Quest Diagnostics Incorporated — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Quest’s diagnostic information services (DIS) business generated 96.9% of revenue. Comparisons below are year over year unless otherwise stated.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $2.331 billion | $2.611 billion | Down 10.7% |
| Operating income / margin | $305 million / 13.1% | $513 million / 19.7% | Income down 40.6% |
| Net income attributable to Quest | $202 million | $355 million | Down 43.0% |
| Diluted EPS | $1.78 | $2.92 | Down 39.0% |
| Operating cash flow | $94 million | $480 million | Down $386 million |
| Capital expenditures | $127 million | $63 million | Up $64 million |
Revenue and operating drivers: DIS revenue fell 11.1% to $2.259 billion, while Diagnostic Solutions revenue rose 2.3% to $72 million. COVID-19 testing revenue declined to $119 million from $599 million. Base-business revenue, excluding COVID-19 testing, grew 10.3% to $2.212 billion, including recent acquisitions. DIS requisition volume fell 3.8% and revenue per requisition fell 7.7%; in the base business, volume rose 7.9% and revenue per requisition rose 2.3%. Management attributed the overall per-requisition decline principally to lower COVID-19 molecular testing.
Cost of services declined 5.2%, but revenue declined faster; cost of services rose to 67.0% of revenue from 63.0%. SG&A increased 3.3% and rose to 18.8% of revenue from 16.3%. Lower COVID-related supply and collection costs were partly offset by higher compensation and benefits costs. The effective tax rate was 23.6%, versus 24.4%.
Cash, debt and liquidity
- Cash and cash equivalents were $175 million at March 31, 2023, down from $315 million at December 31, 2022. Operating cash flow was $94 million; capital expenditures were $127 million.
- Investing cash outflow was $158 million, including $127 million of capital expenditures and $31 million for acquisitions. Financing cash outflow was $76 million; the company paid $74 million in dividends and made no program share repurchases.
- Long-term debt was $3.975 billion, with $2 million current; total debt was approximately $3.977 billion. No borrowings were outstanding under the revolving or secured receivables credit facilities at quarter-end. Available borrowing capacity was approximately $1.2 billion, and the company reported compliance with applicable covenants.
- Accounts receivable was $1.254 billion and current liabilities were $1.355 billion. Days sales outstanding were 47, unchanged from year-end and improved from 49 a year earlier.
Material changes, outlook and management commentary
- Management cited the reduction in COVID-19 testing as the primary reason for lower reported revenue and earnings. Base-business growth partly offset that decline. Operating cash flow also fell, reflecting lower operating income and an additional payroll cycle in Q1 2023.
- The multi-year Invigorate program targets annual savings and productivity improvements of approximately 3% of costs, intended to help offset reimbursement, labor and benefit cost pressures. Q1 program and restructuring charges totaled $19 million pre-tax, including $15 million of employee separation costs; further restructuring charges may occur.
- Management estimated 2023 capital expenditures of approximately $400 million and said existing cash, operating cash flow and credit capacity should fund expected needs for the foreseeable future. The filing provides no full-year revenue or EPS guidance.
- In February 2023, the board increased the share-repurchase authorization by $1 billion; $1.3 billion remained available at quarter-end. The quarterly dividend declared was $0.71 per share, compared with $0.66 in each quarter of 2022.
- After quarter-end, Quest completed the acquisition of select New York-Presbyterian laboratory assets on April 17 for $275 million in cash. It also agreed to acquire Haystack Oncology for approximately $300 million in cash at closing, plus up to $150 million contingent on future milestones; closing was expected in Q2 2023. The company expected to fund these transactions with cash and credit-facility borrowings.
Risks, contingencies and unusual items
- Pending matters include litigation related to the AMCA data-security incident, a ReproSource data incident, alleged web-platform privacy violations, and a 401(k) plan lawsuit, along with other legal and governmental matters. Management said outcomes are not predictable and may affect results or cash flows; it did not believe material legal losses were probable at March 31. Legal reserves were $1 million.
- Reserves for general and professional liability claims were $168 million. The company noted uncertainty in claim estimates and the possibility that liabilities could exceed reserves or insurance coverage.
- Q1 diluted EPS included a net $0.26 per-share decrease from disclosed items, including amortization, restructuring and integration costs, and losses associated with strategic investments, partly offset by stock-based compensation tax benefits. Q1 2022 included a net $0.30 per-share decrease from specified items.
- Interest-rate exposure includes variable-rate borrowing capacity, though no facility borrowings were outstanding at quarter-end. The company uses derivatives for risk management and says it does not use them for speculative purposes.
Key facts for investors to verify
- Whether base-business volume and revenue-per-requisition trends continue to offset declining COVID-19 testing revenue.
- Whether cost savings from Invigorate can counter wage, benefit and reimbursement pressures, and the level of additional restructuring costs.
- Actual operating cash generation, capital spending, and funding and integration costs for the announced acquisitions.
- Developments in legal and data-incident matters and any resulting changes to reserves, cash flows or business risks.
- Any subsequent changes to capital allocation, including dividends, share repurchases and borrowing levels.