Quest Diagnostics Reports Fourth Quarter And Full Year 2017 Financial Results; Provides Guidance For Full Year 2018; Increases Dividend 11% To $0.50 Per Quarter

Three Months Ended December 31,

Twelve Months Ended December 31,

2017

2016

Change

2017

2016

(dollars in millions, except per share data)

Reported:

Net revenues (a) (c)

$

1,936

$

1,861

4.1

%

$

7,709

$

7,515

2.6

%

DIS revenues

$

1,853

$

1,773

4.5

%

$

7,370

$

7,138

3.3

%

Revenue per requisition

2.1

%

1.0

%

Requisition volume

2.4

%

2.3

%

Operating income (b) (c)

$

269

$

276

(2.5)

%

$

1,165

$

1,277

(8.8)

%

Operating income as a percentage of net
revenues (c)

13.9

%

14.8

%

(90) bps

15.1

%

17.0

%

(190) bps

Net income attributable to Quest Diagnostics (c) (d)

$

254

$

155

64.0

%

$

772

$

645

19.8

%

Diluted earnings per share (c) (d)

$

1.82

$

1.09

67.0

%

$

5.50

$

4.51

22.0

%

Cash provided by operations (e)

$

323

$

304

6.0

%

$

1,175

$

1,069

9.9

%

Capital expenditures

$

82

$

128

(35.6)

%

$

252

$

293

(14.0)

%

Adjusted:

Revenues on an equivalent basis

$

1,936

$

1,861

4.1

%

$

7,709

$

7,489

2.9

%

Operating income (f)

$

317

$

305

4.0

%

$

1,282

$

1,230

4.2

%

Operating income as a percentage of net revenues

16.4

%

16.4

%

0 bps

16.6

%

16.4

%

20 bps

Net income attributable to Quest Diagnostics (d)

$

180

$

173

4.3

%

$

740

$

682

8.6

%

Diluted earnings per share excluding amortization (d)

$

1.40

$

1.31

6.9

%

$

5.67

$

5.15

10.1

%

(a)  

For the twelve months ended December 31, 2016, net revenues include $26 million related to the Focus Diagnostics products business, which was sold on May 13, 2016. 

(b)   

For the twelve months ended December 31, 2016, reported operating income includes a gain on escrow recovery associated with an acquisition and $129 million related to the Focus Diagnostics products business and the gain from sale of the Focus Diagnostics products business on May 13, 2016.

(c)  

For further details impacting the year-over-year comparisons related to net revenues, operating income, operating income as a percentage of net revenues, net income attributable to Quest Diagnostics, and diluted EPS, see note 2 of the financial tables attached below.

(d)   

For 2017 and 2016, ETB impacted income tax expense and diluted EPS as follows:

First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

Total

Year

(dollars in millions, except per share data)

2017

Income tax benefit

$

16

$

13

$

7

$

1

$

37

Diluted EPS

$

0.11

$

0.10

$

0.04

$

0.02

$

0.27

2016

Income tax benefit

$

2

$

2

$

3

$

2

$

9

Diluted EPS

$

0.01

$

0.02

$

0.02

$

0.01

$

0.06

(e)   

For details impacting the year-over-year comparisons related to cash provided by operations, see note 6 of the financial tables attached below.

(f)    

For the twelve months ended December 31, 2016, adjusted operating income includes $12 million related to the Focus Diagnostics products business.

Low

High

Revenues (a)

$7.70 billion

$7.77 billion

Revenue increase (a)

4%

5%

Reported diluted EPS

$5.42

$5.62

Adjusted diluted EPS excluding amortization expense and ETB

$6.50

$6.70

Cash provided by operations

Approximately $1.3 billion

Capital expenditures

$350 million

$400 million

(a)   

The outlook for 4% to 5% revenue growth in 2018 represents management's estimates for 2018 versus 2017 reported revenues adjusted to reflect the impact of new revenue recognition rules that are effective January 1, 2018.  Full year 2017 revenues adjusted to reflect the new rules were $7,402 million.  Under the new rules, the company will report uncollectible balances associated with patient responsibility as a reduction in net revenues; historically these amounts were classified as bad debt expense within selling, general and administrative expenses.  We do not expect the new rules to impact net income attributable to Quest Diagnostics or diluted EPS.

