Quest Diagnostics Incorporated — Q1 2021 Form 10-Q
Unaudited results for the three months ended March 31, 2021, compared with the same period in 2020. Quest provides diagnostic information services (DIS), its primary business, and Diagnostic Solutions (DS).
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenues | $2.720 billion | $1.822 billion | +49.3% |
| Operating income | $660 million | $175 million | +277.2% |
| Operating margin | 24.3% | 9.6% | +14.7 percentage points |
| Net income attributable to Quest | $469 million | $99 million | +374.3% |
| Diluted EPS | $3.46 | $0.73 | +$2.73 |
| Operating cash flow | $731 million | $247 million | +$484 million |
DIS revenue rose 51.5% to $2.643 billion; DS revenue was $77 million, down 1.0%. COVID-19 testing revenue was $828 million versus $24 million a year earlier. Routine clinical testing revenue was $1.032 billion versus $945 million. DIS requisition volume grew 25.6% and revenue per requisition rose 20.5%, largely reflecting COVID-19 molecular testing and favorable test mix.
Operating costs and expenses were $2.060 billion, up 25.1%, slower than revenue growth. Cost of services increased 28.0% to $1.626 billion, primarily with higher volume, test mix, COVID-19 supply costs and acquisitions. SG&A rose 17.1% to $407 million. Interest expense, net, was $38 million versus $41 million. The effective tax rate was 24.6%, compared with 22.0%.
Cash, debt and liquidity
Cash and cash equivalents were $1.230 billion at March 31, 2021, versus $1.158 billion at year-end. Total debt was approximately $4.012 billion, consisting of $2 million current and $4.010 billion long-term; the filing estimates debt fair value at $4.4 billion. Cash less reported debt was approximately $2.782 billion. Current assets were $2.999 billion and current liabilities $1.707 billion.
Operating cash flow was $731 million; capital expenditures were $86 million, and net cash used in investing was $93 million. Financing used $566 million, including $410 million of share repurchases and $75 million of dividends paid. The company had $1.3 billion of available borrowing capacity and no borrowings under its revolving or secured receivables facilities; $70 million of letters of credit were outstanding. Management said cash, operating cash flow and credit capacity should be sufficient for foreseeable requirements. The company reported compliance with applicable credit-facility covenants.
Material changes, outlook and notable items
- Year-over-year growth reflects both strong COVID-19 testing demand and comparison with Q1 2020, when pandemic-related declines began in March. Against Q1 2019, base testing volume, excluding specified acquisitions and agreements, was 7.9% lower; base revenue was 5.5% lower. Weather negatively affected those comparisons by an estimated 1.0% and 0.8%, respectively.
- COVID-19 testing revenue declined 27.9% from Q4 2020. Management expects COVID-19 testing demand to continue declining through 2021 as vaccination increases. It cited pandemic duration, reimbursement rates, healthcare and economic conditions, and government responses as key uncertainties. The company reported capacity for approximately 300,000 molecular and 350,000 antibody tests per day.
- No specific full-year revenue or EPS guidance is provided in the filing. Management estimated 2021 capital expenditures of $350 million to $400 million and expected to launch an approximately $1.5 billion accelerated share repurchase in Q2. It targeted annual Invigorate cost savings of approximately 3% of costs; Q1 program charges were $15 million.
- In April 2021, after quarter-end, Quest sold its 40% Q2 Solutions interest for $760 million cash and expects a pretax Q2 gain of approximately $310 million. It will remain a preferred laboratory provider under a multi-year agreement.
- Quest agreed to acquire Mercy Health’s outreach laboratory services business, with closing expected in mid-2021 subject to customary conditions. Medicare sequestration suspension was extended through year-end 2021, preserving a small reimbursement benefit.
- Q1 diluted EPS was reduced by a net $0.30 from disclosed items, including $0.16 amortization, $0.10 systems conversion and integration charges, $0.03 pandemic-related costs and $0.04 noncash investment impairment, partly offset by $0.03 of excess stock-compensation tax benefits. The filing also records an $8 million noncash impairment of an equity-method investment.
Risks and contingencies
The company identifies continuing COVID-19 effects, reimbursement and regulatory changes, competition, billing complexity, and customer, payer and supplier relationships as risks. It faces putative class actions and government inquiries related to the AMCA data-security incident, a 401(k) plan lawsuit, other litigation and government reviews. Management said material legal losses were not probable as of March 31, 2021, but outcomes could affect results or cash flows; legal reserves were $2 million. General and professional liability reserves were $142 million, and management considered reserves and insurance sufficient for currently estimated exposures. The company also notes contingent lease obligations for which no liability was recorded. No material changes to the prior annual report’s risk factors were reported.
Investor facts to verify
- How COVID-19 testing revenue and reimbursement declines compare with recovery in underlying base testing volume and revenue.
- Progress and final terms for the Mercy Health acquisition, and the Q2 timing and realized gain from the Q2 Solutions sale.
- Execution of the planned accelerated repurchase, remaining authorization, and cash deployment relative to debt and capital needs.
- Updates on AMCA-related litigation and investigations, the 401(k) lawsuit, and the adequacy of liability reserves.
- Whether 2021 capital spending and Invigorate savings targets are met as pandemic-related demand and costs change.