Quest Diagnostics Reports Second Quarter 2021 Financial Results; Establishes Full Year 2021 Outlook

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

Change

2021

2020

Change

(dollars in millions, except per share data)

Reported:

Net revenues

$

2,550

$

1,827

39.5

%

$

5,270

$

3,649

44.4

%

Diagnostic Information Services revenues

$

2,474

$

1,764

40.2

%

$

5,117

$

3,508

45.9

%

Revenue per requisition

(3.6)

%

8.1

%

Requisition volume

45.2

%

34.7

%

Organic requisition volume

40.1

%

30.0

%

Operating income (a)

$

533

$

283

88.4

%

$

1,193

$

458

160.5

%

Operating income as a percentage of net revenues (a)

20.9

%

15.5

%

5.4

%

22.6

%

12.5

%

10.1

%

Net income attributable to Quest Diagnostics (a)

$

631

$

185

240.5

%

$

1,100

$

284

287.0

%

Diluted EPS (a) (b)

$

4.96

$

1.36

264.2

%

$

8.38

$

2.09

300.7

%

Cash provided by operations

$

460

$

355

30.1

%

$

1,191

$

602

97.8

%

Capital expenditures

$

84

$

82

2.5

%

$

170

$

165

2.9

%

Adjusted (a):

Operating income

$

584

$

294

98.0

%

$

1,292

$

519

148.8

%

Operating income as a percentage of net revenues

22.9

%

16.1

%

6.8

%

24.5

%

14.2

%

10.3

%

Net income attributable to Quest Diagnostics

$

405

$

193

109.5

%

$

913

$

321

184.3

%

Diluted EPS (b)

$

3.18

$

1.42

123.9

%

$

6.96

$

2.36

194.5

%

(a)

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.

(b)

The sum of reported and adjusted diluted EPS for the first two quarters of 2021 did not equal the totals for the six months ended June 30, 2021 due to both quarterly fluctuations in the company’s earnings and in the weighted average common shares outstanding throughout the period as a result of the impact of accelerated share repurchase agreements (“ASRs”) that the company entered into during April 2021.

Low

High

Net revenues

$9.54 billion

$9.79 billion

Net revenues increase

1.1%

3.7%

Reported diluted EPS

$11.48

$12.18

Adjusted diluted EPS

$10.65

$11.35

Cash provided by operations

At least $1.9 billion

Capital expenditures

Approximately $400 million

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2021 and 2020

(in millions, except per share data)

(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2021

2020

2021

2020

Net revenues

$

2,550

$

1,827

$

5,270

$

3,649

Operating costs and expenses and other operating income:

Cost of services

1,565

1,221

3,191

2,491

Selling, general and administrative

429

360

836

707

Amortization of intangible assets

25

25

52

50

Other operating income, net

(2)

(62)

(2)

(57)

Total operating costs and expenses, net

2,017

1,544

4,077

3,191

Operating income

533

283

1,193

458

Other income (expense):

Interest expense, net

(38)

(41)

(76)

(82)

Other income (expense), net

322

13

326

(3)

Total non-operating income (expense), net

284

(28)

250

(85)

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

817

255

1,443

373

Income tax expense

(177)

(66)

(330)

(92)

Equity in earnings of equity method investees, net of taxes

10

4

27

18

Net income

650

193

1,140

299

Less: Net income attributable to noncontrolling interests

19

8

40

15

Net income attributable to Quest Diagnostics

$

631

$

185

$

1,100

$

284

Earnings per share attributable to Quest Diagnostics’ common
stockholders:

Basic

$

5.05

$

1.38

$

8.52

$

2.12

Diluted

$

4.96

$

1.36

$

8.38

$

2.09

Weighted average common shares outstanding:

Basic

125

134

129

134

Diluted

127

136

131

135

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

June 30, 2021 and December 31, 2020

(in millions, except per share data)

(unaudited)

June 30,
2021

December 31,
2020

Assets

Current assets:

