01—Abstract
Summary
Summary of the 10-K filed February 24, 2015. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported 2014 net revenues of $7.4 billiona, up 4.0% year over year, driven mainly by acquisitions (Solstas, Summit Health, Steward) rather than organic growth.
Organic DIS volume declined about 1%, and revenue per requisition fell 1.8%. Operating income dropped 33% to $983 millionb because 2013 included a $474 million one-time gain on the ibrutinib royalty sale, and 2014 carried $121 million of restructuring charges. Income from continuing operations attributable to Quest fell to $551 million, or $3.78 per diluted share, versus $5.31 in 2013.
Excluding the 2014 items, earnings per share were roughly $4.10 to $4.20c, though this figure is an analyst estimate rather than a reported number. Cash generation improved, with operating cash flow of $938 million versus $652 million, helped by the absence of a 2013 tax payment tied to the royalty sale. Total debt rose to $3.8 billion from $3.3 billion, reflecting acquisition funding.
Management reaffirmed a capital return framework that returns most free cash flow to shareholders through dividends and buybacks, and raised the quarterly dividend 15% to $0.38d per share. The company also launched a new Invigorate cost program targeting an additional $600 million in run-rate savings by the end of 2017, with about $300 million in expected pre-tax charges.
Key risks include continued reimbursement pressure from government and commercial payers, competition from hospital-affiliated labs, potential FDA regulation of laboratory-developed tests, and an uncertain transition to new Medicare fee schedules in 2015. Management expects the business environment to be more stable in 2015 and reimbursement pressure to be consistent with 2014.
02—Key points
Key Highlights
- Net revenues rose 4.0% to $7.4 billion, but growth came mainly from acquisitions; organic DIS volume fell about 1%.
- Diluted EPS from continuing operations fell to $3.78 from $5.31, largely because 2013 included a $474 million gain on the ibrutinib royalty sale.
- Operating cash flow increased to $938 million from $652 million, aided by the absence of a 2013 tax payment tied to the royalty sale.
- Total debt increased to $3.8 billion from $3.3 billion, following the Solstas acquisition and a $600 million senior notes offering.
- The quarterly dividend was raised 15% to $0.38 per share, the fourth increase since 2011, and $132 million of stock was repurchased in 2014.
- A new Invigorate program targets an additional $600 million in run-rate savings by the end of 2017, bringing cumulative savings to $1.3 billion versus 2011.
- Revenue per requisition declined 1.8%, and management expects reimbursement pressure in 2015 to remain consistent with 2014.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Quest Diagnostics Inc kept $0.07.
- Revenue$7.43B100.0%
- Cost of revenue−$4.64B62.4%
- Gross profit$2.80B37.6%
- Operating costs−$1.81B24.4%
- Operating income$983.0M13.2%
- Interest, other & tax−$427.0M5.7%
- Net income$556.0M7.5%
Where FY2014 revenue went
$7.43B- Cost of revenue: $4.64B, 62% of revenue
- SG&A: $1.73B, 23% of revenue
- Net income: $556.0M, 7.5% of revenue
- Other operating costs: $87.0M, 1.2% of revenue
- Interest, other & tax: $427.0M, 5.7% of revenue
Kept 7.5% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 24, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $7.43B$7.15B | +4.0% |
| Cost of Revenue | $4.64B$4.33B | +7.2% |
| Gross Profit | $2.80B$2.82B | −0.8% |
| SG&A Expenses | $1.73B$1.70B | +1.4% |
| Operating Expenses | $6.45B$5.67B | +13.8% |
| Operating Income | $983.00M$1.48B | −33.4% |
| Interest Expense | $167.00M— | — |
| Net Income | $556.00M$849.00M | −34.5% |
| EPS (Basic) | $3.83$5.58 | −31.4% |
| EPS (Diluted) | $3.81$5.54 | −31.2% |
| Shares Outstanding (Basic) | 145.00M152.00M | −4.6% |
| Shares Outstanding (Diluted) | 145.00M153.00M | −5.2% |
05—Questions
Frequently Asked Questions
Why did earnings per share decline so sharply in 2014?
Most of the decline reflects the comparison to 2013, which included a $474 million pre-tax gain (about $1.95 per diluted share) from selling the ibrutinib royalty rights. 2014 also included $121 million of restructuring and integration charges and a $44 million tax benefit that partly offset that headwind.
Is Quest's growth organic or driven by acquisitions?
Growth in 2014 was primarily acquisition-driven. Acquisitions contributed roughly 6% to DIS revenue growth and about 7% to DIS volume, while organic volume declined about 1%, partly due to a harsh winter and the decision not to renew certain business.
How secure is the dividend and what is the capital return plan?
Management expects to return a majority of free cash flow through dividends and share repurchases while maintaining an investment-grade credit rating. The dividend was increased to $0.38 per quarter in January 2015, and the company has $696 million remaining under its buyback authorization.
What are the main regulatory and reimbursement risks?
Key risks include Medicare clinical lab fee schedule changes under the Protecting Access to Medicare Act of 2014, continued pressure from commercial payers and capitated arrangements, possible FDA oversight of laboratory-developed tests, and the ICD-10 coding transition due by October 2015. Medicare accounts for about 14% of consolidated revenues across the lab and physician fee schedules.
06—Continue