DGX Quest Diagnostics Inc

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

Change

2020

2019

Change

(dollars in millions, except per share data)

Reported:

Net revenues

$

1,827

$

1,953

(6.4)

%

$

3,649

$

3,844

(5.1)

%

Diagnostic Information Services revenues

$

1,764

$

1,872

(5.7)

%

$

3,508

$

3,684

(4.8)

%

Revenue per requisition

15.3

%

6.4

%

Requisition volume

(17.7)

%

(10.2)

%

  Organic requisition volume

(18.2)

%

(10.5)

%

Operating income (a)

$

283

$

307

(7.6)

%

$

458

$

555

(17.5)

%

Operating income as a percentage of net revenues (a)

15.5

%

15.7

%

(0.2)

%

12.5

%

14.4

%

(1.9)

%

Income from continuing operations attributable to Quest Diagnostics (a)

$

185

$

206

(10.1)

%

$

284

$

370

(23.3)

%

Diluted EPS (a)

$

1.36

$

1.51

(9.7)

%

$

2.09

$

2.71

(23.0)

%

Cash provided by operations

$

355

$

321

10.4

%

$

602

$

596

0.9

%

Capital expenditures

$

82

$

85

(4.0)

%

$

165

$

132

24.7

%

Adjusted:

Operating income

$

294

$

352

(16.2)

%

$

519

$

638

(18.7)

%

Operating income as a percentage of net revenues

16.1

%

18.0

%

(1.9)

%

14.2

%

16.6

%

(2.4)

%

Income from continuing operations attributable to Quest Diagnostics

$

193

$

237

(18.3)

%

$

321

$

427

(24.7)

%

Diluted EPS

$

1.42

$

1.73

(17.9)

%

$

2.36

$

3.13

(24.3)

%

(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.

Low

High

Net revenues

$8.0 billion

$8.6 billion

Net revenues increase

3.5%

11.3%

Reported diluted EPS

$5.66

$7.66

Adjusted diluted EPS

$6.60

$8.60

Cash provided by operations

At least $1.25 billion

Capital expenditures

$375 million

$400 million

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2020 and 2019

(in millions, except per share data)

(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2020

2019

2020

2019

Net revenues

$

1,827

$

1,953

$

3,649

$

3,844

Operating costs and expenses and other operating income:

Cost of services

1,221

1,265

2,491

2,509

Selling, general and administrative

360

362

707

746

Amortization of intangible assets

25

25

50

49

Other operating income, net

(62)

(6)

(57)

(15)

Total operating costs and expenses, net

1,544

1,646

3,191

3,289

Operating income

283

307

458

555

Other income (expense):

Interest expense, net

(41)

(45)

(82)

(89)

Other income (expense), net

13

3

(3)

12

Total non-operating expenses, net

(28)

(42)

(85)

(77)

Income from continuing operations before income taxes and equity in earnings of equity method investees

255

265

373

478

Income tax expense

(66)

(63)

(92)

(113)

Equity in earnings of equity method investees, net of taxes

4

17

18

30

Income from continuing operations

193

219

299

395

Income from discontinued operations, net of taxes

—

20

—

20

Net income

193

239

299

415

Less: Net income attributable to noncontrolling interests

8

13

15

25

Net income attributable to Quest Diagnostics

$

185

$

226

$

284

$

390

Amounts attributable to Quest Diagnostics' common stockholders:

Income from continuing operations

$

185

$

206

$

284

$

370

Income from discontinued operations, net of taxes

—

20

—

20

Net income

$

185

$

226

$

284

$

390

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:

Income from continuing operations

$

1.38

$

1.52

$

2.12

$

2.74

Income from discontinued operations

—

0.15

—

0.15

Net income

$

1.38

$

1.67

$

2.12

$

2.89

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:

Income from continuing operations

$

1.36

$

1.51

$

2.09

$

2.71

Income from discontinued operations

—

0.15

—

0.15

Net income

$

1.36

$

1.66

$

2.09

$

2.86

Weighted average common shares outstanding:

Basic

134

135

134

134

Diluted

136

136

135

136

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

June 30, 2020 and December 31, 2019

(in millions, except per share data)

(unaudited)

June 30,
2020

December 31,
2019

Assets

Current assets:

Cash and cash equivalents

$

988

$

1,192

Accounts receivable, net

1,126

1,063

Inventories

154

123

Prepaid expenses and other current assets

112

112

Total current assets

2,380

2,490

Property, plant and equipment, net

1,505

1,453

Operating lease right-of-use assets

522

518

Goodwill

6,789

6,619

Intangible assets, net

1,141

1,121

Investments in equity method investees

495

482

Other assets

158

160

Total assets

$

12,990

$

12,843

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

1,142

$

1,041

Current portion of long-term debt

555

804

Current portion of long-term operating lease liabilities

146

145

Total current liabilities

1,843

1,990

Long-term debt

4,020

3,966

Long-term operating lease liabilities

416

413

Other liabilities

753

711

Redeemable noncontrolling interest

77

76

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both June 30, 2020 and December 31, 2019; 217 shares issued as of both June 30, 2020 and December 31, 2019

