Quest Diagnostics Reports First Quarter 2018 Financial Results
- Revenues of $1.88 billion, up 3.7% from 2017
- Reported diluted EPS of $1.27, up 9.5% from 2017
- Adjusted diluted EPS excluding amortization of $1.52, up 24.6% from 2017
- Outlook for full year 2018 remains unchanged
SECAUCUS, N.J., April 19, 2018 /PRNewswire/ -- Quest Diagnostics Inc. (NYSE: DGX), the world's leading provider of diagnostic information services, announced today financial results for the first quarter ended March 31, 2018.
"We delivered strong revenue and earnings growth in the first quarter," said Steve Rusckowski, Chairman, President and CEO. "We grew revenue 3.7 percent despite severe winter weather and the impact of lower Medicare reimbursement under PAMA. Earnings growth was driven by our continued strong execution as well as the benefits of tax reform. Our two-point strategy of accelerating growth and driving operational excellence continues to produce results."
Three Months Ended March 31,
2018 2017 Change
---- ---- ------
(dollars in millions, except per share data)
Reported:
---------
Net revenues (a) $1,884 $1,817 3.7%
Diagnostic Information Services revenues (a) $1,803 $1,730 4.1%
Revenue per requisition 1.6%
Requisition volume 2.2%
Operating income (a) (b) $272 $279 (2.5)%
Operating income as a percentage of net revenues (a) (b) 14.5% 15.4% (90) bps
Net income attributable to Quest Diagnostics (b) $177 $164 8.2%
Diluted EPS (b) $1.27 $1.16 9.5%
Cash provided by operations $180 $196 (8.5)%
Capital expenditures $73 $42 75.4%
Adjusted:
---------
Operating income (a) $303 $297 1.9%
Operating income as a percentage of net revenues (a) 16.1% 16.3% (20) bps
Net income attributable to Quest Diagnostics $192 $159 20.8%
Diluted EPS excluding amortization $1.52 $1.22 24.6%
(a) Net revenues and selling, general and administrative expenses for the three months ended March 31, 2017 have been
restated to reflect the impact of new revenue recognition rules that are 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 when 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.
Outlook for Full Year 2018
The company's outlook for full year 2018 remains unchanged as follows:
Current Outlook
Low High
--- ----
Revenues (a) $7.70 billion $7.77 billion
Revenue increase (a) 4% 5%
Reported diluted EPS $5.42 $5.62
Adjusted diluted EPS excluding amortization $6.50 $6.70
Cash provided by operations Approximately $1.3 billion
Capital expenditures $350 million $400 million
(a) The outlook for 4% to 5% 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 are 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.
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 in listen-only mode by dialing 773-756-0467, passcode 3214469. The company suggests participants dial in approximately 10 minutes before the call.
A replay of the call may be accessed online at www.QuestDiagnostics.com/investor or by phone at 800-846-1910 for domestic callers or 402-280-9953 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on April 19, 2018 until midnight Eastern Time on May 3, 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.
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 Months Ended March 31, 2018 and 2017
(in millions, except per share data)
(unaudited)
Three Months Ended
March 31,
2018 2017
---- ----
Net revenues $1,884 $1,817
Operating costs and expenses and other operating income:
Cost of services 1,226 1,165
Selling, general and administrative 363 355
Amortization of intangible assets 22 17
Other operating expense, net 1 1
--- ---
Total operating costs and expenses, net 1,612 1,538
----- -----
Operating income 272 279
Other income (expense):
Interest expense, net (41) (36)
Other (expense) income, net (2) 3
Total non-operating expenses, net (43) (33)
--- ---
Income before income taxes and equity in earnings of equity method investees 229 246
Income tax expense (52) (78)
Equity in earnings of equity method investees, net of taxes 12 7
--- ---
Net income 189 175
Less: Net income attributable to noncontrolling interests 12 11
Net income attributable to Quest Diagnostics $177 $164
---- ----
Earnings per share attributable to Quest Diagnostics' common stockholders:
Basic $1.30 $1.19
----- -----
Diluted $1.27 $1.16
----- -----
Weighted average common shares outstanding:
Basic 136 137
Diluted 139 141
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
March 31, 2018 and December 31, 2017
(in millions, except per share data)
(unaudited)
March 31, December 31,
2018 2017
---- ----
Assets
------
Current assets:
Cash and cash equivalents $124 $137
Accounts receivable, net 1,026 924
Inventories 94 95
Prepaid expenses and other current assets 127 150
Total current assets 1,371 1,306
Property, plant and equipment, net 1,156 1,145
Goodwill 6,392 6,335
Intangible assets, net 1,174 1,119
Investment in equity method investees 474 462
Other assets 128 136
Total assets $10,695 $10,503
------- -------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $976 $1,021
Current portion of long-term debt 141 36
Total current liabilities 1,117 1,057
Long-term debt 3,718 3,748
Other liabilities 717 663
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 March 31, 2018 and 2 2
December 31, 2017; 217 and 216 shares issued as of March 31, 2018 and December 31, 2017,
respectively
Additional paid-in capital 2,616 2,612
Retained earnings 7,249 7,138
Accumulated other comprehensive loss (41) (48)
Treasury stock, at cost; 81 shares as of both March 31, 2018 and December 31, 2017 (4,796) (4,783)
------ ------
Total Quest Diagnostics stockholders' equity 5,030 4,921
Noncontrolling interests 36 34
--- ---
Total stockholders' equity 5,066 4,955
Total liabilities and stockholders' equity $10,695 $10,503
------- -------
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2018 and 2017
(in millions)
(unaudited)
Three Months Ended
March 31,
2018 2017
---- ----
Cash flows from operating activities:
Net income $189 $175
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 74 62
Provision for doubtful accounts 3 2
