Quest Diagnostics Incorporated — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Figures are unaudited and, unless noted, in millions of dollars. Quest’s diagnostic information services (DIS) business generated over 95% of revenue.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $2,453 | $2,550 | $5,064 | $5,270 |
| Operating income | $388 | $533 | $901 | $1,193 |
| Operating margin | 15.8% | 20.9% | 17.8% | 22.6% |
| Net income attributable to Quest | $234 | $631 | $589 | $1,100 |
| Diluted EPS | $1.96 | $4.96 | $4.88 | $8.38 |
| Operating cash flow | $402 | $460 | $882 | $1,191 |
Q2 revenue declined 3.8% year over year; six-month revenue declined 3.9%. DIS revenue fell 3.6% in Q2 and 3.8% year to date, while Diagnostic Solutions revenue fell 8.8% and 8.9%, respectively. Cost of services rose 2.9% in Q2 and 2.1% for six months, contributing to lower operating margins. Net interest expense was $36 for Q2 and $73 for six months.
Service mix shifted: Q2 COVID-19 testing revenue was $355, down from $511; gene-based and esoteric testing revenue increased to $787 from $673. Base-business revenue, excluding COVID-19 testing, rose 3.3% in Q2 and 5.1% for six months, including recent acquisitions. Q2 DIS requisition volume declined 1.4%, while revenue per requisition declined 2.6%; for six months, volume was flat and revenue per requisition fell 3.9%.
Balance sheet and capital allocation
- At June 30, cash and equivalents were $790, versus $872 at year-end 2021. Current assets were $2,426 and current liabilities were $1,577.
- Long-term debt was $3,983, with $2 current; total reported debt was approximately $4.0 billion. No borrowings were outstanding under the $600 million secured receivables facility or $750 million revolving facility. The company reported $1.3 billion of available borrowing capacity, including the effect of outstanding letters of credit.
- Six-month operating cash flow was $882; investing activities used $251 and financing activities used $713. Capital expenditures were $139. Operating cash flow decreased $309 year over year, primarily due to lower operating income and working-capital timing, partly offset by lower income-tax payments.
- Quest repurchased 4.0 million shares for $550 during the first half and paid $152 in dividends. The quarterly dividend was raised to $0.66 per share from $0.62 in 2021. At June 30, $1.1 billion remained under the repurchase authorization.
Changes, outlook and notable items
- The prior-year comparison includes a $314 pretax gain from the April 2021 sale of Quest’s 40% interest in Q2 Solutions. That transaction materially elevated 2021 reported income and also generated $755 of investing cash proceeds. The gain is not recurring; it should be considered when assessing the sharp year-over-year declines in earnings.
- Management cited lower COVID-19 testing, wage and benefit increases, and higher collection costs as factors affecting results. It also reported softer healthcare-utilization trends in Q2 versus Q1. Revenue per requisition was affected by reduced COVID-19 molecular testing and unit-price pressure of less than 1%, partly offset by favorable test mix.
- Quest expects approximately $400 of 2022 capital expenditures and targets annual savings and productivity improvements of approximately 3% of costs through its multi-year Invigorate program. It incurred $20 of pretax Invigorate charges in the first half, primarily cash costs. Management believes cash, operating cash flow and credit availability will fund foreseeable requirements; this is not a quantified earnings forecast.
- The COVID-19 environment remains a source of volatility in testing volumes and revenue. HRSA stopped accepting claims under its uninsured COVID-19 testing and treatment program after March 22, 2022; Quest reported no material outstanding net receivables under the program at June 30.
- Other Q2 items included $21 of net losses associated with strategic investments, $12 of restructuring and integration charges, and $8 of charges principally related to contingent consideration and charitable support. Management estimated these and other specified items reduced Q2 diluted EPS by a net $0.40; specified first-half items reduced diluted EPS by $0.70.
Risks and contingencies
The filing discusses pending 401(k) plan litigation, class actions and investigations related to the AMCA data-security incident, and lawsuits and investigations concerning a 2021 ReproSource data incident. It also describes other litigation and government inquiries. Management said material legal losses were not probable at June 30, 2022, but outcomes may affect results or cash flows; legal reserves were $3. Professional and general liability reserves were $157, and the company cautioned that claims could exceed recorded reserves or insurance coverage. Quest also has up to $40 of contingent acquisition consideration, with a $39 fair-value accrual at quarter-end.
Investor facts to verify
- Whether base-business growth can offset declining COVID-19 testing and the recent softness in utilization.
- Whether wage, collection and other cost pressures continue to compress operating margins, and whether the Invigorate program delivers its targeted savings.
- How much reported earnings comparisons normalize after excluding the prior-year Q2 Solutions gain and current-period specified items.
- Cash conversion, working-capital trends, capital spending, and the pace of share repurchases and dividends relative to available liquidity.
- Developments in data-security matters, professional-liability claims, and acquisition-related contingent consideration.