Quest Diagnostics Reports First Quarter 2018 Financial Results

Three Months Ended March 31,

2018

2017

Change

(dollars in millions, except per share data)

Reported:

Net revenues (a)

$

1,884

$

1,817

3.7

%

Diagnostic Information Services revenues (a)

$

1,803

$

1,730

4.1

%

Revenue per requisition

1.6

%

Requisition volume

2.2

%

Operating income (a) (b)

$

272

$

279

(2.5)

%

Operating income as a percentage of net revenues (a) (b)

14.5

%

15.4

%

(90)

bps

Net income attributable to Quest Diagnostics (b)

$

177

$

164

8.2

%

Diluted EPS (b)

$

1.27

$

1.16

9.5

%

Cash provided by operations

$

180

$

196

(8.5)

%

Capital expenditures

$

73

$

42

75.4

%

Adjusted:

Operating income (a)

$

303

$

297

1.9

%

Operating income as a percentage of net revenues (a)

16.1

%

16.3

%

(20)

bps

Net income attributable to Quest Diagnostics

$

192

$

159

20.8

%

Diluted EPS excluding amortization

$

1.52

$

1.22

24.6

%

(a)     Net revenues and selling, general and administrative expenses for the three months ended March 31, 2017 have been
         restated to reflect the impact of new revenue recognition rules that are effective January 1, 2018 and were adopted on
         a retrospective basis. Under the new rules, the Company reports 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.

(b)     For further details impacting the year-over-year comparisons related to 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.

Current Outlook

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

$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.  See note 5 of the
          financial tables attached below.

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended March 31, 2018 and 2017

(in millions, except per share data)

(unaudited)

Three Months Ended
March 31,

2018

2017

Net revenues

$

1,884

$

1,817

Operating costs and expenses and other operating income:

Cost of services

1,226

1,165

Selling, general and administrative

363

355

Amortization of intangible assets

22

17

Other operating expense, net

1

1

Total operating costs and expenses, net

1,612

1,538

Operating income

272

279

Other income (expense):

Interest expense, net

(41)

(36)

Other (expense) income, net

(2)

3

Total non-operating expenses, net

(43)

(33)

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

229

246

Income tax expense

(52)

(78)

Equity in earnings of equity method investees, net of taxes

12

7

Net income

189

175

Less: Net income attributable to noncontrolling interests

12

11

Net income attributable to Quest Diagnostics

$

177

$

164

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.30

$

1.19

Diluted

$

1.27

$

1.16

Weighted average common shares outstanding:

Basic

136

137

Diluted

139

141

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

March 31, 2018 and December 31, 2017

(in millions, except per share data)

(unaudited)

March 31,
 2018

December 31,
 2017

Assets

Current assets:

Cash and cash equivalents

$

124

$

137

Accounts receivable, net

1,026

924

Inventories

94

95

Prepaid expenses and other current assets

127

150

Total current assets

1,371

1,306

Property, plant and equipment, net

1,156

1,145

Goodwill

6,392

6,335

Intangible assets, net

1,174

1,119

Investment in equity method investees

474

462

Other assets

128

136

Total assets

$

10,695

$

10,503

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

976

$

1,021

Current portion of long-term debt

141

36

Total current liabilities

1,117

1,057

Long-term debt

3,718

3,748

Other liabilities

717

663

Redeemable noncontrolling interest

77

80

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both March 31, 2018 and 
     December 31, 2017; 217 and 216 shares issued as of March 31, 2018 and December 31, 2017, 
     respectively

2

2

Additional paid-in capital

2,616

2,612

Retained earnings

7,249

7,138

Accumulated other comprehensive loss

(41)

(48)

Treasury stock, at cost; 81 shares as of both March 31, 2018 and December 31, 2017

(4,796)

(4,783)

Total Quest Diagnostics stockholders' equity

5,030

4,921

Noncontrolling interests

36

34

Total stockholders' equity

5,066

4,955

Total liabilities and stockholders' equity

$

10,695

$

10,503

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2018 and 2017

(in millions)

(unaudited)

Three Months Ended
March 31,

2018

2017

Cash flows from operating activities:

Net income

$

189

$

175

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

Depreciation and amortization

74

62

Provision for doubtful accounts

3

2

Deferred income tax provision

24

11

Stock-based compensation expense

19

17

Other, net

(1)

1

Changes in operating assets and liabilities:

Accounts receivable

(97)

(35)

