Quest Diagnostics Incorporated — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; amounts below are in millions of dollars except per-share data. Quest provides diagnostic information services (DIS), which generated more than 90% of revenue, alongside Diagnostic Solutions businesses.
Financial results
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $1,925 | $1,902 | $3,764 | $3,648 |
| Operating income | $301 | $262 | $529 | $470 |
| Operating margin | 15.6% | 13.8% | 14.1% | 12.9% |
| Net income attributable to Quest | $118 | $133 | $179 | $237 |
| Diluted EPS | $0.81 | $0.92 | $1.23 | $1.63 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $327 | $364 |
- Q2 revenue increased 1.2%; excluding acquisitions, growth was 0.8%. DIS revenue rose 0.4%, with requisitions down 0.4% and revenue per requisition up 0.9%. Diagnostic Solutions revenue increased 11.1%.
- H1 revenue increased 3.2%, with acquisitions contributing nearly 2.4 percentage points. DIS requisitions rose 2.4%, including acquisition contribution; revenue per requisition increased 0.1%.
- Operating income grew faster than revenue, while attributable net income and EPS declined. Q2 EPS included a net $0.36 per-share impact from specified charges; H1 included a net $0.90 impact.
- H1 operating cash flow was $327, down $37 year over year. Capital expenditures were $117, versus $117 in H1 2014. Cash and cash equivalents were $150 at June 30, versus $192 at year-end 2014.
- At June 30, total debt was $3,736, including $168 current and $3,568 long-term. Stockholders’ equity was $4,344. Current assets were $1,530 and current liabilities $1,242.
Material changes and unusual items
- Quest issued $1.2 billion of senior notes in March and used proceeds, with credit-facility borrowing, to refinance and retire debt. Early-retirement and related refinancing charges were $65 in Q2 and $144 in H1. The transactions reduced future interest expense and improved the maturity profile; Q2 net interest expense was $37 versus $42 a year earlier.
- Q2 operating income benefited from lower SG&A, reduced intangible amortization and a $13 gain from lowering estimated Summit Health contingent consideration, partly offset by higher service costs. For H1, costs of services rose $70, principally reflecting acquisitions and higher restructuring, integration, and compensation costs.
- H1 financing cash flow was an outflow of $246, compared with an inflow of $434 in 2014, reflecting lower net borrowing and increased share repurchases. H1 repurchases totaled $149; $547 remained authorized at June 30. The quarterly dividend rose to $0.38 per share from $0.33.
Outlook, risks and contingencies
- No specific revenue or EPS guidance is stated in the provided filing text. Management expects approximately $300 of 2015 capital expenditures and says cash, operating cash flow and available credit should support operations, debt service, investment and shareholder returns.
- The Invigorate program had delivered more than $700 of run-rate savings exiting 2014. Management targets an additional $600 of run-rate savings by the end of 2017, for $1.3 billion versus 2011. Estimated 2015 program charges are $95–$115, and total charges for the 2015 course of action are estimated at $300; actual charges could differ materially.
- On July 1, 2015, Quest closed the Q2 Solutions clinical-trials joint venture with Quintiles, contributing assets for a 40% interest. The company expects a material, non-cash gain in Q3; the amount was still being determined. The contributed assets were held for sale at June 30 and were not classified as discontinued operations.
- Legal and regulatory matters include government inquiries and lawsuits concerning billing and other business practices, including a False Claims Act matter involving Berkeley HeartLab. Management said losses on the described matters were not considered probable at June 30, but possible losses could not be estimated and outcomes could materially affect results or cash flows in a period. General and professional liability reserves were approximately $116.
- Management cited reimbursement pressure, competition, changing customer and payer relationships, regulation, and pending or future investigations and litigation as risks. The company reported compliance with credit-agreement covenants and effective disclosure controls.
Important facts for investors to verify
- How much of the revenue and volume growth reflects acquisitions versus underlying performance, particularly given the Q2 decline in DIS requisitions.
- The final Q3 gain and continuing earnings contribution from Q2 Solutions, and the effect of transferring the clinical-trials business.
- Progress toward the $600 additional Invigorate savings target, expected program charges and realized cash costs.
- Whether debt refinancing produces the anticipated lower interest costs, and how debt maturities, variable-rate exposure and liquidity evolve.
- Developments in government investigations and litigation, including whether potential losses become estimable or require additional reserves.