Quest Diagnostics Reports Third Quarter 2020 Financial Results, Reflecting Continued Demand for COVID-19 Testing and Rapid Recovery in Health Care Utilization
SECAUCUS, N.J., Oct. 22, 2020 /PRNewswire/ -- 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, 2020.
"Quest had a very strong third quarter, benefiting from continued demand for COVID-19 testing and the rapid recovery of health care utilization," said Steve Rusckowski, Chairman, CEO and President, Quest Diagnostics. "Quest has performed over 22 million COVID-19 molecular and serology tests to date, more than any other provider. We also developed and introduced several new innovations that are contributing to enabling the country's return to work, the classroom, and the athletic field. I am extremely proud of all that Quest Diagnostics has accomplished throughout the COVID-19 pandemic, and would like to thank our more than 47,000 employees for their hard work and dedication.
"We've seen further signs of the health care system returning to pre-pandemic levels, as our base testing volume, which excludes COVID-19 molecular and antibody testing, continued to recover throughout the third quarter. As we exited September, organic volumes in our base business were down mid-to-high single digits compared to last year. We are raising our full year 2020 outlook given our year to date performance and a clearer line of sight for both the base business and COVID-19 testing."
Mr. Rusckowski continued: "We are grateful for the CARES Act funding that provided our company with support earlier this year at a time of great uncertainty for our nation. Several months into this pandemic, we do not require this funding. As a result, we believe returning these funds to the government now is the right thing to do."
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(dollars in millions, except per share data)
Reported:
---
Net revenues $
2,786 $
1,956 42.5 $
6,435 $
5,800 11.0
% %
Diagnostic Information Services revenues $
2,709 $
1,877 44.3 $
6,217 $
5,561 11.8
% %
Revenue per requisition 20.9 12.4
% %
Requisition volume 19.7 (0.1)
% %
Organic requisition volume 16.6 (1.4)
% %
Operating income (a) $
718 $
313 129.5 $
1,176 $
868 35.5
% %
Operating income as a percentage of net revenues (a) 25.8 16.0
% 9.8 18.3
% 15.0
% 3.3
% % %
Income from continuing operations attributable to Quest Diagnostics (a) $
568 $
215 164.7 $
852 $
585 45.6
% %
Diluted EPS (a) (b) $
4.14 $
1.56 164.6 $
6.25 $
4.27 46.0
% %
Cash provided by operations $
862 $
299 189.0 $
1,464 $
895 63.6
% %
Capital expenditures $
91 $
96 (4.9) $
256 $
228 12.3
% %
Adjusted:
---
Operating income $
831 $
349 138.1 $
1,350 $
987 36.8
% %
Operating income as a percentage of net revenues 29.8 17.9
% 11.9 21.0
% 17.0
% 4.0
% % %
Income from continuing operations attributable to Quest Diagnostics $
591 $
241 144.9 $
912 $
668 36.5
% %
Diluted EPS (b) $
4.31 $
1.76 144.9 $
6.69 $
4.89 36.8
% %
(a) For further details impacting
the year-over-year
comparisons related to
operating income, operating
income as a percentage of net
revenues, income from
continuing operations
attributable to Quest
Diagnostics, and diluted EPS,
see note 2 of the financial
tables attached below.
(b) The sum of reported and adjusted
diluted EPS for the first three
quarters of 2020 did not equal
the totals for the nine months
ended September 30, 2020 due to
quarterly fluctuations in the
company's earnings and weighted
average common shares
outstanding throughout the
period as a result of the
impact of COVID-19 and the
temporary cessation of
repurchases under the company's
share repurchase program.
Updated Outlook for Full Year 2020
The company updates its Full Year 2020 outlook as follows:
Updated Outlook Previous Outlook
Low
High
Low
High
Net revenues
$8.8 billion
$9.1 billion
$8.4 billion
$8.8 billion
Net revenues increase 13.9% 17.8% 8.7% 13.9%
Reported diluted EPS $8.22 $9.22 $7.42 $8.92
Adjusted diluted EPS $9.00 $10.00 $7.50 $9.00
Cash provided by operations At least $1.75 billion At least $1.45 billion
Capital expenditures Approximately $400 million
$375 million
$400 million
Note on Non-GAAP Financial Measures
As used in this press release the term "reported" refers to measures under accounting principles generally accepted in the United States ("GAAP"). The term "adjusted" refers to non-GAAP operating performance measures that exclude special items such as restructuring and integration charges, certain financial impacts resulting from the COVID-19 pandemic, amortization expense, excess tax benefits ("ETB") associated with stock-based compensation, a gain on remeasurement of an equity interest, costs associated with the company's recently announced initiative with the Quest Diagnostics Foundation to reduce health disparities in underserved communities, and other items.
