Quest Diagnostics Reports Fourth Quarter And Full Year 2016 Financial Results; Provides Guidance For Full Year 2017

Three Months Ended December 31,

Twelve Months Ended December 31,

2016

2015

Change

2016

2015

Change

(dollars in millions, except per share data)

Reported:

Net revenues

$

1,861

$

1,849

0.7

%

$

7,515

$

7,493

0.3

%

DIS revenues

$

1,773

$

1,738

2.0

%

$

7,138

$

6,965

2.5

%

Revenue per requisition

0.4

%

0.4

%

Requisition volume

1.5

%

2.0

%

Operating income (a)

$

276

$

239

15.4

%

$

1,277

$

1,399

(8.7)

%

Operating income as a pct of net revenues (a)

14.8

%

12.9

%

190 bps

17.0

%

18.7

%

(170) bps

Net income attributable to Quest
  Diagnostics (a)

$

155

$

188

(17.5)

%

$

645

$

709

(9.1)

%

Diluted earnings per share (a)

$

1.09

$

1.29

(15.5)

%

$

4.51

$

4.87

(7.4)

%

Cash provided by operations (b)

$

304

$

272

11.8

%

$

1,069

$

821

30.2

%

Capital expenditures

$

128

$

94

35.7

%

$

293

$

263

11.5

%

Adjusted:

Revenues on an equivalent basis

$

1,861

$

1,825

1.9

%

$

7,515

$

7,324

2.6

%

Operating income

$

305

$

288

6.1

%

$

1,230

$

1,203

2.3

%

Operating income as a pct of net  revenues

16.4

%

15.5

%

90 bps

16.4

%

16.1

%

30 bps

Net income attributable to Quest
  Diagnostics

$

173

$

157

9.6

%

$

682

$

640

6.4

%

Diluted earnings per share excluding 
  amortization

$

1.31

$

1.19

10.1

%

$

5.15

$

4.77

8.0

%

(a)    

For details impacting the year-over-year comparisons related to operating income, operating income as a percentage of net revenues, net income attributable to Quest Diagnostics and diluted earnings per share, see note 3 of the financial tables attached below.

(b)    

For details impacting the year-over-year comparisons related to cash provided by operations, see note 8 of the financial tables attached below.

Low

High

Revenues

$7.64 billion

$7.72 billion

Revenue increase on a reported basis

1.7%

2.7%

Revenue increase on an equivalent basis (c)

2%

3%

Reported diluted EPS

$4.65

$4.80

Adjusted diluted EPS excluding amortization

$5.37

$5.52

Cash provided by operations

Approximately $1.1 billion

Capital expenditures

$250 million

$300 million

(c)    

Revenues on an equivalent basis for full year 2016 were $7.49 billion which represents the company's reported revenues, excluding all Focus Diagnostics products revenue, in 2016.    

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Twelve Months Ended December 31, 2016 and 2015

(in millions, except per share data)

(unaudited)

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

Net revenues

$

1,861

$

1,849

$

7,515

$

7,493

Operating costs, expenses and other income:

Cost of services

1,160

1,150

4,616

4,657

Selling, general and administrative

400

429

1,681

1,679

Amortization of intangible assets

18

20

72

81

Gain on disposition of business

—

—

(118)

(334)

Other operating expense (income), net

7

11

(13)

11

Total operating costs and expenses, net

1,585

1,610

6,238

6,094

Operating income

276

239

1,277

1,399

Other income (expense):

Interest expense, net

(36)

(36)

(143)

(153)

Other income (expense), net

2

3

(48)

(143)

Total non-operating expenses, net

(34)

(33)

(191)

(296)

Income from continuing operations before income taxes and equity in
  earnings of equity method investees

242

206

1,086

1,103

Income tax expense

(84)

(14)

(429)

(373)

Equity in earnings of equity method investees, net of taxes

9

8

39

23

Net income

167

200

696

753

Less: Net income attributable to noncontrolling interests

12

12

51

44

Net income attributable to Quest Diagnostics

$

155

$

188

$

645

$

709

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.11

$

1.31

$

4.58

$

4.92

Diluted

$

1.09

$

1.29

$

4.51

$

4.87

Weighted average common shares outstanding:

