01—Abstract
Summary
Summary of the 10-K filed February 18, 2014. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported 2013 net revenues of $7.1 billiona, down 3.2% from 2012, as healthcare utilization weakened and Medicare fee schedule cuts reduced revenue per requisition by 3.6%.
Requisition volume rose only 0.2%, and underlying volume excluding acquisitions fell 1.8%. Reported operating income rose 22.8% to $1.475 billionb, but that was driven by a one-time $474 million pre-tax gain from the sale of ibrutinib royalty rights. Diluted EPS from continuing operations was $5.31, up 35.5%, with the gain contributing roughly $1.95 per share.
Excluding the gain and restructuring/Enterix charges, underlying earnings declined. Management's five-point strategy centers on restoring growth through acquisitions (UMass, ATN, Dignity, ConVerge), clinical franchise organizations, and esoteric testing, alongside the Invigorate cost program, which delivered more than $250 millionc in 2013 savings and is targeted to reach about $700 million in run-rate savings by end-2014. Capital returns were significant: about $1.0 billion in share repurchases and dividends of $1.20 per share for the year, with the quarterly dividend raised 10% to $0.33 in January 2014.
The company has about $3.3 billiond of debt, a target debt/EBITDA of 2 to 2.25 times, and an announced $570 million acquisition of Solstas Lab Partners. Investors should weigh the strong headline earnings and cash returns against soft organic volume, continued reimbursement pressure (Medicare clinical lab fee schedule cut 0.75% in 2014, with management expecting 1-2% annual declines), a 2013 operating cash flow drop to $652 million, and pending legal matters including Medicaid overcharge suits and the Myriad BRCA patent dispute.
02—Key points
Key Highlights
- Net revenues fell 3.2% to $7.146 billion; DIS volume rose just 0.2%, and volume excluding acquisitions declined 1.8% due to lower healthcare utilization.
- Revenue per requisition dropped 3.6%, driven by Medicare fee schedule reductions and commercial fee changes effective January 2013.
- Operating income rose 22.8% to $1.475 billion, but included a $474 million pre-tax gain on the ibrutinib royalty sale, which contributed about $1.95 per diluted share.
- Diluted EPS from continuing operations was $5.31 (up 35.5%); absent the one-time gain and other charges, underlying earnings declined.
- Invigorate cost program delivered over $250 million in 2013 savings and is expected to reach about $700 million in run-rate savings by end-2014 versus 2011.
- Operating cash flow fell to $652 million from $1.187 billion, reduced by a $175 million tax payment on the ibrutinib sale and higher restructuring payments.
- Returned over $1 billion to stockholders via buybacks and dividends; quarterly dividend raised 10% to $0.33 and total debt stands at about $3.3 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Quest Diagnostics Inc kept $0.12.
- Revenue$7.15B100.0%
- Cost of revenue−$4.33B60.5%
- Gross profit$2.82B39.5%
- Operating costs−$1.34B18.8%
- Operating income$1.48B20.6%
- Interest, other & tax−$626.0M8.8%
- Net income$849.0M11.9%
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 18, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $7.15B$7.38B | −3.2% |
| Cost of Revenue | $4.33B$4.37B | −0.9% |
| Gross Profit | $2.82B$3.02B | −6.6% |
| SG&A Expenses | $1.70B$1.75B | −2.3% |
| Operating Expenses | $5.67B$6.18B | −8.3% |
| Operating Income | $1.48B$1.20B | +22.8% |
| Net Income | $849.00M$556.00M | +52.7% |
| EPS (Basic) | $5.58$3.49 | +59.9% |
| EPS (Diluted) | $5.54$3.46 | +60.1% |
| Shares Outstanding (Basic) | 152.00M159.00M | −4.4% |
| Shares Outstanding (Diluted) | 153.00M160.00M | −4.4% |
05—Questions
Frequently Asked Questions
Why did reported EPS rise so sharply in 2013 if revenue declined?
Most of the increase came from a one-time $474 million pre-tax gain on selling future ibrutinib royalty rights, worth about $1.95 per diluted share. Lower share count from buybacks also helped. Operating results excluding the gain weakened on lower revenue, partly offset by Invigorate cost savings.
How sustainable is the company's revenue growth outlook?
Management's top 2014 priority is restoring growth, targeting growth above market rates over time, and expects 1-2% annual revenue growth from acquisitions. However, it expects reimbursement to decline 1-2% per year through 2015 and sees continued utilization headwinds, so organic growth remains uncertain.
What are the main regulatory and legal risks for investors?
Key risks include Medicare and Medicaid fee schedule reductions, possible FDA regulation of laboratory-developed tests, and billing compliance. Pending matters include Medicaid overcharge lawsuits in Florida and Michigan, qui tam and subpoena investigations, and a patent dispute with Myriad Genetics over BRCA testing. The company says no losses are probable, but amounts cannot be estimated.
Is the dividend and capital return policy secure?
The company intends to return a majority of free cash flow via dividends and buybacks while maintaining an investment-grade rating and a 2 to 2.25 times debt/EBITDA target. Management believes the dividend can grow over time, but the dividend increase was funded partly by proceeds from portfolio sales, so future returns depend on continued free cash flow.
What drove the decline in operating cash flow?
Operating cash flow dropped to $652 million from $1.187 billion, mainly due to a $175 million income tax payment on the ibrutinib sale, roughly $70 million of deferred taxes paid in 2013, the absence of a $72 million swap termination receipt from 2012, and higher restructuring payments.
06—Continue