10-QPeriod: Q1 FY2010

QUEST DIAGNOSTICS INC Quarterly Report for Q1 Ended Mar 31, 2010

Filed April 26, 2010For Securities:DGX

Summary

Quest Diagnostics Inc. (DGX) reported its first quarter 2010 financial results, showing stable net revenues of $1.8 billion, consistent with the prior year's first quarter. However, operating income saw a decline due to $17.3 million in pre-tax charges related to workforce reductions and an estimated $14.3 million negative impact from severe weather. Diluted earnings per share from continuing operations remained flat at $0.89. The company highlighted the anticipated net positive impact of the recently enacted U.S. healthcare reform legislation due to expanded coverage, while acknowledging potential offsets from fee schedule reductions and an excise tax on medical devices. Management expressed confidence in their ability to adapt to the evolving healthcare landscape and sees the reforms as a long-term benefit for the industry.

Financial Highlights

53 data points
Beta

Revenue

$1.81B

40.9% Gross Margin

Net Income

$162.45M

9.0% Net Margin

EPS (Diluted)

$0.89

Total Assets

$8.52B

Cash & Equivalents

$463.24M

Free Cash Flow

$199.45M

Financial Statements
Beta
Revenue$1.81B
Cost of Revenue$1.07B
Gross Profit$739.13M
SG&A Expenses$430.73M
Operating Expenses$1.51B
Operating Income$298.56M
Interest Expense-$36.53M
Net Income$162.45M
EPS (Basic)$0.90
EPS (Diluted)$0.89
Shares Outstanding (Basic)180.22M
Shares Outstanding (Diluted)182.38M

Key Highlights

  • 1Net revenues remained stable at $1.8 billion for the three months ended March 31, 2010, compared to the same period in 2009.
  • 2Operating income decreased to $298.6 million from $321.1 million, impacted by workforce reduction charges and severe weather.
  • 3Diluted earnings per share from continuing operations were $0.89, unchanged from the prior year.
  • 4The company recorded $17.3 million in pre-tax charges for workforce reductions.
  • 5Severe weather events are estimated to have negatively impacted operating income by $14.3 million.
  • 6Quest Diagnostics expects the new healthcare reform legislation to be a net positive due to increased healthcare access, despite potential Medicare fee schedule reductions.
  • 7Cash flows from operating activities were $239.2 million, a decrease from $272.8 million in the prior year, primarily due to changes in variable compensation payments.

Frequently Asked Questions

Quest Diagnostics anticipates that the U.S. healthcare reform legislation enacted in March 2010 will be a net positive for the industry due to expanded healthcare coverage and the elimination of patient cost-sharing for certain preventive services. However, the company also notes potential offsets from annual reductions in the Medicare clinical laboratory fee schedule and an excise tax on certain medical devices.

Operating income decreased due to specific charges and events in the first quarter of 2010. The company incurred $17.3 million in pre-tax charges related to workforce reductions and experienced an estimated $14.3 million negative impact on operating income from severe weather events, which also affected testing volumes.

Quest Diagnostics manages its exposure to interest rate risk through a program that includes the use of derivative financial instruments, such as interest rate swaps. The company aims to maintain a balanced mix of fixed-rate and variable-rate debt and uses swaps to convert a portion of its fixed-rate debt to variable-rate debt to mitigate the variability in cash outflows. As of March 31, 2010, they had $350 million in notional amount of fixed-to-variable interest rate swaps.

In January 2010, Quest Diagnostics' Board of Directors authorized an additional $750 million for share repurchases. During the first quarter of 2010, the company repurchased approximately 4.5 million shares for $251 million under an accelerated stock purchase agreement. At March 31, 2010, approximately $499 million of share repurchase authorization remained available.