01—Abstract
Summary
Summary of the 10-K filed February 22, 2021. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported a record 2020 driven by COVID-19 testing.
Net revenues rose 22.1% to $9.44 billiona from $7.73 billion, and operating income rose 60.2% to $1.97 billion. Diluted EPS from continuing operations was $10.47, versus $6.13 in 2019. The DIS business generated 97% of revenue, and COVID-19 testing contributed $2.72 billion of 2020 net revenue.
Excluding COVID-19 testing, the base business declined: base testing volume fell 11.4% for the full year, with a 34% drop in Q2 that partly recovered in the second half. Operating cash flow nearly doubled to $2.0 billionb, supported by higher earnings and a $100 million Social Security tax deferral benefit, and free cash flow after $418 million of capex was roughly $1.6 billion. The company deployed capital across acquisitions, dividends, and buybacks.
It closed Blueprint Genetics, the Memorial Hermann outreach lab business, and the remaining 56% of Mid America Clinical Laboratories, spending about $330 millionc net of cash acquired. It paid $297 million in dividends, repurchased $325 million of stock, and in February 2021 raised the quarterly dividend about 11% to $0.62 and added $1 billion to the buyback authorization. Total debt was about $4.0 billion at year-end, and leverage covenants were temporarily loosened through mid-2021 to 6.5x EBITDA at year-end 2020, stepping down to 3.5x thereafter.
Key investor watch items are the durability of COVID-19 testing revenue and reimbursement, which Medicare is cutting to $75d per test from January 2021, the pending PAMA reimbursement cuts (suspended until 2022 but scheduled to resume with up to 15% annual reductions for 2022-2024), ongoing litigation tied to the AMCA data breach and a 401(k) ERISA suit, and continued shifts in health plan and hospital dynamics. Management says that the base business volume and sustained cost savings from its Invigorate program (about $200 million delivered in 2020) are the main levers for growth beyond the pandemic.
02—Key points
Key Highlights
- Record 2020 results: net revenues of $9.44B (+22.1%), operating income of $1.97B (+60.2%), and diluted EPS of $10.47 (vs. $6.13).
- COVID-19 molecular and antibody testing generated about $2.72B of revenue and offset a sharp decline in base testing volume (down 11.4% for the year; Q2 down ~34%).
- Operating cash flow rose to $2.0B (from $1.2B) and capex was $418M, leaving roughly $1.6B of free cash flow.
- Capital returns and M&A: $297M in dividends, $325M in buybacks, $330M in net acquisition spend (Blueprint Genetics, Memorial Hermann outreach, MACL), and a ~11% dividend increase to $0.62/quarter in February 2021 plus a $1B buyback addition.
- Balance sheet: total debt of ~$4.0B; the revolver leverage covenant was temporarily relaxed to 6.5x EBITDA (stepping down to 4.5x by mid-2021 and reverting to 3.5x thereafter), with $1.3B of available borrowing capacity.
- Regulatory risk: PAMA reimbursement cuts were deferred to 2022, with up to 15% annual reductions for 2022-2024; Medicare's COVID-19 high-throughput test rate falls to $75 per test in 2021, and LDT oversight by the FDA remains an open question.
- Legal exposure: ongoing AMCA data security litigation and government inquiries, a 401(k) ERISA class action, and qui tam/billing investigations, with management saying material losses are not currently probable.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Quest Diagnostics Inc kept $0.15.
- Revenue$9.44B100.0%
- Cost of revenue−$5.80B61.5%
- Gross profit$3.63B38.5%
- Operating costs−$1.66B17.6%
- Operating income$1.97B20.9%
- Interest, other & tax−$540.0M5.7%
- Net income$1.43B15.2%
Where FY2020 revenue went
$9.44B- Cost of revenue: $5.80B, 62% of revenue
- SG&A: $1.55B, 16% of revenue
- Net income: $1.43B, 15% of revenue
- Other operating costs: $112.0M, 1.2% of revenue
- Interest, other & tax: $540.0M, 5.7% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 22, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $9.44B$7.73B | +22.1% |
| Cost of Revenue | $5.80B$5.04B | +15.2% |
| Gross Profit | $3.63B$2.69B | +35.1% |
| SG&A Expenses | $1.55B$1.46B | +6.4% |
| Operating Expenses | $7.47B$6.50B | +14.9% |
| Operating Income | $1.97B$1.23B | +60.1% |
| Interest Expense | $166.00M$180.00M | −7.8% |
| Net Income | $1.43B$858.00M | +66.8% |
| EPS (Basic) | $10.62$6.36 | +67.0% |
| EPS (Diluted) | $10.47$6.28 | +66.7% |
| Shares Outstanding (Basic) | 134.00M134.00M | 0.0% |
| Shares Outstanding (Diluted) | 136.00M136.00M | 0.0% |
05—Questions
Frequently Asked Questions
How much of Quest's 2020 growth came from COVID-19 testing versus the core business?
COVID-19 testing generated about $2.72B of 2020 net revenue. Base testing volume fell 11.4% for the year, and while acquisitions and revenue-per-requisition gains (driven mostly by COVID-19 molecular tests) partly offset this, the underlying base business weakened. Investors should treat much of the 2020 earnings lift as non-recurring pandemic-related demand.
Is the 2020 dividend increase and buyback sustainable?
The company expects to return a majority of free cash flow to shareholders through dividends and buybacks while maintaining an investment-grade rating. 2020 free cash flow of roughly $1.6B covered the $297M of dividends and $325M of buybacks comfortably, and the $1B buyback addition and 11% dividend increase reflect confidence. Sustainability depends on how much COVID-19 testing revenue persists and on the 2022-2024 PAMA reimbursement cuts.
What are the biggest reimbursement risks heading into 2021-2024?
PAMA reimbursement rate cuts scheduled for 2021 were suspended until 2022 under the CARES Act, and further reductions of up to 15% per year are capped for 2022-2024. Medicare's per-test rate for COVID-19 high-throughput molecular tests drops from $100 to $75 (plus a $25 add-on for two-day turnaround) starting January 2021. Management expects total reimbursement pressure of roughly 1% for 2021.
How much debt does Quest carry and how much flexibility does it have?
Total debt was about $4.0B at December 31, 2020, with no near-term maturities of significance beyond 2024. The company had $1.3B of available borrowing capacity under its secured receivables facility and senior unsecured revolver, and no borrowings outstanding. Its credit agreement temporarily relaxed the leverage covenant to 6.5x EBITDA, which steps down over 2021 before reverting to 3.5x, and restricts buybacks, dividends, and acquisitions while the relaxed covenant is in effect.
06—Continue