Quest Diagnostics Reports Second Quarter 2017 Financial Results, Raises 2017 Financial Outlook

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

Change

2017

2016

Change

(dollars in millions, except per share data)

Reported:

Net revenues (a) (c)

$

1,943

$

1,906

1.9

%

$

3,842

$

3,769

1.9

%

Diagnostic Information Services revenues

$

1,855

$

1,809

2.5

%

$

3,667

$

3,565

2.9

%

Revenue per requisition

0.7

%

0.2

%

Requisition volume

1.8

%

2.6

%

Operating income (b) (c)

$

319

$

422

(24.6)

%

$

598

$

679

(12.0)

%

Operating income as a percentage of net 
     revenues (c)

16.4

%

22.1

%

(570) bps

15.6

%

18.0

%

(240) bps

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

$

193

$

195

(0.9)

%

$

357

$

298

19.8

%

Diluted EPS (c) (d)

$

1.37

$

1.37

—

%

$

2.53

$

2.08

21.6

%

Cash provided by operations (e)

$

294

$

311

(5.5)

%

$

490

$

464

5.6

%

Capital expenditures

$

65

$

57

14.6

%

$

107

$

104

2.8

%

Adjusted:

Revenues on an equivalent basis

$

1,943

$

1,898

2.3

%

$

3,842

$

3,743

2.6

%

Operating income (f)

$

343

$

324

5.8

%

$

640

$

605

5.8

%

Operating income as a percentage of net revenues

17.6

%

17.0

%

60 bps

16.6

%

16.0

%

60 bps

Net income attributable to Quest 
     Diagnostics (d)

$

204

$

178

14.8

%

$

379

$

327

16.1

%

Diluted EPS excluding amortization (d)

$

1.55

$

1.34

15.7

%

$

2.88

$

2.47

16.6

%

     (a)    

For the three and six months ended June 30, 2016, net revenues include $8 million and $26 million, respectively, related to the
Focus Diagnostics products business, which was sold on May 13, 2016. 

     (b)    

For the three and six months ended June 30, 2016, reported operating income includes $121 million and $129 million, respectively, related to the Focus Diagnostics products business and the gain from sale 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)    

Excess tax benefit associated with stock-based compensation arrangements impacted income tax expense and diluted EPS as follows:

Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016

(dollars in millions, except per share data)

Income tax benefit

$

13

$

2

$

29

$

4

Diluted EPS

$

0.10

$

0.02

$

0.21

$

0.03

     (e)    

For details impacting the year-over-year comparisons related to cash provided by operations, see note 4 of the financial tables
attached below.

     (f)     

For the three and six months ended June 30, 2016, adjusted operating income includes $4 million and $12 million, respectively, related to the Focus Diagnostics products business.

Current Outlook

Previous Outlook

Low

High

Low

High

Revenues

$7.69 billion

$7.74 billion

$7.64 billion

$7.72 billion

Revenue increase on a reported basis

2.3%

3.1%

1.7%

2.7%

Revenue increase on an equivalent basis (g)

2.6%

3.4%

2%

3%

Reported diluted EPS

$4.90

$5.00

$4.73

$4.88

Adjusted diluted EPS excluding amortization

$5.62

$5.72

$5.45

$5.60

Cash provided by operations

Approximately $1.2 billion

Approximately $1.1 billion

Capital expenditures

$250 million

$300 million

$250 million

$300 million

     (g)    

Reported revenues for full year 2016 were $7.52 billion.  Revenues on an equivalent basis for full year 2016 were $7.49 billion
which represents the company's reported revenues, excluding all Focus Diagnostics products revenue.    

