001-12215 | 16-1387862 | |
(Commission File Number) | (I.R.S. Employer Identification No.) | |
Three Giralda Farms Madison, NJ | 07940 | |
(Address of principal executive offices) | (Zip Code) | |
(973) 520-2700 | ||
(Registrant's telephone number, including area code) |
d. | Exhibit | |
99.1 | Press release of Quest Diagnostics Incorporated dated October 22, 2015, announcing, among other things, its results for the quarter ended September 30, 2015. |
QUEST DIAGNOSTICS INCORPORATED | |
By: | /s/ William J.O'Shaughnessy, Jr. |
William J. O'Shaughnessy, Jr. | |
Deputy General Counsel and | |
Corporate Secretary |
• | Adjusted diluted EPS excluding amortization to be between $4.75 and $4.80, compared to previous guidance of $4.70 to $4.85. |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net revenues | $ | 1,880 | $ | 1,904 | $ | 5,644 | $ | 5,552 | |||||||
Operating costs and expenses: | |||||||||||||||
Cost of services | 1,162 | 1,178 | 3,507 | 3,453 | |||||||||||
Selling, general and administrative | 402 | 446 | 1,250 | 1,301 | |||||||||||
Amortization of intangible assets | 20 | 24 | 61 | 71 | |||||||||||
Gain on contribution of business to joint venture | (334 | ) | — | (334 | ) | — | |||||||||
Other operating (income) expense, net | (1 | ) | — | — | 1 | ||||||||||
Total operating costs and expenses | 1,249 | 1,648 | 4,484 | 4,826 | |||||||||||
Operating income | 631 | 256 | 1,160 | 726 | |||||||||||
Other income (expense): | |||||||||||||||
Interest expense, net | (35 | ) | (41 | ) | (117 | ) | (122 | ) | |||||||
Other (expense) income, net | (4 | ) | (1 | ) | (146 | ) | 3 | ||||||||
Total non-operating expenses, net | (39 | ) | (42 | ) | (263 | ) | (119 | ) | |||||||
Income before income taxes and equity in earnings of equity method investees | 592 | 214 | 897 | 607 | |||||||||||
Income tax expense | (239 | ) | (82 | ) | (359 | ) | (234 | ) | |||||||
Equity in earnings of equity method investees, net of taxes | 1 | 7 | 15 | 19 | |||||||||||
Net income | 354 | 139 | 553 | 392 | |||||||||||
Less: Net income attributable to noncontrolling interests | 12 | 10 | 32 | 26 | |||||||||||
Net income attributable to Quest Diagnostics | $ | 342 | $ | 129 | $ | 521 | $ | 366 | |||||||
Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
Basic | $ | 2.37 | $ | 0.89 | $ | 3.61 | $ | 2.52 | |||||||
Diluted | $ | 2.35 | $ | 0.88 | $ | 3.58 | $ | 2.51 | |||||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 144 | 145 | 144 | 144 | |||||||||||
Diluted | 145 | 145 | 145 | 145 | |||||||||||
September 30, 2015 | December 31, 2014 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 123 | $ | 192 | |||
Accounts receivable, net | 914 | 932 | |||||
Inventories | 86 | 110 | |||||
Deferred income taxes | 165 | 169 | |||||
Prepaid expenses and other current assets | 194 | 186 | |||||
Assets held for sale | 166 | 14 | |||||
Total current assets | 1,648 | 1,603 | |||||
Property, plant and equipment, net | 886 | 933 | |||||
Goodwill | 5,895 | 6,032 | |||||
Intangible assets, net | 1,004 | 1,071 | |||||
Investment in equity method investees | 478 | 46 | |||||
Other assets | 163 | 172 | |||||
Total assets | $ | 10,074 | $ | 9,857 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 973 | $ | 1,191 | |||
Current portion of long-term debt | 160 | 518 | |||||
Total current liabilities | 1,133 | 1,709 | |||||
Long-term debt | 3,571 | 3,224 | |||||
Other liabilities | 680 | 594 | |||||
Redeemable noncontrolling interest | 69 | — | |||||
Stockholders' equity: | |||||||
Quest Diagnostics stockholders' equity: | |||||||
Common stock, par value $0.01 per share; 600 shares authorized at both September 30, 2015 and December 31, 2014; 216 shares and 215 shares issued at September 30, 2015 and December 31, 2014, respectively | 2 | 2 | |||||
Additional paid-in capital | 2,469 | 2,418 | |||||
Retained earnings | 6,066 | 5,723 | |||||
Accumulated other comprehensive loss | (31 | ) | (27 | ) | |||
