10-QPeriod: Q3 FY2012

QUEST DIAGNOSTICS INC Quarterly Report for Q3 Ended Sep 30, 2012

Filed October 24, 2012For Securities:DGX

Summary

Quest Diagnostics Inc. (DGX) reported its financial results for the third quarter and the first nine months of 2012. For the nine months ended September 30, 2012, the company saw a significant increase in income from continuing operations, largely driven by a substantial decrease in operating costs compared to the same period in the prior year. This decrease in costs was partly due to the absence of a large one-time charge related to the Medi-Cal lawsuit that impacted the prior year's results. Net revenues for the nine months increased slightly year-over-year, with the clinical laboratory testing business being the primary driver, supported by recent acquisitions. However, the three-month period showed a slight decrease in net revenues. The company is actively pursuing cost reduction initiatives under its 'Invigorate' program, aiming for significant run-rate savings by 2014. This program includes workforce reductions and restructuring efforts, which have led to associated charges but are expected to improve future profitability.

Financial Highlights

55 data points
Beta

Revenue

$1.82B

40.7% Gross Margin

Net Income

$163.00M

8.9% Net Margin

EPS (Diluted)

$1.01

Total Assets

$9.32B

Cash & Equivalents

$191.77M

Free Cash Flow

$349.71M

Financial Statements
Beta
Revenue$1.82B
Cost of Revenue$1.08B
Gross Profit$741.00M
SG&A Expenses$416.85M
Operating Expenses$1.52B
Operating Income$304.62M
Interest Expense$41.69M
Net Income$163.00M
EPS (Basic)$1.02
EPS (Diluted)$1.01
Shares Outstanding (Basic)158.78M
Shares Outstanding (Diluted)160.70M

Key Highlights

  • 1Net revenues for the first nine months of 2012 increased by 1.1% to $5,694.7 million, compared to $5,631.2 million in the prior year period.
  • 2Income from continuing operations for the first nine months of 2012 more than doubled, rising to $499.6 million from $282.3 million in the prior year, reflecting improved cost management and the absence of a large prior-year charge.
  • 3Diluted earnings per share from continuing operations for the first nine months of 2012 were $3.11, a substantial increase from $1.75 in the prior year.
  • 4The company is executing the 'Invigorate' program, a multi-year initiative to reduce its cost structure, targeting $500 million in run-rate cost savings by the end of 2014.
  • 5Restructuring and integration charges, primarily related to workforce reductions and the Invigorate program, totaled $41.4 million for the nine months ended September 30, 2012.
  • 6Cash provided by operating activities significantly increased to $807 million for the first nine months of 2012, up from $558 million in the prior year period.
  • 7Quest Diagnostics repurchased approximately $150 million of its common stock during the first nine months of 2012 under its share repurchase program.

Frequently Asked Questions

The 'Invigorate' program is a multi-year initiative launched by Quest Diagnostics to reduce its cost structure. It aims to achieve $500 million in run-rate cost savings by the end of 2014. The program is designed to address reimbursement pressures, control labor and benefit costs, and free up resources for investment in science and innovation. Benefits include improved operating profitability and quality.

For the nine months ended September 30, 2012, net revenues increased by 1.1% to $5,694.7 million, driven by acquisitions and slight volume increases in clinical testing. However, for the three months ended September 30, 2012, net revenues decreased by 2.9% to $1,851.4 million, primarily due to a decline in clinical testing revenue and volume, partially offset by favorable test mix.

The prior year's nine-month results were significantly impacted by a $236 million pre-tax charge related to the settlement of a California lawsuit concerning billing practices with Medi-Cal. This charge was recorded in 'other operating expense, net' in 2011 and its absence in 2012 contributed to the substantial year-over-year improvement in net income and operating income. For the current period, restructuring and integration charges related to the Invigorate program and other initiatives are the primary charges impacting results.

For the nine months ended September 30, 2012, Quest Diagnostics used $605 million in financing activities, primarily through net debt repayments totaling $507 million. They also repurchased $150 million of stock and paid $81 million in dividends. The company had $1.1 billion in borrowing capacity available under its credit facilities and believes it has sufficient liquidity from operations and credit facilities to fund its obligations and growth opportunities.