Cash and cash equivalents

$

560

$

1,158

Accounts receivable, net

1,255

1,520

Inventories

199

223

Prepaid expenses and other current assets

132

157

Total current assets

2,146

3,058

Property, plant and equipment, net

1,622

1,627

Operating lease right-of-use assets

589

604

Goodwill

7,045

6,873

Intangible assets, net

1,172

1,167

Investments in equity method investees

111

521

Other assets

176

176

Total assets

$

12,861

$

14,026

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable and accrued expenses

$

1,404

$

1,633

Current portion of long-term debt

2

2

Current portion of long-term operating lease liabilities

145

141

Total current liabilities

1,551

1,776

Long-term debt

4,008

4,013

Long-term operating lease liabilities

492

499

Other liabilities

792

847

Redeemable noncontrolling interest

78

82

Stockholders’ equity:

Quest Diagnostics stockholders’ equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both June 30, 2021 and
December 31, 2020; 217 shares issued as of both June 30, 2021 and December 31, 2020

2

2

Additional paid-in capital

2,555

2,841

Retained earnings

10,246

9,303

Accumulated other comprehensive loss

(10)

(21)

Treasury stock, at cost; 95 and 84 shares as of June 30, 2021 and December 31, 2020, respectively

(6,894)

(5,366)

Total Quest Diagnostics stockholders’ equity

5,899

6,759

Noncontrolling interests

41

50

Total stockholders’ equity

5,940

6,809

Total liabilities and stockholders’ equity

$

12,861

$

14,026

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2021 and 2020

(in millions)

(unaudited)

Six Months Ended June 30,

2021

2020

Cash flows from operating activities:

Net income

$

1,140

$

299

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

Depreciation and amortization

201

174

Provision for credit losses

2

13

Deferred income tax (benefit) provision

(89)

23

Stock-based compensation expense

39

31

Gain on disposition of investment

(314)

—

Other, net

1

3

Changes in operating assets and liabilities:

Accounts receivable

265

(75)

Accounts payable and accrued expenses

(199)

42

Income taxes payable

85

51

Termination of interest rate swap agreements

—

40

Other assets and liabilities, net

60

1

Net cash provided by operating activities

1,191

602

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(231)

(228)

Capital expenditures

(170)

(165)

Proceeds from disposition of investment

755

—

Increase in investments and other assets

(10)

(18)

Net cash provided by (used in) investing activities

344

(411)

Cash flows from financing activities:

Proceeds from borrowings

—

749

Repayments of debt

(1)

(1,001)

Purchases of treasury stock

(1,910)

(75)

Exercise of stock options

68

117

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

(22)

(13)

Dividends paid

(156)

(146)

Distributions to noncontrolling interest partners

(53)

(10)

Other financing activities, net

(59)

(16)

Net cash used in financing activities

(2,133)

(395)

Net change in cash and cash equivalents and restricted cash

(598)

(204)

Cash and cash equivalents and restricted cash, beginning of period

1,158

1,192

Cash and cash equivalents and restricted cash, end of period

$

560

$

988

Cash paid during the period for:

Interest

$

78

$

103

Income taxes

$

335

$

20

Three Months Ended
June 30,

Six Months Ended
June 30,

2021

2020

2021

2020

(in millions, except per share data)

Amounts attributable to Quest Diagnostics’ common stockholders:

Net income attributable to Quest Diagnostics

$

631

$

185

$

1,100

$

284

Less: earnings allocated to participating securities

3

1

4

1

Earnings available to Quest Diagnostics’ common stockholders - basic

and diluted

$

628

$

184

$

1,096

$

283

Weighted average common shares outstanding - basic

125

134

129

134

Effect of dilutive securities:

Stock options and performance share units

2

2

2

1

Weighted average common shares outstanding - diluted

127

136

131

135

Earnings per share attributable to Quest Diagnostics’ common
stockholders:

Basic

$

5.05

$

1.38

$

8.52

$

2.12

Diluted

$

4.96

$

1.36

$

8.38

$

2.09

Three Months Ended June 30, 2021

(dollars in millions, except per share data)

Operating income

Operating
income as a
percentage of
net revenues

Income tax
expense (e)

Equity in
earnings of
equity
method
investees, net
of taxes

Net income
attributable
to Quest
Diagnostics

Diluted EPS

As reported

$

533

20.9

%

$

(177)

