Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DGX > SEC Filings for DGX > Form 10-Q on 24-Oct-2013All Recent SEC Filings

Show all filings for QUEST DIAGNOSTICS INC

Form 10-Q for QUEST DIAGNOSTICS INC


24-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our Company

Quest Diagnostics is the world's leading provider of diagnostic information services ("DIS"), providing insights that empower and enable patients, physicians, hospitals, integrated delivery networks, health plans, employers and others to make better healthcare decisions. Over 90% of our revenues are derived from DIS with the balance derived from risk assessment services, clinical trials testing, diagnostic products and healthcare information technology. Our business segment information is disclosed in Note 15 to the interim consolidated financial statements.

Third Quarter Highlights

Our third quarter performance was impacted by a softer market than we expected entering the year, and our efforts to restore growth are taking longer than expected. The healthcare industry overall continues to face utilization headwinds. This is supported by commentary from industry stakeholders, including hospitals, physicians, payers and suppliers. Additionally, the industry faces ongoing pressure on reimbursement which has become more pronounced due to: (1) reductions in Medicare payments of approximately 5%; (2) cuts to the pathology codes on the Medicare physician fee schedule; (3) changes to Medicare fee schedules and coding requirements for molecular diagnostics; and (4) the effects of renewed commercial payer contracts.

Our total net revenues of $1.79 billion were 1.9% below the prior year period. DIS revenues of $1.65 billion were 2.4% below the prior year period. This was principally driven by lower than anticipated healthcare utilization, which resulted in lower DIS volume of approximately 2% after excluding the impact of acquisitions and business days. DIS revenue per requisition for the three months ended September 30, 2013 decreased 4.3% from the prior year period. Diagnostic Solutions ("DS") revenues were 4.1% higher than the prior year period. Income from continuing operations was $402.7 million for the three months ended September 30, 2013. This increase over the prior year period was principally due to the after-tax gain of $298.5 million related to the sale of future royalty rights of Ibrutinib ("Ibrutinib Sale") and was partially offset by the loss on sale of Enterix, our colorectal cancer screening test business ("Enterix"). Earnings per diluted share from continuing operations was $2.66 for the three months ended September 30, 2013. The increase over the prior year period was primarily due to the Ibrutinib Sale and the impact of common stock repurchases on our diluted share count, partially offset by the loss on sale of Enterix.

Initiatives to Improve Operating Efficiency and Restore Growth

In 2012, we launched a new vision and five-point business strategy for our Company (please refer to Item 1. Business in our 2012 Form 10-K) . During the third quarter, we made continued progress on the execution of this strategy.

We sold the royalty rights of Ibrutinib and completed the sale of Enterix.

Our cost excellence program, Invigorate, is on track to realize more than $250 million in savings this year.

On September 4, 2013, we entered into an additional accelerated share repurchase ("ASR") agreement to repurchase $350 million of our common stock as part of our Common Stock repurchase program.

In October 2013, we introduced BRCAvantage, that is intended to significantly broaden patient and provider access to testing for BRCA gene mutations.

Invigorate Program

The diagnostic testing industry is labor intensive. Employee compensation and benefits constitute approximately one-half of our total costs and expenses. Cost of services consists principally of costs for obtaining, transporting and testing specimens. Selling, general and administrative expenses consist principally of the costs associated with our sales and marketing efforts, billing operations, bad debt expense and general management and administrative support. In addition, performing diagnostic testing involves significant fixed costs for facilities and other infrastructure required to obtain, transport and test specimens. Therefore, relatively small changes in volume can have a significant impact on profitability in the short-term.

We are engaged in a multi-year program called Invigorate which is designed to deliver $600 million in annual run-rate cost savings versus 2011 by the time we exit 2014. We are continuing to seek additional opportunities to increase the savings from Invigorate, to as much as $1 billion over time, and where practical to accelerate the savings. The Invigorate program is intended to address continued reimbursement pressures and labor and benefit cost increases, free up additional resources to invest in science, innovation and other growth initiatives, and enable us to improve quality and operating profitability.


