001-12215 | 16-1387862 | |
(Commission File Number) | (I.R.S. Employer Identification No.) | |
500 Plaza Drive Secaucus, NJ | 07094 | |
(Address of principal executive offices) | (Zip Code) | |
(973) 520-2700 | ||
(Registrant's telephone number, including area code) |
QUEST DIAGNOSTICS INCORPORATED | |
By: | /s/ William J. O'Shaughnessy, Jr. |
William J. O'Shaughnessy, Jr. | |
Deputy General Counsel and | |
Corporate Secretary |
• | Third quarter revenues of $1.89 billion, up 1.8% from 2017 |
• | Third quarter reported diluted EPS of $1.53, up 32.7% from 2017 |
• | Third quarter adjusted diluted EPS excluding amortization of $1.68, up 25.4% from 2017 |
• | Updates outlook for full-year 2018. Reported revenues now expected to be approximately $7.62 billion. Reported diluted EPS now expected to be between $5.57 and $5.64 and adjusted diluted EPS excluding amortization expense now expected to be between $6.53 and $6.60. |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||
2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||
(dollars in millions, except per share data) | |||||||||||||||||||||
Reported: | |||||||||||||||||||||
Net revenues (a) | $ | 1,889 | $ | 1,856 | 1.8 | % | $ | 5,692 | $ | 5,537 | 2.8 | % | |||||||||
Diagnostic Information Services revenues (a) | $ | 1,810 | $ | 1,777 | 1.9 | % | $ | 5,448 | $ | 5,283 | 3.1 | % | |||||||||
Revenue per requisition | (0.8 | )% | 0.3 | % | |||||||||||||||||
Requisition volume | 2.0 | % | 2.3 | % | |||||||||||||||||
Operating income (a) (b) | $ | 304 | $ | 298 | 1.8 | % | $ | 881 | $ | 896 | (1.7 | )% | |||||||||
Operating income as a percentage of net revenues (a) (b) | 16.1 | % | 16.1 | % | 0 bps | 15.5 | % | 16.2 | % | (70) bps | |||||||||||
Net income attributable to Quest Diagnostics (b) | $ | 213 | $ | 161 | 32.1 | % | $ | 609 | $ | 518 | 17.5 | % | |||||||||
Diluted EPS (b) | $ | 1.53 | $ | 1.15 | 32.7 | % | $ | 4.37 | $ | 3.68 | 18.8 | % | |||||||||
Cash provided by operations | $ | 402 | $ | 362 | 10.8 | % | $ | 905 | $ | 852 | 6.1 | % | |||||||||
Capital expenditures | $ | 81 | $ | 63 | 29.1 | % | $ | 232 | $ | 170 | 36.6 | % | |||||||||
Adjusted: | |||||||||||||||||||||
Operating income (a) | $ | 311 | $ | 325 | (4.2 | )% | $ | 954 | $ | 965 | (1.1 | )% | |||||||||
Operating income as a percentage of net revenues (a) | 16.5 | % | 17.5 | % | (100) bps | 16.8 | % | 17.4 | % | (60) bps | |||||||||||
Net income attributable to Quest Diagnostics | $ | 215 | $ | 174 | 23.6 | % | $ | 632 | $ | 524 | 20.5 | % | |||||||||
Diluted EPS excluding amortization | $ | 1.68 | $ | 1.35 | 25.4 | % | $ | 4.95 | $ | 4.02 | 23.4 | % |
(a) | Net revenues and selling, general and administrative expenses for the three and nine months ended September 30, 2017 have been restated to reflect the impact of new revenue recognition rules that became effective January 1, 2018 and were adopted on a retrospective basis. Under the new rules, the Company reports uncollectible balances associated with patient responsibility as a reduction in net revenues; historically these amounts were classified as bad debt expense within selling, general and administrative expenses. |
(b) | For further 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 EPS, see note 2 of the financial tables attached below. |
Current Outlook | Previous Outlook | ||||||
Low | High | Low | High | ||||
Revenues (a) | Approximately $7.62 billion | $7.70 billion | $7.74 billion | ||||
Revenue increase (a) | Approximately 3% | 4% | 4.5% | ||||
Reported diluted EPS | $5.57 | $5.64 | $5.50 | $5.64 | |||
Adjusted diluted EPS excluding amortization | $6.53 | $6.60 | $6.53 | $6.67 | |||
Cash provided by operations | Approximately $1.3 billion | Approximately $1.3 billion | |||||
Capital expenditures | $350 million | $400 million | $350 million | $400 million |
