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 April 20, 2017, announcing, among other things, its results for the quarter ended March 31, 2017. |
QUEST DIAGNOSTICS INCORPORATED | |
By: | /s/ William J.O'Shaughnessy, Jr. |
William J. O'Shaughnessy, Jr. | |
Deputy General Counsel and | |
Corporate Secretary |
• | First quarter revenues of $1.90 billion, up 1.9% on a reported basis and up 3.0% on an equivalent basis versus 2016 |
• | First quarter diluted EPS of $1.16 on a reported basis, up 63.4% from 2016; and $1.33 on an adjusted basis excluding amortization, up 17.7% from 2016. Excess tax benefit associated with stock-based compensation increased diluted earnings per share by $0.11 in the quarter. |
• | Raises outlook for full year 2017 diluted EPS. Reported diluted EPS now expected to be between $4.73 and $4.88; and adjusted diluted EPS excluding amortization expense now expected to be between $5.45 and $5.60 |
Three Months Ended March 31, | ||||||||||
2017 | 2016 | Change | ||||||||
(dollars in millions, except per share data) | ||||||||||
Reported: | ||||||||||
Net revenues (a) (b) | $ | 1,899 | $ | 1,863 | 1.9 | % | ||||
Diagnostic Information Services revenues | $ | 1,812 | $ | 1,756 | 3.2 | % | ||||
Revenue per requisition | (0.2 | )% | ||||||||
Requisition volume | 3.5 | % | ||||||||
Operating income (a) (b) | $ | 279 | $ | 257 | 8.7 | % | ||||
Operating income as a percentage of net revenues (b) | 14.7 | % | 13.8 | % | 90 bps | |||||
Net income attributable to Quest Diagnostics (b) (c) | $ | 164 | $ | 103 | 58.8 | % | ||||
Diluted EPS (b) (c) | $ | 1.16 | $ | 0.71 | 63.4 | % | ||||
Cash provided by operations (d) | $ | 196 | $ | 153 | 28.2 | % | ||||
Capital expenditures | $ | 42 | $ | 47 | (11.6 | )% | ||||
Adjusted: | ||||||||||
Revenues on an equivalent basis | $ | 1,899 | $ | 1,845 | 3.0 | % | ||||
Operating income (a) | $ | 297 | $ | 281 | 5.7 | % | ||||
Operating income as a percentage of net revenues | 15.6 | % | 15.1 | % | 50 bps | |||||
Net income attributable to Quest Diagnostics (c) | $ | 175 | $ | 148 | 17.7 | % | ||||
Diluted EPS excluding amortization (c) | $ | 1.33 | $ | 1.13 | 17.7 | % |
(a) | For the three months ended March 31, 2016, net revenues and operating income include $18 million and $8 million, respectively, related to the Focus Diagnostics products business, which was sold on May 13, 2016. |
(b) | For further details impacting the year-over-year comparisons related to net revenues, operating income, operating income as a percentage of net revenues, net income attributable to Quest Diagnostics, and diluted EPS, see note 2 of the financial tables attached below. |
(c) | Excess tax benefit associated with stock-based compensation arrangements impacted income tax expense and diluted EPS as follows: |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(dollars in millions, except per share data) | |||||||
Income tax benefit | $ | 16 | $ | 2 | |||
Diluted EPS | $ | 0.11 | $ | 0.01 |
(d) | For details impacting the year-over-year comparisons related to cash provided by operations, see note 4 of the financial tables attached below. |
Current Outlook | Previous Outlook | ||||||
Low | High | Low | High | ||||
Revenues | $7.64 billion | $7.72 billion | $7.64 billion | $7.72 billion | |||
Revenue increase on a reported basis | 1.7% | 2.7% | 1.7% | 2.7% | |||
Revenue increase on an equivalent basis (e) | 2% | 3% | 2% | 3% | |||
Reported diluted EPS | $4.73 | $4.88 | $4.65 | $4.80 | |||
Adjusted diluted EPS excluding amortization | $5.45 | $5.60 | $5.37 | $5.52 | |||
Cash provided by operations | Approximately $1.1 billion | Approximately $1.1 billion | |||||
Capital expenditures | $250 million | $300 million | $250 million | $300 million |
