Quest Diagnostics Reports Second Quarter 2019 Financial Results

Six Months Ended

June 30,

2019

2018

Change

2019

2018

Change

(dollars in millions, except per share data)

Reported:

Net revenues

$

1,953

$

1,919

1.8

%

$

3,844

$

3,803

1.1

%

Diagnostic Information Services revenues

$

1,872

$

1,835

2.0

%

$

3,684

$

3,638

1.3

%

Revenue per requisition

(2.3)

%

(2.6)

%

Requisition volume

4.4

%

4.0

%

 Organic requisition volume

2.9

%

2.6

%

Operating income (a)

$

307

$

305

0.4

%

$

555

$

577

(3.9)

%

Operating income as a percentage of net revenues (a)

15.7

%

15.9

%

(20) bps

14.4

%

15.2

%

(80) bps

Income from continuing operations attributable to Quest Diagnostics (a)

$

206

$

219

(5.8)

%

$

370

$

396

(6.5)

%

Diluted EPS from continuing operations (a)

$

1.51

$

1.57

(3.9)

%

$

2.71

$

2.84

(4.6)

%

Cash provided by operations

$

321

$

323

(0.9)

%

$

596

$

503

18.5

%

Capital expenditures

$

85

$

78

9.2

%

$

132

$

151

(12.3)

%

Adjusted (b):

Operating income

$

352

$

362

(2.9)

%

$

638

$

687

(7.0)

%

Operating income as a percentage of net revenues

18.0

%

18.9

%

(90) bps

16.6

%

18.1

%

(150) bps

Income from continuing operations attributable to Quest Diagnostics

$

237

$

245

(3.2)

%

$

427

$

456

(6.3)

%

Diluted EPS from continuing operations

$

1.73

$

1.75

(1.1)

%

$

3.13

$

3.27

(4.3)

%

(a) 

For further details impacting the year-over-year comparisons related to operating income, operating income as a percentage of net revenues, income from continuing operations attributable to Quest Diagnostics, and diluted EPS from continuing operations, see note 2 of the financial tables attached below.

(b)

Beginning in 2019, the company has changed how it presents adjusted income measures to additionally exclude amortization expense for all periods presented.  We believe this presentation provides investors with additional insight to evaluate our performance period over period and relative to competitors, as well as to analyze the underlying trends in our business.

Current Outlook

Low

High

Net revenues

$7.60 billion

$7.75 billion

Net revenue increase

1%

3%

Reported diluted EPS from continuing operations (a)

Greater than $5.29

Adjusted diluted EPS

Greater than $6.40

Cash provided by operations

Approximately $1.3 billion

Capital expenditures

$350 million

$400 million

(a)

The outlook for reported diluted EPS from continuing operations was updated to greater than $5.29 from the previous outlook of greater than $5.16 due to the impact of special items in the second quarter.  For a reconciliation of adjusted diluted EPS to reported diluted EPS from continuing operations, see note 5 to the financial tables attached below.

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2019 and 2018
(in millions, except per share data)
(unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2019

2018

2019

2018

Net revenues

$

1,953

$

1,919

$

3,844

$

3,803

Operating costs and expenses and other operating income:

Cost of services

1,265

1,243

2,509

2,469

Selling, general and administrative

362

351

746

714

Amortization of intangible assets

25

22

49

44

Other operating income, net

(6)

(2)

(15)

(1)

Total operating costs and expenses, net

1,646

1,614

3,289

3,226

Operating income

307

305

555

577

Other income (expense):

Interest expense, net

(45)

(42)

(89)

(83)

Other income (expense), net

3

1

12

(1)

Total non-operating expenses, net

(42)

(41)

(77)

(84)

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

265

264

478

493

Income tax expense

(63)

(42)

(113)

(94)