Table of Contents

In connection with our Invigorate program, we launched a voluntary retirement program to certain eligible employees that qualified for the program. This program was essentially completed at the end of the first quarter of 2013. This program will contribute an estimated $40 million in annualized savings, and we have incurred approximately $49 million of pre-tax employee separation costs in connection with the voluntary separation program through September 30, 2013.

In October 2012, as part of Invigorate, we launched a major management restructuring aimed at driving operational excellence and restoring growth. We have completed the elimination of at least three layers from the organization, and have reduced approximately 450 management positions through the end of the third quarter of 2013, contributing about $80 million of the $600 million in expected savings associated with our Invigorate program. We expect to eliminate a total of approximately 500 management positions by the end of 2013. In the nine months ended September 30, 2013, we recorded approximately $19.5 million of pre-tax employee separation costs associated this management restructuring initiative, and are on-track to meet our expected savings in 2013.

In connection with Invigorate, we entered into agreements to outsource certain aspects of our support functions. We recorded approximately $16.5 million of pre-tax employee separations costs and expect to eliminate a total of 350 positions associated with this initiative by the end of 2013.

As a result of our Invigorate program, we expect to deliver more than $250 million in realized savings in 2013 versus 2012. Furthermore, we continue to track well against our goal to deliver $600 million of run rate savings by the end of 2014.

We have updated our high-level estimates of the other categories of pre-tax charges expected to be incurred through 2014 in connection with our Invigorate program. The total estimated pre-tax charges now range from $200 million to $290 million and consist of $125 million to $165 million of employee separation costs; $30 million to $45 million of facility-related costs; $5 million to $15 million of asset impairment charges; and $40 million to $65 million of systems conversion and integration costs. Of the total estimated pre-tax charges expected to be incurred, we estimate that $195 million to $275 million are anticipated to result in cash expenditures. The actual charges incurred in connection with the multi-year course of action could be materially different from these estimates. As detailed plans to implement the multi-year course of action are approved and executed, it will result in charges to earnings. Through September 30, 2013, the cumulative charge recorded in connection with the Invigorate program was approximately $173 million.

For additional information on the Invigorate program and associated costs (see Note 4 to the interim consolidated financial statements).

Divestitures of Businesses

HemoCue

In April 2013, we completed the sale of HemoCue, our diagnostic point-of-care testing business ("HemoCue"). As a
result of the sale, discontinued operations for the nine months ended September 30, 2013 includes a gain of $13.5 million.

Enterix

In September 2013, we completed the sale of Enterix and recorded a $39.6 million pre-tax loss on sale, which is included in other operating expense, net. Enterix was not reclassified to discontinued operations due to the level of continuing involvement in the Enterix business subsequent to its sale to the acquiror.

Sale of Royalty Rights

In July 2013, we sold our right to receive royalties related to the commercialization of Ibrutinib for $485 million in cash. We accounted for this transaction as a sale of royalty rights and recognized a pre-tax gain of $474 million, net of transaction costs, associated with this sale.

Recent Acquisitions

Acquisition of Businesses from UMass Memorial Medical Center

On January 2, 2013, we completed the acquisition of the clinical outreach and anatomic pathology businesses of UMass Memorial Medical Center ("UMass"). This purchase is the first step in a series of transactions between the parties


Table of Contents

whereby the two organizations expect to eventually have a financial stake in a new entity that will perform diagnostic information testing services in a defined territory within the state of Massachusetts.

Acquisition of Advanced Toxicology Network

On May 15, 2013, we completed the acquisition of the toxicology and clinical laboratory business of Advanced Toxicology Network ("ATN") from Concentra, a subsidiary of Humana Inc.

Acquisition of Business from Dignity Health

On June 22, 2013, we completed the acquisition of certain lab-related clinical outreach service operations of Dignity Health ("Dignity"), a hospital system in California.

Acquisition of ConVerge Diagnostic Services

On October 7, 2013, the Company completed the acquisition of ConVerge Diagnostic Services, LLC ("ConVerge") from Water Street Healthcare Partners. ConVerge is a leading full-service laboratory providing clinical, cytology and anatomic pathology testing services to patients, physicians and hospitals in New England.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect our reported financial results and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for most of our business is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. There have been no significant changes to our critical accounting policies from those disclosed in our 2012 Annual Report on Form 10-K.

