Quest Diagnostics Incorporated — Form 10-Q Summary
Business context and period: This unaudited report covers the three months ended March 31, 2022, compared with the same quarter of 2021. Quest primarily provides diagnostic information services (DIS), which generated 97% of quarterly revenue; Diagnostic Solutions (DS) accounted for the balance. Results remain affected by pandemic-related changes in testing volume and mix.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenues | $2.611 billion | $2.720 billion | Down 4.0% |
| Operating income | $513 million | $660 million | Down 22.3% |
| Operating margin | 19.7% | 24.3% | Down 4.6 percentage points |
| Net income attributable to Quest | $355 million | $469 million | Down 24.3% |
| Diluted EPS | $2.92 | $3.46 | Down 15.6% |
| Operating cash flow | $480 million | $731 million | Down $251 million |
Revenue mix shifted: COVID-19 testing revenue fell to $599 million from $828 million, while base-business revenue excluding COVID-19 testing rose to $2.012 billion from $1.892 billion. DIS requisition volume increased 1.3%; base-business testing volume, including acquisitions, increased 6.2%; revenue per requisition declined 5.2%. DS revenue declined 8.9% to $70 million, primarily reflecting lower life-insurance risk assessment services.
Cost of services rose 1.3% to $1.646 billion, and SG&A rose 4.5% to $425 million, despite lower revenue. Cost of services increased to 63.0% of revenue from 59.8%; SG&A increased to 16.3% from 14.9%. Net non-operating expense was $61 million versus $34 million, including $16 million of losses on strategic investments and $8 million of deferred-compensation investment losses. Equity-method earnings increased to $31 million from $17 million.
Balance sheet, cash flow and capital allocation
At March 31, 2022, cash and cash equivalents were $712 million, down from $872 million at year-end 2021. Debt was approximately $3.987 billion, comprising $2 million current and $3.985 billion long-term, versus $4.012 billion at year-end; cash less debt was approximately $3.275 billion. Current assets were $2.475 billion and current liabilities $1.700 billion. The company reported $1.3 billion of available borrowing capacity, with no borrowings under its revolving or secured receivables facilities, and stated it was in compliance with applicable covenants.
Operating cash flow was $480 million. Investing used $169 million, including $105 million for acquisitions and $63 million in capital expenditures. Financing used $471 million, including $373 million of treasury-stock purchases and $74 million of dividends paid. The company repurchased 2.6 million shares for $350 million and had $1.3 billion remaining under its authorization. The quarterly dividend declared increased to $0.66 per share from $0.62 in each 2021 quarter.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or EPS guidance. Management estimated approximately $400 million of 2022 capital expenditures and said it aims to achieve annual savings and productivity improvements of approximately 3% of costs through its Invigorate program. Management believes cash, operating cash flow and available borrowing capacity should fund foreseeable obligations and growth opportunities.
- COVID-19 and reimbursement: Management cautioned that pandemic-related volatility makes the quarter potentially unrepresentative of full-year results. HRSA stopped accepting claims for uninsured testing and treatment after March 22, 2022; the program represented approximately 12% of Q1 COVID-19 testing revenue. Less than 5% of net receivables related to uninsured COVID-19 testing claims, but reimbursement estimates may differ from actual collections.
- Acquisitions and restructuring: Quest acquired Pack Health on February 1 for $123 million net of acquired cash, including $105 million cash consideration and initially estimated $18 million contingent consideration. It recorded $11 million of pre-tax Invigorate charges, primarily for system conversion and integration; further restructuring charges may occur. Total Q1 items identified by management reduced diluted EPS by a net $0.30, including amortization, investment losses, restructuring/integration costs and charitable support, partly offset by tax benefits.
- Legal and operational exposures: The company faces litigation and investigations, including a 401(k) class action and ReproSource data-incident litigation and investigations. OCR closed its review of the 2019 AMCA incident on April 6, 2022. Management said material legal losses were not considered probable at quarter-end, but outcomes could affect results or cash flows; legal reserves were $3 million. Reserves for general and professional liability claims were $158 million.
- Other risks: Key risks include changing COVID-19 demand, reimbursement and billing complexity, wage and supply costs, competition, government regulation and investigations, and investment-value fluctuations. Management reported sufficient testing supplies at the time of filing and no impairment of investments.
Important facts for investors to verify
- Whether base-business growth can offset declining COVID-19 testing demand and lower revenue per requisition.
- Whether operating margins and cash generation recover as pandemic-related revenue and cost mix change.
- Actual reimbursement and collection outcomes for uninsured COVID-19 testing claims after the HRSA program ended.
- Pack Health integration, contingent-consideration payments, and Invigorate savings versus restructuring costs.
- Developments in legal and data-security matters, and the company’s continued capacity for dividends, repurchases and planned capital spending.