$

10

$

631

$

4.96

Restructuring and
integration charges (a)

21

0.9

(5)

—

16

0.12

Other (b)

5

0.1

(1)

—

4

0.03

Gain on sale of
ownership in joint
venture (c)

—

—

55

—

(259)

(2.04)

Amortization expense

25

1.0

(7)

—

18

0.15

ETB

—

—

(5)

—

(5)

(0.04)

As adjusted

$

584

22.9

%

$

(140)

$

10

$

405

$

3.18

Six Months Ended June 30, 2021

(dollars in millions, except per share data)

Operating income

Operating
income as a
percentage of
net revenues

Income tax
expense (e)

Equity in
earnings of
equity
method
investees, net
of taxes

Net income
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

1,193

22.6

%

$

(330)

$

27

$

1,100

$

8.38

Restructuring and

integration charges (a)

38

0.7

(9)

—

29

0.22

Other (b)

5

0.1

(4)

8

9

0.07

Gain on sale of ownership in joint venture (c)

—

—

55

—

(259)

(1.98)

COVID-19 impact (d)

4

0.1

(1)

—

3

0.03

Amortization expense

52

1.0

(14)

2

40

0.31

ETB

—

—

(9)

—

(9)

(0.07)

As adjusted

$

1,292

24.5

%

$

(312)

$

37

$

913

$

6.96

Three Months Ended June 30, 2020

(dollars in millions, except per share data)

Operating income

Operating
income as a
percentage of
net revenues

Income tax
expense (e)

Equity in
earnings of
equity method
investees, net
of taxes

Net income
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

283

15.5

%

$

(66)

$

4

$

185

$

1.36

Restructuring and
integration charges (a)

9

0.6

(1)

—

8

0.06

COVID-19 impact (d)

(23)

(1.3)

10

(3)

(17)

(0.13)

Amortization expense

25

1.3

(7)

3

21

0.16

ETB

—

—

(4)

—

(4)

(0.03)

As adjusted

$

294

16.1

%

$

(68)

$

4

$

193

$

1.42

Six Months Ended June 30, 2020

(dollars in millions, except per share data)

Operating income

Operating
income as a
percentage of
net revenues

Income tax
expense (e)

Equity in
earnings of
equity method
investees, net
of taxes

Net income
attributable to
Quest
Diagnostics

Diluted EPS

As reported

$

458

12.5

%

$

(92)

$

18

$

284

$

2.09

Restructuring and
integration charges (a)

25

0.7

(5)

—

20

0.15

COVID-19 impact (d)

(14)

(0.4)

7

(3)

(13)

(0.10)

Amortization expense

50

1.4

(14)

6

42

0.31

ETB

—

—

(12)

—

(12)

(0.09)

As adjusted

$

519

14.2

%

$

(116)

$

21

$

321

$

2.36

(a)

For both the three and six months ended June 30, 2021, represents costs primarily associated with workforce reductions, systems conversions and integration incurred in connection with further restructuring and integrating our business. For both the three and six months ended June 30, 2020, 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,

2021

2020

2021

2020

(dollars in millions)

Cost of services

$

12

$

3

$

19

$

10

Selling, general and administrative

9

6

19

15

Operating income

$

21

$

9

$

38

$

25

(b)

For the three months ended June 30, 2021, the pre-tax impact primarily represents costs associated with donations, contributions and other financial support through Quest for Health Equity, recorded in selling, general and administrative expenses. For the six months ended June 30, 2021, the pre-tax impact represents an $8 million non-cash impairment to the carrying value of an equity method investment recorded in equity in earnings of equity method investees, net of taxes, and $5 million of costs associated with donations, contributions and other financial support through Quest for Health Equity, recorded in selling, general and administrative expenses.

(c)

For the three and six months ended June 30, 2021, the pre-tax impact represents a gain of $314 million recorded in other income (expense), net following the sale of the company’s 40% ownership interest in Q² Solutions®, its clinical trials central laboratory services joint venture, to IQVIA Holdings, Inc., its joint venture partner, for $760 million in an all-cash transaction.