2

2

Additional paid-in capital

2,764

2,722

Retained earnings

8,307

8,174

Accumulated other comprehensive loss

(55)

(39)

   Treasury stock, at cost; 83 and 84 shares as of June 30, 2020 and December 31, 2019, respectively

(5,187)

(5,218)

Total Quest Diagnostics stockholders' equity

5,831

5,641

Noncontrolling interests

50

46

Total stockholders' equity

5,881

5,687

Total liabilities and stockholders' equity

$

12,990

$

12,843

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2020 and 2019

(in millions)

(unaudited)

Six Months Ended June 30,

2020

2019

Cash flows from operating activities:

Net income

$

299

$

415

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

174

165

Provision for credit losses

13

5

Deferred income tax provision

23

13

Stock-based compensation expense

31

32

Other, net

3

(33)

Changes in operating assets and liabilities:

Accounts receivable

(75)

(81)

Accounts payable and accrued expenses

42

27

Income taxes payable

51

15

Termination of interest rate swap agreements

40

—

Other assets and liabilities, net

1

38

Net cash provided by operating activities

602

596

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(228)

(56)

Capital expenditures

(165)

(132)

Increase in investments and other assets

(18)

(14)

Net cash used in investing activities

(411)

(202)

Cash flows from financing activities:

Proceeds from borrowings

749

1,484

Repayments of debt

(1,001)

(1,448)

Purchases of treasury stock

(75)

(103)

Exercise of stock options

117

66

Employee payroll tax withholdings on stock issued under stock-based compensation plans

(13)

(16)

Dividends paid

(146)

(143)

Distributions to noncontrolling interest partners

(10)

(27)

Other financing activities, net

(16)

(69)

Net cash used in financing activities

(395)

(256)

Net change in cash and cash equivalents and restricted cash

(204)

138

Cash and cash equivalents and restricted cash, beginning of period

1,192

135

Cash and cash equivalents and restricted cash, end of period

$

988

$

273

Cash paid during the period for:

Interest

$

103

$

91

Income taxes

$

20

$

83

1)

  The computation of basic and diluted earnings per common share is as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,

2020

2019

2020

2019

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Income from continuing operations

$

185

$

206

$

284

$

370

Income from discontinued operations, net of taxes

—

20

—

20

Net income attributable to Quest Diagnostics' common stockholders

$

185

$

226

$

284

$

390

Income from continuing operations

$

185

$

206

$

284

$

370

Less: earnings allocated to participating securities

1

—

1

1

Earnings available to Quest Diagnostics' common stockholders - basic and diluted

$

184

$

206

$

283

$

369

Weighted average common shares outstanding - basic

134

135

134

134

Effect of dilutive securities:

Stock options and performance share units

2

1

1

2

Weighted average common shares outstanding - diluted

136

136

135

136

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:

Income from continuing operations

$

1.38

$

1.52

$

2.12

$

2.74

Income from discontinued operations

—

0.15

—

0.15

Net income

$

1.38

$

1.67

$

2.12

$

2.89

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:

Income from continuing operations

$

1.36

$

1.51

$

2.09

$

2.71

Income from discontinued operations

—

0.15

—

0.15

Net income

$

1.36

$

1.66

$

2.09

$

2.86

2)

The following tables reconcile reported GAAP results to non-GAAP adjusted results:

Three Months Ended June 30, 2020

(dollars in millions, except per share data)

Operating
income

Operating
income as a
percentage of
net revenues

Income tax
expense (d)

Equity in
earnings of
equity method
investees, net
of taxes

Income from
continuing
operations
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

283

15.5

%

$

(66)

$

4

$

185

$

1.36

Restructuring and
integration charges (a)

9

0.6

(1)

—

8

0.06

COVID-19 impact (b)

(23)

(1.3)

10

(3)

(17)

(0.13)

Amortization expense

25

1.3

(7)

3

21

0.16

ETB

—

—

(4)

—

(4)

(0.03)

As adjusted

$

294

16.1

%

$

(68)

$

4

$

193

$

1.42

Six Months Ended June 30, 2020

(dollars in millions, except per share data)

Operating
income

Operating
income as a
percentage of
net revenues

Income tax
expense (d)

Equity in
earnings of
equity method
investees, net
of taxes

Income from
continuing
operations
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

458

12.5

%

$

(92)