Basic

138

143

140

144

Diluted

141

144

142

145

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

December 31, 2016 and 2015

(in millions, except per share data)

(unaudited)

December 31,
2016

December 31,
2015

Assets

Current assets:

Cash and cash equivalents

$

359

$

133

Accounts receivable, net

926

901

Inventories

82

84

Prepaid expenses and other current assets

155

207

Assets held for sale

9

176

Total current assets

1,531

1,501

Property, plant and equipment, net

1,029

925

Goodwill

6,000

5,905

Intangible assets, net

949

984

Investment in equity method investees

443

473

Other assets

148

174

Total assets

$

10,100

$

9,962

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

975

$

1,014

Current portion of long-term debt

6

159

Total current liabilities

981

1,173

Long-term debt

3,728

3,492

Other liabilities

654

514

Redeemable noncontrolling interest

77

70

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized at both December 31, 2016
  and 2015; 216 shares issued at both December 31, 2016 and 2015

2

2

Additional paid-in capital

2,545

2,481

Retained earnings

6,613

6,199

Accumulated other comprehensive loss

(72)

(38)

Treasury stock, at cost; 79 shares and 73 shares at December 31, 2016 and 2015,
  respectively

(4,460)

(3,960)

Total Quest Diagnostics stockholders' equity

4,628

4,684

Noncontrolling interests

32

29

Total stockholders' equity

4,660

4,713

Total liabilities and stockholders' equity

$

10,100

$

9,962

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Twelve Months Ended December 31, 2016 and 2015

(in millions)

(unaudited)

Twelve Months Ended
December 31,

2016

2015

Cash flows from operating activities:

Net income

$

696

$

753

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

249

304

Provision for doubtful accounts

308

297

Deferred income tax provision

37

112

Stock-based compensation expense

69

52

Gain on disposition of business

(118)

(334)

Other, net

(6)

6

Changes in operating assets and liabilities:

Accounts receivable

(343)

(262)

Accounts payable and accrued expenses

56

(24)

Income taxes payable

42

(41)

Termination of interest rate swap agreements

54

—

Other assets and liabilities, net

25

(42)

Net cash provided by operating activities

1,069

821

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(139)

(67)

Proceeds from sale of businesses

270

—

Capital expenditures

(293)

(263)

Investment in equity method investee

—

(33)

Decrease in investments and other assets

10

1

Net cash used in investing activities

(152)

(362)

Cash flows from financing activities:

Proceeds from borrowings

1,869

2,453

Repayments of debt

(1,724)

(2,537)

Purchases of treasury stock

(590)

(224)

Exercise of stock options

73

60

Employee payroll tax withholdings on stock issued under stock-based compensation plans

(10)

(7)

Dividends paid

(223)

(212)

Distributions to noncontrolling interests

(41)

(42)

Sale of noncontrolling interest in subsidiary

—

63

Payment of deferred business acquisition consideration

—

(51)

Other financing activities, net

(45)

(21)

Net cash used in financing activities

(691)

(518)

Net change in cash and cash equivalents

226

(59)

Cash and cash equivalents, beginning of period

133

192

Cash and cash equivalents, end of period

$

359

$

133

Cash paid during the period for:

Interest

$

148

$

172

Income taxes

$

361

$

319

1)

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

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

155

$

188

$

645

$

709

Less: Earnings allocated to participating securities

—

—

3

3

Earnings available to Quest Diagnostics' common stockholders - basic and diluted

$

155

$

188

$

642

$

706

Weighted average common shares outstanding - basic

138

143

140

144

Effect of dilutive securities:

Stock options and performance share units

3

1

2

1

Weighted average common shares outstanding - diluted

141

144

142

145

Earnings per share attributable to Quest Diagnostics' common
  stockholders:

Basic

$

1.11

$

1.31

$

4.58

$

4.92

Diluted

$

1.09

$

1.29

$

4.51

$

4.87

2)

In the second quarter of 2016, the company elected to early adopt the accounting standard update that simplifies several aspects of the accounting for stock-based compensation award transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and accounting for forfeitures, effective January 1, 2016.  As a result, certain reclassifications have been made to the prior period financial statements to conform with the current period presentation.

