Quest Diagnostics (DGX)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET

Executives

Kathleen Valentine - Director of Investor Relations

Robert Hagemann - Chief Financial Officer and Senior Vice President

Surya Mohapatra - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

William Quirk - Piper Jaffray Companies

Ralph Giacobbe - Crédit Suisse AG

Jason Gurda - Leerink Swann LLC

Shelley Gnall-Sazenski

Ricky Goldwasser - Morgan Stanley

Steven Valiquette - UBS Investment Bank

Gary Lieberman - Wells Fargo Securities, LLC

Arthur Henderson - Jefferies & Company, Inc.

Robert Willoughby

Thomas Gallucci - Lazard Capital Markets LLC

Anthony Vendetti

Darren Lehrich - Deutsche Bank AG

Brendan Strong - Barclays Capital

Gary Taylor - Citigroup Inc

Adam Feinstein - Barclays Capital

Dawn Brock - Kaufman Bros., L.P.

Amanda Murphy - William Blair & Company L.L.C.

Bill Bonello - RBC Capital Markets, LLC

Presentation

Operator

Welcome to the Quest Diagnostics Fourth Quarter and Full Year Conference Call. [Operator Instructions] Now, I'd like to introduce Kathleen Valentine, Director of Investor Relations for Quest Diagnostics. Go ahead, please.

Kathleen Valentine

Thank you, and good morning. I am here with Surya Mohapatra, our Chairman and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer.

Some of our commentary and answers to questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that they are made and which reflect management's current estimates, projections, expectations or beliefs, and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, adverse results from pending or future government investigation; lawsuits or private actions; the competitive environment; changes in government regulations; changing relationships with customers, payers, suppliers and strategic partners; and other factors described in the Quest Diagnostics' 2009 Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

A copy of our earnings press release is available, and the text of our prepared remarks will be available later today in the Investor Relations Quarterly Updates section of our website at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on our website.

Now, here is Surya Mohapatra.

Surya Mohapatra

Thank you, Kathleen. We generated strong cash flow in the quarter and we're encouraged by the continued improvement in our volume trends and the stability in revenue for acquisition. During the fourth quarter, earnings per share were $0.97, unchanged from 2009; revenues are $1.8 billion, 1.3% below 2009 and cash flow was $340 million. For the full year, earnings per share increased 5% to $4.06, revenues were $7.4 billion, 1.2% below 2009 and cash from operations was $1.1 billion.

2010 was a year in which we saw pressure in our volume due to the general slowdown in physician office visits. Despite being negatively impacted by the volume decline, our business remained strong and we grew earnings per share. In addition, we are making progress on a number of key growth initiatives. Looking ahead to 2011, we expect organic revenues to grow approximately 1%, earnings per share to increase to between $4.10 and $4.30 and we will generate approximately $1.1 billion in cash.

We are committed to using our substantial cash flow to generate value for our shareholders. Our first priority is to deploy cash to grow the business. In addition, we will deploy excess cash into share repurchases. In 2010, we returned $750 million to our shareholders through share repurchases. This morning, we announced that our Board of Directors have approved an additional $750 million for future share buybacks, brining our current authorization to $1 billion.

I'll update you on our progress after Bob discuss the financial results. Bob?

Robert Hagemann

Thanks, Surya. Revenues for the quarter were $1.8 billion, 1.3% below the prior year, and earnings per share were $0.97, unchanged from the prior year. Included in EPS is a $0.03 charge associated with workforce reductions and a $0.03 charge for settlement of certain employment litigation. These charges were partially offset by a $0.05 benefit associated with non-recurring tax items.

Clinical testing revenues, which account for over 90% of our total revenues, were 1.4% below the prior year in the quarter. For the full year, Clinical testing revenues decreased 1.3%. Revenue per requisition in Q4 was 1.5% below the prior year and has been stable for the last three quarters. For the full year, revenue per requisition approximated that of the prior-year level.

Year-over-year, revenue per requisition continues to benefit from an increased mix of gene-based and esoteric testing and increases in the number of test order per requisition. However, this benefit has been offset by some business in payer mix changes and Medicare fee decrease and pricing changes in connection with several large contract extensions executed in 2009 and the first half of 2010.

The business in payer mix changes, which continue to pressure revenue per requisition, include further rebound in lower price drugs of abuse testing and weakness in our higher priced Anatomic Pathology testing.

Volume in the quarter was 0.1% above the prior year and continue to be pressured by the general slowdown in physician office visits. However, the fourth quarter volume reflects continued and steady improvement from the first part of the year. For the full year, volume was off 1%. Drugs of abuse testing has continued to rebound and grew 8.2% in the quarter and contributed modestly to the improved volume trend.

Revenue in our Non-Clinical Testing businesses, which includes Risk Assessment, Clinical Trials Testing, Point-of-Care Testing and Healthcare IT, was generally in line with the prior-year level for the quarter and for the full year.

In the quarter, operating income, as a percentage of revenues, was 16.1% compared to 17.9% in the prior year. The charges, which I referred to earlier, reduced the current year percentage by 1%.

We continue to make progress in managing our cost structure and driving quality improvements and are evaluating a number of new opportunities to further improve our efficiency and quality. While doing so, we have also made recent investments in sales and service, which are temporarily pressuring margins, but which we expect over the longer term will result in accelerated revenue growth and return to margin expansion.

We continue to see strong performance in our billing and collection metrics. Bad debt expense, as a percentage of revenues, was 3.8% in the quarter compared to 3.9% a year ago. Days sales outstanding were 44 days compared to 43 days at the beginning of the year.

Cash from operations was $340 million and compares to $360 million in the fourth quarter of 2009. Cash from operations totaled $1.1 billion for the full year. Capital expenditures were $69 million in the quarter compared to $50 million a year ago.

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