Quest Diagnostics Incorporated — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Quest provides diagnostic information services (DIS), which generated approximately 97% of revenue, and smaller Diagnostic Solutions (DS) businesses. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2.295bn | $2.486bn | $6.964bn | $7.550bn |
| Operating income | $342m | $392m | $995m | $1.293bn |
| Operating margin | 14.9% | 15.8% | 14.3% | 17.1% |
| Net income attributable to Quest | $225m | $256m | $662m | $845m |
| Diluted EPS | $1.96 | $2.17 | $5.79 | $7.05 |
| Operating cash flow | $207m | $502m | $745m | $1.384bn |
Q3 cost of services was $1.541bn and SG&A was $380m. For the first nine months, capital expenditures were $336m, acquisition spending net of cash acquired was $611m, and dividends paid were $234m. Cash and cash equivalents were $143m at September 30, 2023, down from $315m at year-end 2022.
Total debt was approximately $4.25bn, including $304m classified as current; the balance sheet included $3.946bn of long-term debt. The company had $278m drawn on its secured receivables facility and no borrowings on its $750m unsecured revolver at quarter-end. Reported available capacity across the facilities was $927m. A $300m 4.25% senior note is due April 2024.
Material changes and operating drivers
- Q3 revenue fell 7.7% year over year and nine-month revenue fell 7.8%; operating income declined 13.0% and 23.1%, respectively.
- The decline primarily reflected lower COVID-19 testing. Q3 COVID-19 testing revenue was $26m versus $316m a year earlier. Base-business revenue, including acquisitions but excluding COVID-19 testing, increased 4.8% in Q3; base-business testing volume rose 5.7%.
- Q3 DIS requisition volume declined 0.5%, while revenue per requisition fell 7.2%, largely due to reduced COVID-19 molecular testing. DS revenue was flat in Q3 and up 1.2% for the nine-month period.
- Nine-month operating cash flow decreased $639m, primarily due to lower operating income and differences in the timing and extent of COVID-19 revenue collections. Days sales outstanding increased to 50 from 47 at both December 31, 2022 and September 30, 2022.
- Investing cash outflow increased to $947m, mainly reflecting acquisitions and higher capital spending. Financing cash flow was $30m provided, versus $1.187bn used in the prior-year period, which included $947m of share repurchases. Quest made no program share repurchases in the first nine months of 2023.
Outlook, management commentary, and risks
- Management targets annual Invigorate savings and productivity improvements of approximately 3% of costs, intended to offset reimbursement, labor, and benefit-cost pressures. It reported $32m of pre-tax Invigorate and other restructuring/integration charges for the first nine months; further charges may occur.
- Management estimated approximately $400m of 2023 capital expenditures and said cash, operating cash flow, and borrowing capacity should fund operating needs, debt service, dividends, repurchases, and growth opportunities. The filing text does not provide a clear full-year revenue or EPS guidance figure.
- During October 2023, the secured receivables facility was amended: its borrowing capacity became $525m, with a further $75m uncommitted accordion, and maturity was extended to October 2025. Quest also entered into $375m of forward-starting interest-rate swaps to hedge exposure related to an anticipated debt issuance.
- Acquisitions included New York-Presbyterian laboratory assets for $275m and Haystack Oncology for $392m net of acquired cash. Haystack contingent consideration was initially estimated at $88m; additional payments may depend on revenue benchmarks and CMS reimbursement coverage.
- Legal and contingency exposures include 401(k) plan litigation, lawsuits and investigations related to the AMCA data incident, ReproSource data-security litigation, and other proceedings. Management said material legal losses were not considered probable at September 30, 2023, but outcomes may be material in the period determined or paid. General and professional liability reserves were $164m; management cautioned actual liabilities could exceed reserves or insurance.
- Other identified risks include reimbursement and billing complexity, government regulation and investigations, competition, customer and payer relationships, and variable interest rates. The company reported compliance with applicable financial covenants and effective disclosure controls.
Key facts for investors to verify
- Whether base-business volume and revenue growth can offset continued normalization in COVID-19 testing and pressure on revenue per requisition.
- Cash conversion, receivables collections, and the elevated 50-day DSO, alongside acquisition and capital-spending requirements.
- Refinancing or repayment plans for the $300m notes due April 2024 and the company’s borrowing costs and facility availability after the October amendment.
- Haystack’s commercial progress, CMS reimbursement prospects, and potential contingent consideration payments.
- Actual Invigorate savings and any further restructuring costs, as well as developments in litigation, investigations, and liability claims.