3)

The following tables reconcile reported results to adjusted results:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(dollars in millions, except per share data)

Adjusted operating income:

Operating income

$

276

$

239

$

1,277

$

1,399

Gain on disposition of business (a)

—

—

(118)

(334)

Restructuring and integration charges (b)

23

22

78

105

Other (c)

6

27

(7)

33

Adjusted operating income

$

305

$

288

$

1,230

$

1,203

Adjusted operating income as a percentage of net revenues:

Operating income as a percentage of net revenues

14.8

%

12.9

%

17.0

%

18.7

%

Gain on disposition of business (a)

—

—

(1.5)

(4.4)

Restructuring and integration charges (b)

1.2

1.2

1.0

1.4

Other (c)

0.4

1.4

(0.1)

0.4

Adjusted operating income as a percentage of net revenues

16.4

%

15.5

%

16.4

%

16.1

%

Adjusted net income:

Net income attributable to Quest Diagnostics

$

155

$

188

$

645

$

709

Gain on disposition of business (a)

—

—

(118)

(334)

Retirement of debt and related refinancing charges (d)

—

—

48

150

Restructuring and integration charges (b)

24

22

82

110

Other (c)

6

25

—

31

Income tax expense (benefit) associated with the special items (e)

(12)

(78)

25

(26)

Adjusted net income

$

173

$

157

$

682

$

640

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

1.09

$

1.29

$

4.51

$

4.87

Gain on disposition of business (a) (e)

—

—

(0.24)

(1.30)

Retirement of debt and related refinancing charges (d) (e)

—

(0.01)

0.21

0.62

Restructuring and integration charges (b) (e)

0.10

0.09

0.35

0.46

Certain income tax benefits (e)

—

(0.40)

—

(0.40)

Other (c) (e)

0.03

0.11

(0.06)

0.14

Amortization expense (f)

0.09

0.11

0.38

0.38

Adjusted diluted EPS excluding amortization expense

$

1.31

$

1.19

$

5.15

$

4.77

Revenue on an equivalent basis:

Net revenues

$

1,861

$

1,849

$

7,515

$

7,493

Excluded revenue (g)

—

(24)

—

(169)

Revenue on an equivalent basis

$

1,861

$

1,825

$

7,515

$

7,324

(a)

For the twelve months ended December 31, 2016, represents the pre-tax gain on the sale of our Focus Diagnostics products business to DiaSorin S.p.A. for $300 million in cash, or $293 million net of transaction costs and working capital adjustments, which includes $25 million of proceeds held in escrow.  For the twelve months ended December 31, 2015, represents the gain associated with the contribution of our clinical trials testing business to Q² Solutions, the clinical trials joint venture with Quintiles Transnational Holdings Inc.

(b)

For the twelve months ended December 31, 2016, represents costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.  For the twelve months ended December 31, 2015, represents costs primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business.  The following table summarizes the pre-tax impact of restructuring and integration charges on the company's consolidated statements of operations:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(dollars in millions)

Cost of services

$

15

$

12

$

40

$

63

Selling, general and administrative

7

10

37

42

Other operating expense, net

1

—

1

—

Operating income

$

23

$

22

$

78

$

105

Equity in earnings of equity method investees, net of taxes

$

1

$

—

$

4

$

5

(c)

For the three months ended December 31, 2016, primarily represents non-cash asset impairment charges.  For the twelve months ended December 31, 2016, primarily represents a gain on escrow recovery associated with an acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters.

For the three months ended December 31, 2015, primarily represents non-cash asset impairment charges and other costs associated with winding down subsidiaries as well as costs incurred related to certain legal matters.  For the twelve months ended December 31, 2015, primarily represents non-cash asset impairment charges and other costs associated with Celera Products and the winding down of another subsidiary as well as costs incurred related to certain legal matters, partially offset by a pre-tax gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.  The following table summarizes the pre-tax impact of these other items on the company's consolidated statement of operations:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(dollars in millions)

Cost of Sales

$

—

$

2

$

—

$

2

Selling, general and administrative

—

14

6

21

Other operating expense (income), net

6

11

(13)

10

Operating income

$

6

$

27

$

(7)

$

33

Other non-operating (income) expense, net

$

—

$

(2)