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2017 and 2016

(in millions, except per share data)

(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

Net revenues

$

1,943

$

1,906

$

3,842

$

3,769

Operating costs and expenses and other operating income:

Cost of services

1,170

1,155

2,335

2,299

Selling, general and administrative

437

430

874

872

Amortization of intangible assets

18

17

35

36

Gain on disposition of business

—

(118)

—

(118)

Other operating (income) expense, net

(1)

—

—

1

Total operating costs and expenses, net

1,624

1,484

3,244

3,090

Operating income

319

422

598

679

Other income (expense):

Interest expense, net

(38)

(34)

(74)

(70)

Other income (expense), net

11

(5)

14

(54)

Total non-operating expenses, net

(27)

(39)

(60)

(124)

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

292

383

538

555

Income tax expense

(94)

(183)

(172)

(250)

Equity in earnings of equity method investees, net of taxes

9

9

16

19

Net income

207

209

382

324

Less: Net income attributable to noncontrolling interests

14

14

25

26

Net income attributable to Quest Diagnostics

$

193

$

195

$

357

$

298

Earnings per share attributable to Quest Diagnostics' common 
     stockholders:

Basic

$

1.40

$

1.38

$

2.59

$

2.10

Diluted

$

1.37

$

1.37

$

2.53

$

2.08

Weighted average common shares outstanding:

Basic

137

140

137

141

Diluted

140

142

140

143

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

June 30, 2017 and December 31, 2016

(in millions, except per share data)

(unaudited)

June 30,
 2017

December 31,
 2016

Assets

Current assets:

Cash and cash equivalents

$

314

$

359

Accounts receivable, net

947

926

Inventories

83

82

Prepaid expenses and other current assets

156

164

Total current assets

1,500

1,531

Property, plant and equipment, net

1,045

1,029

Goodwill

6,080

6,000

Intangible assets, net

949

949

Investment in equity method investees

451

443

Other assets

146

148

Total assets

$

10,171

$

10,100

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

912

$

975

Current portion of long-term debt

5

6

Total current liabilities

917

981

Long-term debt

3,732

3,728

Other liabilities

709

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 June 30, 2017 and 
     December 31, 2016; 216 shares issued as of both June 30, 2017 and December 31, 2016

2

2

Additional paid-in capital

2,565

2,545

Retained earnings

6,847

6,613

Accumulated other comprehensive loss

(60)

(72)

Treasury stock, at cost; 80 shares and 79 shares as of June 30, 2017 and December 31, 2016, 
     respectively

(4,657)

(4,460)

Total Quest Diagnostics stockholders' equity

4,697

4,628

Noncontrolling interests

36

32

Total stockholders' equity

4,733

4,660

Total liabilities and stockholders' equity

$

10,171

$

10,100

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2017 and 2016

(in millions)

(unaudited)

Six Months Ended June 30,

2017

2016

Cash flows from operating activities:

Net income

$

382

$

324

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

Depreciation and amortization

128

123

Provision for doubtful accounts

165

167

Deferred income tax provision

79

(4)

Stock-based compensation expense

37

36

Gain on disposition of business

—

(118)

Other, net

(8)

9

Changes in operating assets and liabilities:

Accounts receivable

(185)

(249)

Accounts payable and accrued expenses

(93)

23

Income taxes payable

(3)

141

Other assets and liabilities, net

(12)

12

Net cash provided by operating activities

490

464

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(112)

(135)

Disposition of business

1

275

Escrow proceeds associated with disposition of business

25

—

Capital expenditures

(107)

(104)

Decrease (increase) in investments and other assets

1

(9)

Net cash (used in) provided by investing activities

(192)

27

Cash flows from financing activities:

Proceeds from borrowings

—

1,869

Repayments of debt

(3)

(1,720)

Purchases of treasury stock

(300)

(390)

Exercise of stock options

97

38

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

(23)

(9)

Dividends paid

(124)

(111)

Distributions to noncontrolling interests

(20)

(19)

Other financing activities, net

30

1

Net cash used in financing activities

(343)

(341)

Net change in cash and cash equivalents

(45)

150

Cash and cash equivalents, beginning of period

359

133

Cash and cash equivalents, end of period

$

314

$

283

Cash paid during the period for:

Interest

$

77

$

75

Income taxes

$

113

$

121

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

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

193

$

195

$

357

$

298

Less: earnings allocated to participating securities

—

1

1

1

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

$

193

$

194

$

356

$

297

Weighted average common shares outstanding - basic

137

140

137

141

Effect of dilutive securities:

