48.5

Excess tax benefits from stock-based compensation arrangements

4.5

0.9

Dividends paid

(64.7)

(71.3)

Distributions to noncontrolling interests

(35.7)

(36.7)

Other financing activities, net

(21.5)

(8.4)

Net cash provided by (used in) financing activities

63.5

(986.5)

Net change in cash and cash equivalents

(284.4)

(85.0)

Cash and cash equivalents, beginning of period

449.3

534.3

Cash and cash equivalents, end of period

$     164.9

$     449.3

Cash paid during the period for:

Interest

$     161.8

$     139.8

Income taxes

$     285.3

$     421.9

Notes to Financial Tables

1)

The computation of basic and diluted earnings per common share is as follows:

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2011

2010

2011

2010

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common

  stockholders:

Income from continuing operations

$    189.9

$    166.8

$    472.2

$    722.7

Loss from discontinued operations, net of taxes

(0.4)

(1.1)

(1.6)

(1.8)

Net income available to common stockholders

$    189.5

$    165.7

$    470.6

$    720.9

Income from continuing operations

$    189.9

$    166.8

$    472.2

$    722.7

Less: Earnings allocated to participating securities

1.0

0.9

3.0

3.4

Earnings available to Quest Diagnostics' common stockholders –

  basic and diluted

$    188.9

$    165.9

$    469.2

$    719.3

Weighted average common shares outstanding – basic

157.8

170.4

158.7

175.7

Effect of dilutive securities:

Stock options and performance share units

1.3

1.4

1.5

1.6

Weighted average common shares outstanding – diluted

159.1

171.8

160.2

177.3

Earnings per share attributable to Quest Diagnostics'

  common stockholders - basic:

Income from continuing operations

$     1.20

$      0.97

$      2.96

$      4.09

Loss from discontinued operations

-

(0.01)

(0.01)

(0.01)

Net income

$     1.20

$      0.96

$      2.95

$      4.08

Earnings per share attributable to Quest Diagnostics'

  common stockholders - diluted:

Income from continuing operations

$     1.19

$      0.97

$      2.93

$      4.06

Loss from discontinued operations

-

(0.01)

(0.01)

(0.01)

Net income

$     1.19

$      0.96

$      2.92

$      4.05

2)

Adjusted amounts for operating income, operating income as a percentage of net revenues, income from continuing operations, and diluted earnings per common share represent the Company's results before the impact of the Medi-Cal charge, restructuring and integration charges, transaction costs related to the acquisitions of Athena Diagnostics and Celera Corporation, CEO succession costs, an employment litigation settlement and the estimated impact of severe weather.  Adjusted measures are presented because management believes those measures are useful adjuncts to reported results under accounting principles generally accepted in the United States of America when comparing results of operations from period to period.  Adjusted measures should not be considered as an alternative to the corresponding measures determined under accounting principles generally accepted in the United States.  The following tables reconcile reported results to adjusted results:

Three months ended December 31, 2011

(dollars in millions, except per share data)

As Reported

Restructuring

and

Integration

Charges

(a)

CEO

Succession

Costs

(b)

As Adjusted

Operating income

$     325.1

$         5.7

$         5.6

$     336.4

Operating income as a % of net revenues

17.3%

0.3%

0.3%

17.9%

Income from continuing operations (c)

189.9

3.5

3.4

196.8

Diluted earnings per common share

1.19

0.02

0.02

1.23

(a)

Includes $8.7 million of pre-tax costs principally associated with professional fees incurred in conjunction with further restructuring and integrating our business.  The remainder is primarily associated with the reversal of certain previously established reserves for restructuring activities, principally associated with workforce reductions. 

(b)

Principally represents accrued severance and accelerated vesting of equity awards in connection with the succession of our CEO.

(c)

For both the restructuring and integration charges, and CEO succession costs, income tax expense was calculated using a combined federal and state rate of 38.7%. 

