10-QPeriod: Q3 FY2014

QUEST DIAGNOSTICS INC Quarterly Report for Q3 Ended Sep 30, 2014

Filed October 30, 2014For Securities:DGX

Summary

Quest Diagnostics' third quarter 2014 results show a notable increase in net revenues, driven by a 7.1% rise in its core Diagnostic Information Services (DIS) business. This growth was largely attributable to recent acquisitions, which contributed significantly to both revenue and volume, with underlying DIS volume showing a slight sequential improvement. Despite revenue growth, operating income saw a substantial decrease year-over-year, primarily due to the absence of a significant one-time gain from the prior year's royalty rights sale and increased operating costs associated with acquisitions and restructuring efforts. The company continues to execute its five-point strategy, focusing on innovation and operational efficiency, including progress on its multi-year Invigorate program aimed at cost reduction.

Financial Highlights

57 data points
Beta

Revenue

$1.90B

38.1% Gross Margin

Net Income

$129.00M

6.8% Net Margin

EPS (Diluted)

$0.88

Total Assets

$9.80B

Cash & Equivalents

$170.00M

Free Cash Flow

$169.00M

Financial Statements
Beta
Revenue$1.90B
Cost of Revenue$1.18B
Gross Profit$726.00M
SG&A Expenses$446.00M
Operating Expenses$1.65B
Operating Income$256.00M
Interest Expense$42.00M
Net Income$129.00M
EPS (Basic)$0.89
EPS (Diluted)$0.88
Shares Outstanding (Basic)145.00M
Shares Outstanding (Diluted)145.00M

Key Highlights

  • 1Net revenues increased by 6.5% to $1.9 billion, driven by the Diagnostic Information Services (DIS) segment, which grew 7.1% to $1.8 billion.
  • 2DIS volume (requisitions) increased by 7.8% year-over-year, with recent acquisitions contributing significantly to this growth.
  • 3Operating income decreased by 62.9% to $256 million, primarily due to the absence of a $474 million gain on the sale of royalty rights in the prior year's period.
  • 4The company completed three acquisitions in the first half of 2014: Solstas Lab Partners Group ($572 million), Summit Health ($151 million), and Steward Health Care Systems LLC ($34 million), which contributed to revenue and goodwill.
  • 5Restructuring charges for the nine months ended September 30, 2014, totaled $35 million, part of the ongoing 'Invigorate' program aimed at cost reduction and operational efficiency.
  • 6Diluted earnings per share from continuing operations decreased significantly to $0.88 from $2.66 in the prior year, impacted by increased costs and the absence of prior-year gains.
  • 7Cash flows from operating activities improved to $635 million for the first nine months of 2014, compared to $442 million in the same period of 2013.

Frequently Asked Questions

Quest Diagnostics saw a 6.5% increase in net revenues to $1.9 billion for the third quarter of 2014, largely driven by its DIS segment. However, operating income significantly decreased by 62.9% to $256 million. This decline was mainly due to the absence of a substantial gain from royalty rights sold in the prior year and increased operating costs related to acquisitions and restructuring.

The company completed three acquisitions in early 2014, which contributed to revenue growth and increased DIS volume. These acquisitions added approximately 7% to DIS revenue growth and 8% to DIS volume in the third quarter. However, they also led to higher operating costs, including integration and restructuring expenses, which impacted profitability.

The Invigorate program is a multi-year initiative designed to reduce the company's cost structure, aiming for up to $700 million in run-rate savings by the end of 2014 and potentially over $1 billion in the long term. For the nine months ended September 30, 2014, restructuring charges related to this program and other initiatives amounted to $35 million. The company expects to incur additional charges between $20 million and $30 million in the fourth quarter of 2014.

For the nine months ended September 30, 2014, Quest Diagnostics generated $635 million in operating cash flow. The company used $725 million for business acquisitions and $219 million for capital expenditures. Financing activities included $487 million in net debt increase, $139 million in dividend payments, and $82 million in share repurchases.