01—Abstract
Summary
Summary of the 10-K filed February 22, 2024. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) closed 2023 with net revenues of $9.25 billiona, down 6.4% from $9.88 billion in 2022, as COVID-19 testing revenue fell to $223 million from $1.45 billion.
The decline masks a healthier core: base business revenues (excluding COVID-19 testing) rose to $9.03 billionb from $8.43 billion, and base DIS revenue per requisition growth and volume growth both improved. Diluted EPS fell to $7.49 from $7.97, reflecting lower COVID volumes, a $29 million impairment tied to a business shutdown, and about $108 million of intangible amortization. Operating cash flow dropped to $1.27 billion from $1.72 billion, partly from the timing of COVID-era collections and lower operating income.
Management continued to lean on acquisitions and capital return. Quest bought Haystack Oncology for $392 millionc (MRD testing), acquired select assets of NewYork-Presbyterian's lab business for $275 million, and closed other deals totaling about $699 million in aggregate consideration. The company issued $750 million of 6.40% senior notes due 2033 and raised its quarterly dividend 5.6% to $0.75 per share, its 13th increase since 2012.
It repurchased only $276 milliond of stock in 2023 versus $1.4 billion in 2022, leaving $1.0 billion of authorization. Total debt is about $4.7 billion. The key risk for investors is reimbursement.
The filing highlights PAMA-driven Medicare fee cuts, with the next round delayed to January 1, 2025 and capped at 15% annually from 2025 to 2027. It also flags FDA's proposed rule to regulate laboratory-developed tests, consumer and payer pressure on pricing, and growing health plan steering toward preferred lab networks. Management points to its Invigorate cost program (targeting about 3% annual savings) and Advanced Diagnostics growth as offsets.
02—Key points
Key Highlights
- Net revenues fell 6.4% to $9.25 billion, but base business revenues (excluding COVID-19 testing) grew 7.1% to $9.03 billion, showing underlying growth as pandemic testing rolled off.
- Diluted EPS declined to $7.49 from $7.97; 2023 results absorbed about $1.22 per share of net items including $0.70 of intangible amortization and a $29 million impairment.
- Operating income fell 11.6% to $1.26 billion, with operating margin contracting to 13.6% from 14.5%.
- Operating cash flow was $1.27 billion versus $1.72 billion in 2022, reflecting lower operating income and COVID-era collection timing; DSO rose to 50 days from 47.
- Capital deployment focused on M&A: Haystack Oncology ($392 million), NewYork-Presbyterian lab assets ($275 million), and a February 2024 Lenco Diagnostics deal ($111 million), while buybacks dropped to $276 million from $1.4 billion.
- The dividend was raised 5.6% to $0.75 per quarter, and total debt stands at about $4.7 billion after the $750 million 2033 notes offering.
- Regulatory risk remains elevated: PAMA Medicare cuts are deferred to 2025 (capped at 15% per year through 2027), and FDA has proposed regulating laboratory-developed tests.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2023, Quest Diagnostics Inc kept $0.09.
- Revenue$9.25B100.0%
- Cost of revenue−$6.20B67.0%
- Gross profit$3.05B33.0%
- Operating costs−$1.79B19.4%
- Operating income$1.26B13.6%
- Interest, other & tax−$408.0M4.4%
- Net income$854.0M9.2%
Where FY2023 revenue went
$9.25B- Cost of revenue: $6.20B, 67% of revenue
- SG&A: $1.64B, 18% of revenue
- Net income: $854.0M, 9.2% of revenue
- Other operating costs: $149.0M, 1.6% of revenue
- Interest, other & tax: $408.0M, 4.4% of revenue
Kept 9.2% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2023filed February 22, 2024Financial Statements
FY2023 against FY2022
| Line item | FY2023FY2022 | Change |
|---|---|---|
| Revenue | $9.25B$9.88B | −6.4% |
| Cost of Revenue | $6.20B$6.45B | −3.9% |
| Gross Profit | $3.05B$3.43B | −11.1% |
| SG&A Expenses | $1.64B$1.87B | −12.4% |
| Operating Expenses | $7.99B$8.46B | −5.5% |
| Operating Income | $1.26B$1.43B | −11.6% |
| Interest Expense | $163.00M$148.00M | +10.1% |
| Net Income | $854.00M$946.00M | −9.7% |
| EPS (Basic) | $7.59$8.10 | −6.3% |
| EPS (Diluted) | $7.49$7.97 | −6.0% |
| Shares Outstanding (Basic) | 112.00M116.00M | −3.4% |
| Shares Outstanding (Diluted) | 113.00M118.00M | −4.2% |
05—Questions
Frequently Asked Questions
How much of the revenue decline came from COVID-19 testing, and how is the core business performing?
COVID-19 testing revenue dropped to $223 million in 2023 from $1,454 million in 2022, accounting for nearly all of the $631 million total decline. Excluding COVID-19, base business revenues grew about 7%, driven by base volume growth of 6.5% and higher revenue per requisition in the base business of 1.1%.
Why did earnings per share fall, and what one-time items affected 2023?
Diluted EPS fell to $7.49 from $7.97. Results were reduced by about $1.22 per share of net items, including roughly $0.70 per share of intangible amortization ($108 million pre-tax), $0.31 from a $44 million charge (mainly a $29 million impairment tied to a business shutdown), and $0.29 from workforce reduction and integration costs. Share count reduction from buybacks partly offset these pressures.
Is the dividend safe, and how much cash is going back to shareholders?
The dividend was increased to $0.75 per quarter ($3.00 annually), a 5.6% raise, and dividends paid were $314 million in 2023. Share repurchases fell sharply to $276 million from $1.4 billion, leaving $1.0 billion of authorization. Management says it expects to return a majority of free cash flow to stockholders, though 2023 operating cash flow of $1.27 billion less $408 million of capex limits flexibility compared with prior years.
What is the biggest regulatory risk to Quest's business?
The largest risk is Medicare reimbursement under PAMA, which cut clinical lab fees in 2018 to 2020 and calls for further revisions based on market surveys. Implementation was delayed to January 1, 2025, with annual reductions capped at 15% from 2025 to 2027. Separately, the FDA's October 2023 proposed rule to regulate laboratory-developed tests could change competitive dynamics if finalized.
What growth drivers does management highlight for the next few years?
Management points to Advanced Diagnostics (molecular, oncology, and genetic testing), including the Haystack MRD ctDNA test and the QUEST AD-DETECT Alzheimer's blood test; hospital outreach and Professional Laboratory Services (about $780 million in 2023 revenue); consumer-initiated testing through QuestHealth; and the Invigorate cost program, which targets about 3% annual savings to offset labor and inflation pressures.
06—Continue