Business context and reporting period
Quest Diagnostics Incorporated (NYSE: DGX) filed this Form 10-K for the fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter report; it does not provide a clear set of Q4-only financial results in the supplied text. Quest is a U.S.-focused diagnostic information services provider. Its Diagnostic Information Services business generated 97.3% of 2021 revenue.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net revenue | $10.788 billion | $9.437 billion | +14.3% |
| Operating income | $2.381 billion | $1.971 billion | +20.8% |
| Operating margin | 22.1% | 20.9% | +1.2 percentage points |
| Net income attributable to Quest | $1.995 billion | $1.431 billion | +39.4% |
| Diluted EPS from continuing operations | $15.55 | $10.47 | +48.5% |
| Operating cash flow | $2.233 billion | $2.005 billion | +$228 million |
| Capital expenditures | $403 million | $418 million | -$15 million |
- COVID-19 testing revenue was $2.770 billion, versus $2.723 billion in 2020. Base-business revenue, including recent acquisitions, rose 20.4% year over year but was only 0.4% above 2019 levels excluding recent acquisitions.
- Diagnostic Information Services requisition volume increased 16.5%; revenue per requisition declined 1.6%, mainly reflecting Professional Laboratory Services mix and pricing pressure.
- Cash and cash equivalents were $872 million at year-end, down from $1.158 billion. Long-term debt was $4.010 billion, with a further $2 million current portion. No borrowings were outstanding under the $1.3 billion of available credit facilities; the company reported covenant compliance.
- Net cash used in financing was $2.540 billion, principally reflecting $2.2 billion of share repurchases and $309 million of dividends paid. DSO was 48 days, compared with 46 days at year-end 2020.
Material changes and unusual items
- Reported 2021 earnings included a $314 million pretax gain from selling Quest’s 40% interest in Q2 Solutions to IQVIA for $760 million in cash. Management said identified items, on net, increased diluted EPS by $1.31; therefore reported earnings growth was not solely operating growth.
- Quest acquired Mercy Health’s outreach laboratory business for $225 million and Labtech assets for $85 million, including estimated contingent consideration. Total 2021 acquisitions were $336 million net of cash acquired.
- Quest repurchased 16.0 million shares for $2.2 billion in 2021, compared with 2.7 million shares for $325 million in 2020. The April 2021 accelerated repurchase agreements accounted for 10.7 million shares and $1.5 billion.
- Invigorate restructuring and integration charges were $56 million pretax; the filing also identifies $61 million of related systems conversion and integration charges across expense lines. Quest reported that it exceeded its annual cost-savings and productivity target of approximately 3% of costs.
Outlook, management commentary, and risks
- Management expected COVID-19 testing demand to trend down in 2022 and beyond, while anticipating continued recovery in routine testing. The pace and extent remain uncertain and depend on the pandemic, variants, reimbursement, healthcare utilization, and economic conditions.
- For 2022, management expected combined reimbursement-rate pressure from all payers of less than 1%, wage inflation of 3%–4%, approximately $400 million in capital expenditures, and approximately $160 million in incremental growth investments.
- The next PAMA data collection and reporting requirements, and related Medicare laboratory-rate changes, were delayed until 2023; scheduled reductions for 2023–2025 are capped at 15% annually. Quest also cited rising patient cost-sharing and denials as potential pressure on collections and results.
- Principal risks include pandemic-driven volatility in testing, reimbursement and pricing pressure, labor and supply constraints, competition and in-house testing by health systems, potential FDA regulation of laboratory-developed tests, billing and compliance exposure, cybersecurity and privacy risks, and acquisition integration. A ReproSource subsidiary experienced a ransomware-related data incident in August 2021; Quest said its other systems were not affected.
- Legal matters include putative class actions and government inquiries related to the 2019 AMCA data incident, a 401(k) plan lawsuit, and other proceedings. Management said material legal losses were not probable at year-end, but could not predict outcomes; recorded legal reserves were $4 million.
- After year-end, Quest announced a 6.5% increase in its quarterly dividend to $0.66 per share and an additional $1 billion share-repurchase authorization. It also announced a CEO succession plan: James Davis was named CEO-elect, with the transition planned for November 1, 2022; the CFO announced retirement during 2022.
Important facts for investors to verify
- Separate underlying operating performance from the $314 million Q2 Solutions gain and other identified adjustments; assess earnings and EPS excluding these items and the impact of share repurchases.
- Track routine, non-COVID testing volumes and revenue per requisition as COVID testing demand and reimbursement normalize.
- Monitor patient receivables, concessions, denials, and collection assumptions; contractual allowances for DIS receivables were identified as a critical audit matter.
- Review the timing and effect of PAMA reimbursement changes, payer pricing pressure, labor inflation, and the expected 2022 investment program.
- Follow legal and cybersecurity developments, acquisition integration, debt maturities, and execution of the announced leadership transition.
PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2021.