Equity in earnings of equity method investees, net of taxes

17

11

30

23

Income from continuing operations

219

233

395

422

Income from discontinued operations, net of taxes

20

—

20

—

Net income

239

233

415

422

Less: Net income attributable to noncontrolling interests

13

14

25

26

Net income attributable to Quest Diagnostics

$

226

$

219

$

390

$

396

Amounts attributable to Quest Diagnostics' common stockholders:

Income from continuing operations

$

206

$

219

$

370

$

396

Income from discontinued operations, net of taxes

20

—

20

—

Net income

$

226

$

219

$

390

$

396

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:

Income from continuing operations

$

1.52

$

1.60

$

2.74

$

2.90

Income from discontinued operations

0.15

—

0.15

—

Net income

$

1.67

$

1.60

$

2.89

$

2.90

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:

Income from continuing operations

$

1.51

$

1.57

$

2.71

$

2.84

Income from discontinued operations

0.15

—

0.15

—

Net income

$

1.66

$

1.57

$

2.86

$

2.84

Weighted average common shares outstanding:

Basic

135

136

134

136

Diluted

136

139

136

139

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2019 and December 31, 2018
(in millions, except per share data)
(unaudited)

June 30,
 2019

December 31,
 2018

Assets

Current assets:

Cash and cash equivalents

$

273

$

135

Accounts receivable, net

1,088

1,012

Inventories

105

99

Prepaid expenses and other current assets

100

144

Total current assets

1,566

1,390

Property, plant and equipment, net

1,307

1,288

Operating lease right-of-use assets

511

—

Goodwill

6,605

6,563

Intangible assets, net

1,172

1,207

Investment in equity method investees

458

436

Other assets

141

119

Total assets

$

11,760

$

11,003

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

951

$

1,021

Current portion of long-term debt

807

464

Current portion of long-term operating lease liabilities

146

—

Total current liabilities

1,904

1,485

Long-term debt

3,169

3,429

Long-term operating lease liabilities

413

—

Other liabilities

689

745

Redeemable noncontrolling interest

76

77

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both June 30, 2019 and December 31, 2018; 217 shares issued as of both June 30, 2019 and December 31, 2018

2

2

Additional paid-in capital

2,686

2,667

Retained earnings

7,849

7,602

Accumulated other comprehensive loss

(58)

(59)

Treasury stock, at cost; 82 shares as of both June 30, 2019 and December 31, 2018

(5,020)

(4,996)

Total Quest Diagnostics stockholders' equity

5,459

5,216

Noncontrolling interests

50

51

Total stockholders' equity

5,509

5,267

Total liabilities and stockholders' equity

$

11,760

$

11,003

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2019 and 2018
(in millions)
(unaudited)

Six Months Ended June 30,

2019

2018

Cash flows from operating activities:

Net income

$

415

$

422

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

Depreciation and amortization

165

151

Provision for doubtful accounts

5

—

Deferred income tax provision

13

39

Stock-based compensation expense

32

34

Other, net

(33)

18

Changes in operating assets and liabilities:

Accounts receivable

(81)

(127)

Accounts payable and accrued expenses

27

(64)

Income taxes payable

15

(7)

Other assets and liabilities, net

38

37

Net cash provided by operating activities

596

503

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(56)

(165)

Capital expenditures

(132)

(151)

Increase in investments and other assets

(14)

(14)

Net cash used in investing activities

(202)

(330)

Cash flows from financing activities:

Proceeds from borrowings

1,484

1,520

Repayments of debt

(1,448)

(1,553)

Purchases of treasury stock

(103)

(50)

Exercise of stock options

66

71

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

(16)

(20)

Dividends paid

(143)

(129)

Distributions to noncontrolling interest partners

(27)

(28)

Contributions from noncontrolling interest partners

—

4

Other financing activities, net

(69)

7

Net cash used in financing activities

(256)

(178)

Net change in cash and cash equivalents and restricted cash

138

(5)

Cash and cash equivalents and restricted cash, beginning of period

135

137

Cash and cash equivalents and restricted cash, end of period

$

273

$

132

Cash and cash equivalents

$

273

$

132

Restricted cash

—

—

Cash and cash equivalents and restricted cash, end of period

$

273

$

132

Cash paid during the period for:

Interest

$

91

$

86

Income taxes

$

83

$

41

Notes to Financial Tables

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

Three Months Ended

June 30,

Six Months Ended

June 30,

2019

2018

2019

2018

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Income from continuing operations

$

206

$

219

$

370

$

396

Income from discontinued operations, net of taxes

20

—

20

—

Net income attributable to Quest Diagnostics' common stockholders

$

226

$

219

$

390

$

396

Income from continuing operations

$

206

$

219

$

370

$

396

Less: earnings allocated to participating securities

—

—

1

1

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

$

206

$

219

$

369

$

395

Weighted average common shares outstanding - basic

135

136

134

136

Effect of dilutive securities:

Stock options and performance share units

1

3

2

3

Weighted average common shares outstanding - diluted

136

139

136

139

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:

Income from continuing operations

$

1.52

$

1.60

$

2.74

$

2.90

Income from discontinued operations

0.15

—

0.15

—

Net income

$

1.67

$

1.60

$

2.89

$

2.90

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:

Income from continuing operations

$

1.51

$

1.57

$

2.71

$

2.84

Income from discontinued operations

0.15

—

0.15

—

Net income

$

1.66

$

1.57

$

2.86

$

2.84

2)  The following tables reconcile reported GAAP results to non-GAAP adjusted results:

Three Months Ended June 30, 2019

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (c)

Equity in earnings of equity method investees, net of taxes

Income from continuing operations  attributable to Quest Diagnostics

Diluted EPS from continuing operations

As reported

$

307

15.7

%

$

(63)

$

17

$

206

$

1.51

Restructuring and integration charges (a)

26

1.3

(7)

—

19

0.14

Other (b)

(6)

(0.3)

—

—

(6)

(0.04)

Amortization expense

25

1.3

(7)

5

23

0.16

ETB

—

—

(5)

—

(5)

(0.04)

As adjusted

$

352

18.0

%

$

(82)

$

22

$

237

$

1.73

Six Months Ended June 30, 2019

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (c)

Equity in earnings of equity method investees, net of taxes

Income from continuing operations attributable to Quest Diagnostics

Diluted EPS from continuing operations

As reported

$

555

14.4

%

$

(113)

$

30

$

370

$

2.71

Restructuring and integration charges (a)

48

1.3

(13)

—

35

0.26

Other (b)

(14)

(0.4)

(1)

—

(15)

(0.10)

Amortization expense

49

1.3

(14)

10

45

0.32

ETB

—

—

(8)

—

(8)

(0.06)

As adjusted

$

638

16.6

%

$

(149)

$

40

$

427

$

3.13

Three Months Ended June 30, 2018

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (c)

Equity in earnings of equity method investees, net of taxes

Income from continuing operations attributable to Quest Diagnostics

Diluted EPS from continuing operations

As reported

$

305

15.9

%

$

(42)

$

11

$

219

$

1.57

Restructuring and integration charges (a)

25

1.3

(6)

—

19

0.13

Other (b)

10

0.5

(3)

—

7

0.05

Amortization expense

22

1.2

(6)

4

20

0.14

ETB

—

—

(5)

—

(5)

(0.04)

Certain income tax benefits (d)

—

—

(15)

—

(15)

(0.10)

As adjusted

$

362

18.9

%

$

(77)

$

15

$

245

$

1.75

Six Months Ended June 30, 2018

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (c)

Equity in earnings of equity method investees, net of taxes

Income from continuing operations attributable to Quest Diagnostics

Diluted EPS from continuing operations

As reported

$

577

15.2

%

$

(94)

$

23

$

396

$

2.84

Restructuring and integration charges (a)

56

1.5

(14)

—

42

0.30

Other (b)

10

0.2

(3)

—

7

0.05

Amortization expense

44

1.2

(13)

8

39

0.28

ETB

—

—

(13)

