10-QPeriod: Q2 FY2015

QUEST DIAGNOSTICS INC Quarterly Report for Q2 Ended Jun 30, 2015

Filed July 30, 2015For Securities:DGX

Summary

Quest Diagnostics Incorporated (DGX) reported its second-quarter and first-half 2015 financial results. For the three months ended June 30, 2015, net revenues increased by 1.2% to $1.9 billion compared to the prior year, driven by a 0.4% increase in the Diagnostic Information Services (DIS) business and an 11.1% increase in Diagnostic Solutions (DS) businesses. Net income attributable to Quest Diagnostics stockholders decreased by 11.5% to $118 million, or $0.81 per diluted share, impacted by significant charges related to debt retirement and restructuring costs. For the six months ended June 30, 2015, net revenues grew 3.2% to $3.76 billion, while net income attributable to stockholders fell 24.5% to $179 million, or $1.23 per diluted share, also heavily influenced by one-time charges. The company is actively managing its cost structure through the "Invigorate" program, aiming for significant run-rate savings. A notable event was the formation of the Q2 Solutions joint venture with Quintiles, contributing the clinical trials testing business in exchange for a 40% ownership stake, which is expected to result in a material non-cash gain in the third quarter. The company also completed a substantial refinancing of its debt, issuing $1.2 billion in senior notes and retiring older, higher-interest debt, which resulted in significant one-time losses but improved future interest expense and maturity profile.

Financial Highlights

57 data points
Beta

Revenue

$1.93B

38.6% Gross Margin

Net Income

$118.00M

6.1% Net Margin

EPS (Diluted)

$0.81

Total Assets

$9.72B

Cash & Equivalents

$150.00M

Free Cash Flow

$224.00M

Financial Statements
Beta
Revenue$1.93B
Cost of Revenue$1.18B
Gross Profit$743.00M
SG&A Expenses$429.00M
Operating Expenses$1.62B
Operating Income$301.00M
Interest Expense$37.00M
Net Income$118.00M
EPS (Basic)$0.82
EPS (Diluted)$0.81
Shares Outstanding (Basic)144.00M
Shares Outstanding (Diluted)145.00M

Key Highlights

  • 1Total net revenues for Q2 2015 increased 1.2% year-over-year to $1.9 billion, with DIS revenue up 0.4% and DS revenue up 11.1%.
  • 2Net income attributable to Quest Diagnostics stockholders for Q2 2015 decreased 11.5% to $118 million ($0.81 per diluted share) due to significant charges.
  • 3The company incurred substantial pre-tax charges for debt retirement and refinancing ($66 million in Q2, $150 million in H1 2015) and restructuring ($23 million in Q2, $54 million in H1 2015).
  • 4Formation of the Q2 Solutions joint venture with Quintiles (closed July 1, 2015) is expected to generate a material non-cash gain in Q3 2015.
  • 5The company completed a $1.2 billion senior notes offering in March 2015 and retired over $1.2 billion of existing debt, improving its debt maturity profile.
  • 6The "Invigorate" program continues, with the company aiming for an additional $600 million in run-rate savings by the end of 2017.
  • 7Share repurchases totaled $39 million in Q2 2015, with $547 million remaining on authorization.

Frequently Asked Questions

The company incurred significant pre-tax charges related to the early retirement of debt and refinancing activities. For the three months ended June 30, 2015, these charges amounted to $66 million, impacting diluted earnings per share by $0.28. For the six months ended June 30, 2015, these charges were $150 million, impacting diluted earnings per share by $0.64. While these charges negatively impacted reported net income, they resulted in a lower overall interest expense and a more favorable debt maturity profile going forward.

Quest Diagnostics formed a joint venture called Q2 Solutions with Quintiles Transnational Holdings Inc. This involved contributing certain assets of its clinical trials testing business in exchange for a 40% ownership interest. The transaction closed on July 1, 2015, and the company expects to recognize a material non-cash gain in the third quarter of 2015 related to the fair value of its equity interest in the joint venture compared to the carrying value of the contributed assets.

The company is actively executing its multi-year "Invigorate" program, designed to reduce its cost structure. By the end of 2014, over $700 million in run-rate savings had been achieved, and the company has set a goal of an additional $600 million in run-rate savings by the end of 2017. This program focuses on various areas including standardization of processes, IT systems, procurement, and operational efficiency. Restructuring charges related to this program were noted in both the three and six-month periods.

Yes, total net revenues for the second quarter of 2015 increased by 1.2% to $1.9 billion compared to the prior year. The Diagnostic Information Services (DIS) business, which represents over 90% of revenue, saw a 0.4% increase, while the Diagnostic Solutions (DS) businesses grew by 11.1%. Notably, revenue per requisition in the DIS business increased by 0.9%, the first year-over-year growth in this metric since the first quarter of 2012.