(d)

For the six months ended June 30, 2021 and both the three and six months ended June 30, 2020, represents the impact of certain items resulting from the COVID-19 pandemic. For the six months ended June 30, 2021, includes incremental costs incurred to protect the health and safety of the company’s employees and customers. For both the three and six months ended June 30, 2020, includes $65 million of income recognized attributable to the receipt of the initial tranche of funds from the government that were appropriated to healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), partially offset by expense associated with a payment to eligible employees to help offset expenses they incurred as a result of COVID-19, certain asset impairment charges, and incremental costs incurred primarily to protect the health and safety of the company’s employees and customers. During the three months ended September 30, 2020, the company reversed the $65 million of income received from the government under the CARES Act, which funds were returned during the three months ended December 31, 2020.

The following table summarizes the pre-tax impact of these COVID-19 items on the company’s consolidated statements of operations:

Three Months Ended
June 30,

Six Months Ended
June 30,

2021

2020

2021

2020

(dollars in millions)

Cost of services

$

—

$

34

$

4

$

35

Selling, general and administrative

—

5

—

8

Other operating income, net

—

(62)

—

(57)

Operating income

$

—

$

(23)

$

4

$

(14)

Net income attributable to noncontrolling interest

$

—

$

1

$

—

$

3

(e)

For restructuring and integration charges, COVID-19 impacts, other items and amortization expense, income tax impacts, where recorded, were primarily calculated using combined statutory income tax rates of 25.5% for both 2021 and 2020. For the gain on sale of ownership in joint venture, income tax expense on the transaction resulted in an effective income rate of 17.6%.

3)

In April 2021, the company entered into ASRs with several financial institutions to repurchase $1.5 billion of the company’s common stock as part of its share repurchase program. For the three months ended June 30, 2021, the company paid $1.5 billion to the financial institutions and received an initial amount of 9.1 million shares of its common stock, for a value of $1.2 billion, which represents 80% of the total value of shares to be repurchased under the ASRs. The specific number of shares that the company ultimately will purchase under the ASRs will be based on the average of the daily volume-weighted average price per share of the company’s common stock during a repurchase period. There were no other shares repurchased during three months ended June 30, 2021. For the six months ended June 30, 2021, the company repurchased 12.5 million shares of its common stock for $1.6 billion, including 9.1 million shares repurchased under ASRs. In each of February and March 2021, the company’s Board of Directors increased the size of its share repurchase program by $1 billion. As of June 30, 2021, $1.3 billion remained available under the company’s share repurchase authorization.

4)

The outlook for adjusted diluted EPS represents management’s estimates for the full year 2021 before the impact of special items. Further impacts to earnings related to special items may occur throughout 2021. Additionally, the amount of ETB is dependent upon employee stock option exercises and the company’s stock price, which are difficult to predict. The following table reconciles our full year 2021 outlook for adjusted diluted EPS to the corresponding amounts determined under GAAP:

Low

High

Diluted EPS

$

11.48

$

12.18

Restructuring and integration charges (a)

0.46

0.46

COVID-19 impact (b)

0.03

0.03

Amortization expense (c)

0.62

0.62

Costs associated with Quest for Health Equity (d)

0.21

0.21

Gain on sale of ownership in joint venture (e)

(2.02)

(2.02)

ETB

(0.13)

(0.13)

Adjusted diluted EPS

$

10.65

$

11.35

(a)

Represents estimated pre-tax charges of $75 million primarily associated with workforce reductions, systems conversions and integration costs incurred in connection with further restructuring and integrating our business and impairment charges. Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(b)

Represents estimated pre-tax charges of $4 million associated with the impact of certain items resulting from the COVID-19 pandemic. Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(c)

Represents the estimated impact of amortization expense on the calculation of adjusted diluted EPS. Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

Amortization of intangible assets

$

104

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

2

Total pre-tax amortization expense

$

106

Total amortization expense, net of an estimated tax benefit using a combined statutory income tax rate of 25.5%

$

79

(d)

Represents estimated pre-tax charges of $35 million associated with donations, contributions and other financial support through Quest for Health Equity. Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(e)

Represents a pre-tax gain of $314 million recorded in other income (expense), net following the sale of the company’s 40% ownership in Q² Solutions®. Income tax expense on the transaction resulted in an effective income tax rate of 17.6%.