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 non-GAAP 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 internationally, passcode: 7895081; or via live webcast on the company's website at www.QuestDiagnostics.com/investor. 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 800-337-6568 for domestic callers or 402-220-9660 for international callers. No passcode is required. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on October 22, 2020 until midnight Eastern Time on November 5, 2020. 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 47,000 employees understand that, in the right hands and with the right context, our diagnostic insights can inspire actions that transform lives. www.QuestDiagnostics.com.
Forward Looking Statements
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, impacts of the COVID-19 pandemic and measures taken in response, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, the complexity of billing, reimbursement and revenue recognition for clinical laboratory testing, 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 and Nine Months Ended September 30, 2020 and 2019
(in millions, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---
2020 2019 2020 2019
---
Net revenues $
2,786 $
1,956 $
6,435 $
5,800
Operating costs and expenses and other operating income:
Cost of services 1,580 1,264 4,071 3,773
Selling, general and administrative 396 362 1,103 1,108
Amortization of intangible assets 27 23 77 72
Other operating expense (income), net 65 (6) 8 (21)
Total operating costs and expenses, net 2,068 1,643 5,259 4,932
Operating income 718 313 1,176 868
Other income (expense):
Interest expense, net (42) (44) (124) (133)
Other income, net 77 1 74 13
Total non-operating income (expense), net 35 (43) (50) (120)
Income from continuing operations before income taxes and equity in earnings of equity method investees 753 270 1,126 748
Income tax expense (177) (62) (269) (175)
Equity in earnings of equity method investees, net of taxes 15 18 33 48
Income from continuing operations 591 226 890 621
Income from discontinued operations, net of taxes - 20
Net income 591 226 890 641
Less: Net income attributable to noncontrolling interests 23 11 38 36
Net income attributable to Quest Diagnostics $
568 $
215 $
852 $
605
Amounts attributable to Quest Diagnostics' common stockholders:
Income from continuing operations $
568 $
215 $
852 $
585
Income from discontinued operations, net of taxes - 20
Net income $
568 $
215 $
852 $
605
Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations $
4.20 $
1.59 $
6.33 $
4.33
Income from discontinued operations - 0.15
Net income $
4.20 $
1.59 $
6.33 $
4.48
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations $
4.14 $
1.56 $
6.25 $
4.27
Income from discontinued operations - 0.15
Net income $
4.14 $
1.56 $
6.25 $
4.42
Weighted average common shares outstanding:
Basic 135 135 134 135
Diluted 137 137 136 136
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 2020 and December 31, 2019
(in millions, except per share data)
(unaudited)
September 30, December 31,
2020 2019
---
Assets
---
Current assets:
Cash and cash equivalents $
1,605 $
1,192
Accounts receivable, net 1,421 1,063
Inventories 205 123
Prepaid expenses and other current assets 117 112
Total current assets 3,348 2,490
Property, plant and equipment, net 1,544 1,453
Operating lease right-of-use assets 535 518
Goodwill 6,880 6,619
Intangible assets, net 1,192 1,121
Investments in equity method investees 480 482
Other assets 164 160
Total assets $
14,143 $
12,843
Liabilities and Stockholders' Equity
---
Current liabilities:
Accounts payable and accrued expenses $
1,686 $
1,041
Current portion of long-term debt 555 804
Current portion of long-term operating lease liabilities 148 145
Total current liabilities 2,389 1,990
Long-term debt 4,018 3,966
Long-term operating lease liabilities 428 413
Other liabilities 782 711
Redeemable noncontrolling interest 80 76
Stockholders' equity:
Quest Diagnostics stockholders' equity:
Common stock, par value $0.01 per share; 600 shares authorized as of both September 30, 2020 and
