01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics' 2015 10-K shows a company that returned to top-line growth while executing a multi-year restructuring.
Total net revenues reached $7.49 billiona, up 0.8% from $7.44 billion in 2014, with the Diagnostic Information Services (DIS) business growing 1.3% to $6.97 billion on a 1.2% volume increase and a flat 0.1% revenue per requisition. The Diagnostic Solutions (DS) segment declined 6.1%, largely because the clinical trials business was contributed to the Q2 Solutions joint venture with Quintiles on July 1, 2015, which reduced total revenue growth by about 1.2 points. Reported profitability was inflated by one-time items.
Operating income rose 42% to $1.40 billionb, but this included a $334 million non-cash gain on the Q2 Solutions contribution and $105 million of restructuring and integration charges. Diluted EPS from continuing operations was $4.87, up from $3.78, with the company citing a net $0.48 benefit from items that were not part of the core run-rate. The effective tax rate rose to 33.8%, and a $145 million deferred tax expense on the Q2 gain weighed on results.
Operating cash flow declined to $810 millionc from $938 million, partly due to $146 million of cash charges for early debt retirement. Capital allocation remained shareholder-focused. The company returned roughly 80% of free cash flow through $212 million of dividends and $224 million of buybacks, raised the quarterly dividend 5% to $0.40 in January 2016, and ended the year with $3.65 billion of total debt and $972 million of remaining repurchase authority.
Management is targeting $1.3 billiond in cumulative Invigorate run-rate savings by the end of 2017, with $200 million realized in 2015, and expects 2016 Invigorate charges of $80 to $100 million. Key risks remain reimbursement pressure from government and commercial payers, the possible PAMA-driven Medicare fee schedule reset expected as early as 2017, FDA oversight of laboratory-developed tests, and ongoing billing and qui tam litigation.
02—Key points
Key Highlights
- Total net revenues of $7.49B grew 0.8% year over year. DIS revenue grew 1.3% to $6.97B, driven by 1.2% volume growth and acquisitions that contributed about 1.3 points, while revenue per requisition rose only 0.1%.
- Reported operating income of $1.40B (up 42%) was boosted by a $334M non-cash gain on the Q2 Solutions clinical trials JV and offset by $105M of restructuring and integration charges; underlying growth is more modest.
- Diluted EPS from continuing operations was $4.87, up from $3.78, with management citing a net $0.48 benefit from non-recurring items, including the JV gain, a $58M deferred tax benefit, and $150M of debt retirement charges.
- Free cash flow returned to shareholders totaled roughly 80% of FCF through $212M in dividends and $224M in buybacks. The quarterly dividend was raised 5% to $0.40, and $972M of repurchase authority remained at year-end.
- Invigorate cost program delivered over $200M of realized savings in 2015, with a goal of $1.3B cumulative run-rate savings by the end of 2017. Planned 2016 Invigorate charges are $80–100M, mostly for systems conversion.
- Balance sheet: total debt was $3.65B, down from $3.74B, after a $1.2B senior notes issuance used to refinance higher-coupon notes. Cash on hand was $133M, and $1.3B of credit facility capacity was available.
- Key risks include continued Medicare and commercial payer reimbursement pressure, PAMA-driven Medicare fee schedule revisions expected as early as 2017, possible FDA regulation of laboratory-developed tests, and ongoing billing-related litigation and False Claims Act exposure.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Quest Diagnostics Inc kept $0.09.
- Revenue$7.49B100.0%
- Cost of revenue−$4.66B62.2%
- Gross profit$2.84B37.8%
- Operating costs−$1.44B19.2%
- Operating income$1.40B18.7%
- Interest, other & tax−$690.0M9.2%
- Net income$709.0M9.5%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $7.49B$7.43B | +0.8% |
| Cost of Revenue | $4.66B$4.64B | +0.4% |
| Gross Profit | $2.84B$2.80B | +1.4% |
| SG&A Expenses | $1.68B$1.73B | −2.8% |
| Operating Expenses | $6.09B$6.45B | −5.5% |
| Operating Income | $1.40B$983.00M | +42.3% |
| Interest Expense | $154.00M$167.00M | −7.8% |
| Net Income | $709.00M$556.00M | +27.5% |
| EPS (Basic) | $4.92$3.83 | +28.5% |
| EPS (Diluted) | $4.87$3.81 | +27.8% |
| Shares Outstanding (Basic) | 144.00M145.00M | −0.7% |
| Shares Outstanding (Diluted) | 145.00M145.00M | 0.0% |
05—Questions
Frequently Asked Questions
Did Quest's 2015 EPS growth reflect improving core operations?
Only partially. Diluted EPS from continuing operations rose to $4.87 from $3.78, but results included a $334M pre-tax gain on the Q2 Solutions contribution, $150M of debt retirement charges, and $105M of restructuring costs. Management attributed a net $0.48 benefit to these items. Excluding them, growth was driven mainly by the modest 1.3% DIS revenue increase and Invigorate cost savings.
What drove the decline in Diagnostic Solutions revenue?
DS revenue fell 6.1% to $528M. The main cause was the July 1, 2015 contribution of the clinical trials testing business to the Q2 Solutions joint venture, which reduced DS revenue by about 17%. Because the company now holds a 40% equity interest accounted for under the equity method, that business no longer contributes to consolidated revenue.
What are the main regulatory risks for 2016 and beyond?
The main near-term risk is the Protecting Access to Medicare Act (PAMA), which will revise Medicare Clinical Laboratory Fee Schedule rates, possibly as early as 2017. Management also flagged FDA's planned increase in regulation of laboratory-developed tests and continued government and commercial payer pressure on reimbursement. Ongoing False Claims Act and Medicaid billing lawsuits, including the Florida Medicaid case and the Berkeley HeartLab qui tam, add further uncertainty.
How strong is Quest's capital return and balance sheet position?
Capital return was substantial, with $212M in dividends and $224M in buybacks in 2015, and the company said it expects to return a majority of free cash flow to investors. Total debt declined to $3.65B, but the company remains focused on maintaining an investment-grade rating. Liquidity appears adequate, with $133M of cash and $1.3B of available credit facility capacity. Operating cash flow fell to $810M from $938M, partly because of $146M of pre-tax debt retirement costs.
06—Continue