Treasury stock, at cost; 72 shares and 71 shares at September 30, 2015 and December 31, 2014, respectively | (3,917 | ) | (3,815 | ) | |||
Total Quest Diagnostics stockholders' equity | 4,589 | 4,301 | |||||
Noncontrolling interests | 32 | 29 | |||||
Total stockholders' equity | 4,621 | 4,330 | |||||
Total liabilities and stockholders' equity | $ | 10,074 | $ | 9,857 |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 553 | $ | 392 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 230 | 235 | |||||
Provision for doubtful accounts | 232 | 224 | |||||
Deferred income tax provision (benefit) | 138 | (21 | ) | ||||
Stock-based compensation expense | 39 | 38 | |||||
Excess tax benefits from stock-based compensation arrangements | (4 | ) | — | ||||
Gain on contribution of business to joint venture | (334 | ) | — | ||||
Other, net | (4 | ) | (5 | ) | |||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (214 | ) | (260 | ) | |||
Accounts payable and accrued expenses | (41 | ) | 20 | ||||
Income taxes payable | (15 | ) | 22 | ||||
Other assets and liabilities, net | (41 | ) | (10 | ) | |||
Net cash provided by operating activities | 539 | 635 | |||||
Cash flows from investing activities: | |||||||
Business acquisitions, net of cash acquired | (41 | ) | (725 | ) | |||
Capital expenditures | (169 | ) | (219 | ) | |||
Investment in equity method investee | (37 | ) | — | ||||
Decrease in investments and other assets | 10 | 10 | |||||
Net cash used in investing activities | (237 | ) | (934 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from borrowings | 2,214 | 1,953 | |||||
Repayments of debt | (2,235 | ) | (1,466 | ) | |||
Purchases of treasury stock | (174 | ) | (82 | ) | |||
Exercise of stock options | 58 | 55 | |||||
Excess tax benefits from stock-based compensation arrangements | 4 | — | |||||
Dividends paid | (158 | ) | (139 | ) | |||
Distributions to noncontrolling interests | (28 | ) | (23 | ) | |||
Sale of noncontrolling interest in subsidiary | 51 | — | |||||
Payment of deferred business acquisition consideration | (51 | ) | — | ||||
Other financing activities, net | (52 | ) | (16 | ) | |||
Net cash (used in) provided by financing activities | (371 | ) | 282 | ||||
Net change in cash and cash equivalents | (69 | ) | (17 | ) | |||
Cash and cash equivalents, beginning of period | 192 | 187 | |||||
Cash and cash equivalents, end of period | $ | 123 | $ | 170 | |||
Cash paid during the period for: | |||||||
Interest | $ | 151 | $ | 133 | |||
Income taxes | $ | 249 | $ | 236 |
1) | The computation of basic and diluted earnings per common share is as follows: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(in millions, except per share data) | |||||||||||||||
Amounts attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
Net income attributable to Quest Diagnostics | $ | 342 | $ | 129 | $ | 521 | $ | 366 | |||||||
Less: earnings allocated to participating securities | 2 | 1 | 3 | 2 | |||||||||||
Earnings available to Quest Diagnostics' common stockholders - basic and diluted | $ | 340 | $ | 128 | $ | 518 | $ | 364 | |||||||
Weighted average common shares outstanding - basic | 144 | 145 | 144 | 144 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Stock options and performance share units | 1 | — | 1 | 1 | |||||||||||
Weighted average common shares outstanding - diluted | 145 | 145 | 145 | 145 | |||||||||||
Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
Basic | $ | 2.37 | $ | 0.89 | $ | 3.61 | $ | 2.52 | |||||||
Diluted | $ | 2.35 | $ | 0.88 | $ | 3.58 | $ | 2.51 |