December 31, 2019; 217 shares issued as of both September 30, 2020 and December 31, 2019 2 2
Additional paid-in capital 2,801 2,722
Retained earnings 8,800 8,174
Accumulated other comprehensive loss (42) (39)
Treasury stock, at cost; 82 and 84 shares as of September 30, 2020 and December 31, 2019,
respectively (5,161) (5,218)
Total Quest Diagnostics stockholders' equity 6,400 5,641
Noncontrolling interests 46 46
Total stockholders' equity 6,446 5,687
Total liabilities and stockholders' equity $
14,143 $
12,843
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2020 and 2019
(in millions)
(unaudited)
Nine Months Ended
September 30,
2020 2019
---
Cash flows from operating activities:
Net income $
890 $
641
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 263 247
Provision for credit losses 18 9
Deferred income tax provision 12 15
Stock-based compensation expense 63 44
Other, net (60) (44)
Changes in operating assets and liabilities:
Accounts receivable (355) (113)
Accounts payable and accrued expenses 514 80
Income taxes payable 95 9
Termination of interest rate swap agreements 40
Other assets and liabilities, net (16) 7
Net cash provided by operating activities 1,464 895
Cash flows from investing activities:
Business acquisitions, net of cash acquired (329) (56)
Capital expenditures (256) (228)
Increase in investments and other assets (19) (27)
Net cash used in investing activities (604) (311)
Cash flows from financing activities:
Proceeds from borrowings 749 1,484
Repayments of debt (1,002) (1,448)
Purchases of treasury stock (75) (153)
Exercise of stock options 144 98
Employee payroll tax withholdings on stock issued under stock-based compensation plans (13) (16)
Dividends paid (222) (215)
Distributions to noncontrolling interest partners (34) (39)
Other financing activities, net 6 4
Net cash used in financing activities (447) (285)
Net change in cash and cash equivalents and restricted cash 413 299
Cash and cash equivalents and restricted cash, beginning of period 1,192 135
Cash and cash equivalents and restricted cash, end of period $
1,605 $
434
Cash paid during the period for:
Interest $
136 $
149
Income taxes $
168 $
148
Notes to Financial Tables
1) The computation of basic and diluted earnings per common share is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---
2020 2019 2020 2019
---
(in millions, except per share data)
Amounts attributable to Quest Diagnostics' common stockholders:
Income from continuing operations $
568 $
215 $
852 $
585
Income from discontinued operations, net of taxes - 20
Net income attributable to Quest Diagnostics' common stockholders $
568 $
215 $
852 $
605
Income from continuing operations $
568 $
215 $
852 $
585
Less: earnings allocated to participating securities 2 1 3 2
Earnings available to Quest Diagnostics' common stockholders - basic and diluted $
566 $
214 $
849 $
583
Weighted average common shares outstanding - basic 135 135 134 135
Effect of dilutive securities:
Stock options and performance share units 2 2 2 1
Weighted average common shares outstanding - diluted 137 137 136 136
Earnings per share attributable to Quest Diagnostics' common stockholders - basic:
Income from continuing operations $
4.20 $
1.59 $
6.33 $
4.33
Income from discontinued operations - 0.15
Net income $
4.20 $
1.59 $
6.33 $
4.48
Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:
Income from continuing operations $
4.14 $
1.56 $
6.25 $
4.27
Income from discontinued operations - 0.15
Net income $
4.14 $
1.56 $
6.25 $
4.42
2) The following tables reconcile reported GAAP results to non-GAAP adjusted results:
Three Months Ended September 30, 2020
(dollars in millions, except per share data)
Operating Operating Income tax Equity in Income from Diluted EPS
income income as a expense (e) earnings of continuing
percentage of equity operations
net revenues method attributable
investees, net to Quest
of taxes Diagnostics
---
As reported $
718 25.8
% $
(177) $
15 $
568 $
4.14
Restructuring and integration
charges (a) 18 0.6 (4) 14 0.10
COVID-19 impact (b) 68 2.5 (18) 1 52 0.39
Gain on remeasurement of equity
interest (c) 7 (63) (0.46)