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Twelve Months Ended December 31, 2017 and 2016
(in millions, except per share data)
(unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2017

2016

2017

2016

Net revenues

$

1,936

$

1,861

$

7,709

$

7,515

Operating costs and expenses and other operating income:

Cost of services

1,194

1,160

4,719

4,616

Selling, general and administrative

453

400

1,750

1,681

Amortization of intangible assets

20

18

74

72

Gain on disposition of business

—

—

—

(118)

Other operating expense (income), net

—

7

1

(13)

Total operating costs and expenses, net

1,667

1,585

6,544

6,238

Operating income

269

276

1,165

1,277

Other income (expense):

Interest expense, net

(39)

(36)

(151)

(143)

Other income (expense), net

4

2

16

(48)

Total non-operating expenses, net

(35)

(34)

(135)

(191)

Income before income taxes and equity in earnings of equity method investees

234

242

1,030

1,086

Income tax benefit (expense)

23

(84)

(241)

(429)

Equity in earnings of equity method investees, net of taxes

10

9

35

39

Net income

267

167

824

696

Less: Net income attributable to noncontrolling interests

13

12

52

51

Net income attributable to Quest Diagnostics

$

254

$

155

$

772

$

645

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.86

$

1.11

$

5.63

$

4.58

Diluted

$

1.82

$

1.09

$

5.50

$

4.51

Weighted average common shares outstanding:

Basic

136

138

137

140

Diluted

139

141

140

142

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31, 2017 and 2016
(in millions, except per share data)
(unaudited)

December 31, 2017

December 31, 2016

Assets

Current assets:

Cash and cash equivalents

$

137

$

359

Accounts receivable, net

924

926

Inventories

95

82

Prepaid expenses and other current assets

150

155

Assets held for sale

—

9

Total current assets

1,306

1,531

Property, plant and equipment, net

1,145

1,029

Goodwill

6,335

6,000

Intangible assets, net

1,119

949

Investment in equity method investees

462

443

Other assets

136

148

Total assets

$

10,503

$

10,100

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

1,021

$

975

Current portion of long-term debt

36

6

Total current liabilities

1,057

981

Long-term debt

3,748

3,728

Other liabilities

663

654

Redeemable noncontrolling interest

80

77

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2017 and 2016; 216 shares issued as of both December 31, 2017 and 2016

2

2

Additional paid-in capital

2,612

2,545

Retained earnings

7,138

6,613

Accumulated other comprehensive loss

(48)

(72)

Treasury stock, at cost; 81 shares and 79 shares as of December 31, 2017 and 2016, respectively

(4,783)

(4,460)

Total Quest Diagnostics stockholders' equity

4,921

4,628

Noncontrolling interests

34

32

Total stockholders' equity

4,955

4,660

Total liabilities and stockholders' equity

$

10,503

$

10,100

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Twelve Months Ended December 31, 2017 and 2016
(in millions)
(unaudited)

Twelve Months Ended
December 31,

2017

2016

Cash flows from operating activities:

Net income

$

824

$

696

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

270

249

Provision for doubtful accounts

315

308

Deferred income tax provision

9

37

Stock-based compensation expense

79

69

Gain on disposition of business

—

(118)

Other, net

(6)

(6)

Changes in operating assets and liabilities:

Accounts receivable

(298)

(343)

Accounts payable and accrued expenses

(8)

56

Income taxes payable

16

42

Termination of interest rate swap agreements

—

54

Other assets and liabilities, net

(26)

25

Net cash provided by operating activities

1,175

1,069

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(581)

(139)

Proceeds from disposition of business

1

270

Escrow proceeds associated with disposition of business

25

—

Capital expenditures

(252)

(293)

Decrease in investments and other assets

2

10

Net cash used in investing activities

(805)

(152)

Cash flows from financing activities:

Proceeds from borrowings

205

1,869

Repayments of debt

(182)

(1,724)

Purchases of treasury stock

(465)

(590)

Exercise of stock options

130

73

Employee payroll tax withholdings on stock issued under stock-based compensation plans

