10-QPeriod: Q3 FY2011

QUEST DIAGNOSTICS INC Quarterly Report for Q3 Ended Sep 30, 2011

Filed November 3, 2011For Securities:DGX

Summary

Quest Diagnostics Inc. (DGX) reported its third-quarter and year-to-date results for the period ending September 30, 2011. The company saw modest revenue growth driven by acquisitions, but experienced a significant decline in net income primarily due to a substantial charge related to the settlement of the California Lawsuit. Despite this one-time charge, underlying operational performance showed some resilience, with stable clinical testing volumes and improved revenue per requisition. Key financial developments include the successful integration of acquired businesses, Athena Diagnostics and Celera Corporation, which contributed to revenue growth. However, increased operating expenses, driven by restructuring charges, acquisition-related costs, and higher employee compensation, impacted profitability. The company also continued its share repurchase program and announced a dividend increase, signaling confidence in its future cash flow generation. Investors should closely monitor the impact of ongoing cost-reduction initiatives and the company's ability to navigate ongoing legal and regulatory challenges.

Financial Highlights

57 data points
Beta

Revenue

$1.88B

40.9% Gross Margin

Net Income

$171.85M

9.2% Net Margin

EPS (Diluted)

$1.07

Total Assets

$9.33B

Cash & Equivalents

$110.83M

Free Cash Flow

$298.39M

Financial Statements
Beta
Revenue$1.88B
Cost of Revenue$1.12B
Gross Profit$767.74M
SG&A Expenses$446.60M
Operating Expenses$1.58B
Operating Income$322.05M
Interest Expense$44.06M
Net Income$171.85M
EPS (Basic)$1.08
EPS (Diluted)$1.07
Shares Outstanding (Basic)157.82M
Shares Outstanding (Diluted)159.00M

Key Highlights

  • 1Net revenues increased by 2.2% to $1.91 billion for the third quarter of 2011 compared to the prior year, driven by acquisitions and a modest increase in clinical testing revenue.
  • 2Net income attributable to Quest Diagnostics stockholders decreased significantly by 13.3% to $171.8 million in Q3 2011 from $198.1 million in Q3 2010, largely due to a $236 million pre-tax charge related to the settlement of the California Lawsuit.
  • 3Acquisition of Athena Diagnostics for $740 million and Celera Corporation for $344 million (net of acquired cash) were completed, contributing to revenue growth and expanding service offerings.
  • 4Operating income decreased by 4.4% to $322.1 million for the third quarter, with operating income as a percentage of net revenues declining to 16.9% from 18.1% in the prior year, impacted by increased operating costs and the aforementioned settlement charge.
  • 5Cash flows from operating activities were $558 million for the nine months ended September 30, 2011, a decrease from $778 million in the prior year, impacted by the Medi-Cal payment and acquisition-related costs.
  • 6The company repurchased $885 million of its common stock for the nine months ended September 30, 2011, and announced an increase in its quarterly cash dividend to $0.17 per share, signaling a commitment to returning capital to shareholders.
  • 7Goodwill increased substantially by $694 million to $5.8 billion, primarily due to goodwill recorded from the acquisitions of Athena and Celera.

Frequently Asked Questions

The primary reason for the substantial decrease in net income was a $236 million pre-tax charge recorded in the first quarter of 2011 related to the settlement of the California Lawsuit concerning allegations of overcharging Medi-Cal. This one-time charge significantly impacted profitability for the period.

The acquisitions of Athena Diagnostics and Celera Corporation contributed positively to net revenue growth, adding approximately 3.0% and 1.9% to Q3 and year-to-date revenue, respectively. However, these acquisitions also led to increased operating expenses, including integration charges and amortization of intangible assets, and a significant increase in goodwill on the balance sheet.

Quest Diagnostics has initiated a multi-year program to reduce its cost structure by $500 million by the end of 2014 to address reimbursement pressures and cost increases. The company also implemented cost-saving actions in Q3 2011, including workforce reductions, which resulted in charges but are aimed at aligning costs with reduced volume and improving operating profitability.

The company has managed its debt by issuing new senior notes in 2011 and utilizing credit facilities. For capital return, Quest Diagnostics continued its aggressive share repurchase program, buying back $885 million in common stock for the nine months ended September 30, 2011. Additionally, the company announced an increase in its quarterly cash dividend to $0.17 per share, indicating confidence in its ability to generate sufficient cash flow.