Quest Diagnostics 1998 Annual Report Download - page 4

By most measures, 1998 was a year
in which your company made solid
progress. Even as we met the challenges
of growing competition and declining
clinical testing volume, we generated
strong cash flow, extended our strategic
partnerships in new and innovative
ways, aggressively managed costs, and
made significant progress toward
achieving our goal of becoming a unified,
customer-driven company with
common systems, practices and values
everywhere throughout the country.
At yearend, we were well positioned
to take a new strategic step to further
improve our prospects.
Perhaps most important for long-
term success, we reinforced in 1998
the commitment to our vision –
“dedicated people improvingthehealth
of patients through unsurpassed
diagnostic insights” – by pledging
ourselves to a set of ambitious and
clearly quantifiable goals for
instilling unsurpassed quality in
every aspect of the business.
As the information included in
this report demonstrates, Quest
Diagnostics has come a long, long
way from the difficult years of the
mid-1990s. Our turnaround is
succeeding. We are committed to
becoming the clear industry leader
by providing our patients and
customers with services and products
of exceptional quality. In a business
where the quality of what we do can
literally mean the difference between
life and death, we are absolutely
convinced that consistent, unsurpassed
quality will provide the ultimate
competitive edge.
SBCL Acquisition
We announced an agreement as this
report was going to press to acquire
the clinical laboratory business of
SmithKline Beecham plc. Quest
Diagnostics has agreed to purchase
SmithKline Beecham Clinical
Laboratories(SBCL) for approximately
$1.3 billion in cash and stock. This
important acquisition will enable us
to provide a higher level of service
for customers and patients in a cost-
constrained environment, thereby
increasing shareholder returns.
This transaction is highly strategic
and timely. We are confident we
have the discipline and the focus to
ensure successful integration of the
two companies. We are acquiring a
company that in many ways mirrors
our own business. Both companies
have strong reputations as well-
managed operations. We share a
common commitment to quality,
integrity andcompliance, and are
bothdedicated to improving
patient health. Combining the two
companies will improve the quality,
convenience and accessibility of our
services; accelerate innovation of
new tests and information products;
and enable continued reduction in
our costs by sharing the best practices
from each of our organizations. We
expect to complete the transaction
this summer, following shareholder
approval and regulatory clearance.
Upon completion, SmithKline
Beecham plc will become our largest
shareholder, owning approximately
29.5% of our shares.
Performance Summary
We are pleased to report that in
1998, Quest Diagnostics reported
net income of $26.9 million, or $0.89
per diluted share, on revenues of
$1.46 billion, versus 1997 net income,
adjusted to exclude special charges, of
$17.6 million, or $0.60 per share, on
revenues of $1.53 billion.
As anticipated, requisition volume
declined 7% from 1997, although
the rate of decline did slow over
the course of the year. Given these
conditions, we are particularly
pleased with our ability to generate
substantial amounts of cash. We
ended the year with $203 million
of cash on hand, and generated
$141 million in cash from operations.
Strong cash generation reflects
significant improvements in
our billing, collection and cost
management processes.
There are many other indicators
of financial strength in our
1998 performance:
In addition to repaying $33 million
of scheduled bank debt, we prepaid
an additional $20 million of debt
ahead of schedule,while also buying
back $13 million of our stock.
We remained firmly on track to
meet the commitment made at the
time of our spinoff from Corning
Incorporated in early 1997 to reduce
the cost of running our business by
$180 million by the end of 2000.
Through the end of 1998, we
eliminated $100 million in costs
unrelated to the decline in requisition
volume, and we remain confident
that we will meet our goal. These
savings are allowing us to reinvest in
our business to assure long term
profitable growth.
We reduced bad debt expense from
7.4% of revenues in 1997 to 6.1% in
1998, steadily progressing toward
our goal of 4% by the end of 2000.
A major step was the conversion of
our Teterboro facility to a new
billing system, by far the largest and
most successful conversion to date.
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Chairman’s Letter