(a) | The updated outlook for revenue growth in 2018 represents management’s estimates for 2018 versus 2017 reported revenues adjusted to reflect the impact of new revenue recognition rules that became effective January 1, 2018. full-year 2017 revenues adjusted to reflect the new rules were $7,402 million. See note 5 of the financial tables attached below. |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net revenues | $ | 1,889 | $ | 1,856 | $ | 5,692 | $ | 5,537 | |||||||
Operating costs and expenses and other operating income: | |||||||||||||||
Cost of services | 1,222 | 1,190 | 3,691 | 3,525 | |||||||||||
Selling, general and administrative | 354 | 348 | 1,068 | 1,061 | |||||||||||
Amortization of intangible assets | 22 | 19 | 66 | 54 | |||||||||||
Other operating (income) expense, net | (13 | ) | 1 | (14 | ) | 1 | |||||||||
Total operating costs and expenses, net | 1,585 | 1,558 | 4,811 | 4,641 | |||||||||||
Operating income | 304 | 298 | 881 | 896 | |||||||||||
Other income (expense): | |||||||||||||||
Interest expense, net | (41 | ) | (38 | ) | (124 | ) | (112 | ) | |||||||
Other income (expense), net | 3 | (2 | ) | 2 | 12 | ||||||||||
Total non-operating expenses, net | (38 | ) | (40 | ) | (122 | ) | (100 | ) | |||||||
Income before income taxes and equity in earnings of equity method investees | 266 | 258 | 759 | 796 | |||||||||||
Income tax expense | (48 | ) | (92 | ) | (142 | ) | (264 | ) | |||||||
Equity in earnings of equity method investees, net of taxes | 9 | 9 | 32 | 25 | |||||||||||
Net income | 227 | 175 | 649 | 557 | |||||||||||
Less: Net income attributable to noncontrolling interests | 14 | 14 | 40 | 39 | |||||||||||
Net income attributable to Quest Diagnostics | $ | 213 | $ | 161 | $ | 609 | $ | 518 | |||||||
Earnings per share attributable to Quest Diagnostics’ common stockholders: | |||||||||||||||
Basic | $ | 1.56 | $ | 1.18 | $ | 4.46 | $ | 3.77 | |||||||
Diluted | $ | 1.53 | $ | 1.15 | $ | 4.37 | $ | 3.68 | |||||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 136 | 137 | 136 | 137 | |||||||||||
Diluted | 139 | 140 | 139 | 140 | |||||||||||
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 263 | $ | 137 | |||
Accounts receivable, net | 1,097 | 924 | |||||
Inventories | 95 | 95 | |||||
Prepaid expenses and other current assets | 148 | 150 | |||||
Total current assets | 1,603 | 1,306 | |||||
Property, plant and equipment, net | 1,194 | 1,145 | |||||
Goodwill | 6,447 | 6,335 | |||||
Intangible assets, net | 1,168 | 1,119 | |||||
Investment in equity method investees | 456 | 462 | |||||
Other assets | 118 | 136 | |||||
Total assets | $ | 10,986 | $ | 10,503 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 1,085 | $ | 1,021 | |||
Current portion of long-term debt | 304 | 36 | |||||
Total current liabilities | 1,389 | 1,057 | |||||
Long-term debt | 3,394 | 3,748 | |||||
Other liabilities | 761 | 663 | |||||
Redeemable noncontrolling interest | 77 | 80 | |||||
Stockholders’ equity: | |||||||
Quest Diagnostics stockholders’ equity: | |||||||
Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2018 and December 31, 2017; 217 and 216 shares issued as of September 30, 2018 and December 31, 2017, respectively | 2 | 2 | |||||
Additional paid-in capital | 2,656 | 2,612 | |||||
Retained earnings | 7,546 | 7,138 | |||||
Accumulated other comprehensive loss | (58 | ) | (48 | ) | |||
Treasury stock, at cost; 81 shares as of both September 30, 2018 and December 31, 2017 | (4,829 | ) | (4,783 | ) | |||
Total Quest Diagnostics stockholders’ equity | 5,317 | 4,921 | |||||
Noncontrolling interests | 48 | 34 | |||||
Total stockholders’ equity | 5,365 | 4,955 | |||||
Total liabilities and stockholders’ equity | $ | 10,986 | $ | 10,503 |
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 649 | $ | 557 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 228 | 197 | |||||