Amortization expense 27 0.9 (7) 3 23 0.16
ETB (3) (3) (0.02)
As adjusted $
831 29.8
% $
(202) $
19 $
591 $
4.31
Nine Months Ended September 30, 2020
(dollars in millions, except per share data)
Operating Operating Income tax Equity in Income from Diluted EPS
income income as a expense (e) earnings of continuing
percentage of equity operations
net revenues method attributable
investees, net to Quest
of taxes Diagnostics
---
As reported $
1,176 18.3
% $
(269) $
33 $
852 $
6.25
Restructuring and integration
charges (a) 43 0.7 (9) 34 0.25
COVID-19 impact (b) 54 0.8 (11) (2) 39 0.29
Gain on remeasurement of equity
interest (c) 7 (63) (0.46)
Amortization expense 77 1.2 (21) 9 65 0.47
ETB (15) (15) (0.11)
As adjusted $
1,350 21.0
% $
(318) $
40 $
912 $
6.69
Three Months Ended September 30, 2019
(dollars in millions, except per share data)
Operating Operating Income tax Equity in Income from Diluted EPS
income income as a expense (e) earnings of continuing
percentage of equity operations
net revenues method attributable
investees, net to Quest
of taxes Diagnostics
---
As reported $
313 16.0
% $
(62) $
18 $
215 $
1.56
Restructuring and integration
charges (a) 16 0.8 (4) 12 0.09
Other (d) (3) (0.1) 1 (2) (0.01)
Amortization expense 23 1.2 (6) 2 19 0.14
ETB (3) (3) (0.02)
As adjusted $
349 17.9
% $
(74) $
20 $
241 $
1.76
Nine Months Ended September 30, 2019
(dollars in millions, except per share data)
Operating Operating Income tax Equity in Income from Diluted EPS
income income as a expense (e) earnings of continuing
percentage of equity operations
net revenues method attributable
investees, net to Quest
of taxes Diagnostics
---
As reported $
868 15.0
% $
(175) $
48 $
585 $
4.27
Restructuring and integration
charges (a) 64 1.1 (17) 47 0.35
Other (d) (17) (0.3) (17) (0.11)
Amortization expense 72 1.2 (20) 12 64 0.46
ETB (11) (11) (0.08)
As adjusted $
987 17.0
% $
(223) $
60 $
668 $
4.89
(a) For both the three and nine months
ended September 30, 2020 and 2019,
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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in millions)
Cost of services $
11 $
7 $
21 $
29
Selling, general and administrative 7 9 22 35
Operating income $
18 $
16 $
43 $
64
(b) For both the three and nine months
ended September 30, 2020,
represents the impact of certain
items resulting from the COVID-19
pandemic. For the three months
ended September 30, 2020,
principally includes the reversal
of $65 million of income previously
recognized during the second
quarter of 2020 attributable to the
receipt of funds from the
government that were appropriated
to healthcare providers under the
CARES Act and, to a lesser extent,
incremental costs incurred
primarily to protect the health and
safety of the company's employees
and customers. For the nine months
ended September 30, 2020,
principally includes expense
associated with a one-time payment
to eligible employees to help
offset expenses they incurred as a
result of COVID-19, certain asset
impairment charges, and incremental
costs incurred primarily to protect
the health and safety of the
company's employees and customers.
The following table summarizes the
pre-tax impact of these COVID-19
items on the company's consolidated
statements of operations:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in millions)
Cost of services $
3
$ $
38
$
Selling, general and administrative 8
Other operating expense (income),
net 65 8
Operating income $
68
$ $
54
$
Equity in earnings of equity method
investees, net of taxes $
1
$ $
(2)
$
Net income attributable to
noncontrolling interest $
(1)
$ $
2
$
(c) For the three and nine months ended
September 30, 2020, the pre-tax
impact represents a gain of $70
million recognized in other income,
net based on the difference between
the fair value and the carrying
value of an equity interest. On
August 1, 2020, the company
completed its acquisition of the
remaining 56% interest in Mid
America Clinical Laboratories, LLC
("MACL") from its joint venture
partners. As a result of the
transaction, the company remeasured
its previously held minority
interest in MACL to fair value and
recognized a gain.
