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 Incorporated (NYSE: DGX), the world's leading provider of diagnostic information services, announced today financial results for the first quarter ended March 31, 2018.

Quest Diagnostics Incorporated logo. (PRNewsFoto/Quest Diagnostics Incorporated)

"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,
 2018


December 31,
 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 
     December 31, 2017; 217 and 216 shares issued as of March 31, 2018 and December 31, 2017, 
     respectively

2



2


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,
 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 rules

(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



$

7,402


2018 Equivalent revenue growth







4

%


5

%

2018 Revenue outlook







$

7,698



$

7,772


 

SOURCE Quest Diagnostics

For further information: For further information: Denny Moynihan, Quest Diagnostics (Media): 973-520-2800, Shawn Bevec, Quest Diagnostics (Investors): 973-520-2900