$

18

$

284

$

2.09

Restructuring and
integration charges (a)

25

0.7

(5)

—

20

0.15

COVID-19 impact (b)

(14)

(0.4)

7

(3)

(13)

(0.10)

Amortization expense

50

1.4

(14)

6

42

0.31

ETB

—

—

(12)

—

(12)

(0.09)

As adjusted

$

519

14.2

%

$

(116)

$

21

$

321

$

2.36

Three Months Ended June 30, 2019

(dollars in millions, except per share data)

Operating
income

Operating
income as a
percentage of
net revenues

Income tax
expense (d)

Equity in
earnings of
equity method
investees, net
of taxes

Income from
continuing
operations
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

307

15.7

%

$

(63)

$

17

$

206

$

1.51

Restructuring and
integration charges (a)

26

1.3

(7)

—

19

0.14

Other (c)

(6)

(0.3)

—

—

(6)

(0.04)

Amortization expense

25

1.3

(7)

5

23

0.16

ETB

—

—

(5)

—

(5)

(0.04)

As adjusted

$

352

18.0

%

$

(82)

$

22

$

237

$

1.73

Six Months Ended June 30, 2019

(dollars in millions, except per share data)

Operating
income

Operating
income as a
percentage of
net revenues

Income tax
expense (d)

Equity in
earnings of
equity method
investees, net of
taxes

Income from
continuing
operations
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

555

14.4

%

$

(113)

$

30

$

370

$

2.71

Restructuring and
integration charges (a)

48

1.3

(13)

—

35

0.26

Other (c)

(14)

(0.4)

(1)

—

(15)

(0.10)

Amortization expense

49

1.3

(14)

10

45

0.32

ETB

—

—

(8)

—

(8)

(0.06)

As adjusted

$

638

16.6

%

$

(149)

$

40

$

427

$

3.13

(a) 

For both the three and six months ended June 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
June 30,

Six Months Ended
June 30,

2020

2019

2020

2019

(dollars in millions)

Cost of services

$

3

$

11

$

10

$

22

Selling, general and administrative

6

15

15

26

Operating income

$

9

$

26

$

25

$

48

(b) 

For both the three and six months ended June 30, 2020, represents the impact of certain items resulting from the COVID-19 pandemic including $65 million of income recognized attributable to the receipt of the initial tranche of funds from the government that were appropriated to healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), partially offset by 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:

Six Months Ended
June 30,

2020

2019

2020

2019

(dollars in millions)

Cost of services

$

34

$

—

$

35

$

—

Selling, general and administrative

5

—

8

—

Other operating income, net

(62)

—

(57)

—

Operating income

$

(23)

$

—

$

(14)

$

—

Net income attributable to noncontrolling interest

$

1

$

—

$

3

$

—

(c) 

For the three months ended June 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.  For the six months ended June 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 accrual associated with a previous acquisition,  partially offset by non-cash asset impairment charges.  The following table summarizes the pre-tax impact of these other items on the company's consolidated statements of operations:

Three Months Ended
June 30,

Six Months Ended
June 30,

2020

2019

2020

2019

(dollars in millions)

Selling, general and administrative

$

—

$

—

$

—

$

1

Other operating income, net

—

(6)

—

(15)

Operating income

$

—

$

(6)

$

—

$

(14)

(d) 

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 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 accrual associated with a previous acquisition, there was no net income tax expense as the gain is non-taxable.

3)

Discontinued operations, net of taxes, for the three and six months ended June 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 June 30, 2020, the company did not repurchase any shares of its common stock.  For the six months ended June 30, 2020, the company repurchased 0.7 million shares of its common stock for $75 million.  As of June 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 through the end of 2020. 

5)

For the six months ended June 30, 2020, net cash provided by operating activities includes $65 million that the company received from the initial tranche of funds that were appropriated to healthcare providers under the CARES Act.

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.  Both reported and adjusted diluted EPS exclude any proceeds that we may receive from the secondary tranche of funds distributed to healthcare providers under the CARES Act.  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 2020 outlook for adjusted diluted EPS to the corresponding amounts determined under GAAP:

Low

High

Diluted EPS

$

5.66

$

7.66

Restructuring and integration charges (a)

0.50

0.50

COVID-19 impact

(0.10)

(0.10)

Amortization expense (b)

0.65

0.65

ETB

(0.11)

(0.11)

Adjusted diluted EPS

$

6.60

$

8.60

(a) 

Represents estimated full year pre-tax charges of $90 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

$

107

Amortization expense included in equity in earnings of equity method investees, net of taxes

11

Total pre-tax amortization expense

$

118

Total amortization expense, net of an estimated tax benefit using a combined statutory income tax rate of 25.5%

$

88