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 |
• | First quarter revenues of $1.89 billion, up 0.4% from 2018 |
• | First quarter reported diluted EPS of $1.20, down 5.4% from 2018; and adjusted diluted EPS of $1.40, down 7.9% from 2018 |
• | Cash provided by operations was $275 million, up 53.4% from 2018 |
• | Outlook for full-year 2019 remains unchanged. |
Three Months Ended March 31, | ||||||||||
2019 | 2018 | Change | ||||||||
(dollars in millions, except per share data) | ||||||||||
Reported: | ||||||||||
Net revenues | $ | 1,891 | $ | 1,884 | 0.4 | % | ||||
Diagnostic Information Services revenues | $ | 1,812 | $ | 1,803 | 0.5 | % | ||||
Revenue per requisition | (3.0 | )% | ||||||||
Requisition volume | 3.6 | % | ||||||||
Organic requisition volume | 2.4 | % | ||||||||
Operating income (a) | $ | 248 | $ | 272 | (8.7 | )% | ||||
Operating income as a percentage of net revenues (a) | 13.2 | % | 14.5 | % | (130) bps | |||||
Net income attributable to Quest Diagnostics (a) | $ | 164 | $ | 177 | (7.3 | )% | ||||
Diluted EPS (a) | $ | 1.20 | $ | 1.27 | (5.4 | )% | ||||
Cash provided by operations | $ | 275 | $ | 180 | 53.4 | % | ||||
Capital expenditures | $ | 47 | $ | 73 | (35.3 | )% | ||||
Adjusted (b): | ||||||||||
Operating income | $ | 286 | $ | 325 | (11.6 | )% | ||||
Operating income as a percentage of net revenues | 15.1 | % | 17.2 | % | (210) bps | |||||
Net income attributable to Quest Diagnostics | $ | 190 | $ | 211 | (9.9 | )% | ||||
Diluted EPS | $ | 1.40 | $ | 1.52 | (7.9 | )% |
(a) | 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. |
(b) | Beginning in 2019, the company has changed how it presents adjusted income measures to additionally exclude amortization expense for all periods. 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 | Greater than $5.16 | ||
Adjusted diluted EPS | Greater than $6.40 | ||
Cash provided by operations | Approximately $1.3 billion | ||
Capital expenditures | $350 million | $400 million |
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net revenues | $ | 1,891 | $ | 1,884 | |||
Operating costs and expenses and other operating income: | |||||||
Cost of services | 1,244 | 1,226 | |||||
Selling, general and administrative | 384 | 363 | |||||
Amortization of intangible assets | 24 | 22 | |||||
Other operating (income) expense, net | (9 | ) | 1 | ||||
Total operating costs and expenses, net | 1,643 | 1,612 | |||||
Operating income | 248 | 272 | |||||
Other income (expense): | |||||||
Interest expense, net | (44 | ) | (41 | ) | |||
Other income (expense), net | 9 | (2 | ) | ||||
Total non-operating expenses, net | (35 | ) | (43 | ) | |||
Income before income taxes and equity in earnings of equity method investees | 213 | 229 | |||||
Income tax expense | (50 | ) | (52 | ) | |||
Equity in earnings of equity method investees, net of taxes | 13 | 12 | |||||
Net income | 176 | 189 | |||||
Less: Net income attributable to noncontrolling interests | 12 | 12 | |||||
Net income attributable to Quest Diagnostics | $ | 164 | $ | 177 | |||
Earnings per share attributable to Quest Diagnostics’ common stockholders: | |||||||
Basic | $ | 1.22 | $ | 1.30 | |||
Diluted | $ | 1.20 | $ | 1.27 | |||
Weighted average common shares outstanding: | |||||||
Basic | 134 | 136 | |||||
Diluted | 136 | 139 | |||||
March 31, 2019 | December 31, 2018 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 464 | $ | 135 | |||
Accounts receivable, net | 1,079 | 1,012 | |||||
Inventories | 98 | 99 | |||||
Prepaid expenses and other current assets | 137 | 144 | |||||
Total current assets | 1,778 | 1,390 | |||||
Property, plant and equipment, net | 1,277 | 1,288 | |||||
Operating lease right-of-use assets | 497 | — | |||||
Goodwill | 6,605 | 6,563 | |||||
Intangible assets, net | 1,200 | 1,207 | |||||
