Quest Diagnostics Incorporated — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This annual filing includes quarterly results, but the summary below focuses on full-year performance. Amounts are in U.S. dollars.
Business context and reporting period
Quest Diagnostics is a diagnostic testing, information and services company. It processed approximately 148 million test requisitions in 2009. Clinical testing generated more than 90% of revenue; the company also provides life-insurance risk assessment, clinical-trial testing, diagnostic products and healthcare IT services. Approximately 3% of revenue came from foreign operations.
Key financial metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net revenue | $7.455 billion | $7.249 billion |
| Operating income | $1.359 billion | $1.222 billion |
| Operating margin | 18.2% | 16.9% |
| Income from continuing operations attributable to Quest stockholders | $730 million | $632 million |
| Net income attributable to Quest stockholders | $729 million | $581 million |
| Diluted EPS from continuing operations | $3.88 | $3.22 |
| Net cash from operating activities | $997 million | $1.063 billion |
| Capital expenditures | $167 million | $213 million |
| Cash and cash equivalents at year-end | $534 million | $254 million |
| Total debt at year-end | $3.107 billion | $3.083 billion |
Gross profit was $3.134 billion, or approximately 42.0% of revenue. Operating cash flow less capital expenditures was approximately $831 million. The current ratio was approximately 1.6, based on reported current assets and liabilities. Bad-debt expense was 4.3% of revenue, down from 4.5% in 2008. The quarterly dividend remained $0.10 per share, or $0.40 for the year.
Material changes versus the prior comparable period
- Revenue increased 2.8%; clinical-testing revenue increased 3.2%. Requisition volume fell 0.7%, while revenue per requisition rose 3.9%, principally from test mix and reimbursement changes.
- Pre-employment drug-testing volume declined approximately 22%, reflecting reduced employer hiring; exiting certain low-profit laboratory-management agreements also reduced volume.
- Operating margin expanded to 18.2% from 16.9%, reflecting cost reductions, cost containment and higher revenue per requisition. The 2009 margin also included a $15.5 million storm-insurance settlement gain.
- Continuing-operations income attributable to Quest stockholders rose to $730 million from $632 million, helped by operating performance and $36 million lower net interest expense. Lower discontinued-operations charges also lifted reported net income: the 2009 loss was $1.2 million versus $50.7 million in 2008.
- Operating cash flow declined year over year, including a $308 million payment for the NID government settlement. Management said underlying operating cash flow, after considering that payment, exceeded 2008. Days sales outstanding improved to 43 from 44.
- Cash increased, while total debt was broadly stable. The company issued $750 million of long-term notes and used proceeds in part to retire nearer-term debt; 2009 financing also included $500 million of share repurchases.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management expects long-term industry growth and aims to grow faster than the U.S. clinical-laboratory market, improve margins and expand international revenue to 10% of consolidated revenue. It estimated 2010 capital expenditures of approximately $200 million.
- Capital returns: In January 2010, the board authorized an additional $750 million of repurchases; the company also entered into a $250 million accelerated share repurchase, initially covering approximately 4.5 million shares. These are subsequent events, not 2009-period results.
- Reimbursement and competition: Government and commercial payers continue to pressure pricing and utilization. The Medicare clinical laboratory fee schedule decreased 1.9% effective January 1, 2010. A potential 21.2% reduction to the physician fee schedule was temporarily delayed by Congress; approximately 3% of 2009 revenue was tied to that schedule.
- Legal and compliance: Quest paid $308 million in 2009 to resolve the federal investigation involving its discontinued NID subsidiary; NID pleaded guilty to felony misbranding. Quest also entered a five-year Corporate Integrity Agreement. Separate federal and state billing-related investigations and lawsuits remained pending; management reported approximately $10 million of reserves and said losses were not then probable or reasonably estimable for several matters. Outcomes could still materially affect results or cash flows in the period resolved.
- Other notable items: 2009 continuing-operations results included $20.4 million of debt-extinguishment charges, a $7.0 million investment write-down, discrete tax benefits and the $15.5 million insurance gain. The company reported no goodwill impairment. It identified payer concentration, economic weakness, regulatory change, billing and collection, IT-system conversion, testing quality, acquisition integration and debt as significant risks.
- Controls and audit: Management and the independent auditor reported effective internal control over financial reporting as of December 31, 2009; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether volume, reimbursement and revenue-per-requisition trends persist, particularly as payer pricing pressure continues.
- The amount and timing of any further costs, penalties or settlements from pending billing investigations and the company’s compliance with the Corporate Integrity Agreement.
- Whether operating cash flow remains strong after working-capital needs, legal payments, capital expenditures, dividends and repurchases.
- Debt maturities, interest-rate exposure and the effect of continued buybacks on leverage and financial flexibility.
- Whether management’s long-term growth and international-revenue objectives are supported by measurable progress and profitable execution.