Quest Diagnostics Incorporated — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited; amounts are in millions except per-share data. Quest provides diagnostic information services (DIS), which generated about 97% of revenue, and Diagnostic Solutions (DS).
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $2,486 | $2,774 | $7,550 | $8,044 |
| Operating income | $392 | $652 | $1,293 | $1,845 |
| Operating margin | 15.8% | 23.5% | 17.1% | 22.9% |
| Net income attributable to Quest | $256 | $505 | $845 | $1,605 |
| Diluted EPS | $2.17 | $4.02 | $7.05 | $12.41 |
| Operating cash flow | $502 | $561 | $1,384 | $1,752 |
- Q3 revenue declined 10.4% year over year; nine-month revenue declined 6.1%. COVID-19 testing revenue was $316 in Q3 versus $709, and $1,270 for nine months versus $2,048.
- Base-business revenue, including acquisitions and excluding COVID-19 testing, increased 5.4% in Q3 and 5.2% for nine months. Q3 DIS requisition volume fell 6.2% overall, while base-business volume rose 1.6%; revenue per requisition fell 5.1% overall but rose 3.3% in the base business.
- Q3 cost of services fell 3.1%, but SG&A rose 8.5%; operating margin contracted 7.7 percentage points. For nine months, cost of services rose 0.3% and SG&A rose 3.8%.
- At September 30, cash and cash equivalents were $700 (versus $872 at year-end 2021); debt was $3,982, including $2 current and $3,980 long-term. Total current assets were $2,334 and current liabilities $1,602. Debt fair value was estimated at $3.6 billion.
- Nine-month investing cash flow was a $369 use, including $257 of capital expenditures and $106 for acquisitions. Financing used $1,187, including $947 of treasury-stock purchases and $230 of dividends. Cash decreased $172 over the period.
Changes, outlook and management commentary
- The principal year-over-year revenue pressure was lower COVID-19 testing demand, while the base business grew. COVID-related molecular testing also affected revenue per requisition and test mix.
- Comparisons with 2021 earnings are affected by the $314 pretax gain on the Q2 Solutions joint-venture sale recorded in the first nine months of 2021, as well as prior-year strategic-investment gains. In 2022, nine-month other non-operating expense included $31 of deferred-compensation investment losses and $30 of strategic-investment losses.
- Management reported Q3 items that reduced diluted EPS by a net $0.19, including $27 of amortization expense and $13 of restructuring and integration charges, partly offset by a $10 CARES Act payroll tax credit and other gains. Nine-month items reduced diluted EPS by a net $0.89, including amortization, investment losses and restructuring charges, partly offset by tax benefits and the payroll tax credit.
- The multi-year Invigorate program targets annual savings and productivity improvements of approximately 3% of costs. The company recorded $32 of pretax program charges in the first nine months, primarily systems conversion and integration costs; further restructuring charges may occur.
- Management estimated approximately $400 of 2022 capital expenditures. It said cash, operating cash flow and credit availability should provide sufficient financial flexibility for foreseeable requirements, including capital spending, debt service, dividends, repurchases and growth opportunities. No specific earnings guidance was provided in the filing.
- In February 2022, the board increased the repurchase authorization by $1 billion. Quest repurchased 7.1 million shares for $950 in the first nine months; $746 remained authorized at September 30. Quarterly dividends declared in 2022 were $0.66 per share, up from $0.62 in 2021.
- After quarter-end, Quest amended its secured receivables facility: aggregate capacity decreased from $600 to $525, comprising a $425 loan commitment and $100 letter-of-credit capacity. At quarter-end there were no borrowings under its credit facilities; available capacity was reported as $1.3 billion, and the company was in compliance with applicable covenants.
Risks, contingencies and unusual matters
- Management cited COVID-19 demand volatility, competition, reimbursement and billing complexity, regulatory changes, and changing customer, payer, supplier and partner relationships as risks to future results. Inflationary compensation costs and fluctuations in COVID testing also affect performance.
- Legal proceedings include a 401(k) class action, litigation and investigations related to the AMCA data-security incident, and ReproSource patient-data litigation. Management said material losses on legal matters were not considered probable at September 30, 2022, but outcomes and potential exposure could not be reliably estimated.
- Reserves for legal matters were $5; reserves for general and professional liability claims were $162. Management cautioned that claims could exceed reserves or insurance coverage, potentially affecting results, cash flows or financial condition.
- Pack Health was acquired on February 1, 2022 for $123 net of cash acquired, including contingent consideration initially estimated at $18. Acquisition-related contingent consideration obligations had a potential maximum aggregate payment of $40.
Important facts for investors to verify
- Whether growth in base-business volumes and revenue per requisition can offset continued declines in COVID-19 testing.
- Whether cost inflation and restructuring costs continue to pressure operating margins, and whether Invigorate delivers its targeted savings.
- Cash generation, capital spending, debt and liquidity after the amended secured receivables facility, including the facility’s reduced capacity and maturity schedule.
- Share repurchase pace, remaining authorization and dividend commitments relative to operating cash flow and investment needs.
- Developments in the disclosed litigation, data-security matters and professional-liability claims, including any changes to reserves or insurance recoveries.
- How much reported earnings comparability is affected by prior-year Q2 Solutions sale gains and investment fair-value movements.