Investment in equity method investees | 454 | 436 | |||||
Other assets | 126 | 119 | |||||
Total assets | $ | 11,937 | $ | 11,003 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 1,029 | $ | 1,021 | |||
Current portion of long-term debt | 1,108 | 464 | |||||
Current portion of long-term operating lease liabilities | 145 | — | |||||
Total current liabilities | 2,282 | 1,485 | |||||
Long-term debt | 3,131 | 3,429 | |||||
Long-term operating lease liabilities | 393 | — | |||||
Other liabilities | 713 | 745 | |||||
Redeemable noncontrolling interest | 77 | 77 | |||||
Stockholders’ equity: | |||||||
Quest Diagnostics stockholders’ equity: | |||||||
Common stock, par value $0.01 per share; 600 shares authorized as of both March 31, 2019 and December 31, 2018; 217 shares issued as of both March 31, 2019 and December 31, 2018 | 2 | 2 | |||||
Additional paid-in capital | 2,671 | 2,667 | |||||
Retained earnings | 7,694 | 7,602 | |||||
Accumulated other comprehensive loss | (55 | ) | (59 | ) | |||
Treasury stock, at cost; 83 shares and 82 shares as of March 31, 2019 and December 31, 2018, respectively | (5,022 | ) | (4,996 | ) | |||
Total Quest Diagnostics stockholders’ equity | 5,290 | 5,216 | |||||
Noncontrolling interests | 51 | 51 | |||||
Total stockholders’ equity | 5,341 | 5,267 | |||||
Total liabilities and stockholders’ equity | $ | 11,937 | $ | 11,003 |
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 176 | $ | 189 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 84 | 74 | |||||
Provision for doubtful accounts | 4 | 3 | |||||
Deferred income tax provision | 3 | 24 | |||||
Stock-based compensation expense | 17 | 19 | |||||
Other, net | (18 | ) | (1 | ) | |||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (71 | ) | (97 | ) | |||
Accounts payable and accrued expenses | 32 | (68 | ) | ||||
Income taxes payable | 43 | 5 | |||||
Other assets and liabilities, net | 5 | 32 | |||||
Net cash provided by operating activities | 275 | 180 | |||||
Cash flows from investing activities: | |||||||
Business acquisitions, net of cash acquired | (56 | ) | (130 | ) | |||
Capital expenditures | (47 | ) | (73 | ) | |||
Increase in investments and other assets | (7 | ) | (1 | ) | |||
Net cash used in investing activities | (110 | ) | (204 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from borrowings | 1,139 | 935 | |||||
Repayments of debt | (802 | ) | (832 | ) | |||
Purchases of treasury stock | (53 | ) | (50 | ) | |||
Exercise of stock options | 20 | 34 | |||||
Employee payroll tax withholdings on stock issued under stock-based compensation plans | (15 | ) | (20 | ) | |||
Dividends paid | (72 | ) | (61 | ) | |||
Distributions to noncontrolling interest partners | (12 | ) | (15 | ) | |||
Contributions from noncontrolling interest partners | — | 2 | |||||
Other financing activities, net | (41 | ) | 18 | ||||
Net cash provided by financing activities | 164 | 11 | |||||
Net change in cash and cash equivalents and restricted cash | 329 | (13 | ) | ||||
Cash and cash equivalents and restricted cash, beginning of period | 135 | 137 | |||||
Cash and cash equivalents and restricted cash, end of period | $ | 464 | $ | 124 | |||
Cash and cash equivalents | $ | 464 | $ | 124 | |||
Restricted cash | — | — | |||||
Cash and cash equivalents and restricted cash, end of period | $ | 464 | $ | 124 | |||
Cash paid during the period for: | |||||||
Interest | $ | 28 | $ | 49 | |||
Income taxes | $ | 3 | $ | 2 |
1) | The computation of basic and diluted earnings per common share is as follows: |
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(in millions, except per share data) | |||||||
Amounts attributable to Quest Diagnostics' common stockholders: | |||||||
Net income attributable to Quest Diagnostics | $ | 164 | $ | 177 | |||
