2019

2018

Change

(dollars in millions, except per share data)

Reported:

Net revenues

$

1,891

$

1,884

0.4

%

Diagnostic Information Services revenues

$

1,812

$

1,803

0.5

%

Revenue per requisition

(3.0)

%

Requisition volume

3.6

%

 Organic requisition volume

2.4

%

Operating income (a)

$

248

$

272

(8.7)

%

Operating income as a percentage of net revenues (a)

13.2

%

14.5

%

(130) bps

Net income attributable to Quest Diagnostics (a)

$

164

$

177

(7.3)

%

Diluted EPS (a)

$

1.20

$

1.27

(5.4)

%

Cash provided by operations

$

275

$

180

53.4

%

Capital expenditures

$

47

$

73

(35.3)

%

Adjusted (b):

Operating income

$

286

$

325

(11.6)

%

Operating income as a percentage of net revenues

15.1

%

17.2

%

(210) bps

Net income attributable to Quest Diagnostics

$

190

$

211

(9.9)

%

Diluted EPS

$

1.40

$

1.52

(7.9)

%

(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)    

Beginning in 2019, the company has changed how it presents adjusted income measures to additionally exclude amortization expense for all periods.  We believe this presentation provides investors with additional insight to evaluate our performance period over period and relative to competitors, as well as to analyze the underlying trends in our business.

Current Outlook

Low

High

Net revenues

$7.60 billion

$7.75 billion

Net revenue increase

1%

3%

Reported diluted EPS

Greater than $5.16

Adjusted diluted EPS

Greater than $6.40

Cash provided by operations

Approximately $1.3 billion

Capital expenditures

$350 million

$400 million

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended March 31, 2019 and 2018

(in millions, except per share data)  

(unaudited)

Three Months Ended
March 31,

2019

2018

Net revenues

$

1,891

$

1,884

Operating costs and expenses and other operating income:

Cost of services

1,244

1,226

Selling, general and administrative

384

363

Amortization of intangible assets

24

22

Other operating (income) expense, net

(9)

1

Total operating costs and expenses, net

1,643

1,612

Operating income

248

272

Other income (expense):

Interest expense, net

(44)

(41)

Other income (expense), net

9

(2)

Total non-operating expenses, net

(35)

(43)

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

213

229

Income tax expense

(50)

(52)

Equity in earnings of equity method investees, net of taxes

13

12

Net income

176

189

Less: Net income attributable to noncontrolling interests

12

12

Net income attributable to Quest Diagnostics

$

164

$

177

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.22

$

1.30

Diluted

$

1.20

$

1.27

Weighted average common shares outstanding:

Basic

134

136

Diluted

136

139

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Balance Sheets

March 31, 2019 and December 31, 2018

(in millions, except per share data)

(unaudited)

March 31,
 2019

December 31,
 2018

Assets

Current assets:

Cash and cash equivalents

$

464

$

135

Accounts receivable, net

1,079

1,012

Inventories

98

99

Prepaid expenses and other current assets

137

144

Total current assets

1,778

1,390

Property, plant and equipment, net

1,277

1,288

Operating lease right-of-use assets

497

—

Goodwill

6,605

6,563

Intangible assets, net

1,200

1,207

Investment in equity method investees

454

436

Other assets

126

119

Total assets

$

11,937

$

11,003

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

1,029

$

1,021

Current portion of long-term debt

1,108

464

Current portion of long-term operating lease liabilities

145

—

Total current liabilities

2,282

1,485

Long-term debt

3,131

3,429

Long-term operating lease liabilities

393

—

Other liabilities

713

745

Redeemable noncontrolling interest

77

77

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized as of both March 31, 2019 and December 31, 2018; 217 shares issued as of both March 31, 2019 and December 31, 2018

2

2

Additional paid-in capital

2,671

2,667

Retained earnings

7,694

7,602

Accumulated other comprehensive loss

(55)

(59)

Treasury stock, at cost; 83 shares and 82 shares as of March 31, 2019 and December 31, 2018, respectively

(5,022)

(4,996)

Total Quest Diagnostics stockholders' equity

5,290

5,216

Noncontrolling interests

51

51

Total stockholders' equity

5,341

5,267

Total liabilities and stockholders' equity

$

11,937

$

11,003

Quest Diagnostics Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

(in millions)

(unaudited)