Twelve months ended December 31, 2011

(dollars in millions, except per share data)

As

Reported

Medi-Cal

Charge

(d)

Restructuring

and

Integration

Charges

(e)

Transaction

Costs

(f)

CEO

Succession

Costs

(g)

Severe

Weather

(h)

As

Adjusted

Operating income

$      995.0

$      236.0

$        52.2

$        16.9

$          5.6

$        18.5

$   1,324.2

Operating income as a % of net revenues

13.2%

3.1%

0.7%

0.2%

0.1%

0.3%

17.6%

Income from continuing operations (i)

472.2

194.7

32.0

15.2

3.4

11.3

728.8

Diluted earnings per common share

2.93

1.22

0.20

0.09

0.02

0.07

4.53

(d)

Represents the first quarter 2011 pre-tax charge of $236 million associated with the agreement in principle related to Medi-Cal.  The terms of the final settlement, which was reached in the second quarter, were consistent with the agreement in principle and resulted in no additional charge.

(e)

Represents costs incurred in conjunction with further restructuring and integrating our business, and includes $41.9 million of pre-tax charges, principally associated with workforce reductions, with the remainder principally professional fees.

(f)

Includes $20.0 million of pre-tax transaction costs associated with the acquisitions of Athena Diagnostics and Celera Corporation.  Of these costs, $16.9 million, primarily related to professional fees, was recorded in selling, general, and administrative expenses and $3.1 million of financing related costs were recorded in interest expense, net.

(g)

Principally represents accrued severance and accelerated vesting of equity awards in connection with the succession of our CEO.

(h)

Represents an estimate of the impact of severe weather in the first quarter of 2011.

(i)

Income tax expense of $41.3 million associated with the Medi-Cal charge was calculated by applying a combined federal and the applicable state tax rate of 36% to the portion of the settlement for which a tax benefit has been recorded.  Income tax expense of $4.8 million associated with transaction costs was calculated by applying a combined federal and state rate of 38.7% to those costs for which a tax benefit has been recorded. For the estimated impact of severe weather, restructuring and integration charges, and CEO succession costs, income tax expense was calculated using a combined federal and state rate of 38.7%. 

Three months ended December 31, 2010

(dollars in millions, except per share data)

As Reported

Restructuring

Charges

(j)

Employment

Litigation

Settlement

As Adjusted

Operating income

$     294.2

$          9.6

$         9.6

$     313.4

Operating income as a % of net revenues

16.1%

0.6%

0.5%

17.2%

Income from continuing operations (k)

166.8

5.9

5.9

178.6

Diluted earnings per common share

0.97

0.03

0.03

1.03

(j)

Includes $9.6 million of pre-tax restructuring charges, principally associated with workforce reductions.

(k)

For both the restructuring charges, and the employment litigation settlement, income tax expense was calculated using a combined federal and state rate of 39%. 

Twelve months ended December 31, 2010

(dollars in millions, except per share data)

As Reported

Severe

Weather

(l)

Restructuring

Charges

(m)

Employment

Litigation

Settlement

As Adjusted

Operating income

$  1,295.5

$       14.1

$       27.0

$         9.6

$  1,346.2

Operating income as a % of net revenues

17.6%

0.2%

0.4%

0.1%

18.3%

Income from continuing operations (n)

722.7

8.6

16.4

5.9

753.6

Diluted earnings per common share

4.06

0.05

0.09

0.03

4.23

(l)

Represents an estimate of the impact of severe weather in the first quarter of 2010.

(m)

Includes $27.0 million of pre-tax restructuring charges, principally associated with workforce reductions.

(n)

For the estimated impact of severe weather, restructuring charges, and the employment litigation settlement, income tax expense was calculated using a combined federal and state rate of 39%. 

3)

The following table summarizes the impact to the year over year comparisons for restructuring and integration charges, CEO succession costs and the employment litigation settlement on certain reported results for the three months ended December 31, 2011 and 2010 (in millions, except per share data):

Three months ended December 31, 2011 and 2010

Restructuring and Integration

Charges

CEO Succession

 Costs

2011

2010

Better

(Worse)

2011

2010

Better

(Worse)

Cost of services

$    (2.7)

$      1.9

$      4.6

$         -

$      -

$         -

Selling, general and administrative

8.4

7.7

(0.7)

5.6

-

(5.6)

Operating income

5.7

9.6

3.9

5.6

-

(5.6)

Net income

3.5

5.9

2.4

3.4

-

(3.4)

Diluted earnings per common share

0.02

0.03

0.01

0.02

-

(0.02)

Employment Litigation

Settlement

2011

2010

Better

(Worse)

Cost of services

$         -

$      -

$      -

Selling, general and administrative

-

-

-

Operating income

-

9.6

9.6

Net income

-

5.9

5.9

Diluted earnings per common share

-

0.03

0.03

4)

