Quest Diagnostics Incorporated — Q2 2023 Form 10-Q
Business context and period: Quest provides diagnostic information services (DIS) and diagnostic solutions (DS); DIS generated 97% of revenue. This unaudited quarterly report covers the three and six months ended June 30, 2023, compared with the same 2022 periods. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2,338 | $2,453 | $4,669 | $5,064 |
| Operating income | $348 | $388 | $653 | $901 |
| Operating margin | 14.9% | 15.8% | 14.0% | 17.8% |
| Net income attributable to Quest | $235 | $234 | $437 | $589 |
| Diluted EPS | $2.05 | $1.96 | $3.83 | $4.88 |
| Operating cash flow | $444 | $402 | $538 | $882 |
Revenue and earnings: Q2 revenue fell 4.7%; six-month revenue fell 7.8%. The principal drag was lower COVID-19 testing, partly offset by growth in base business and acquisitions. Q2 DIS revenue decreased 4.9%, while DS revenue rose 1.6%. Q2 DIS requisition volume increased 0.2%, but revenue per requisition declined 4.9%, largely reflecting less COVID-19 molecular testing. Including acquisitions, base-business DIS revenue grew 9.7% in Q2. Cost of services declined, but operating income and margins still fell. Q2 diluted EPS increased 4.6%, aided by fewer weighted-average shares and a more favorable comparison in non-operating items; six-month EPS declined 21.5%.
Cash flow and investment: Six-month operating cash flow declined $344, primarily due to lower operating income and timing of COVID-19 collections. Investing used $840, including $609 for acquisitions and $231 in capital expenditures. The company estimated 2023 capital expenditures of approximately $400.
Financial position and capital
At June 30, cash and cash equivalents were $126, down from $315 at year-end 2022. Total debt was approximately $4.30 billion ($518 current and $3.78 billion long-term); cash-adjusted debt was approximately $4.17 billion. Debt included $320 of secured receivables facility borrowings and $300 of 4.25% notes due April 2024. The company reported $885 of borrowing capacity available under credit facilities and compliance with applicable covenants. Its $750 senior unsecured revolver had no outstanding borrowings. Management said cash, operating cash flow and available borrowing capacity should support operating needs, debt service, dividends, repurchases and growth opportunities for the foreseeable future.
Current assets were $1,733 versus current liabilities of $1,875. The quarterly dividend was $0.71 per share. No shares were repurchased in the first half of 2023; $1.3 billion remained authorized for repurchases at June 30.
Material developments, outlook and risks
- Acquisitions: Quest acquired select New York-Presbyterian laboratory assets for $275 in April and Haystack Oncology in June for $392 net of cash acquired, including $304 cash consideration and $88 estimated contingent consideration. Haystack payments may include up to $150 more, dependent on revenue benchmarks through 2028 and CMS reimbursement coverage. Acquisition purchase accounting was preliminary.
- Costs and unusual items: The multi-year Invigorate program targets annual savings and productivity improvements of approximately 3% of costs to help offset inflation and reimbursement pressures. Six-month 2023 charges for Invigorate and other restructuring activities totaled $26, including integration costs; the financial statements separately report $21 of restructuring and impairment charges. Q2 results included items management said reduced diluted EPS by a net $0.25; first-half items reduced it by a net $0.51.
- Outlook: The filing does not provide formal revenue or earnings guidance. Management cited continued cost, labor and reimbursement pressures and expects further restructuring charges may occur.
- Contingencies and risks: Pending matters include 401(k) plan litigation, claims related to the AMCA data incident, ReproSource data incident lawsuits, a website privacy class action and other legal and governmental matters. Management said material legal losses were not probable as of June 30, but outcomes could affect results or cash flows. Legal reserves were $7; reserves for general and professional liability claims were $161, and actual claims could exceed reserves or insurance. Other risks cited include billing and reimbursement complexity, regulation, competition and customer, payer and supplier relationships.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether routine and advanced-testing growth can offset continued declines in COVID-19 testing and the resulting pressure on revenue per requisition.
- Whether operating margins and cash generation stabilize as labor costs, reimbursement conditions and the Invigorate savings program evolve.
- Acquisition integration and returns, including Haystack’s reimbursement prospects, contingent consideration and preliminary purchase-price allocations.
- Debt maturities, borrowing needs and liquidity after acquisitions, capital expenditures and dividends.
- Developments in legal matters and professional-liability claims that could change reserves or cash flows.