(d) For the three months ended September
30, 2019, the pre-tax impact
primarily represents a gain
associated with the decrease in the
fair value of the contingent
consideration accrual associated
with a previous acquisition,
partially offset by costs incurred
related to a data security
incident. For the nine months
ended September 30, 2019, the pre-
tax impact primarily represents a
gain associated with an insurance
claim for hurricane related losses,
and a gain associated with the
decrease in the fair value of the
contingent consideration accruals
associated with previous
acquisitions, partially offset by
non-cash asset impairment charges,
and costs incurred related to a
data security incident.
The following table summarizes the
pre-tax impact of these other
items on the company's consolidated
statements of operations:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(dollars in millions)
Selling, general and administrative
$ $
4
$ $
5
Other operating expense (income), net (7) (22)
Operating income
$ $
(3)
$ $
(17)
(e) For restructuring and integration
charges, COVID-19 impacts, other
items and amortization expense,
income tax impacts, where recorded,
were primarily calculated using
combined statutory income tax rates
of 25.5% for both 2020 and 2019. For
the gain on remeasurement of equity
interest, income tax expense was
calculated based on an effective
income tax rate on the transaction of
11.8%, which is lower than the
statutory income tax rate due to a
permanent difference in the financial
reporting and tax basis of goodwill.
For the gain associated with an
insurance claim for hurricane related
losses in 2019, there was no net
income tax expense as the company was
able to utilize net operating loss
carryforwards for which a valuation
allowance had previously been
established. For the gain in 2019
associated with the decrease in the
fair value of the contingent
consideration accruals associated
with previous acquisitions, there was
no net income tax expense related to
acquisitions in which the gain is
non-taxable.
3) Discontinued operations, net of
taxes, for the nine months ended
September 30, 2019 includes
discrete tax benefits of $20
million associated with the
favorable resolution of certain tax
contingencies related to Nichols
Institute Diagnostics, a test kit
manufacturing subsidiary whose
operations were discontinued in
2006.
4) For the three months ended September
30, 2020, the company did not
repurchase any shares of its common
stock. For the nine months ended
September 30, 2020, the company
repurchased 0.7 million shares of
its common stock for $75 million.
As of September 30, 2020, $1.2
billion remained available under
the company's share repurchase
authorizations; however the company
has temporarily suspended
additional share repurchases under
the existing authorization.
5) For the nine months ended September
30, 2020, net cash provided by
operating activities includes $138
million that the company received
from the funds that were
appropriated to healthcare
providers under the CARES Act,
which is included in accounts
payable and accrued expenses. The
company has determined that it will
return the CARES Act funds.
6) The outlook for adjusted diluted EPS
represents management's estimates
for the full year 2020 before the
impact of special items. Further
impacts to earnings related to
special items may occur throughout
2020. Additionally, the amount of
ETB is dependent upon employee
stock option exercises and the
company's stock price, which are
difficult to predict. The outlook
for diluted EPS and adjusted
diluted EPS is subject to the risks
and uncertainties described under
"Forward Looking Statements". The
following table reconciles our 2020
outlook for adjusted diluted EPS to
the corresponding amounts
determined under GAAP:
Low High
Diluted EPS $
8.22 $
9.22
Restructuring and integration charges
(a) 0.39 0.39
COVID-19 impact 0.29 0.29
Gain on remeasurement of equity
interest (0.46) (0.46)
Amortization expense (b) 0.63 0.63
Initiative to reduce health
disparities in underserved
communities (c) 0.05 0.05
ETB (0.12) (0.12)
Adjusted diluted EPS $
9.00 $
10.00
(a) Represents estimated full year
pre-tax charges of $71 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 statutory income tax
rate of 25.5%.
(b) Represents the estimated impact
of amortization expense for
2020 on the calculation of
adjusted diluted EPS.
Amortization expense used in
the calculation is as follows
(dollars in millions):
Amortization of intangible assets $
103
Amortization expense included in
equity in earnings of equity
method investees, net of taxes 11
Total pre-tax amortization
expense $
114
Total amortization expense, net of
an estimated tax benefit using a
combined statutory income tax
rate of 25.5% $
85
(c) Represents estimated full year
pre-tax charges of $10 million
associated with the company's
recently announced initiative
with the Quest Diagnostics
Foundation to reduce health
disparities in underserved
communities including through a
combination of donated testing
services, education programs,
partnerships, and financial
support. Income tax benefits
were calculated using a
combined statutory income tax
rate of 25.5%.
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SOURCE Quest Diagnostics