Stock options and performance share units

3

2

3

2

Weighted average common shares outstanding - diluted

140

142

140

143

Earnings per share attributable to Quest Diagnostics' common 
     stockholders:

Basic

$

1.40

$

1.38

$

2.59

$

2.10

Diluted

$

1.37

$

1.37

$

2.53

$

2.08

2)       The following tables reconcile reported GAAP results to non-GAAP adjusted results:

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

(dollars in millions, except per share data)

Adjusted operating income:

Operating income

$

319

$

422

$

598

$

679

Gain on disposition of business (a)

—

(118)

—

(118)

Restructuring and integration charges (b)

22

18

40

37

Other (c)

2

2

2

7

Adjusted operating income

$

343

$

324

$

640

$

605

Adjusted operating income as a percentage of net revenues:

Operating income as a percentage of net revenues

16.4

%

22.1

%

15.6

%

18.0

%

Gain on disposition of business (a)

—

(6.2)

—

(3.1)

Restructuring and integration charges (b)

1.1

1.0

1.0

1.0

Other (c)

0.1

0.1

—

0.1

Adjusted operating income as a percentage of net revenues

17.6

%

17.0

%

16.6

%

16.0

%

Adjusted net income:

Net income attributable to Quest Diagnostics

$

193

$

195

$

357

$

298

Gain on disposition of business (a)

—

(118)

—

(118)

Retirement of debt and related refinancing charges (d)

—

—

—

48

Restructuring and integration charges (b)

23

19

41

40

Other (c)

(5)

8

(5)

14

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

(7)

74

(14)

45

Adjusted net income

$

204

$

178

$

379

$

327

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

1.37

$

1.37

$

2.53

$

2.08

Gain on disposition of business (a) (e)

—

(0.24)

—

(0.24)

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

—

—

—

0.21

Restructuring and integration charges (b) (e)

0.10

0.08

0.18

0.17

Other (c) (e)

(0.02)

0.04

(0.02)

0.06

Amortization expense (f)

0.10

0.09

0.19

0.19

Adjusted diluted EPS excluding amortization expense

$

1.55

$

1.34

$

2.88

$

2.47

Revenue on an equivalent basis:

Net revenues

$

1,943

$

1,906

$

3,842

$

3,769

Excluded revenue (g)

—

(8)

—

(26)

Revenue on an equivalent basis

$

1,943

$

1,898

$

3,842

$

3,743

          (a)   

For the three and six months ended June 30, 2016, represents the pre-tax gain on the sale of our Focus Diagnostics
products business to DiaSorin S.p.A.

          (b) 

For the three and six months ended June 30, 2017 and 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
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

(dollars in millions)

Cost of services

$

9

$

10

$

19

$

17

Selling, general and administrative

13

8

21

20

Operating income

$

22

$

18

$

40

$

37

Equity in earnings of equity method investees, net of taxes

$

1

$

1

$

1

$

3

          (c) 

For the three and six months ended June 30, 2017, primarily represents gain on the sale of an interest in an equity
method investee and costs incurred related to certain legal matters.  For the three and six months ended June 30, 2016,
primarily represents 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 statements of operations:   

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

(dollars in millions)

Selling, general and administrative

$

2

$

3

$

2

$

6

Other operating (income) expense, net

—

(1)

—

1

Operating income

$

2

$

2

$

2

$

7

Other non-operating income (expense), net                         

$

(7)

$

6

$

(7)

$

7

          (d) 

For the six months ended June 30, 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 following table summarizes the pre-tax impact of retirement of debt and related refinancing charges on the
company's consolidated statements of operations:    

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

(dollars in millions)

Other non-operating income (expense), net                                 

—

—

—

48

          (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, specificially the
goodwill associated with the disposition.  For the retirement of debt and related refinancing charges, restructuring and
integration charges and other items, income tax impacts, where recorded, were calculated using combined tax rates of
38.7% and 38.9% for 2017 and 2016, respectively.  The following table summarizes the income tax expense (benefit)
associated with the special items: 