Less: earnings allocated to participating securities | 1 | 1 | |||||
Earnings available to Quest Diagnostics' common stockholders - basic and diluted | $ | 163 | $ | 176 | |||
Weighted average common shares outstanding - basic | 134 | 136 | |||||
Effect of dilutive securities: | |||||||
Stock options and performance share units | 2 | 3 | |||||
Weighted average common shares outstanding - diluted | 136 | 139 | |||||
Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||
Basic | $ | 1.22 | $ | 1.30 | |||
Diluted | $ | 1.20 | $ | 1.27 |
2) | The following tables reconcile reported GAAP results to non-GAAP adjusted results: |
Three Months Ended March 31, 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 tax | Net income attributable to Quest Diagnostics | Diluted earnings per common share | |||||||||||||||||
As reported | $ | 248 | 13.2 | % | $ | (50 | ) | $ | 13 | $ | 164 | $ | 1.20 | |||||||||
Restructuring and integration charges (a) | 22 | 1.1 | (6 | ) | — | 16 | 0.12 | |||||||||||||||
Other (b) | (8 | ) | (0.5 | ) | (1 | ) | — | (9 | ) | (0.06 | ) | |||||||||||
Amortization expense | 24 | 1.3 | (7 | ) | 5 | 22 | 0.16 | |||||||||||||||
ETB | — | — | (3 | ) | — | (3 | ) | (0.02 | ) | |||||||||||||
As adjusted | $ | 286 | 15.1 | % | $ | (67 | ) | $ | 18 | $ | 190 | $ | 1.40 |
Three Months Ended March 31, 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 tax | Net income attributable to Quest Diagnostics | Diluted earnings per common share | |||||||||||||||||
As reported | $ | 272 | 14.5 | % | $ | (52 | ) | $ | 12 | $ | 177 | $ | 1.27 | |||||||||
Restructuring and integration charges (a) | 31 | 1.6 | (8 | ) | — | 23 | 0.17 | |||||||||||||||
Amortization expense | 22 | 1.1 | (7 | ) | 4 | 19 | 0.14 | |||||||||||||||
ETB | — | — | (8 | ) | — | (8 | ) | (0.06 | ) | |||||||||||||
As adjusted | $ | 325 | 17.2 | % | $ | (75 | ) | $ | 16 | $ | 211 | $ | 1.52 |
(a) | For the three months ended March 31, 2019, represents costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business. For the three months ended March 31, 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 March 31, | |||||||
2019 | 2018 | ||||||
(dollars in millions) | |||||||
Cost of services | $ | 11 | $ | 12 | |||
Selling, general and administrative | 11 | 18 | |||||
Other operating (income) expense, net | — | 1 | |||||
Operating income | $ | 22 | $ | 31 |
(b) | For the three months ended March 31, 2019, the pre-tax impact primarily represents a gain associated with an insurance claim for hurricane related losses partially offset by non-cash asset impairment charges. 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, | |||||||
2019 | 2018 | ||||||
(dollars in millions) | |||||||
Selling, general and administrative | $ | 1 | $ | — | |||
Other operating (income) expense, net | (9 | ) | — | ||||
Operating income | $ | (8 | ) | $ | — |
(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. |
3) | For the three months ended March 31, 2019, the company repurchased 0.6 million shares of its common stock for $50 million. As of March 31, 2019, $0.5 billion remained available under the company’s share repurchase authorizations. |
4) | 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 | $ | 5.16 | |
Restructuring and integration charges (a) | 0.68 | ||
Other | (0.03 | ) | |
Amortization expense (b) | 0.63 | ||
ETB | (0.04 | ) | |
Adjusted diluted EPS | $ | 6.40 |
(a) | Represents estimated full-year pre-tax charges of $125 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 | $ | 99 | |
Amortization expense included in equity in earnings of equity method investees, net of taxes | 15 | ||
Total pre-tax amortization expense | $ | 114 | |
Total amortization expense, net of an estimated tax benefit using a combined tax rate of 25.5% | $ | 85 |