$

7

$

(2)

(d)

For the twelve months ended December 31, 2016, represents charges associated with the March 2016 cash tender offer where the company purchased $200 million of its 6.95% Senior Notes due July 2037 and 5.75% Senior Notes due January 2040.  For the twelve months ended December 31, 2015, represents: charges associated with the March 2015 cash tender offer where the company purchased $250 million aggregate principal amount of its 6.95% Senior Notes due July 2037 and 5.75% Senior Notes due January 2040; and charges associated with the April 2015 redemption where the company redeemed all of its 5.45% Senior Notes due November 2015, $150 million of its 3.2% Senior Notes due April 2016 and all of its 6.4% Senior Notes due July 2017.  The following table summarizes the impact of pre-tax charges on retirement of debt and related refinancing charges on the company's consolidated statements of operations: 

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(dollars in millions)

Interest expense, net

$

—

$

—

$

—

$

6

Other non-operating expense, net

—

—

48

144

$

—

$

—

$

48

$

150

(e) 

For the twelve months ended December 31, 2016, for the gain on disposition of business, income tax expense resulted in a combined tax rate of 71.4%, which was significantly in excess of the statutory rate primarily due to a lower tax basis in the assets sold, specifically the goodwill associated with the disposition.  For the twelve months ended December 31, 2015, for the gain on disposition of business, the associated deferred income tax liability was calculated using a combined tax rate of 43.3% and did not result in any significant current income taxes payable.  For the  retirement of debt and related refinancing charges, income tax benefits were calculated such that the combined tax rate was 38.9% and 40% for 2016 and 2015, respectively.  For the restructuring and integration charges and other items, income tax impacts, where recorded, were calculated using combined tax rates of 38.7% and 38.9% for 2016 and 2015, respectively.  The following table summarizes the income tax expense (benefit) associated with the special items:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(dollars in millions)

Gain on disposition of business

$

—

$

—

$

84

$

145

Retirement of debt and related refinancing charges

—

(2)

(18)

(60)

Restructuring and integration charges

(9)

(9)

(32)

(43)

Certain income tax benefits

—

(58)

—

(58)

Other

(3)

(9)

(9)

(10)

$

(12)

$

(78)

$

25

$

(26)

For the three and twelve months ended December 31, 2015, certain income tax benefits represent the recognition of a deferred income tax benefit associated with winding down a subsidiary.

(f) 

Represents the impact of amortization expense on diluted earnings per common share, net of the income tax benefit.  The income tax benefit was primarily calculated using a combined tax rate of 38.7% and 38.9% for 2016 and 2015, respectively.  The pre-tax amortization expense that is excluded from the calculation of adjusted diluted EPS excluding amortization expense is recorded in the company's statements of operations as follows:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016

2015

2016

2015

(dollars in millions)

Amortization of intangible assets

$

18

$

20

$

72

$

81

Equity in earnings of equity method investees, net of taxes

4

4

16

8

$

22

$

24

$

88

$

89

(g)

Effective July 1, 2015, the company contributed its clinical trials testing business to the Q² Solutions joint venture.  In 2016, the company wound down its Celera products business and completed its exit from the products business as a result of the sale of Focus Diagnostics products on May 13, 2016.  For the three months ended December 31, 2015, excluded revenue represents Celera products and Focus Diagnostics products reported revenues.  Excluded revenue for the twelve months ended December 31, 2015, represents clinical trials testing reported revenues for the first and second quarters of 2015, Celera products reported revenues for all of 2015 and Focus Diagnostics products revenues subsequent to April 2015.

4)

For the twelve months ended December 31, 2016, the company recorded income tax expense of $84 million associated with the gain on sale of our Focus Diagnostics products business, consisting of $91 million of current income tax expense and a deferred income tax benefit of $7 million.  In connection with the gain associated with the contribution of our clinical trial testing business to the Q² Solutions joint venture, the company recorded a deferred income tax liability of $145 million for the twelve months ended December 31, 2015.

5)

Other operating expense (income), net includes miscellaneous income and expense items related to operating activities.  For the three months ended December 31, 2016, other operating expense (income), net principally consists of non-cash asset impairment charges.  Other operating expense (income), net for the twelve months ended December 31, 2016, principally consists of a gain on an escrow recovery associated with an acquisition, partially offset by non-cash asset impairment charges. 

