Quest Diagnostics Incorporated — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Quest provides diagnostic testing and related services; clinical testing generated more than 90% of revenue. Interim statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1.907B | $1.903B | $3.843B | $3.725B |
| Operating income | $334.7M | $316.9M | $634.3M | $347.8M |
| Operating margin | 17.6% | 16.6% | 16.5% | 9.3% |
| Net income attributable to Quest | $177.7M | $163.1M | $336.8M | $109.3M |
| Diluted EPS | $1.11 | $1.02 | $2.10 | $0.68 |
| Operating cash flow | Not separately reported | Not separately reported | $412.1M | $220.1M |
Q2 revenue was nearly flat year over year; clinical testing revenue rose 0.7%, including acquisition contribution. Six-month revenue increased 3.2%; acquisitions contributed approximately 2% of consolidated growth. Six-month requisition volume rose 2.0%, but management estimated underlying growth at about 0.5% after weather and acquisitions. Revenue per requisition was unchanged in Q2 and up 1.4% for the half.
Q2 operating margin improved by 1.0 percentage point, with cost-reduction actions and lower prior-year acquisition transaction costs contributing. Six-month margin and earnings comparisons benefited substantially from the prior-year $236M Medi-Cal charge and 2011 severe weather. Q2 diluted EPS included $0.06 per share of identified costs; six-month EPS included $0.14 per share.
Six-month operating cash flow was $412M; capital expenditures were $77M, implying approximately $335M of operating cash flow after capital expenditures. Cash was $174M at June 30. Balance-sheet debt carrying amounts totaled approximately $3.823B ($444.5M current and $3.378B long-term); the filing separately reports $3.735B of outstanding debt in its contractual-obligations table. Available borrowing capacity was $840M. Current assets were $1.477B versus current liabilities of $1.325B. The company paid $54M in dividends and repurchased $100M of stock during the half.
Changes, outlook and key commentary
- Compared with Q2 2011, operating income rose $17.9M and diluted EPS rose $0.09. Compared with the first half of 2011, operating income rose $286.5M, primarily reflecting the absence of the Medi-Cal charge and weather-related effects in 2011.
- Management’s Invigorate program targets $500M of annualized cost savings versus 2011 by exit 2014, with about 20% expected by exit 2012. Estimated related pre-tax charges through 2014 are $100M–$175M, of which $90M–$155M are expected to be cash costs. A voluntary retirement program is expected to generate about $40M of annualized savings when fully implemented in Q1 2013.
- Management estimated 2012 capital expenditures of approximately $200M. It stated that cash, operating cash flow and credit facilities should provide sufficient liquidity for operating needs, debt service, dividends, repurchases and growth. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- In July 2012, after quarter-end, the company terminated interest-rate swaps and received $71.8M; proceeds are to reduce interest expense over the remaining terms of the hedged debt.
Risks and contingencies
Legal matters include pending appeals and lawsuits alleging billing or pricing violations, a Michigan Medicaid overbilling suit, government subpoenas and employment-related claims. Management said losses on the described other legal matters were not considered probable at June 30, but potential losses could not be estimated; outcomes could materially affect results or cash flows in the period recognized or paid. Legal reserves were less than $5M. Separate reserves for general and professional liability claims were approximately $123M.
The company reported $202M of liabilities for unrecognized tax benefits and said up to approximately $17M might decrease within 12 months. It was in compliance with credit-agreement covenants. Key business risks cited include reimbursement pressure, labor and benefit cost increases, competition, regulatory changes, customer and payer relationships, and litigation or government investigations.
Investor facts to verify
- How much of the announced savings program is realized, and what restructuring charges and cash costs are ultimately incurred?
- Whether underlying requisition volumes and revenue per requisition improve, especially given reimbursement and test-mix pressures.
- Debt balances and refinancing/liquidity needs; reconcile balance-sheet carrying debt with the contractual-obligations debt figure.
- Developments and potential financial exposure from government investigations, billing-related lawsuits and other contingencies.
- Whether cash generation supports planned capital spending, dividends and share repurchases without materially increasing leverage.