Three Months Ended
June 30,

Six Months Ended
June 30,

2017

2016

2017

2016

(dollars in millions)

Gain on disposition of business

$

—

$

84

$

—

$

84

Retirement of debt and related refinancing charges

—

—

$

—

(18)

Restructuring and integration charges

(9)

(6)

(16)

(15)

Other

2

(4)

2

(6)

$

(7)

$

74

$

(14)

$

45

          (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 rates of 38.7% and 38.9% for 2017 and 2016,
respectively.  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 June 30,

Six Months Ended June 30,

2017

2016

2017

2016

(dollars in millions)

Amortization of intangible assets

$

18

$

17

$

35

$

36

Equity in earnings of equity method investees, net of taxes

4

4

8

8

$

22

$

21

$

43

$

44

          (g) 

For the three and six months ended June 30, 2016, excluded revenue represents reported revenues from the Focus
Diagnostics products business, which was sold on May 13, 2016.

3)

For the three months ended June 30, 2017, the company repurchased 1.4 million shares of its common stock for $150 million. 
For the six months ended June 30, 2017, the company repurchased 3.0 million shares of its common stock for $300 million.  At
June 30, 2017, $1.1 billion remained available under the company's share repurchase authorizations.  

4)

For the three and six months ended June 30, 2017, net cash provided by operations included an additional payroll cycle.  For the six months ended June 30, 2016, net cash provided by operations included $47 million of pre-tax cash charges related to the retirement of debt in connection with the March 2016 cash tender offer.

5)

The outlook for adjusted diluted EPS excluding amortization expense represents management's estimates for the full year 2017 before the impact of special items and amortization expense.  Further impacts to earnings related to special items may be incurred throughout the remainder of the year.  The following table reconciles our 2017 outlook for adjusted diluted EPS excluding amortization expense to the corresponding amounts determined under GAAP:

Low

High

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

4.90

$

5.00

Restructuring and integration charges (a)

0.35

0.35

Amortization expense (b)

0.39

0.39

Other

(0.02)

(0.02)

Adjusted diluted EPS excluding amortization expense

$

5.62

$

5.72

          (a)  

Represents estimated full year pre-tax charges of $80 million primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating our business.  Income tax benefits were calculated using a combined tax rate of 38.7%.

          (b)   

Represents the full year impact of amortization expense 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

$

72

Amortization expense included in equity in earnings of equity method investees

16

Total pre-tax amortization expense

$

88

Total amortization expense, net of an estimated tax benefit

$

54

6)

The outlook for 2.6% to 3.4% revenue growth on an equivalent basis in 2017 represents management's estimates for 2017
versus reported 2016 revenues adjusted to exclude the 2016 revenues from the Focus Diagnostics products business. The
company completed its exit from the products business as a result of the sale of Focus Diagnostics products on May 13,
2016.  Consequently, our 2017 revenues will not include revenues associated with that business.  The following tables
reconcile our 2016 net revenues determined under GAAP with equivalent revenue for 2016 and provide our 2017 revenue
outlook:

Three Months Ended

Year Ended

March 31,
 2016

June 30,
 2016

September 30,
 2016

December 31,
 2016

December 31,
 2016

(dollars in millions)

2016 Revenue on an equivalent basis:

Net revenues

$

1,863

$

1,906

$

1,885

$

1,861

$

7,515

Excluded revenue (a)

(18)

(8)

—

—

(26)

2016 Revenue on an equivalent basis

$

1,845

$

1,898

$

1,885

$

1,861

$

7,489

2017 Revenue outlook:

Low

High

2016 Revenue on an equivalent basis

$

7,489

$

7,489

2017 Equivalent revenue growth

2.6

%

3.4

%

2017 Revenue outlook

$

7,690

$

7,740

               (a)       

The 2016 excluded revenue is comprised of all of Focus Diagnostics products revenues reported in 2016.