2) | Adjusted amounts for operating income, operating income as a percentage of net revenues and net income attributable to Quest Diagnostics represent the company's results before the impact of special items, such as the gain on contribution of business to clinical trials joint venture, charges on retirement of debt and related refinancing charges, restructuring and integration charges, charges in equity in earnings of equity method investeees and other items. Adjusted diluted EPS excluding amortization expense represents the company's results before the impact of special items and amortization expense. Revenue on an equivalent basis represents 2014 net revenues excluding clinical trials testing revenues in the third quarter of 2014. Adjusted cash provided by operations represents cash provided by operations before the cash impact of charges on retirement of debt. Adjusted measures are presented because management believes those measures are useful adjuncts to reported results under accounting principles generally accepted in the United States 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 reconciles reported results to adjusted results: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(dollars in millions, except per share data) | |||||||||||||||
Adjusted operating income: | |||||||||||||||
Operating income | $ | 631 | $ | 256 | $ | 1,160 | $ | 726 | |||||||
Gain on contribution of business to clinical trials joint venture (a) | (334 | ) | — | (334 | ) | — | |||||||||
Restructuring and integration charges (b) | 29 | 40 | 83 | 91 | |||||||||||
Other (c) | (1 | ) | 8 | 6 | 19 | ||||||||||
Adjusted operating income | $ | 325 | $ | 304 | $ | 915 | $ | 836 | |||||||
Adjusted operating income as a percentage of net revenues: | |||||||||||||||
Operating income as a percentage of net revenues | 33.6 | % | 13.4 | % | 20.5 | % | 13.1 | % | |||||||
Gain on contribution of business to clinical trials joint venture (a) | (17.8 | ) | — | (5.9 | ) | — | |||||||||
Restructuring and integration charges (b) | 1.5 | 2.1 | 1.5 | 1.6 | |||||||||||
Other (c) | — | 0.5 | 0.1 | 0.4 | |||||||||||
Adjusted operating income as a percentage of net revenues | 17.3 | % | 16.0 | % | 16.2 | % | 15.1 | % | |||||||
Adjusted net income: | |||||||||||||||
Net income attributable to Quest Diagnostics | $ | 342 | $ | 129 | $ | 521 | $ | 366 | |||||||
Gain on contribution of business to clinical trials joint venture (a) (e) | (189 | ) | — | (189 | ) | — | |||||||||
Charges on retirement of debt and related refinancing charges (d) (e) | (2 | ) | — | 92 | — | ||||||||||
Restructuring and integration charges (b) (e) | 18 | 25 | 51 | 59 | |||||||||||
Charges in equity in earnings of equity method investees (f) | 3 | — | 3 | — | |||||||||||
Other (c) (e) | — | 7 | 5 | 15 | |||||||||||
Adjusted net income | $ | 172 | $ | 161 | $ | 483 | $ | 440 | |||||||
Adjusted diluted EPS excluding amortization expense: | |||||||||||||||
Diluted earnings per common share | $ | 2.35 | $ | 0.88 | $ | 3.58 | $ | 2.51 | |||||||
Gain on contribution of business to clinical trials joint venture (a) (e) | (1.30 | ) | — | (1.30 | ) | — | |||||||||
Charges on retirement of debt and related refinancing charges (d) (e) | (0.01 | ) | — | 0.63 | — | ||||||||||
Restructuring and integration charges (b) (e) | 0.12 | 0.17 | 0.35 | 0.41 | |||||||||||
Charges in equity in earnings of equity method investees (f) | 0.02 | — | 0.02 | — | |||||||||||
Other (c) (e) | — | 0.05 | 0.03 | 0.10 | |||||||||||
Amortization expense (g) | 0.10 | 0.10 | 0.27 | 0.30 | |||||||||||
Adjusted diluted EPS excluding amortization expense | $ | 1.28 | $ | 1.20 | $ | 3.58 | $ | 3.32 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(dollars in millions) | |||||||||||||||
Revenue on an equivalent basis: | |||||||||||||||
Net revenues | $ | 1,880 | $ | 1,904 | $ | 5,644 | $ | 5,552 | |||||||
Clinical trials revenue (h) | — | (41 | ) | — | (41 | ) | |||||||||
Revenue on an equivalent basis | $ | 1,880 | $ | 1,863 | $ | 5,644 | $ | 5,511 | |||||||
Adjusted cash provided by operations: | |||||||||||||||
Cash provided by operations | $ | 212 | $ | 271 | $ | 539 | $ | 635 | |||||||
Cash charges on retirement of debt (i) | (24 | ) | — | 103 | — | ||||||||||
Adjusted cash provided by operations | $ | 188 | $ | 271 | $ | 642 | $ | 635 |
(a) | Represents the gain associated with the contribution of our clinical trial testing business to Q Squared Solutions, the clinical trials joint venture with Quintiles Transnational Holdings Inc. |