Provision for doubtful accounts | 2 | 5 | |||||
Deferred income tax provision | 52 | 90 | |||||
Stock-based compensation expense | 53 | 54 | |||||
Other, net | 7 | (5 | ) | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (166 | ) | (29 | ) | |||
Accounts payable and accrued expenses | 51 | (3 | ) | ||||
Income taxes payable | (1 | ) | — | ||||
Other assets and liabilities, net | 30 | (14 | ) | ||||
Net cash provided by operating activities | 905 | 852 | |||||
Cash flows from investing activities: | |||||||
Business acquisitions, net of cash acquired | (219 | ) | (299 | ) | |||
Capital expenditures | (232 | ) | (170 | ) | |||
(Increase) decrease in investments and other assets | (4 | ) | 5 | ||||
Net cash used in investing activities | (455 | ) | (464 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from borrowings | 1,630 | — | |||||
Repayments of debt | (1,665 | ) | (5 | ) | |||
Purchases of treasury stock | (150 | ) | (350 | ) | |||
Exercise of stock options | 95 | 125 | |||||
Employee payroll tax withholdings on stock issued under stock-based compensation plans | (20 | ) | (23 | ) | |||
Dividends paid | (198 | ) | (186 | ) | |||
Distributions to noncontrolling interests | (41 | ) | (38 | ) | |||
Sale of noncontrolling interest in subsidiaries | 12 | — | |||||
Other financing activities, net | 13 | 55 | |||||
Net cash used in financing activities | (324 | ) | (422 | ) | |||
Net change in cash and cash equivalents and restricted cash | 126 | (34 | ) | ||||
Cash and cash equivalents and restricted cash, beginning of period | 137 | 384 | |||||
Cash and cash equivalents and restricted cash, end of period | $ | 263 | $ | 350 | |||
Cash and cash equivalents | $ | 263 | $ | 350 | |||
Restricted cash | — | — | |||||
Cash and cash equivalents and restricted cash, end of period | $ | 263 | $ | 350 | |||
Cash paid during the period for: | |||||||
Interest | $ | 114 | $ | 104 | |||
Income taxes | $ | 70 | $ | 177 |
1) | The computation of basic and diluted earnings per common share is as follows: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(in millions, except per share data) | |||||||||||||||
Amounts attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
Net income attributable to Quest Diagnostics | $ | 213 | $ | 161 | $ | 609 | $ | 518 | |||||||
Less: earnings allocated to participating securities | 1 | 1 | 2 | 2 | |||||||||||
Earnings available to Quest Diagnostics' common stockholders - basic and diluted | $ | 212 | $ | 160 | $ | 607 | $ | 516 | |||||||
Weighted average common shares outstanding - basic | 136 | 137 | 136 | 137 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Stock options and performance share units | 3 | 3 | 3 | 3 | |||||||||||
Weighted average common shares outstanding - diluted | 139 | 140 | 139 | 140 | |||||||||||
Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
Basic | $ | 1.56 | $ | 1.18 | $ | 4.46 | $ | 3.77 | |||||||
Diluted | $ | 1.53 | $ | 1.15 | $ | 4.37 | $ | 3.68 |
2) | The following tables reconcile reported GAAP results to non-GAAP adjusted results: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions, except per share data) | |||||||||||||||
Adjusted operating income: | |||||||||||||||
Operating income | $ | 304 | $ | 298 | $ | 881 | $ | 896 | |||||||
Restructuring and integration charges (a) | 19 | 23 | 75 | 63 | |||||||||||
Other (b) | (12 | ) | 4 | (2 | ) | 6 | |||||||||
Adjusted operating income | $ | 311 | $ | 325 | $ | 954 | $ | 965 | |||||||
Adjusted operating income as a percentage of net revenues: | |||||||||||||||
Operating income as a percentage of net revenues | 16.1 | % | 16.1 | % | 15.5 | % | 16.2 | % | |||||||
Restructuring and integration charges (a) | 1.0 | 1.2 | 1.3 | 1.1 | |||||||||||
Other (b) | (0.6 | ) | 0.2 | — | 0.1 | ||||||||||
Adjusted operating income as a percentage of net revenues | 16.5 | % | 17.5 | % | 16.8 | % | 17.4 | % | |||||||