Results of Operations

Three and Nine Months Ended September 30, 2013 Compared with Three and Nine
Months Ended September 30, 2012

Continuing Operations
                                Three Months Ended September 30,               Nine Months Ended September 30,
                                                          % Increase                                     % Increase
                                2013           2012       (Decrease)         2013            2012        (Decrease)
                                                  (dollars in millions, except per share data)
Net revenues               $    1,787.1     $ 1,821.7         (1.9 )%   $     5,389.5     $ 5,608.8         (3.9 )%
Income from continuing
operations                        402.7         158.5        154.1  %           670.9         489.9         36.9  %
Earnings per diluted share $       2.66     $    0.98        171.4  %   $        4.32     $    3.04         42.1  %

Results for the three months ended September 30, 2013 were impacted by the following: (1) a pre-tax gain of $474.1 million, or $1.97 per diluted share, associated with the Ibrutinib Sale; (2) a pre-tax loss of $39.6 million, or $0.17 per diluted share, associated with the sale of Enterix; and (3) pre-tax charges of $39.3 million, or $0.16 per diluted share, related to restructuring costs primarily associated with workforce reductions, integration costs and professional fees associated with further restructuring and integrating our business.

Results for the nine months ended September 30, 2013 were impacted by the following: (1) a pre-tax gain of $474.1 million, or $1.92 per diluted share, associated with the Ibrutinib Sale; (2) pre-tax charges of $102.6 million, or $0.41 per diluted share, related to restructuring costs primarily associated with workforce reductions, integration costs and professional fees


Table of Contents

associated with further restructuring and integrating our business; and (3) a pre-tax loss of $39.6 million, or $0.16 per diluted share, associated with the sale of Enterix.

Results for the three months ended September 30, 2012 included $44.2 million of pre-tax charges, or $0.17 per diluted share, related to restructuring costs primarily associated with workforce reductions, integration costs and professional fees associated with further restructuring and integrating our business.

Results for the nine months ended September 30, 2012 included $69.6 million of pre-tax charges, or $0.27 per diluted share, related to restructuring costs primarily associated with workforce reductions, integration costs and professional fees associated with further restructuring and integrating our business and $10.1 million, or $0.04 per diluted share, principally associated with separation costs and accelerated vesting of certain equity awards in connection with the succession of our prior CEO.

Net Revenues

Net revenues for the three months ended September 30, 2013 were 1.9% below the prior year level.

DIS revenue, which accounted for over 90% of our consolidated net revenues, decreased by 2.4% for the three months ended September 30, 2013 compared to the prior year period. DIS volume, measured by the number of requisitions, increased 2.0% for the third quarter of 2013 compared to the prior year period. The acquisitions of UMass, ATN and Dignity contributed approximately 2.8% to the DIS volume growth in the quarter. The year-over-year volume comparisons benefited by approximately 1% due to the number of business days in the quarter. The contribution from these acquisitions and the higher number of business days was essentially offset by a decrease in our underlying volumes of approximately 2% resulting from the previously discussed utilization headwinds.

Revenue per requisition for the three months ended September 30, 2013 decreased 4.3% from the prior year level. This decrease is primarily associated with a Medicare fee schedule reduction, including pathology reimbursement reductions and molecular diagnostics coding requirements that went into effect at the beginning of the year and Medicare reductions related to sequestration, which were implemented at the beginning of the second quarter. Certain commercial fee schedule changes, all of which went into effect at the beginning of the year, also negatively impacted revenue per requisition in the quarter. Revenue per requisition was also negatively impacted by a decrease in higher priced anatomic pathology testing and an increase in lower priced drugs-of-abuse testing, which includes the impact of the ATN acquisition.

Net revenues for the nine months ended September 30, 2013 were 3.9% below the prior year level.