(e) | Reported revenues for full year 2016 were $7.52 billion. 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. |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Net revenues | $ | 1,899 | $ | 1,863 | |||
Operating costs and expenses and other operating income: | |||||||
Cost of services | 1,165 | 1,144 | |||||
Selling, general and administrative | 437 | 442 | |||||
Amortization of intangible assets | 17 | 19 | |||||
Other operating expense, net | 1 | 1 | |||||
Total operating costs and expenses, net | 1,620 | 1,606 | |||||
Operating income | 279 | 257 | |||||
Other income (expense): | |||||||
Interest expense, net | (36 | ) | (36 | ) | |||
Other income (expense), net | 3 | (49 | ) | ||||
Total non-operating expenses, net | (33 | ) | (85 | ) | |||
Income before income taxes and equity in earnings of equity method investees | 246 | 172 | |||||
Income tax expense | (78 | ) | (67 | ) | |||
Equity in earnings of equity method investees, net of taxes | 7 | 10 | |||||
Net income | 175 | 115 | |||||
Less: Net income attributable to noncontrolling interests | 11 | 12 | |||||
Net income attributable to Quest Diagnostics | $ | 164 | $ | 103 | |||
Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||
Basic | $ | 1.19 | $ | 0.72 | |||
Diluted | $ | 1.16 | $ | 0.71 | |||
Weighted average common shares outstanding: | |||||||
Basic | 137 | 143 | |||||
Diluted | 141 | 144 | |||||
March 31, 2017 | December 31, 2016 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 367 | $ | 359 | |||
Accounts receivable, net | 960 | 926 | |||||
Inventories | 77 | 82 | |||||
Prepaid expenses and other current assets | 154 | 164 | |||||
Total current assets | 1,558 | 1,531 | |||||
Property, plant and equipment, net | 1,027 | 1,029 | |||||
Goodwill | 6,001 | 6,000 | |||||
Intangible assets, net | 933 | 949 | |||||
Investment in equity method investees | 443 | 443 | |||||
Other assets | 147 | 148 | |||||
Total assets | $ | 10,109 | $ | 10,100 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 979 | $ | 975 | |||
Current portion of long-term debt | 6 | 6 | |||||
Total current liabilities | 985 | 981 | |||||
Long-term debt | 3,725 | 3,728 | |||||
Other liabilities | 658 | 654 | |||||
Redeemable noncontrolling interest | 78 | 77 | |||||
Stockholders' equity: | |||||||
Quest Diagnostics stockholders' equity: | |||||||
Common stock, par value $0.01 per share; 600 shares authorized as of both March 31, 2017 and December 31, 2016; 216 shares issued as of both March 31, 2017 and December 31, 2016 | 2 | 2 | |||||
Additional paid-in capital | 2,542 | 2,545 | |||||
Retained earnings | 6,715 | 6,613 | |||||
Accumulated other comprehensive loss | (68 | ) | (72 | ) | |||
Treasury stock, at cost; 79 shares as of both March 31, 2017 and December 31, 2016 | (4,561 | ) | (4,460 | ) | |||
Total Quest Diagnostics stockholders' equity | 4,630 | 4,628 | |||||
Noncontrolling interests | 33 | 32 | |||||
Total stockholders' equity | 4,663 | 4,660 | |||||
Total liabilities and stockholders' equity | $ | 10,109 | $ | 10,100 |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 175 | $ | 115 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 62 | 62 | |||||
Provision for doubtful accounts | 84 | 86 | |||||
Deferred income tax provision | 11 | 8 | |||||
Stock-based compensation expense | 17 | 18 | |||||
Other, net | 1 | 1 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (117 | ) | (145 | ) | |||
Accounts payable and accrued expenses | (95 | ) | (69 | ) | |||
Income taxes payable | 63 | 62 | |||||
Other assets and liabilities, net | (5 | ) | 15 | ||||
Net cash provided by operating activities | 196 | 153 | |||||
Cash flows from investing activities: | |||||||
Business acquisitions, net of cash acquired | (1 | ) | (135 | ) | |||
Escrow proceeds associated with disposition of business | 25 | — | |||||