(b) | 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(dollars in millions) | |||||||||||||||
Cost of services | $ | 20 | $ | 14 | $ | 51 | $ | 37 | |||||||
Selling, general and administrative | 9 | 25 | 32 | 53 | |||||||||||
Other operating (income) expense, net | — | 1 | — | 1 | |||||||||||
$ | 29 | $ | 40 | $ | 83 | $ | 91 |
(c) | For the nine months ended September 30, 2015, primarily represents non-cash asset impairment charges primarily associated with our Celera Products business and costs incurred related to 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 acquisition. |
(d) | Charges on retirement of debt and related refinancing charges represent: charges associated with the March 2015 cash tender offer (the "Tender Offer") in which 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 (the "Redemption") in which 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(dollars in millions) | |||||||||||||||
Interest expense, net | $ | — | $ | — | $ | 6 | $ | — | |||||||
Other (expense) income, net | — | — | 144 | — | |||||||||||
$ | — | $ | — | $ | 150 | $ | — |
(e) | For the gain on contribution of business to clinical trials joint venture, the associated deferred tax liability was calculated using a combined tax rate of 43.3% and does not result in any significant current taxes payable. For the charges on retirement of debt and related refinancing charges, income tax benefits were calculated such that the combined tax rate for the full year will be 40%. For the restructuring and integration charges and other items, income tax impacts, where recorded, were calculated using combined tax rates of 38.9% and 38.2% for 2015 and 2014, respectively. |
(f) | Charges in equity in earnings of equity method investees of $5 million, pre-tax, primarily consist of restructuring and integration charges incurred by the clinical trials joint venture. |
(g) | 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 combined tax rates of 38.9% and 38.2% for 2015 and 2014, 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(dollars in millions) | |||||||||||||||
Amortization of intangible assets | $ | 20 | $ | 24 | $ | 61 | $ | 71 | |||||||
Equity in earnings of equity method investees, net of taxes | 4 | — | 4 | — | |||||||||||
$ | 24 | $ | 24 | $ | 65 | $ | 71 |
(h) | Effective July 1, 2015, the company’s clinical trials testing business was contributed to the clinical trials joint venture. Clinical trials revenue reported in the third quarter of 2014 is excluded to provide 2014 revenue on an equivalent basis. |
(i) | For the three months ended September 30, 2015, represents the estimated cash tax benefit realized on the retirement of debt in connection with the recent debt refinancing. For the nine months ended September 30, 2015, represents $146 million of pre-tax cash charges on retirement of debt in connection with our recent debt refinancing, net of the estimated cash tax benefit realized. |
3) | For the three and nine months ended September 30, 2015, the $334 million gain on contribution of business to joint venture represents the gain associated with the contribution of our clinical trial testing business to the clinical trials joint venture. |
4) | Other operating (income) expense, net includes miscellaneous income and expense items related to operating activities. For the nine months ended September 30, 2015, other operating (income) expense, net principally includes non-cash asset impairment charges primarily associated with our Celera Products business, substantially 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 acquisition. |
5) | Other (expense) 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 nine months ended September 30, 2015, other (expense) income, net includes $144 million of pre-tax charges on the retirement of debt associated with the Tender Offer and Redemption. |
