10-QPeriod: Q2 FY2009

QUEST DIAGNOSTICS INC Quarterly Report for Q2 Ended Jun 30, 2009

Filed July 28, 2009For Securities:DGX

Summary

Quest Diagnostics Inc. (DGX) reported a strong second quarter and first half of 2009, with income from continuing operations increasing significantly year-over-year, driven by improved operating performance and lower interest expenses. Net revenues saw modest growth, primarily in the core clinical testing segment, despite some volume headwinds from pre-employment drug testing and exited lab management agreements. The company also benefited from a $15.5 million insurance settlement for storm-related losses. Financially, DGX demonstrated solid cost management, with operating costs and expenses decreasing as a percentage of net revenues due to efficiency improvements and cost containment actions. The company also actively managed its capital structure, repaying debt and continuing its share repurchase program. Despite a significant settlement payment related to a past government investigation, DGX expects to maintain sufficient financial flexibility through operating cash flow and available credit facilities.

Financial Highlights

53 data points
Beta

Revenue

$1.90B

42.1% Gross Margin

Net Income

$188.20M

9.9% Net Margin

EPS (Diluted)

$1.00

Total Assets

$8.21B

Cash & Equivalents

$119.29M

Free Cash Flow

-$45.59M

Financial Statements
Beta
Revenue$1.90B
Cost of Revenue$1.10B
Gross Profit$801.61M
SG&A Expenses$448.76M
Operating Expenses$1.54B
Operating Income$359.38M
Interest Expense-$36.96M
Net Income$188.20M
EPS (Basic)$1.01
EPS (Diluted)$1.00
Shares Outstanding (Basic)185.27M
Shares Outstanding (Diluted)187.00M

Key Highlights

  • 1Income from continuing operations rose to $188 million ($1.00/share) for Q2 2009 and $357 million ($1.89/share) for the first six months, up from $162 million ($0.83/share) and $303 million ($1.54/share) respectively in 2008.
  • 2Net revenues grew 3.5% to $1.9 billion for Q2 2009 and 2.4% to $3.7 billion for the first six months, primarily driven by the clinical testing segment.
  • 3Revenue per requisition increased by 4.6% for the quarter and 4.4% for the six months, aided by a favorable test mix and a Medicare laboratory fee increase.
  • 4Operating costs and expenses as a percentage of net revenues improved to 81% for Q2 2009 (from 83% in 2008) and 82% for the first six months (from 84% in 2008) due to efficiency gains and cost containment.
  • 5The company made a significant $308 million payment in Q2 2009 to settle a federal government investigation related to NID, which was previously reserved.
  • 6Despite the settlement, cash flows from operating activities were $264 million for the first six months, with underlying cash flows exceeding the prior year due to higher earnings.
  • 7DGX repurchased $250 million of common stock in the first six months of 2009 under its authorized share repurchase program.

Frequently Asked Questions

The increase in income from continuing operations was primarily driven by improved operating performance within the clinical testing segment and, to a lesser extent, lower interest expense. Specific drivers include revenue growth from a positive test mix and Medicare fee increases, coupled with successful cost reduction initiatives and efficiency improvements.

Net revenues grew due to an increase in revenue per requisition, driven by a favorable test mix and a Medicare laboratory fee increase. While overall clinical testing revenue grew, the total volume of requisitions decreased slightly due to headwinds from pre-employment drug testing (linked to reduced hiring) and the company's decision to exit unprofitable laboratory management agreements. Foreign exchange rates also had a modest negative impact on revenue growth.

The company made a $308 million payment in the second quarter of 2009 to finalize a settlement for a federal government investigation related to NID. This payment was funded through cash on hand and available credit facilities. While it reduced cash and cash equivalents and impacted net cash provided by operating activities for the six-month period, the company stated that underlying operating cash flows, excluding the settlement, exceeded the prior year. The company also indicated it has sufficient liquidity and borrowing capacity to manage its obligations.

During the first six months of 2009, the company used cash for investing activities (primarily capital expenditures), financing activities such as share repurchases ($250 million) and dividend payments ($38 million), and debt repayments. The company expects to continue generating positive cash flow from operations and believes its cash on hand, operating cash flow, and available credit facilities will provide sufficient financial flexibility to meet its needs for capital expenditures, debt service, dividends, and share repurchases for the foreseeable future.