DIS revenue, which accounted for over 90% of our consolidated net revenues, decreased by 4.3% for the nine months ended September 30, 2013 compared to the prior year period. DIS volume, measured by the number of requisitions, decreased 0.5% compared to the prior year period. The acquisitions of UMass, ATN and Dignity contributed approximately 1.7% to the DIS volume for the nine months ended September 30, 2013. The underlying volume was about 2% below the prior year.

Revenue per requisition for the nine months ended September 30, 2013 decreased 3.8% from the prior year level. This decrease is primarily associated with a Medicare fee schedule reduction, including pathology reimbursement reductions and molecular diagnostics coding requirements, as well as certain commercial fee schedule changes, all of which went into effect at the beginning of the year. Revenue per requisition was also negatively impacted by a decrease in higher priced anatomic pathology testing and an increase in lower priced drugs-of-abuse testing, which includes the impact of the ATN acquisition. We expect reimbursement pressures to adversely impact our underlying revenue per requisition by about 3% for the full year in 2013, as compared to 2012.

Our DS business accounted for approximately 8% of our net revenues for the three and nine months ended September 30, 2013 and 2012. For the three months ended September 30, 2013, combined revenues in these businesses increased by approximately 4.1%, compared to the prior year period. This compares to the second quarter of 2013, where combined revenues in these businesses were up approximately 0.4% as compared to the second quarter of 2012. For the nine months ended September 30, 2013, combined revenues in these businesses increased by approximately 0.7%, compared to the prior year period. The increase in both periods was primarily due to an increase in revenues within our focus diagnostics products business.


Table of Contents

Operating Costs and Expenses

                                                   Three Months Ended September 30,
                                                                                         Increase
                                       2013                      2012                   (Decrease)
                                             % Net                      % Net                    % Net
                                  $         Revenue          $         Revenue        $         Revenue
                                                        (dollars in millions)
Cost of services             $ 1,088.5        60.9  %   $ 1,081.0        59.3 %   $    7.5         1.6  %
Selling, general and
administrative expenses
(SG&A)                           423.0        23.7          416.9        22.9          6.1         0.8
Amortization of intangible
assets                            20.2         1.1           18.6         1.0          1.6         0.1
Gain on sale of royalty
rights                          (474.1 )     (26.5 )            -           -       (474.1 )     (26.5 )
Other operating expense, net      40.1         2.2            0.6         0.1         39.5         2.1
Total operating costs and
expenses                     $ 1,097.7        61.4  %   $ 1,517.1        83.3 %   $ (419.4 )     (21.9 )%
Bad debt expense (included
in SG&A)                     $    64.7         3.6  %   $    61.2         3.4 %   $    3.5         0.2  %



                                                   Nine Months Ended September 30,
                                                                                         Increase
                                       2013                      2012                   (Decrease)
                                             % Net                      % Net                    % Net
                                  $         Revenue          $         Revenue        $         Revenue
                                                        (dollars in millions)
Cost of services             $ 3,274.0        60.7  %   $ 3,292.1        58.7 %   $  (18.1 )       2.0  %
Selling, general and
administrative expenses
(SG&A)                         1,289.4        23.9        1,324.2        23.6        (34.8 )       0.3
Amortization of intangible
assets                            59.2         1.1           56.2         1.0          3.0         0.1
Gain on sale of royalty
rights                          (474.1 )      (8.8 )            -           -       (474.1 )      (8.8 )
Other operating expense, net      35.8         0.7            0.5           -         35.3         0.7
Total operating costs and
expenses                     $ 4,184.3        77.6  %   $ 4,673.0        83.3 %   $ (488.7 )      (5.7 )%
Bad debt expense (included
in SG&A)                     $   204.1         3.8  %   $   208.4         3.7 %   $   (4.3 )       0.1  %

Total Operating Costs and Expenses

For the three months ended September 30, 2013, total operating costs and expenses were $419.4 million below the prior year level. This decrease was primarily driven by the $474.1 million gain associated with the Ibrutinib Sale, partially offset by $39.6 million associated with the loss on sale of Enterix. Results for the three months ended September 30, 2013 included $39.3 million of pre-tax restructuring and integration charges ($11.0 million in cost of services and $28.3 million in selling, general and administrative expenses), primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business.