(23)

(10)

Dividends paid

(247)

(223)

Distributions to noncontrolling interests

(51)

(41)

Sale of noncontrolling interest in subsidiary

4

—

Payment of deferred business acquisition consideration

(3)

—

Other financing activities, net

40

(45)

Net cash used in financing activities

(592)

(691)

Net change in cash and cash equivalents

(222)

226

Cash and cash equivalents, beginning of period

359

133

Cash and cash equivalents, end of period

$

137

$

359

Cash paid during the period for:

Interest

$

159

$

148

Income taxes

$

243

$

361

1)  The computation of basic and diluted earnings per common share is as follows:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

254

$

155

$

772

$

645

Less: Earnings allocated to participating securities

1

—

3

3

Earnings available to Quest Diagnostics' common stockholders - basic and diluted

$

253

$

155

$

769

$

642

Weighted average common shares outstanding - basic

136

138

137

140

Effect of dilutive securities:

Stock options and performance share units

3

3

3

2

Weighted average common shares outstanding - diluted

139

141

140

142

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.86

$

1.11

$

5.63

$

4.58

Diluted

$

1.82

$

1.09

$

5.50

$

4.51

2)  The following tables reconcile reported results to adjusted results:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

(dollars in millions, except per share data)

Adjusted operating income:

Operating income

$

269

$

276

$

1,165

$

1,277

Gain on disposition of business (a)

—

—

—

(118)

Restructuring and integration charges (b)

42

23

105

78

Other (c)

6

6

12

(7)

Adjusted operating income

$

317

$

305

$

1,282

$

1,230

Adjusted operating income as a percentage of net revenues:

Operating income as a percentage of net revenues

13.9

%

14.8

%

15.1

%

17.0

%

Gain on disposition of business (a)

—

—

—

(1.5)

Restructuring and integration charges (b)

2.2

1.2

1.4

1.0

Other (c)

0.3

0.4

0.1

(0.1)

Adjusted operating income as a percentage of net revenues

16.4

%

16.4

%

16.6

%

16.4

%

Adjusted net income:

Net income attributable to Quest Diagnostics

$

254

$

155

$

772

$

645

Gain on disposition of business (a)

—

—

—

(118)

Retirement of debt and related refinancing charges (d)

—

—

—

48

Restructuring and integration charges (b)

42

24

106

82

Other (c)

6

6

10

—

Income tax (benefit) expense associated with the special items (e)

(122)

(12)

(148)

25

Adjusted net income

$

180

$

173

$

740

$

682

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

1.82

$

1.09

$

5.50

$

4.51

Gain on disposition of business (a) (e)

—

—

—

(0.24)

Retirement of debt and related refinancing charges (d) (e)

—

—

—

0.21

Restructuring and integration charges (b) (e)

0.19

0.10

0.47

0.35

Certain income tax benefits (e)

(0.77)

—

(0.77)

—

Other (c) (e)

0.05

0.03

0.07

(0.06)

Amortization expense (f)

0.11

0.09

0.40

0.38

Adjusted diluted EPS excluding amortization expense

1.40

1.31

5.67

5.15

ETB (g)

(0.02)

(0.01)

(0.27)

(0.06)

Adjusted diluted EPS excluding amortization expense and ETB

$

1.38

$

1.30

$

5.40

$

5.09

Revenue on an equivalent basis:

Net revenues

$

1,936

$

1,861

$

7,709

$

7,515

Excluded revenue (h)

—

—

—

(26)

Revenue on an equivalent basis

$

1,936

$

1,861

$

7,709

$

7,489

(a)    

For the twelve months ended December 31, 2016, represents the pre-tax gain on the sale of our Focus Diagnostics products business.