Capital expenditures | (42 | ) | (47 | ) | |||
Increase in investments and other assets | (4 | ) | (8 | ) | |||
Net cash used in investing activities | (22 | ) | (190 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from borrowings | — | 665 | |||||
Repayments of debt | (2 | ) | (453 | ) | |||
Purchases of treasury stock | (150 | ) | (115 | ) | |||
Exercise of stock options | 46 | 7 | |||||
Employee payroll tax withholdings on stock issued under stock-based compensation plans | (22 | ) | (8 | ) | |||
Dividends paid | (62 | ) | (55 | ) | |||
Distributions to noncontrolling interests | (9 | ) | (9 | ) | |||
Other financing activities, net | 33 | — | |||||
Net cash (used in) provided by financing activities | (166 | ) | 32 | ||||
Net change in cash and cash equivalents | 8 | (5 | ) | ||||
Cash and cash equivalents, beginning of period | 359 | 133 | |||||
Cash and cash equivalents, end of period | $ | 367 | $ | 128 | |||
Cash paid during the period for: | |||||||
Interest | $ | 46 | $ | 53 | |||
Income taxes | $ | 8 | $ | 4 |
1) | The computation of basic and diluted earnings per common share is as follows: |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(in millions, except per share data) | |||||||
Amounts attributable to Quest Diagnostics' common stockholders: | |||||||
Net income attributable to Quest Diagnostics | $ | 164 | $ | 103 | |||
Less: earnings allocated to participating securities | 1 | — | |||||
Earnings available to Quest Diagnostics' common stockholders - basic and diluted | $ | 163 | $ | 103 | |||
Weighted average common shares outstanding - basic | 137 | 143 | |||||
Effect of dilutive securities: | |||||||
Stock options and performance share units | 4 | 1 | |||||
Weighted average common shares outstanding - diluted | 141 | 144 | |||||
Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||
Basic | $ | 1.19 | $ | 0.72 | |||
Diluted | $ | 1.16 | $ | 0.71 |
2) | The following tables reconcile reported GAAP results to non-GAAP adjusted results: |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(dollars in millions, except per share data) | |||||||
Adjusted operating income: | |||||||
Operating income | $ | 279 | $ | 257 | |||
Restructuring and integration charges (a) | 18 | 19 | |||||
Other (b) | — | 5 | |||||
Adjusted operating income | $ | 297 | $ | 281 | |||
Adjusted operating income as a percentage of net revenues: | |||||||
Operating income as a percentage of net revenues | 14.7 | % | 13.8 | % | |||
Restructuring and integration charges (a) | 0.9 | 1.0 | |||||
Other (b) | — | 0.3 | |||||
Adjusted operating income as a percentage of net revenues | 15.6 | % | 15.1 | % | |||
Adjusted net income: | |||||||
Net income attributable to Quest Diagnostics | $ | 164 | $ | 103 | |||
Retirement of debt and related refinancing charges (c) | — | 48 | |||||
Restructuring and integration charges (a) | 18 | 21 | |||||
Other (b) | — | 6 | |||||
Income tax expense (benefit) associated with the special items above (d) | (7 | ) | (30 | ) | |||
Adjusted net income | $ | 175 | $ | 148 | |||
Adjusted diluted EPS excluding amortization expense: | |||||||
Diluted earnings per common share | $ | 1.16 | $ | 0.71 | |||
Retirement of debt and related refinancing charges (c) (d) | — | 0.21 | |||||
Restructuring and integration charges (a) (d) | 0.08 | 0.09 | |||||
Other (b) (d) | — | 0.02 | |||||
Amortization expense (e) | 0.09 | 0.10 | |||||
Adjusted diluted EPS excluding amortization expense | $ | 1.33 | $ | 1.13 |
Revenue on an equivalent basis: | |||||||
Net revenues | $ | 1,899 | $ | 1,863 | |||
Excluded revenue (f) | — | (18 | ) | ||||
Revenue on an equivalent basis | $ | 1,899 | $ | 1,845 |
(a) | For the three months ended March 31, 2017 and 2016, represents costs primarily associated with 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 March 31, | |||||||