For the three months ended December 31, 2015, other operating expense (income), net principally includes non-cash asset impairment charges associated with winding down a subsidiary.  Other operating expense (income), net for the twelve months ended December 31, 2015, principally includes non-cash asset impairment charges primarily associated with Celera products and the winding down of another subsidiary, partially offset by a gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition.

6)

Other income (expense), net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments, other non-operating assets and early retirement of debt.  For the twelve months ended December 31, 2016, other income (expense), net includes $48 million of charges on the retirement of debt associated with the March 2016 cash tender offer and non-cash asset impairment charges associated with certain investments of $7 million.  Other income (expense), net for the twelve months ended December 31, 2015, includes $144 million of charges on the retirement of debt associated with the March 2015 cash tender offer and April 2015 redemption.  

7)

For the twelve months ended December 31, 2016, the company repurchased 7.4 million shares of its common stock for $590 million, including 3.1 million shares repurchased under an accelerated share repurchase agreement during the second and third quarters of 2016.  As of December 31, 2016, $1.4 billion remained available under the Company's share repurchase authorizations.

8)

For the twelve months ended December 31, 2016, net cash provided by operations included $91 million of income taxes paid associated with the sale of Focus Diagnostics products and $47 million of pre-tax cash charges, or $30 million after the related cash tax benefit, related to the retirement of debt, which were partially offset by $54 million of proceeds received from the termination of interest rate swap agreements.

For the twelve months ended December 31, 2015, net cash provided by operations included $146 million of pre-tax cash charges, or $89 million after the related cash tax benefit, related to the retirement of debt.

9)

The outlook for adjusted diluted EPS excluding amortization expense represents management's estimates for the full year 2017 before the impact of special items and amortization expense.  Further impacts to earnings related to special items may be incurred throughout 2017.  The following table reconciles our 2017 outlook for adjusted diluted EPS excluding amortization expense to the corresponding amount determined under GAAP:

Low

High

Diluted earnings per common share

$

4.65

$

4.80

Restructuring and integration charges (a)

0.35

0.35

Amortization expense (b)

0.37

0.37

Adjusted diluted EPS excluding amortization expense

$

5.37

$

5.52

(a)       

Represents estimated full year pre-tax charges of $80 million primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating our business.  Income tax benefits were calculated using a combined tax rate of 38.7%.

(b)       

Represents the estimated impact of amortization expense for 2017 on the calculation of adjusted diluted EPS excluding amortization expense.  Amortization expense used in the calculation is as follows (dollars in millions):

Amortization of intangible assets

$

69

Amortization expense included in equity in earnings of equity method investees, net of taxes

16

Total pre-tax amortization expense

$

85

Total amortization expense, net of an estimated tax benefit

$

53

10)

The outlook for 2% to 3% revenue growth on an equivalent basis in 2017 represents management's estimates for 2017 versus reported 2016 revenues adjusted to exclude the 2016 revenues from the Focus Diagnostics products business.  The company completed its exit from the products business as a result of the sale of Focus Diagnostics products on May 13, 2016.  Consequently, our 2017 revenues will not include revenues associated with that business.  The following table reconciles our 2016 net revenues determined under GAAP with equivalent revenue for 2016:

Three Months Ended

Year Ended

March 31,
 2016

June 30,
 2016

September 30,
 2016

December 31,
 2016

December 31,
 2016

(dollars in millions)

2016 Revenue on an equivalent basis:

Net revenues

$

1,863

$

1,906

$

1,885

$

1,861

$

7,515

Excluded revenue (a)

(18)

(8)

—

—

(26)

2016 Revenue on an equivalent basis

$

1,845

$

1,898

$

1,885

$

1,861

$

7,489

2017 Revenue outlook:

Low

High

2016 Revenue on an equivalent basis

$

7,489

$

7,489

2017 Equivalent revenue growth

2%

3%

2017 Revenue outlook

$

7,640

$

7,720

(a) 

The 2016 excluded revenue is comprised of all of Focus Diagnostics products revenues reported in 2016.