Adjusted net income: | |||||||||||||||
Net income attributable to Quest Diagnostics | $ | 213 | $ | 161 | $ | 609 | $ | 518 | |||||||
Restructuring and integration charges (a) | 19 | 23 | 75 | 64 | |||||||||||
Other (b) | (12 | ) | 9 | (2 | ) | 4 | |||||||||
Income tax benefit associated with special items (c) | (5 | ) | (19 | ) | (50 | ) | (62 | ) | |||||||
Adjusted net income | $ | 215 | $ | 174 | $ | 632 | $ | 524 | |||||||
Adjusted diluted EPS excluding amortization expense: | |||||||||||||||
Diluted earnings per common share | $ | 1.53 | $ | 1.15 | $ | 4.37 | $ | 3.68 | |||||||
Restructuring and integration charges (a) (c) | 0.10 | 0.10 | 0.40 | 0.28 | |||||||||||
Other (b) (c) | (0.06 | ) | 0.04 | (0.01 | ) | 0.02 | |||||||||
Amortization expense (d) | 0.13 | 0.10 | 0.41 | 0.29 | |||||||||||
ETB | (0.02 | ) | (0.04 | ) | (0.12 | ) | (0.25 | ) | |||||||
Certain income tax benefits (c) (e) | — | — | (0.10 | ) | — | ||||||||||
Adjusted diluted EPS excluding amortization expense | $ | 1.68 | $ | 1.35 | $ | 4.95 | $ | 4.02 |
(a) | For the three and nine months ended September 30, 2018, represents costs primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business. For the three and nine months ended September 30, 2017, 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions) | |||||||||||||||
Cost of services | $ | 10 | $ | 12 | $ | 36 | $ | 31 | |||||||
Selling, general and administrative | 9 | 11 | 38 | 32 | |||||||||||
Other operating (income) expense, net | — | — | 1 | — | |||||||||||
Operating income | $ | 19 | $ | 23 | $ | 75 | $ | 63 | |||||||
Equity in earnings of equity method investee, net of taxes | $ | — | $ | — | $ | — | $ | 1 |
(b) | For the three months ended September 30, 2018, primarily represents a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our Mobile Medical Examination Services, Inc. ("MedXM") acquisition partially offset by non-cash asset impairment changes. For the nine months ended September 30, 2018, primarily represents a gain associated with the decrease in the fair value of the contingent consideration accrual associated with our MedXM acquisition and an insurance claim for hurricane related losses partially offset by costs incurred related to certain legal matters and non-cash asset impairment changes. For the three months ended September 30, 2017, primarily represents non-cash asset impairment charges and incremental costs incurred as a result of the hurricanes. For the nine months ended September 30, 2017, primarily represents non-cash asset impairment charges, incremental costs incurred as a result of the hurricanes and costs incurred related to certain legal matters, partially offset by a gain on the sale of an interest in an equity method investment. The following table summarizes the pre-tax impact of these other items on the company's consolidated statements of operations: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions) | |||||||||||||||
Cost of sales | $ | 1 | $ | 3 | $ | 12 | $ | 3 | |||||||
Selling, general and administrative | — | 1 | — | 3 | |||||||||||
Other operating (income) expense, net | (13 | ) | — | (14 | ) | — | |||||||||
Operating income | $ | (12 | ) | $ | 4 | $ | (2 | ) | $ | 6 | |||||
Other non-operating income (expense), net | $ | — | $ | 5 | $ | — | $ | (2 | ) |
(c) | For restructuring and integration charges and other items, income tax impacts, where recorded, were primarily calculated using combined tax rates of 25.5% and 38.7% for 2018 and 2017, respectively. The following table summarizes the income tax expense (benefit) associated with special items: |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions) | |||||||||||||||
Restructuring and integration charges | $ | (5 | ) | $ | (9 | ) | $ | (19 | ) | $ | (25 | ) | |||