The following table summarizes the impact to the year over year comparisons for the Medi-Cal charge, transaction costs, restructuring and integration charges, CEO succession costs, the estimated impact of severe weather and the employment litigation settlement on certain reported results for the twelve months ended December 31, 2011 and 2010 (in millions, except per share data):

Twelve Months Ended December 31, 2011 and 2010

Medi-Cal Charge

Transaction Costs

2011

2010

Better

(Worse)

2011

2010

Better

(Worse)

Cost of services

$         -

$      -

$         -

$         -

$      -

$         -

Selling, general and administrative

-

-

-

16.9

-

(16.9)

Operating income

236.0

-

(236.0)

16.9

-

(16.9)

Net income

194.7

-

(194.7)

15.2

-

(15.2)

Diluted earnings per common share

1.22

-

(1.22)

0.09

-

(0.09)

Twelve Months Ended December 31, 2011 and 2010

Restructuring and Integration

Charges

CEO Succession Costs

2011

2010

Better

(Worse)

2011

2010

Better

(Worse)

Cost of services

$    22.2

$      6.4

$  (15.8)

$      -

$      -

$      -

Selling, general and administrative

30.0

20.6

(9.4)

5.6

-

(5.6)

Operating income

52.2

27.0

(25.2)

5.6

-

(5.6)

Net income

32.0

16.4

(15.6)

3.4

-

(3.4)

Diluted earnings per common share

0.20

0.09

(0.11)

0.02

-

(0.02)

Severe Weather

Employment

Litigation Settlement

2011

2010

Better

(Worse)

2011

2010

Better

(Worse)

Cost of services

$         * 

$         * 

$         * 

$      -

$      -

$      -

Selling, general and administrative

           * 

           * 

           * 

-

-

-

Operating income

18.5

14.1

(4.4)

-

9.6

9.6

Net income

11.3

8.6

(2.7)

-

5.9

5.9

Diluted earnings per common share

0.07

0.05

(0.02)

-

0.03

0.03

*

The estimated impact on operating costs of severe weather predominantly affects cost of services; with a lesser impact on selling, general, and administrative expenses.

5)

Other operating expense, net includes special charges, and miscellaneous income and expense items related to operating activities. For the twelve months ended December 31, 2011, other operating expense, net included a first quarter 2011 pre-tax charge of $236 million associated with the agreement in principle related to Medi-Cal.  For the three and twelve months ended December 31, 2010, other operating expense, net included a $9.6 million pre-tax charge associated with the settlement of employment litigation.

6)

Results for the three and twelve months ended December 31, 2011 include discrete tax benefits of $0.08 and $0.11 per diluted share, respectively, primarily associated with certain state tax planning initiatives and the favorable resolution of certain tax contingencies.  Results for the three and twelve months ended December 31, 2010 include discrete tax benefits of $0.05 and $0.12 per diluted share, respectively, primarily associated with the favorable resolution of certain tax contingencies.

7)

Other income, net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments and other non-operating assets.  For the twelve months ended December 31, 2011, other income, net includes a pre-tax gain of $3.2 million associated with the sale of an investment.  For the three and twelve months ended December 31, 2011, other income, net also includes gains of $3.8 million and $0.3 million, respectively, associated with investments held in trusts pursuant to our supplemental deferred compensation plans. For the three and twelve months ended December 31, 2010, other income, net includes gains of $3.3 million and $5.7 million, respectively, associated with investments held in trusts pursuant to our supplemental deferred compensation plans.

8)

For the three months ended December 31, 2011, the Company repurchased 0.9 million shares of its common stock at a price of $57.21 per share for $50 million.  For the twelve months ended December 31, 2011, the Company repurchased 17.3 million shares of its common at a price of $54.05 per share for $935 million, including 15.4 million shares of its common stock at a price of $54.30 per share for $835 million from SB Holdings Capital Inc., a wholly-owned subsidiary of GlaxoSmithKline plc.  For the three and twelve months ended December 31, 2011, the Company reissued 0.9 million shares and 3.6 million shares, respectively, for employee benefit plans.  As of December 31, 2011, the Company had $65 million remaining under share repurchase authorizations. In January 2012, our Board of Directors authorized $1.0 billion of additional share repurchases, bringing the total available under share repurchase authorizations at that date to $1.1 billion.