01—Abstract
Summary
Summary of the 8-K filed February 1, 2024. Cited figures are marked; the original filing is the authoritative source.
Quest Diagnostics (DGX) reported fourth quarter and full year 2023 results on February 1, 2024, showing a sharp reversal in the mix of its business as COVID-19 testing revenue fell away.
Q4 net revenues were $2.29 billiona, down 1.9% year over year, but the base business (excluding COVID-19 testing) grew 4.7% to $2.25 billion. Full-year revenues were $9.25 billion, down 6.4%, while base business revenues rose 7.1% to $9.03 billion. COVID-19 testing revenues collapsed 84.7% for the year to $223 million.
Reported diluted EPS for Q4 nearly doubled to $1.70b (up 95.4%), largely because Q4 2022 was depressed by Quest for Health Equity costs and other charges, but adjusted diluted EPS rose a more modest 8.6% to $2.15. For the full year, reported diluted EPS fell 6.0% to $7.49 and adjusted diluted EPS fell 12.5% to $8.71, reflecting the loss of high-margin COVID testing profit and lower adjusted operating margin (15.8% versus 17.6%). Management guided 2024 to a return to overall revenue growth of 1.1% to 2.1%, with net revenues of $9.35 to $9.45 billion, reported diluted EPS of $7.69 to $7.99, and adjusted diluted EPS of $8.60 to $8.90.
Cash from operations is expected to be about $1.3 billionc and capital expenditures about $420 million. The Board also approved a 5.6% increase in the quarterly dividend, from $0.71 to $0.75 per share ($3.00 annually), payable April 22, 2024. This marks continued annual dividend increases since 2011.
Investors should note that the company's balance sheet carries higher leverage after 2023 borrowings (long-term debt of $4.41 billiond plus a $303 million current portion, up from roughly $3.98 billion), and that 2023 acquisitions of $611 million supported its growth strategy. Overall, the filing signals that Quest's core diagnostics franchise is growing at a healthy mid-single-digit-plus pace, that the post-COVID earnings reset is largely complete, and that management expects a return to modest top-line growth in 2024. The primary items to monitor are execution on the 2024 guidance, the pace of base business growth, and the company's capital allocation priorities given higher debt levels and a $1.0 billion remaining share repurchase authorization.
02—Key points
Key Highlights
- Base business revenues grew 7.1% for full-year 2023 to $9.03 billion, offsetting an 84.7% decline in COVID-19 testing revenues to $223 million.
- Q4 2023 reported diluted EPS of $1.70 (up 95.4%) and adjusted diluted EPS of $2.15 (up 8.6%); full-year adjusted diluted EPS fell 12.5% to $8.71 as COVID testing profits rolled off.
- 2024 guidance calls for net revenues of $9.35–$9.45 billion (1.1%–2.1% growth), reported diluted EPS of $7.69–$7.99, and adjusted diluted EPS of $8.60–$8.90.
- Quarterly dividend raised 5.6% to $0.75 per share ($3.00 annually), payable April 22, 2024, marking an increase every year since 2011.
- Full-year 2023 operating cash flow was $1.27 billion, down 25.9%, while capital expenditures were $408 million; 2024 outlook is about $1.3 billion in operating cash flow and $420 million in capex.
- Total debt rose to roughly $4.7 billion (including current portion) after $2.59 billion of new borrowings, partly funding $611 million of business acquisitions in 2023.
- The company repurchased 2.0 million shares for $276 million in 2023, with $1.0 billion remaining under its repurchase authorization.
03—Questions
Frequently Asked Questions
How much of Quest's revenue decline in 2023 was caused by the end of COVID-19 testing?
Nearly all of it. Full-year net revenues fell $631 million (6.4%) to $9.25 billion, while COVID-19 testing revenues dropped $1.23 billion (84.7%) to $223 million. Base business revenues, which exclude COVID testing, grew $600 million (7.1%) to $9.03 billion, so the underlying franchise was expanding.
Why did reported EPS rise in Q4 2023 while adjusted EPS grew more slowly?
Reported diluted EPS of $1.70 benefited from a comparison against a weak Q4 2022, which included $84 million of Quest for Health Equity costs and other charges that depressed reported results. Adjusted diluted EPS, which strips out restructuring, amortization, impairment, and other special items, rose a more modest 8.6% to $2.15. Investors typically focus on adjusted EPS to gauge underlying operating performance.
What does the 2024 guidance imply for the business?
Management expects net revenues of $9.35–$9.45 billion, implying growth of 1.1% to 2.1%, which is a return to overall growth after 2023's decline. Adjusted diluted EPS of $8.60–$8.90 would be roughly flat to modestly higher than 2023's $8.71 at the midpoint, reflecting headwinds from the loss of COVID testing profits and tailwinds elsewhere. Management also reiterated a longer-term outlook of mid-single-digit revenue growth and high-single-digit earnings growth.
Is the dividend increase sustainable given the company's cash flow and debt?
The 5.6% increase raises the annual payout to $3.00 per share. In 2023, dividends paid totaled $314 million against operating cash flow of $1.27 billion, and 2024 operating cash flow is guided to about $1.3 billion, so coverage appears adequate. However, debt increased meaningfully in 2023, and capital expenditures plus acquisitions also draw on cash, so the sustainability depends on continued base business growth and disciplined leverage.
Why did operating income fall so sharply for the full year?
Full-year reported operating income fell 11.6% to $1.26 billion, and adjusted operating income fell 16.3% to $1.46 billion. The decline reflects the loss of high-margin COVID-19 testing revenue, with adjusted operating margin dropping to 15.8% from 17.6%. Lower COVID testing volume is the primary driver, partly offset by base business growth and cost actions.
04—Continue