01—Abstract
Summary
Summary of the 10-K filed February 20, 2020. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported 2019 net revenues of $7.7 billiona, up 2.6% year over year, with operating income up 11.8% to $1.231 billion and diluted EPS from continuing operations of $6.13, up 15.9%.
Growth was driven by the Diagnostic Information Services (DIS) business, which grew revenue 2.8% on 4.3% volume growth (about 3.1% organic, 1.2% from acquisitions), partly offset by a 1.3% decline in revenue per requisition. Management attributed the pricing pressure mainly to PAMA-driven Medicare reimbursement cuts and rising denials. Operating margin improved to 15.9% from 14.6%, aided by a $95 millionb net other operating gain (including a $73 million sale-leaseback gain) and Invigorate cost-savings, though it was partly offset by higher amortization and integration costs.
Cash generation was solid, with operating cash flow of $1.243 billionc and capex of $400 million, leaving roughly $843 million of free cash flow. Total debt rose to $4.77 billion, and cash ended the year at $1.19 billion after net borrowings to fund acquisitions and refinancing. Management reiterated a strategy of returning most free cash flow to shareholders: the quarterly dividend was raised about 6% to $0.56 from $0.53, and $1.2 billion remained under the repurchase authorization.
Key risks flagged in the filing include continued PAMA reimbursement cuts (about 10%d scheduled for 2020, with further capped reductions from 2021 to 2023), government and health-plan pressure on pricing, potential FDA regulation of laboratory-developed tests, and cybersecurity exposure. The AMCA data security incident is a notable open item, with 39 lawsuits filed (37 still pending after two dismissals) and government investigations underway, though the company says the 2019 financial impact was not material.
02—Key points
Key Highlights
- Net revenues of $7.726B (+2.6%); DIS revenues +2.8% to $7.405B, with DIS volume up 4.3%
- Revenue per requisition fell 1.3%, driven by roughly 2.5% of reimbursement pressure including PAMA unit price cuts and higher denials
- Operating income rose 11.8% to $1.231B; operating margin expanded to 15.9% from 14.6%, helped by a $95M net other operating gain
- Diluted EPS from continuing operations of $6.13 (+15.9%); net income attributable to Quest of $858M
- Operating cash flow of $1.243B; capex of $400M; free cash flow roughly $843M
- Dividend raised about 6% to $0.56 per quarter; $1.2B remaining under the share repurchase authorization
- Total debt of $4.77B; the company refinanced its 2020 maturities with 2.95% notes due 2030 and used the proceeds to redeem $800M of notes in January 2020
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Quest Diagnostics Inc kept $0.11.
- Revenue$7.73B100.0%
- Cost of revenue−$5.04B65.2%
- Gross profit$2.69B34.8%
- Operating costs−$1.46B18.9%
- Operating income$1.23B15.9%
- Interest, other & tax−$373.0M4.8%
- Net income$858.0M11.1%
Where FY2019 revenue went
$7.73B- Cost of revenue: $5.04B, 65% of revenue
- SG&A: $1.46B, 19% of revenue
- Net income: $858.0M, 11% of revenue
- Interest, other & tax: $373.0M, 4.8% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 20, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $7.73B$7.53B | +2.6% |
| Cost of Revenue | $5.04B$4.93B | +2.3% |
| Gross Profit | $2.69B$2.60B | +3.2% |
| SG&A Expenses | $1.46B$1.42B | +2.3% |
| Operating Expenses | $6.50B$6.43B | +1.0% |
| Operating Income | $1.23B$1.10B | +11.8% |
| Interest Expense | $180.00M$169.00M | +6.5% |
| Net Income | $858.00M$736.00M | +16.6% |
| EPS (Basic) | $6.36$5.39 | +18.0% |
| EPS (Diluted) | $6.28$5.29 | +18.7% |
| Shares Outstanding (Basic) | 134.00M136.00M | −1.5% |
| Shares Outstanding (Diluted) | 136.00M139.00M | −2.2% |
05—Questions
Frequently Asked Questions
How did Quest Diagnostics perform in 2019 and what drove growth?
Revenue grew 2.6% to $7.7B. Growth came mainly from organic test volume (+3.1%) and acquisitions (+1.2% volume contribution), with the benefit of expanded in-network access after becoming a participating provider with UnitedHealthcare and Horizon BCBS of New Jersey. Pricing was a headwind, with revenue per requisition down 1.3%.
What is the biggest regulatory risk to Quest's revenue?
PAMA-driven Medicare Clinical Laboratory Fee Schedule cuts. Rates were reduced in 2018 and 2019 and are scheduled to fall about 10% more in 2020, with reductions of up to 15% per year allowed for 2021 to 2023. Management expects total reimbursement pressure of slightly more than 2% in 2020, including $80M to $85M from PAMA. The LAB Act, enacted in late 2019, delays the next PAMA data collection to January 2021 but does not eliminate the cuts.
How is management returning cash to shareholders?
The company aims to return most of its free cash flow through dividends and buybacks while maintaining an investment-grade rating. In 2019 it paid $286M in dividends and repurchased $353M of stock. The quarterly dividend rose to $0.56 per share in 2020, and $1.2B of repurchase authorization remained at year-end.
What is the status of the AMCA data security incident?
A breach at AMCA, a collection agency serving Optum360, exposed financial, medical and personal data for some Quest customers. Quest says the 2019 financial impact was not material, but 37 consolidated or pending lawsuits and government inquiries remain open. The company has limited, deductible-subject insurance coverage and cannot estimate potential losses.
Are there notable acquisitions or post-year-end events?
In 2019, Quest acquired Boyce & Bynum's clinical lab business for $61M. After year-end, it closed the $110M acquisition of Blueprint Genetics (January 21, 2020) and agreed to acquire Memorial Hermann's outreach lab business. The company targets more than 2% compound annual revenue growth from acquisitions.
06—Continue