Accounts payable and accrued expenses

(68)

(95)

Income taxes payable

5

63

Other assets and liabilities, net

32

(5)

Net cash provided by operating activities

180

196

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(130)

(1)

Capital expenditures

(73)

(42)

Increase in investments and other assets

(1)

(4)

Net cash used in investing activities

(204)

(47)

Cash flows from financing activities:

Proceeds from borrowings

935

—

Repayments of debt

(832)

(2)

Purchases of treasury stock

(50)

(150)

Exercise of stock options

34

46

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

(20)

(22)

Dividends paid

(61)

(62)

Distributions to noncontrolling interests

(15)

(9)

Sale of noncontrolling interest in subsidiaries

2

—

Other financing activities, net

18

33

Net cash provided by (used in) financing activities

11

(166)

Net change in cash and cash equivalents and restricted cash

(13)

(17)

Cash and cash equivalents and restricted cash, beginning of period

137

384

Cash and cash equivalents and restricted cash, end of period

$

124

$

367

Cash and cash equivalents

$

124

$

367

Restricted cash

—

—

Cash and cash equivalents and restricted cash, end of period

$

124

$

367

Cash paid during the period for:

Interest

$

49

$

46

Income taxes

$

2

$

8

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

Three Months Ended
March 31,

2018

2017

(in millions, except per
share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

177

$

164

Less: earnings allocated to participating securities

1

1

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

$

176

$

163

Weighted average common shares outstanding - basic

136

137

Effect of dilutive securities:

Stock options and performance share units

3

4

Weighted average common shares outstanding - diluted

139

141

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.30

$

1.19

Diluted

$

1.27

$

1.16

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

Three Months Ended
March 31,

2018

2017

(dollars in millions, except
per share data)

Adjusted operating income:

Operating income

$

272

$

279

Restructuring and integration charges (a)

31

18

Adjusted operating income

$

303

$

297

Adjusted operating income as a percentage of net revenues:

Operating income as a percentage of net revenues

14.5

%

15.4

%

Restructuring and integration charges (a)

1.6

0.9

Adjusted operating income as a percentage of net revenues

16.1

%

16.3

%

Adjusted net income:

Net income attributable to Quest Diagnostics

$

177

$

164

Restructuring and integration charges (a)

31

18

Income tax benefit associated with special items (b)

(16)

(23)

Adjusted net income

$

192

$

159

Adjusted diluted EPS excluding amortization expense:

Diluted earnings per common share

$

1.27

$

1.16

Restructuring and integration charges (a) (b)

0.17

0.08

Amortization expense (c)

0.14

0.09

ETB (d)

(0.06)

(0.11)

Adjusted diluted EPS excluding amortization expense

$

1.52

$

1.22

(a)        For the three months ended March 31, 2018, represents costs primarily associated with workforce
            reductions, systems conversions and integration incurred in connection with further restructuring
            and integrating our business.  For the three months ended March 31, 2017, 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
March 31,

2018

2017

(dollars in millions)

Cost of services

$

12

$

10

Selling, general and administrative

18

8

Other operating expense, net

1

—

Operating income

$

31

$

18

(b)        For restructuring and integration charges, income tax impacts, where recorded, were calculated using
            combined tax rates of 25.5% and 38.7% for 2018 and 2017, respectively.  The following table
            summarizes the income tax benefit associated with special items:

Three Months Ended
March 31,

2018

2017

(dollars in millions)

Restructuring and integration charges

$

(8)

$

(7)

ETB (d)

(8)

(16)

$

(16)

$

(23)

Three Months Ended
March 31,

2018

2017

(dollars in millions)

Amortization of intangible assets

$

22

$

17

Equity in earnings of equity method investees, net of taxes

4

4

$

26

$

21

(d)        Represents the impact of ETB recorded in income tax expense.

Low

High

Diluted earnings per common share

$

5.42

$

5.62

Restructuring and integration charges (a)

0.59

0.59

Amortization expense (b)

0.58

0.58

ETB (c)

(0.09)

(0.09)

Adjusted diluted EPS excluding amortization expense

$

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

$

91

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

16

Total pre-tax amortization expense

$

107

Total amortization expense, net of an estimated tax benefit

$

80

(c)        Represents the estimated full year impact of ETB.

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:

2017 Revenue on an adjusted basis

$

7,402

$

7,402

2018 Equivalent revenue growth

4

%

5

%

2018 Revenue outlook

$

7,698

$

7,772