—

(13)

(0.10)

Certain income tax benefits (d)

—

—

(15)

—

(15)

(0.10)

As adjusted

$

687

18.1

%

$

(152)

$

31

$

456

$

3.27

(a) 

For the three and six months ended June 30, 2019, represents costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.  For the three and six months ended June 30, 2018, represents costs primarily associated with workforce reductions, systems conversions and integration 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

June 30,

Six Months Ended

June 30,

2019

2018

2019

2018

(dollars in millions)

Cost of services

$

11

$

14

$

22

$

26

Selling, general and administrative

15

11

26

29

Other operating income, net

—

—

—

1

Operating income

$

26

$

25

$

48

$

56

(b) 

For the three months ended June 30, 2019, the pre-tax impact primarily represents a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our ReproSource, Inc. acquisition.  For the six months ended June 30, 2019, the pre-tax impact primarily represents a gain associated with an insurance claim for hurricane related losses, and a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our ReproSource, Inc. acquisition partially offset by non-cash asset impairment charges. For the three and six months ended June 30, 2018, the pre-tax impact primarily represents costs incurred related to certain legal matters partially offset by a gain associated with an insurance claim for hurricane related losses.  The following table summarizes the pre-tax impact of these other items on the company's consolidated statements of operations:

Three Months Ended

June 30,

Six Months Ended

June 30,

2019

2018

2019

2018

(dollars in millions)

Cost of sales

$

—

$

11

$

—

$

11

Selling, general and administrative

—

—

1

—

Other operating income, net

(6)

(1)

(15)

(1)

Operating income

$

(6)

$

10

$

(14)

$

10

(c)

For restructuring and integration charges, other items and amortization expense, income tax impacts, where recorded, were primarily calculated using combined tax rates of 25.5% for both 2019 and 2018.  For the gain associated with an insurance claim for hurricane related losses in 2019, there was no net income tax expense as the company is able to utilize net operating loss carryforwards for which a valuation allowance had previously been established.  For the gain in 2019 associated with the decrease in the fair value of the contingent consideration accrual associated with our ReproSource, Inc. acquisition, there was no net income tax expense as the gain is non-taxable. 

(d)

Represents an income tax benefit associated with a change in a tax return accounting method that enabled the company to accelerate the deduction of certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017.

3)

Discontinued operations, net of taxes, for the three and six months ended June 30, 2019 includes discrete tax benefits of $20 million associated with the favorable resolution of certain tax contingencies related to Nichols Institute Diagnostics, a test kit manufacturing subsidiary whose operations were discontinued in 2006.

4)

For the three months ended June 30, 2019, the company repurchased 0.5 million shares of its common stock for $50 million.  For the six months ended June 30, 2019, the company repurchased 1.1 million shares of its common stock for $100 million.  As of June 30, 2019, $0.5 billion remained available under the company's share repurchase authorizations.       

5)

The outlook for adjusted diluted EPS represents management's estimates for the full-year 2019 before the impact of special items, including ETB and amortization expense.  Further impacts to earnings related to special items may occur throughout 2019.  Additionally, the amount of ETB is dependent upon employee stock option exercises and the company's stock price, which are difficult to predict.  The following table reconciles our 2019 outlook for adjusted diluted EPS to the corresponding amounts determined under GAAP:

Diluted earnings per common share from continuing operations

$

5.29

Restructuring and integration charges (a)

0.65

Other

(0.10)

Amortization expense (b)

0.62

ETB

(0.06)

Adjusted diluted EPS

$

6.40

(a) 

Represents estimated full-year pre-tax charges of $118 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 25.5%.

(b) 

Represents the estimated impact of amortization expense for 2019 on the calculation of adjusted diluted EPS.  Amortization expense used in the calculation is as follows (dollars in millions):

Amortization of intangible assets

$

98

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

15

Total pre-tax amortization expense

$

113

Total amortization expense, net of an estimated tax benefit using a combined tax rate of 25.5%

$

84