(b)     

For the three and twelve months ended December 31, 2017, represents costs primarily associated with systems conversions, integration and workforce reductions incurred in connection with further restructuring and integrating our business. For the three and twelve months ended December 31, 2016, represents costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.  The following table summarizes the pre-tax impact of restructuring and integration charges on the company's consolidated statements of operations:

Three Months Ended December 31,

Twelve Months Ended December 31,

2017

2016

2017

2016

(dollars in millions)

Cost of services

$

14

$

15

$

45

$

40

Selling, general and administrative

28

7

60

37

Other operating expense, net

—

1

—

1

Operating income

$

42

$

23

$

105

$

78

Equity in earnings of equity method investees, net of taxes

$

—

$

1

$

1

$

4

(c)    

For the three months ended December 31, 2017, primarily represents non-cash asset impairment charges and incremental costs incurred as a result of the hurricanes.  For the twelve months ended December 31, 2017, primarily represents non-cash asset impairment charges associated with an investment, non-cash asset impairment charges and incremental costs incurred as a result of hurricanes and costs incurred related to certain legal matters, partially offset by gain on the sale of an interest in an equity method investee.  For the three months ended December 31, 2016, primarily represents non-cash asset impairment charges.  For the twelve months ended December 31, 2016, primarily represents a gain on escrow recovery associated with an acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters.  The following table summarizes the pre-tax impact of these other items on the company's consolidated statement of operations:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

(dollars in millions)

Cost of Sales

$

2

$

—

$

5

$

—

Selling, general and administrative

4

—

7

6

Other operating expense (income), net

—

6

—

(13)

Operating income

$

6

$

6

$

12

$

(7)

Other non-operating (income) expense, net

$

—

$

—

$

(2)

$

7

(d)     

For the twelve months ended December 31, 2016, represents charges associated with the March 2016 cash tender offer where the company purchased $200 million of its 6.95% Senior Notes due July 2037 and 5.75% Senior Notes due January 2040.  The pre-tax charges associated with the retirement of debt and related refinancing charges are recorded in other income (expense), net on the company's consolidated statement of operations.

(e)   

For gain on disposition of business, income tax expense resulted in a combined tax rate of 71.4%, which was significantly in excess of the statutory rate primarily due to a lower tax basis in the assets sold, specifically the goodwill associated with the disposition.   For the retirement of debt and related refinancing charges, income tax benefits were calculated such that the combined tax rate was 38.9% for 2016.  For the restructuring and integration charges and other items, income tax impacts, where recorded, were primarily calculated using combined tax rates of 38.7% for both 2017 and 2016.  For the three and twelve months ended December 31, 2017, other items also includes the impact of recording a valuation allowance against certain net operating loss carryforwards in a geography impacted by hurricanes. The following table summarizes the income tax (benefit) expense associated with the special items:

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2017

2016

2017

2016

(dollars in millions)

Gain on disposition of business

$

—

$

—

$

—

$

84

Retirement of debt and related refinancing charges

—

—

—

(18)

Restructuring and integration charges

(16)

(9)

(41)

(32)

Other

—

(3)

(1)

(9)

Certain income tax benefits (1)

(106)

—

(106)

—

$

(122)

$

(12)

$

(148)

$

25

(1) - For the three and twelve months ended December 31, 2017, certain income tax benefits represents the net tax benefit associated with the TCJA.  The company recorded an estimated net income tax benefit of $106 million associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of net deferred tax liabilities and reserves at the new combined tax rate of 25.5%, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits.

(f)    

Represents the impact of amortization expense on diluted earnings per common share, net of the income tax benefit.  The income tax benefit was primarily calculated using a combined tax rate of 38.7% for both 2017 and 2016.  The pre-tax amortization expense that is excluded from the calculation of adjusted diluted EPS excluding amortization expense is recorded in the company's statements of operations as follows:

Three Months Ended December 31,

Twelve Months Ended December 31,

2017

2016

2017

2016

(dollars in millions)

Amortization of intangible assets

$

20

$

18

$

74

$

72

Equity in earnings of equity method investees, net of taxes

4

4

16

16

$

24

$

22

$

90

$

88

(g)    

Represents the impact of ETB recorded in income tax expense.

(h)     

For the twelve months ended December 31, 2016, excluded revenue represents reported revenue for the Focus Diagnostics products business, which was sold on May 13, 2016.

3)

Other operating expense (income), net includes miscellaneous income and expense items related to operating activities.  For the three months ended December 31, 2016, other operating expense (income), net principally consists of non-cash asset impairment charges.  Other operating expense (income), net for the twelve months ended December 31, 2016, principally consists of a gain on an escrow recovery associated with an acquisition, partially offset by non-cash asset impairment charges.

