01—Abstract
Summary
Summary of the 10-K filed February 21, 2023. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported 2022 net revenues of $9.9 billiona, down 8.4% from $10.8 billion in 2021, as COVID-19 testing revenue fell to $1.45 billion from $2.77 billion.
Excluding COVID-19 testing, the base business grew 5.6% in revenue and 2.2% in testing volume, and the company described itself as the world's leading provider of diagnostic information services. Diluted EPS fell to $7.97b from $15.55, largely because 2021 included a $314 million gain on the sale of its Q2 Solutions stake and 2022 operating income declined 40% to $1.43 billion. The filing also shows $1.7 billion of operating cash flow, $1.4 billion of share repurchases, and $305 million of dividends, and management raised the quarterly dividend 7.6% to $0.71 and added $1 billion to the buyback authorization.
The filing highlights strategic growth initiatives: a target of more than 2% annual revenue growth through acquisitions, Advanced Diagnostics growth of at least 8% per year, consumer-initiated testing through QuestHealth, and Professional Laboratory Services for hospital partners. 2022 acquisitions included Pack Health and the Summa Health outreach business, and an agreement was signed in February 2023 to acquire select assets of New York-Presbyterian's laboratory business. Cost-control progress under the Invigorate program included $88 millionc of 2022 restructuring-related charges.
Gross margin compression is visible in the results, with cost of services rising to 65.3% of revenue from 61.0%, and SG&A rising to 19.0% from 16.0%, partly due to $93 milliond of Quest for Health Equity donations. Key risks for investors include ongoing PAMA-driven Medicare reimbursement pressure (with cuts deferred to 2024 and capped at 15% annually), health plan and IDN pressure on pricing, potential FDA regulation of laboratory-developed tests, a fragmented and competitive market, cybersecurity incidents (including the 2021 ReproSource breach and the earlier AMCA incident), and several pending class actions and government inquiries. Total debt was about $4.0 billion at year-end 2022, and the company stated it intends to remain investment-grade.
02—Key points
Key Highlights
- Revenue declined 8.4% to $9.88 billion as COVID-19 testing revenue fell by roughly $1.3 billion, while base business revenue grew 5.6% to $8.43 billion.
- Diluted EPS dropped to $7.97 from $15.55, mainly because 2021 included a $314 million pre-tax gain on the Q2 Solutions sale; 2022 operating income fell 40% to $1.43 billion.
- Operating margin compressed to 14.5% from 22.1%, with cost of services rising to 65.3% of revenue and SG&A rising to 19.0%.
- Capital return remained significant: $1.4 billion of share repurchases and $305 million of dividends in 2022, with a new $1 billion repurchase authorization in February 2023 and a 7.6% dividend increase to $0.71 per quarter.
- Strategy targets more than 2% annual revenue growth from acquisitions and at least 8% annual growth in Advanced Diagnostics; 2022 acquisitions included Pack Health and Summa Health's outreach business, and a New York-Presbyterian asset deal was announced in February 2023.
- Operating cash flow fell to $1.72 billion from $2.23 billion, and total debt was about $4.0 billion at year-end 2022.
- Principal risks include PAMA Medicare fee cuts (deferred to 2024, capped at 15% annually), health plan pricing pressure, potential FDA regulation of lab-developed tests, cybersecurity incidents, and pending class actions and government investigations.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2022, Quest Diagnostics Inc kept $0.10.
- Revenue$9.88B100.0%
- Cost of revenue−$6.45B65.3%
- Gross profit$3.43B34.7%
- Operating costs−$2.00B20.3%
- Operating income$1.43B14.4%
- Interest, other & tax−$482.0M4.9%
- Net income$946.0M9.6%
Where FY2022 revenue went
$9.88B- Cost of revenue: $6.45B, 65% of revenue
- SG&A: $1.87B, 19% of revenue
- Net income: $946.0M, 9.6% of revenue
- Other operating costs: $131.0M, 1.3% of revenue
- Interest, other & tax: $482.0M, 4.9% of revenue
Kept 9.6% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 21, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $9.88B$10.79B | −8.4% |
| Cost of Revenue | $6.45B$6.58B | −2.0% |
| Gross Profit | $3.43B$4.21B | −18.4% |
| SG&A Expenses | $1.87B$1.73B | +8.5% |
| Operating Expenses | $8.46B$8.41B | +0.6% |
| Operating Income | $1.43B$2.38B | −40.0% |
| Interest Expense | $148.00M$152.00M | −2.6% |
| Net Income | $946.00M$2.00B | −52.6% |
| EPS (Basic) | $8.10$15.85 | −48.9% |
| EPS (Diluted) | $7.97$15.55 | −48.7% |
| Shares Outstanding (Basic) | 116.00M125.00M | −7.2% |
| Shares Outstanding (Diluted) | 118.00M128.00M | −7.8% |
05—Questions
Frequently Asked Questions
Why did Quest's earnings fall so sharply in 2022?
Most of the decline reflects the wind-down of COVID-19 testing, which fell from $2.77 billion in 2021 to $1.45 billion in 2022. The 2021 results also included a $314 million pre-tax gain on the sale of the Q2 Solutions stake, which does not recur. Higher cost of services and SG&A, including $93 million of Quest for Health Equity donations and $88 million of restructuring charges, further reduced operating margins.
How healthy is the underlying business excluding COVID-19 testing?
The base business grew, with revenue up 5.6% and testing volume up 2.2% including acquisitions, and revenue per requisition up 3.0% from favorable test and payer mix. Management attributes part of the growth to recent acquisitions, which contributed about 0.8% to DIS revenue. Investors should note that base volume growth was modest relative to the company's stated goals.
What are the biggest regulatory risks to Quest's revenue?
The most significant is PAMA, which requires future Medicare clinical lab fee schedule cuts based on market-rate surveys, with reductions capped at 15% per year from 2024 to 2026. Implementation was delayed until January 1, 2024 by legislation adopted in December 2022. The filing also notes possible FDA regulation of laboratory-developed tests and continued payer prior-authorization efforts that could reduce test utilization.
How does Quest return cash to shareholders?
Quest's stated framework is to return a majority of free cash flow through dividends and share repurchases while maintaining an investment-grade credit rating. In 2022 it repurchased 10.1 million shares for $1.4 billion and paid $305 million in dividends. In February 2023 the board added $1 billion to the buyback program, bringing available authorization to roughly $1.3 billion, and raised the quarterly dividend to $0.71.
06—Continue