6) | For the three months ended September 30, 2015, the company repurchased 0.3 million shares of its common stock at an average price of $69.24 per share for $25 million. For the nine months ended September 30, 2015, the company repurchased 2.4 million shares of its common stock at an average price of $71.27 per share for $174 million. At September 30, 2015, $522 million remained available under the company’s share repurchase authorizations. |
7) | The outlook for adjusted diluted EPS excluding amortization expense represents management’s estimates for the full year 2015 before the impact of special items and amortization expense. The outlook for adjusted cash provided by operations represents management’s estimate for the full year 2015 before the cash impact of charges on retirement of debt. These measures are presented because management believes they are useful adjuncts to the corresponding amounts determined under accounting principles generally accepted in the United States since they are meaningful to evaluate the company’s ongoing operating performance. Adjusted diluted EPS excluding amortization expense and adjusted cash provided by operations are not measures of financial performance under accounting principles generally accepted in the United States and should not be considered as alternatives to the corresponding amount determined under accounting principles generally accepted in the United States. |
Low | High | ||||||
Adjusted diluted EPS excluding amortization expense: | |||||||
Diluted earnings per common share | $ | 4.65 | $ | 4.70 | |||
Gain on contribution of business to clinical trials joint venture (a) | (1.30 | ) | (1.30 | ) | |||
Charges on retirement of debt and related refinancing charges (b) | 0.63 | 0.63 | |||||
Restructuring and integration charges (c) | 0.35 | 0.35 | |||||
Charges in equity in earnings of equity method investees (d) | 0.02 | 0.02 | |||||
Other (e) | 0.03 | 0.03 | |||||
Amortization expense, net of tax (f) | 0.37 | 0.37 | |||||
Adjusted diluted EPS excluding amortization expense | $ | 4.75 | $ | 4.80 | |||
Adjusted cash provided by operations (dollars in millions): | |||||||
Cash provided by operations | $ | 747 | |||||
Cash charges on retirement of debt (g) | 103 | ||||||
Adjusted cash provided by operations | $ | 850 |
(a) | Represents the pre-tax gain of $334 million recorded in the third quarter of 2015 associated with the contribution of our clinical trial testing business to the clinical trials joint venture. |
(b) | Represents pre-tax charges of $150 million, incurred through September 30, 2015, associated with the retirement of debt and related refinancing charges in connection with the Tender Offer and Redemption. |
(c) | Represents pre-tax charges of $83 million primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business through September 30, 2015. Further charges to earnings may be incurred as additional restructuring and integration activities are executed throughout the remainder of the year. |
(d) | Represents pre-tax charges of $5 million primarily associated with restructuring and integration charges incurred by the clinical trials joint venture through September 30, 2015. |
(e) | Principally represents pre-tax charges of $20 million associated with non-cash impairment charges primarily associated with our Celera Products business and costs incurred related to 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 acquisition through September 30, 2015. |
(f) | Represents the full year impact of amortization expense 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 | $ | 80 | ||
Amortization expense included in equity in earnings of equity method investees | 9 | |||
Total pre-tax amortization expense | $ | 89 | ||
Total amortization expense, net of an estimated tax benefit | $ | 55 |
(g) | Represents pre-tax cash charges of $146 million on retirement of debt in connection with our recent debt refinancing, net of the estimated cash tax benefit realized through September 30, 2015. |