2017 | 2016 | ||||||
(dollars in millions) | |||||||
Cost of services | $ | 10 | $ | 7 | |||
Selling, general and administrative | 8 | 12 | |||||
Operating income | $ | 18 | $ | 19 | |||
Equity in earnings of equity method investees, net of taxes | $ | — | $ | 2 |
(b) | For the three months ended March 31, 2016, primarily represents costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters. The following table summarizes the pre-tax impact of these other items on the company's consolidated statements of operations: |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(dollars in millions) | |||||||
Selling, general and administrative | $ | — | $ | 3 | |||
Other operating expense, net | — | 2 | |||||
Operating income | $ | — | $ | 5 | |||
Other non-operating expense, net | $ | — | $ | 1 |
(c) | For the three months ended March 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. The following table summarizes the pre-tax impact of retirement of debt and related refinancing charges on the company's consolidated statements of operations: |
Three Months Ended March 31, | |||||
2017 | 2016 | ||||
(dollars in millions) | |||||
Other non-operating expense, net | — | 48 |
(d) | For the retirement of debt and related refinancing charges, income tax benefits were calculated using a combined tax rate of 38.9%. 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 2017 and 2016, respectively. The following table summarizes the income tax expense (benefit) associated with the special items: |
Three Months Ended March 31, | |||||||
2017 | 2016 | ||||||
(dollars in millions) | |||||||
Retirement of debt and related refinancing charges | $ | — | $ | (18 | ) | ||
Restructuring and integration charges | (7 | ) | (9 | ) | |||
Other | — | (3 | ) | ||||
$ | (7 | ) | $ | (30 | ) |
(e) | 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 rates of 38.7% and 38.9% for 2017 and 2016, 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 March 31, | |||||||
2017 | 2016 | ||||||
(dollars in millions) | |||||||
Amortization of intangible assets | $ | 17 | $ | 19 | |||
Equity in earnings of equity method investees, net of taxes | 4 | 4 | |||||
$ | 21 | $ | 23 |
(f) | For the three months ended March 31, 2016, excluded revenue represents reported revenues from the Focus Diagnostics products business, which was sold on May 13, 2016. |
3) | For the three months ended March 31, 2017, the company repurchased 1.6 million shares of its common stock for $150 million. At March 31, 2017, $1.2 billion remained available under the company’s share repurchase authorizations. |
4) | For the three months ended March 31, 2016, net cash provided by operations included $47 million of pre-tax cash charges related to the retirement of debt in connection with the March 2016 cash tender offer. |
5) | 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 the remainder of the year. The following table reconciles our 2017 outlook for adjusted diluted EPS excluding amortization expense to the corresponding amounts determined under GAAP: |
Low | High | ||||||
Adjusted diluted EPS excluding amortization expense: | |||||||
Diluted earnings per common share | $ | 4.73 | $ | 4.88 | |||
Restructuring and integration charges (a) | 0.35 | 0.35 | |||||
Amortization expense (b) | 0.37 | 0.37 | |||||
Adjusted diluted EPS excluding amortization expense | $ | 5.45 | $ | 5.60 |
(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 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 | $ | 69 | |
Amortization expense included in equity in earnings of equity method investees | 16 | ||
Total pre-tax amortization expense | $ | 85 | |
Total amortization expense, net of an estimated tax benefit | $ | 53 |
6) | 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. |