Results for the three months ended September 30, 2012 included $44.2 million of pre-tax restructuring and integration charges ($20.1 million in cost of services and $24.1 million in selling, general and administrative expenses), primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business.

For the nine months ended September 30, 2013, total operating costs and expenses were $488.7 million below the prior year level. This decrease was principally driven by the $474.1 million gain associated with the Ibrutinib Sale, actions we have taken to reduce our cost structure under our Invigorate program, partially offset by $39.6 million associated with the loss on sale of Enterix. The savings associated with Invigorate have served to mitigate some of the earnings impact from the year over year revenue decrease. These savings were partially offset by higher costs primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business. These costs totaled $102.6 million ($38.4 million in cost of services and $64.2 million in selling, general and administrative expenses).


Table of Contents

Results for the nine months ended September 30, 2012 included $69.6 million of pre-tax restructuring and integration charges ($28.7 million in cost of services and $40.9 million in selling, general and administrative expenses), primarily associated with workforce reductions and professional fees incurred in connection with further restructuring and integrating our business. In addition, $10.1 million of pre-tax charges, associated with separation costs and accelerated vesting of certain equity awards in connection with the succession of our prior CEO, were recorded in selling, general and administrative expenses in 2012.

Cost of Services

The increase in cost of services for three months ended September 30, 2013 is primarily due to increased costs associated with our recent acquisitions. This was partially offset by actions we have taken to reduce our cost structure under the Invigorate program, lower performance-based compensation and lower testing volumes in our DIS business.

The decrease in cost of services for the nine months ended September 30, 2013 is primarily due to the impact of actions we have taken to reduce our cost structure under the Invigorate program, lower performance-based compensation and lower testing volumes in our DIS business, partially offset by increased costs related to our recent acquisitions.

The decrease in net revenues was the primary factor for the increase in cost of services as a percentage of net revenues in 2013 compared to both prior year periods.

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses for the three months ended September 30, 2013 is primarily associated with higher costs associated with restructuring and integration activities, partially offset by the impact of actions we have taken to reduce our cost structure under the Invigorate program and lower performance-based compensation.

The decrease in selling, general and administrative expenses for the nine months ended September 30, 2013 is primarily due to the impact of actions we have taken to reduce our cost structure under the Invigorate program, lower performance-based compensation and lower bad debt expense. This was partially offset by higher costs associated with restructuring and integration activities in the nine months ended September 30, 2013, compared to the prior year period.

The decrease in net revenues was the primary factor for the increase in selling, general and administrative expenses as a percentage of net revenues in 2013 compared to both prior year periods.

Amortization of Intangible Assets

The increase in amortization of intangible assets for the three and nine months ended September 30, 2013, compared to the prior year period, primarily reflects the impact of amortization of intangible assets acquired as part of the ATN, Dignity and UMass acquisitions.

Other Operating Expense, net

Other operating expense, net includes miscellaneous income and expense items
related to operating activities. For both the three and nine months ended
September 30, 2013, other operating expense, net includes a loss on sale of
$39.6 million associated with the sale of Enterix.

Operating Income
                                   Three Months Ended September 30,               Nine Months Ended September 30,
                                                               Increase                                       Increase
                                2013             2012         (Decrease)        2013             2012        (Decrease)
                                                                (dollars in millions)
Operating income            $    689.5       $    304.6      $     384.9   $    1,205.2       $   935.8     $     269.4
Operating income as a % of
net revenues                      38.6 %           16.7 %           21.9 %         22.4 %          16.7 %           5.7 %

The increase in operating income as a percentage of net revenues for the three months ended September 30, 2013 as compared to the prior year period, is primarily driven by the gain associated with the Ibrutinib Sale, partially offset by the loss


Table of Contents

on sale of Enterix, reduced revenues and higher cost of services and selling, general and administrative expenses. The increase in operating income as a percentage of net revenues for the nine months ended September 30, 2013 as compared to the prior year period, is primarily driven by the gain associated with the Ibrutinib Sale, partially offset by the loss on sale of Enterix, higher . . .

  Add DGX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DGX - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.