01—Abstract
Summary
Summary of the 10-K filed February 22, 2017. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported 2016 net revenues of $7.5 billiona, up 0.3% year over year, with the Focus Diagnostics sale, the Clinical Trials joint venture contribution and the wind-down of Celera products together reducing revenue growth by about 2.3 points.
Diagnostic Information Services (DIS) revenue grew 2.5% to $7.1 billionb, driven by 2.0% volume growth and 0.4% revenue per requisition growth, with acquisitions contributing 0.8 points. Reported operating income fell 8.7% to $1.28 billion, largely because 2015 included a $334 million gain on the Clinical Trials contribution, and diluted EPS from continuing operations declined 7.4% to $4.51. Excluding one-time items, management cited a net $0.26 per share drag in 2016, with a $118 million gain on the Focus sale offset by systems conversion costs and a $48 million debt-retirement loss.
Cash generation improved, with operating cash flow rising to $1.07 billionc from $821 million, and management returned capital through $590 million of buybacks and $223 million of dividends. The quarterly dividend was raised 12.5% to $0.45 for 2017, and the board added $1 billion of repurchase authority. Total debt was about $3.7 billion, and the company stated it is committed to an investment-grade credit rating.
The Invigorate cost program reached more than $1.1 billiond in run-rate savings against a $1.3 billion goal for exiting 2017, and management expects 2017 charges of $60 million to $80 million. Key risks include continued pricing and reimbursement pressure from government and commercial payers, the possible repeal or replacement of the ACA, PAMA fee schedule revisions targeted for 2018, FDA oversight of laboratory-developed tests, and a December 2016 cyberattack that exposed certain patient data. Investors should also note that billing operations were outsourced to Optum360 from November 2016, which introduces transition and execution risk, and that the effective tax rate rose to 39.5% in 2016.
02—Key points
Key Highlights
- Revenue was $7.52 billion, up 0.3% reported. Organic DIS growth was 1.7%, and acquisitions added 0.8%.
- DIS revenue rose 2.5% to $7.14 billion, with requisition volume up 2.0% and revenue per requisition up 0.4%.
- Diluted EPS from continuing operations was $4.51, down from $4.87, mainly because 2015 included a $334 million gain on the Clinical Trials contribution.
- Operating cash flow increased 30% to $1.07 billion, and cash and equivalents ended the year at $359 million.
- Capital return was $813 million in 2016 ($590 million of buybacks plus $223 million of dividends). The quarterly dividend rose 12.5% to $0.45, and buyback authority was increased by $1 billion.
- Invigorate cost savings exceeded $1.1 billion run-rate versus a $1.3 billion goal for exiting 2017.
- Billing operations were outsourced to Optum360 starting November 2016, and a December 2016 cyber attack exposed certain patient data.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Quest Diagnostics Inc kept $0.09.
- Revenue$7.21B100.0%
- Cost of revenue−$4.32B59.8%
- Gross profit$2.90B40.2%
- Operating costs−$1.62B22.5%
- Operating income$1.28B17.7%
- Interest, other & tax−$632.0M8.8%
- Net income$645.0M8.9%
Where FY2016 revenue went
$7.21B- Cost of revenue: $4.62B, 64% of revenue
- SG&A: $1.38B, 19% of revenue
- Net income: $645.0M, 8.9% of revenue
- Interest, other & tax: $632.0M, 8.8% of revenue
Kept 8.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 22, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $7.21B$7.49B | −3.7% |
| Cost of Revenue | $4.62B$4.66B | −0.9% |
| Gross Profit | $2.90B$2.84B | +2.2% |
| SG&A Expenses | $1.38B$1.68B | −17.8% |
| Operating Expenses | $5.94B$6.09B | −2.6% |
| Operating Income | $1.28B$1.40B | −8.7% |
| Interest Expense | $144.00M$154.00M | −6.5% |
| Net Income | $645.00M$709.00M | −9.0% |
| EPS (Basic) | $4.58$4.92 | −6.9% |
| EPS (Diluted) | $4.51$4.87 | −7.4% |
| Shares Outstanding (Basic) | 140.00M144.00M | −2.8% |
| Shares Outstanding (Diluted) | 142.00M145.00M | −2.1% |
05—Questions
Frequently Asked Questions
Why did reported operating income and EPS decline in 2016 if revenue grew?
Operating income fell 8.7% to $1.28 billion, and diluted EPS fell to $4.51 from $4.87. The main cause was comparison to 2015, which included a $334 million pre-tax gain on the Clinical Trials joint venture contribution. In 2016, the $118 million Focus Diagnostics gain was offset by a $48 million debt-retirement loss, $82 million of restructuring and integration charges, and a higher effective tax rate of 39.5%.
How sustainable is the DIS growth, and what is driving it?
DIS growth was supported by gene-based and esoteric testing, expanding hospital health system relationships, and acquisitions such as Clinical Laboratory Partners. Pricing pressure of about 0.7% partially offset favorable test mix. Management expects reimbursement pressure to remain around 1% in 2017, and organic growth depends on continued volume gains from advanced diagnostics and partnerships.
What are the biggest regulatory and reimbursement risks?
Key risks include potential repeal or replacement of the ACA, which management says is uncertain in scope and timing. Revisions to the Medicare Clinical Laboratory Fee Schedule under PAMA are targeted for 2018, and the company believes the impact will be manageable but cannot yet quantify it. FDA intent to regulate laboratory-developed tests and proposed tax reform could also affect results. Medicare and Medicaid represent about 17% of net revenues.
How is the company returning capital, and is the balance sheet secure?
In 2016 the company repurchased $590 million of stock, including a $250 million accelerated repurchase, and paid $223 million in dividends. About $1.4 billion of repurchase authority remains. Total debt was $3.7 billion, with $1.3 billion of available credit facility capacity, and management says it intends to maintain an investment-grade rating. Leverage and interest costs are manageable, but debt levels limit flexibility if earnings decline.
06—Continue