01—Abstract
Summary
Summary of the 10-K filed February 28, 2022. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) closed 2021 as a year of strong top-line growth and heavy capital return, though much of that growth was COVID-19 driven.
Net revenues rose 14.3% to $10.8 billiona, from $9.4 billion in 2020. COVID-19 testing contributed $2.77 billion, while base business revenue (excluding COVID-19 testing) grew to $8.0 billion from $6.7 billion. Diluted EPS from continuing operations was $15.55, up from $10.47, but that figure includes about $1.31 per share of net non-recurring benefits, most notably a $314 million pre-tax gain on the sale of its 40% stake in Q2 Solutions to IQVIA.
Operating income rose 20.8% to $2.38 billionb, and operating margin expanded to 22.1%. Cash generation and capital deployment were the main investor stories. Operating cash flow was $2.23 billion, and the company repurchased $2.2 billion of stock, including $1.5 billion under accelerated share repurchase agreements.
Management also raised the quarterly dividend 6.5% to $0.66c and authorized an additional $1 billion buyback in February 2022. Leverage remains modest, with about $4.0 billion of debt against $872 million of cash, and the company maintains an investment-grade rating framework. Management guides to lower COVID-19 testing demand in 2022 and continued PAMA-driven Medicare reimbursement pressure from 2023 through 2025, which is capped at 15% annually.
Key risks for investors include the durability of COVID-19 testing revenue, reimbursement cuts from PAMA and other government payers, health plan and IDN pressure on pricing, and the development of competing testing models such as point-of-care and home testing. The company also disclosed a 2021 ransomware incident at its ReproSource subsidiary and ongoing AMCA data-breach litigation. Leadership transition is underway: CEO Stephen Rusckowski will become Executive Chairman effective November 1, 2022, and James Davis will succeed him as CEO.
02—Key points
Key Highlights
- Net revenues rose 14.3% to $10.79 billion, though COVID-19 testing contributed $2.77 billion, so the base business (ex-COVID) grew about 19% on an acquisition-aided basis versus 2020
- Operating income increased 20.8% to $2.38 billion, expanding operating margin to 22.1% from 20.9%
- Diluted EPS of $15.55 (up from $10.47) was inflated by roughly $1.31 per share of net non-recurring items, including a $314 million gain on the Q2 Solutions stake sale
- Operating cash flow of $2.23 billion, with $2.2 billion returned via buybacks and $309 million in dividends paid
- Dividend raised 6.5% to $0.66 per quarter (eleventh increase since 2011); an additional $1 billion buyback was authorized in February 2022
- Acquisitions included Mercy Health's outreach business ($225 million) and Labtech Diagnostics ($85 million); Pack Health acquired in February 2022 for $105 million
- Guidance flags lower COVID-19 testing demand in 2022, plus PAMA reimbursement cuts of up to 15% annually from 2023–2025, as key headwinds
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2021, Quest Diagnostics Inc kept $0.18.
- Revenue$10.79B100.0%
- Cost of revenue−$6.58B61.0%
- Gross profit$4.21B39.0%
- Operating costs−$1.83B16.9%
- Operating income$2.38B22.1%
- Interest, other & tax−$386.0M3.6%
- Net income$2.00B18.5%
Where FY2021 revenue went
$10.79B- Cost of revenue: $6.58B, 61% of revenue
- Net income: $2.00B, 18% of revenue
- SG&A: $1.73B, 16% of revenue
- Other operating costs: $101.0M, 0.9% of revenue
- Interest, other & tax: $386.0M, 3.6% of revenue
Kept 18% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2021filed February 28, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Revenue | $10.79B$9.44B | +14.3% |
| Cost of Revenue | $6.58B$5.80B | +13.4% |
| Gross Profit | $4.21B$3.63B | +15.9% |
| SG&A Expenses | $1.73B$1.55B | +11.4% |
| Operating Expenses | $8.41B$7.47B | +12.6% |
| Operating Income | $2.38B$1.97B | +20.8% |
| Interest Expense | $152.00M$166.00M | −8.4% |
| Net Income | $2.00B$1.43B | +39.4% |
| EPS (Basic) | $15.85$10.62 | +49.2% |
| EPS (Diluted) | $15.55$10.47 | +48.5% |
| Shares Outstanding (Basic) | 125.00M134.00M | −6.7% |
| Shares Outstanding (Diluted) | 128.00M136.00M | −5.9% |
05—Questions
Frequently Asked Questions
How much of Quest's 2021 revenue growth came from COVID-19 testing?
COVID-19 testing generated $2.77 billion of 2021 net revenues, roughly flat versus $2.72 billion in 2020. Total growth of $1.35 billion therefore came mostly from the base business, which rose to $8.02 billion from $6.71 billion, a gain of about 19.5%. Investors should note that the base business also benefited from the post-pandemic recovery in volumes and from acquisitions. Management expects COVID-19 demand to trend down in 2022 and beyond.
Why was 2021 EPS so much higher than 2020, and what is the underlying earnings power?
Reported diluted EPS was $15.55 versus $10.47. Management said 2021 included net non-recurring benefits of about $1.31 per share, mainly the $2.02 per share pre-tax gain on the Q2 Solutions sale. Excluding these items, EPS would be materially lower, though the company also benefited from a lower share count after the ASRs and buybacks. Operating income growth of 20.8% is the cleaner indicator of operating performance.
What is the biggest regulatory risk to Quest's Medicare reimbursement?
The main risk is PAMA, which reduced Medicare Clinical Laboratory Fee Schedule rates for 2018–2020 and calls for further revisions based on market surveys. Reductions from 2023 to 2025 are capped at 15% per year. Federal legislation in December 2021 delayed the next data reporting period and rate cuts until January 1, 2023. Government payers represented about 10% of consolidated net revenues in 2021, and Medicare sequestration was partly suspended, creating a temporary benefit. Quest is also party to an industry lawsuit challenging CMS's implementation of PAMA.
How is management returning capital to shareholders, and how sustainable is it?
Management said it expects to return a majority of free cash flow through dividends and buybacks while maintaining an investment-grade rating. In 2021 it repurchased 16.0 million shares for $2.2 billion, funded partly by the $760 million Q2 Solutions proceeds. Remaining authorization was $0.7 billion at year-end, plus a new $1 billion authorization in February 2022. Debt was about $4.0 billion with $1.3 billion of available credit capacity, and dividends are about $2.64 per share annually. Sustainability depends on maintaining operating cash flow as COVID-related volumes decline.
Are there leadership changes or notable legal exposures investors should know about?
On February 3, 2022, Quest announced that CEO Stephen Rusckowski will become Executive Chairman effective November 1, 2022, and James Davis will become CEO. CFO Mark Guinan also plans to retire in 2022. On the legal side, Quest faces putative class actions and government inquiries related to the 2019 AMCA data breach, a 401(k) ERISA lawsuit in New Jersey, and qui tam claims. Management says it does not believe material losses are probable, but it acknowledges outcomes could be material. A 2021 ransomware incident at subsidiary ReproSource exposed some patient data.
06—Continue