Other | 4 | (3 | ) | 1 | (1 | ) | |||||||||
ETB | (4 | ) | (7 | ) | (17 | ) | (36 | ) | |||||||
Certain income tax benefits (e) | — | — | (15 | ) | — | ||||||||||
$ | (5 | ) | $ | (19 | ) | $ | (50 | ) | $ | (62 | ) |
(d) | 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 25.5% and 38.7% for 2018 and 2017, 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, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(dollars in millions) | |||||||||||||||
Amortization of intangible assets | $ | 22 | $ | 19 | $ | 66 | $ | 54 | |||||||
Equity in earnings of equity method investees, net of taxes | 5 | 4 | 13 | 12 | |||||||||||
$ | 27 | $ | 23 | $ | 79 | $ | 66 |
(e) | Represents an income tax benefit associated with a change in a tax return accounting method that will enable 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) | For the three months ended September 30, 2018, the company repurchased 0.9 million shares of its common stock for $100 million. For the nine months ended September 30, 2018, the company repurchased 1.4 million shares of its common stock for $150 million. As of September 30, 2018, $0.8 billion remained available under the company’s share repurchase authorizations. |
4) | The outlook for adjusted diluted EPS excluding amortization expense represents management’s estimates for the full-year 2018 before the impact of special items, including ETB, and amortization expense. Further impacts to earnings related to special items may occur throughout the remainder of the year. 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 2018 outlook for adjusted diluted EPS excluding amortization expense to the corresponding amounts determined under GAAP: |
Low | High | ||||||
Diluted earnings per common share | $ | 5.57 | $ | 5.64 | |||
Restructuring and integration charges (a) | 0.62 | 0.62 | |||||
Amortization expense (b) | 0.58 | 0.58 | |||||
Other | (0.01 | ) | (0.01 | ) | |||
Certain income tax benefits | (0.10 | ) | (0.10 | ) | |||
ETB | (0.13 | ) | (0.13 | ) | |||
Adjusted diluted EPS excluding amortization expense | $ | 6.53 | $ | 6.60 |
(a) | Represents estimated full-year pre-tax charges of $115 million primarily associated with systems conversions, integration and workforce reductions 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 2018 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 | $ | 90 | |
Amortization expense included in equity in earnings of equity method investees, net of taxes | 17 | ||
Total pre-tax amortization expense | $ | 107 | |
Total amortization expense, net of an estimated tax benefit | $ | 80 |
5) | The outlook for 3% revenue growth in 2018 represents management's estimates for 2018 versus 2017 reported revenues adjusted to reflect the impact of new revenue recognition rules that became effective January 1, 2018. Under the new rules, the company will report uncollectible balances associated with patient responsibility as a reduction in net revenues when historically these amounts were classified as bad debt expense within selling, general and administrative expenses. |
Three Months Ended | Year Ended | ||||||||||||||||||
March 31, 2017 | June 30, 2017 | September 30, 2017 | December 31, 2017 | December 31, 2017 | |||||||||||||||
(dollars in millions) | |||||||||||||||||||
2017 Revenue on an adjusted basis: | |||||||||||||||||||
Net revenues | $ | 1,899 | $ | 1,943 | $ | 1,931 | $ | 1,936 | $ | 7,709 | |||||||||
Adjustment for adoption of new revenue recognition standard | (82 | ) | (79 | ) | (75 | ) | (71 | ) | (307 | ) | |||||||||
2017 Revenue on an adjusted basis | $ | 1,817 | $ | 1,864 | $ | 1,856 | $ | 1,865 | $ | 7,402 | |||||||||
2018 Revenue outlook: | |||||||||||||||||||
2017 Revenue on an adjusted basis | $ | 7,402 | |||||||||||||||||
2018 Equivalent revenue growth | 3.0 | % | |||||||||||||||||
2018 Revenue outlook | $ | 7,620 |