Deferred income tax provision 24 11
Stock-based compensation expense 19 17
Other, net (1) 1
Changes in operating assets and liabilities:
Accounts receivable (97) (35)
Accounts payable and accrued expenses (68) (95)
Income taxes payable 5 63
Other assets and liabilities, net 32 (5)
Net cash provided by operating activities 180 196
--- ---
Cash flows from investing activities:
Business acquisitions, net of cash acquired (130) (1)
Capital expenditures (73) (42)
Increase in investments and other assets (1) (4)
Net cash used in investing activities (204) (47)
---- ---
Cash flows from financing activities:
Proceeds from borrowings 935 -
Repayments of debt (832) (2)
Purchases of treasury stock (50) (150)
Exercise of stock options 34 46
Employee payroll tax withholdings on stock issued under stock-based compensation plans (20) (22)
Dividends paid (61) (62)
Distributions to noncontrolling interests (15) (9)
Sale of noncontrolling interest in subsidiaries 2 -
Other financing activities, net 18 33
Net cash provided by (used in) financing activities 11 (166)
--- ----
Net change in cash and cash equivalents and restricted cash (13) (17)
Cash and cash equivalents and restricted cash, beginning of period 137 384
--- ---
Cash and cash equivalents and restricted cash, end of period $124 $367
---- ----
Cash and cash equivalents $124 $367
Restricted cash - -
Cash and cash equivalents and restricted cash, end of period $124 $367
---- ----
Cash paid during the period for:
Interest $49 $46
Income taxes $2 $8
Notes to Financial Tables
1) The computation of basic and diluted earnings per common share is as follows:
Three Months Ended
March 31,
2018 2017
---- ----
(in millions, except per
share data)
Amounts attributable to Quest Diagnostics' common stockholders:
Net income attributable to Quest Diagnostics $177 $164
Less: earnings allocated to participating securities 1 1
Earnings available to Quest Diagnostics' common stockholders - basic and diluted $176 $163
---- ----
Weighted average common shares outstanding - basic 136 137
Effect of dilutive securities:
Stock options and performance share units 3 4
Weighted average common shares outstanding - diluted 139 141
--- ---
Earnings per share attributable to Quest Diagnostics' common stockholders:
Basic $1.30 $1.19
----- -----
Diluted $1.27 $1.16
----- -----
2) The following tables reconcile reported GAAP results to non-GAAP adjusted results:
Three Months Ended
March 31,
2018 2017
---- ----
(dollars in millions, except
per share data)
Adjusted operating income:
--------------------------
Operating income $272 $279
Restructuring and integration charges (a) 31 18
Adjusted operating income $303 $297
---- ----
Adjusted operating income as a percentage of net revenues:
----------------------------------------------------------
Operating income as a percentage of net revenues 14.5% 15.4%
Restructuring and integration charges (a) 1.6 0.9
Adjusted operating income as a percentage of net revenues 16.1% 16.3%
---- ----
Adjusted net income:
--------------------
Net income attributable to Quest Diagnostics $177 $164
Restructuring and integration charges (a) 31 18
Income tax benefit associated with special items (b) (16) (23)
--- ---
Adjusted net income $192 $159
---- ----
Adjusted diluted EPS excluding amortization expense:
----------------------------------------------------
Diluted earnings per common share $1.27 $1.16
Restructuring and integration charges (a) (b) 0.17 0.08
Amortization expense (c) 0.14 0.09
ETB (d) (0.06) (0.11)
----- -----
Adjusted diluted EPS excluding amortization expense $1.52 $1.22
----- -----
(a) 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. For the three months ended March 31, 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
March 31,
2018 2017
---- ----
(dollars in millions)
Cost of services $12 $10
Selling, general and administrative 18 8
Other operating expense, net 1 -
Operating income $31 $18
--- ---
(b) For restructuring and integration charges, income tax impacts, where recorded, were calculated using
combined tax rates of 25.5% and 38.7% for 2018 and 2017, respectively. The following table
summarizes the income tax benefit associated with special items:
Three Months Ended
March 31,
2018 2017
---- ----
(dollars in millions)
Restructuring and integration charges $(8) $(7)
ETB (d) (8) (16)
$(16) $(23)
---- ----
(c) 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
March 31,
2018 2017
---- ----
(dollars in millions)
Amortization of
intangible assets $22 $17
Equity in earnings of
equity method
investees, net of taxes 4 4
--- ---
$26 $21
--- ---
(d) Represents the impact of ETB recorded in income tax expense.
3) For the three months ended March 31, 2018, the company repurchased 0.5 million shares of its common
stock for $50 million. At March 31, 2018, $0.9 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 be incurred 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 $5.42 $5.62
Restructuring and integration charges (a) 0.59 0.59
Amortization expense (b) 0.58 0.58
ETB (c) (0.09) (0.09)
----- -----
Adjusted diluted EPS excluding amortization expense $6.50 $6.70
----- -----
(a) Represents estimated full year pre-tax charges of $110 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 $91
Amortization expense included in
equity in earnings of equity
method investees, net of taxes 16
---
Total pre-tax amortization
expense $107
----
Total amortization expense, net
of an estimated tax benefit $80
---
(c) Represents the estimated full year impact of ETB.
5) The outlook for 4% to 5% 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.
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, June 30, September 30, December 31, December 31,
2017 2017 2017 2017 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 (82) (79) (75) (71) (307)
recognition rules
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 $7,402
2018 Equivalent revenue growth 4% 5%
--- ---
2018 Revenue outlook $7,698 $7,772
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