4)

Other income (expense), net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments, other non-operating assets and early retirement of debt.  For the twelve months ended December 31, 2017, other income (expense), net includes a $7 million gain on the sale of an interest in an equity method investment, which is partially offset by non-cash asset impairment charges associated with certain investments of $6 million.  For the twelve months ended December 31, 2016, other income (expense), net includes $48 million of charges on the retirement of debt associated with the March 2016 cash tender offer and non-cash asset impairment charges associated with certain investments of $7 million.

5)

For the three months ended December 31, 2017, the company repurchased 1.0 million shares of its common stock for $100 million.  For the twelve months ended December 31, 2017, the company repurchased 4.6 million shares of its common stock for $465 million.  At December 31, 2017, $917 million remained available under the company's share repurchase authorizations. 

6)

For the twelve months ended December 31, 2017, net cash provided by operations benefited from a $62 million decrease in 2017 tax payments associated with the realization of a deferred tax benefit and improved operating performance.  For the twelve months ended December 31, 2016, net cash provided by operations included $91 million of income taxes paid associated with the sale of Focus Diagnostics products and $47 million of pre-tax cash charges, or $30 million after the related cash tax benefit, related to the retirement of debt, which were partially offset by $54 million of proceeds received from the termination of interest rate swap agreements.

7)

The outlook for adjusted diluted EPS excluding amortization expense and ETB represents management's estimates for the full year 2018 before the impact of special items, amortization expense and ETB.  Further impacts to earnings related to special items may be incurred throughout 2018.  Additionally, the amount of ETB is dependent upon employee exercise behavior and the company's stock price, which are difficult to predict.  The following table reconciles our 2018 outlook for adjusted diluted EPS excluding amortization expense and ETB to the corresponding amount determined under GAAP:

Low

High

Diluted earnings per common share

$

5.42

$

5.62

Restructuring and integration charges (a)

0.59

0.59

Amortization expense (b)

0.53

0.53

ETB (c)

(0.04)

(0.04)

Adjusted diluted EPS excluding amortization expense and ETB

$

6.50

$

6.70

(a)   

Represents estimated full year pre-tax charges of $110 million primarily associated with systems conversions, integration and workforce reductions incurred in connection with further restructuring and integrating our business.  Income tax benefits were calculated using a combined tax rate of 25.5%.

(b)    

Represents the estimated impact of amortization expense for 2018 on the calculation of adjusted diluted EPS excluding amortization expense.  Amortization expense used in the calculation is as follows (dollars in millions):

Amortization of intangible assets

$

82

Amortization expense included in equity in earnings of equity method investees, net of taxes

16

Total pre-tax amortization expense

$

98

Total amortization expense, net of an estimated tax benefit

$

73

(c)

Represents the estimated impact of ETB.

8)

The outlook for 4% to 5% revenue growth in 2018 represents management's estimates for 2018 versus 2017 reported revenues adjusted to reflect the impact of new revenue recognition rules that are effective January 1, 2018.  Under the new rules, the Company will report uncollectible balances associated with patient responsibility as a reduction in net revenues when historically these amounts were classified as bad debt expense within selling, general and administrative expenses.

The following table reconciles our 2017 net revenues determined under current revenue recognition rules with 2017 net revenue adjusted to reflect the impact of the new revenue recognition rules:

Three Months Ended

Year Ended

March 31,
 2017

June 30,
 2017

September 30,
 2017

December 31,
 2017

December 31,
 2017

(dollars in millions)

2017 Revenue on an adjusted basis:

Net revenues

$

1,899

$

1,943

$

1,931

$

1,936

$

7,709

Adjustment for adoption of new revenue
recognition rules

(82)

(79)

(75)

(71)

(307)

2017 Revenue on an adjusted basis

$

1,817

$

1,864

$

1,856

$

1,865

$

7,402

2018 Revenue outlook:

Low

High

2017 Revenue on an adjusted basis

$

7,402

$

7,402

2018 Equivalent revenue growth

4

%

5

%

2018 Revenue outlook

$

7,698

$

7,772