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.    

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended March 31, 2017 and 2016

(in millions, except per share data)

(unaudited)

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

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

March 31, 2017 and December 31, 2016

(in millions, except per share data)

(unaudited)

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

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2017 and 2016

(in millions)

(unaudited)

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.