Full Press Release Details
QUEST DIAGNOSTICS REPORTS THIRD QUARTER 2018 FINANCIAL RESULTS
SECAUCUS, N.J., October 23, 2018 - Quest Diagnostics Incorporated (NYSE: DGX), the world's leading provider of diagnostic information services, announced today financial results for the third quarter ended September 30, 2018 and updated its outlook for full-year 2018.
"We grew revenues and continued to deliver strong earnings growth in the third quarter," said Steve Rusckowski, Chairman, President and CEO. "We had a productive quarter, announcing three acquisitions and a Professional Lab Services agreement. We are updating our full-year revenue guidance to reflect lower than expected revenue performance this year, which has been affected in large part by industry headwinds we called out in the previous quarter. Looking ahead, our acquisition pipeline, along with our expanding health plan access, including UnitedHealthcare beginning January 1, position us well for growth in 2019."
| 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 | % |
Outlook for full-year 2018
The Company is updating its outlook for full-year 2018 as follows:
| 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 |
Note on Non-GAAP Financial Measures
As used in this press release the term "reported" refers to measures under the accounting principles generally accepted in the United States ("GAAP"). The term "adjusted" refers to non-GAAP measures as follows: (i) for the purpose of income measures the term "adjusted" refers to operating performance measures that exclude special items such as restructuring and integration charges, excess tax benefit ("ETB") associated with stock based compensation and other items; and (ii) the term "adjusted diluted EPS excluding amortization" represents the company's diluted EPS before the impact of special items (described above) and amortization expense.
Non-GAAP adjusted measures are presented because management believes those measures are useful adjuncts to GAAP results. Non-GAAP adjusted measures should not be considered as an alternative to the corresponding measures determined under GAAP. Management may use these non-GAAP measures to evaluate our performance period over period and relative to competitors, to analyze the underlying trends in our business, to establish operational budgets and forecasts and for incentive compensation purposes. We believe that these non-GAAP measures are useful to investors and analysts to evaluate our performance period over period and relative to competitors, as well as to analyze the underlying trends in our business and to assess our performance. The additional tables attached below include reconciliations of adjusted measures to GAAP measures.
Conference Call Information
Quest Diagnostics will hold its quarterly conference call to discuss financial results beginning at 8:30 a.m. Eastern Time today. The conference call can be accessed by dialing 888-455-0391 within the U.S. and Canada, or 773-756-0467, passcode: Investor; or via live webcast on the Company's website at www.QuestDiagnsotics.com/investor.
A replay of the call may be accessed online at www.QuestDiagnostics.com/investor or by phone at 866-483-9044 for domestic callers or 203-369-1586 for international callers. No passcode is required. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on October 23, 2018 until midnight Eastern Time on November 6, 2018. Anyone listening to the call is encouraged to read the company's periodic reports, on file with the Securities and Exchange Commission, including the discussion of risk factors and historical results of operations and financial condition in those reports.
About Quest Diagnostics
Quest Diagnostics empowers people to take action to improve health outcomes. Derived from the world's largest database of clinical lab results, our diagnostic insights reveal new avenues to identify and treat disease, inspire healthy behaviors and improve health care management. Quest annually serves one in three adult Americans and half the physicians and hospitals in the United States, and our 45,000 employees understand that, in the right hands and with the right context, our diagnostic insights can inspire actions that transform lives. www.QuestDiagnostics.com.
The statements in this press release which are not historical facts may be forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that they are made and which reflect management's current estimates, projections, expectations or beliefs and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers or strategic partners and other factors discussed in the company's most recently filed Annual Report on Form 10-K and in any of the company's subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including those discussed in the "Business," "Risk Factors," "Cautionary Factors that May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of those reports.
For further information: Denny Moynihan, Quest Diagnostics (Media): 973-520-2800, Shawn Bevec, Quest Diagnostics (Investors): 973-520-2900
This earnings release, including the attached financial tables, is available online in the Newsroom section at www.QuestDiagnostics.com.
ADDITIONAL TABLES FOLLOW
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2018 and 2017
(in millions, except per share data)
| 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 |
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 2018 and December 31, 2017
(in millions, except per share data)
| 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 |
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2018 and 2017
| 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 |
Notes to Financial Tables
| 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 |
| 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 |
| 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 |
| 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 | ) |
| 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 | ) |
| 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 |
| 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 |
| 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 |
The following tables reconcile our 2017 net revenues determined under previous revenue recognition rules with 2017 net revenue adjusted to reflect the impact of the new revenue recognition rules:
| 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 |