Three Months Ended
March 31,

2019

2018

Cash flows from operating activities:

Net income

$

176

$

189

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

Depreciation and amortization

84

74

Provision for doubtful accounts

4

3

Deferred income tax provision

3

24

Stock-based compensation expense

17

19

Other, net

(18)

(1)

Changes in operating assets and liabilities:

Accounts receivable

(71)

(97)

Accounts payable and accrued expenses

32

(68)

Income taxes payable

43

5

Other assets and liabilities, net

5

32

Net cash provided by operating activities

275

180

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(56)

(130)

Capital expenditures

(47)

(73)

Increase in investments and other assets

(7)

(1)

Net cash used in investing activities

(110)

(204)

Cash flows from financing activities:

Proceeds from borrowings

1,139

935

Repayments of debt

(802)

(832)

Purchases of treasury stock

(53)

(50)

Exercise of stock options

20

34

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

(15)

(20)

Dividends paid

(72)

(61)

Distributions to noncontrolling interest partners

(12)

(15)

Contributions from noncontrolling interest partners

—

2

Other financing activities, net

(41)

18

Net cash provided by financing activities

164

11

Net change in cash and cash equivalents and restricted cash

329

(13)

Cash and cash equivalents and restricted cash, beginning of period

135

137

Cash and cash equivalents and restricted cash, end of period

$

464

$

124

Cash and cash equivalents

$

464

$

124

Restricted cash

—

—

Cash and cash equivalents and restricted cash, end of period

$

464

$

124

Cash paid during the period for:

Interest

$

28

$

49

Income taxes

$

3

$

2

Notes to Financial Tables

1)

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

Three Months Ended
March 31,

2019

2018

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

164

$

177

Less: earnings allocated to participating securities

1

1

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

$

163

$

176

Weighted average common shares outstanding - basic

134

136

Effect of dilutive securities:

Stock options and performance share units

2

3

Weighted average common shares outstanding - diluted

136

139

Earnings per share attributable to Quest Diagnostics' common stockholders:

Basic

$

1.22

$

1.30

Diluted

$

1.20

$

1.27

2)

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

Three Months Ended March 31, 2019

(dollars in millions except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (c)

Equity in earnings of equity method investees, net of tax

Net income attributable to Quest Diagnostics

Diluted earnings per common share

As reported

$

248

13.2

%

$

(50)

$

13

$

164

$

1.20

Restructuring and

integration charges (a)

22

1.1

(6)

—

16

0.12

Other (b)

(8)

(0.5)

(1)

—

(9)

(0.06)

Amortization expense

24

1.3

(7)

5

22

0.16

ETB

—

—

(3)

—

(3)

(0.02)

As adjusted

$

286

15.1

%

$

(67)

$

18

$

190

$

1.40

Three Months Ended March 31, 2018

(dollars in millions except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (c)

Equity in earnings of equity method investees, net of tax

Net income attributable to Quest Diagnostics

Diluted earnings per common share

As reported

$

272

14.5

%

$

(52)

$

12

$

177

$

1.27

Restructuring and

integration charges (a)

31

1.6

(8)

—

23

0.17

Amortization expense

22

1.1

(7)

4

19

0.14

ETB

—

—

(8)

—

(8)

(0.06)

As adjusted

$

325

17.2

%

$

(75)

$

16

$

211

$

1.52

(a)   

For the three months ended March 31, 2019, represents costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.  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. 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,

2019

2018

(dollars in millions)

Cost of services

$

11

$

12

Selling, general and administrative

11

18

Other operating (income) expense, net

—

1

Operating income

$

22

$

31

(b)     

For the three months ended March 31, 2019, the pre-tax impact primarily represents a gain associated with an insurance claim for hurricane related losses partially offset by non-cash asset impairment charges.  The following table summarizes the pre-tax impact of these other items on the company's consolidated statements of operations:

Three Months Ended
March 31,

2019

2018

(dollars in millions)

Selling, general and administrative

$

1

$

—

Other operating (income) expense, net

(9)

—

Operating income

$

(8)

$

—

(c)    

For restructuring and integration charges, other items, and amortization expense, income tax impacts, where recorded, were primarily calculated using combined tax rates of 25.5% for both 2019 and 2018.  For the gain associated with an insurance claim for hurricane related losses in 2019, there was no net income tax expense as the company is able to utilize net operating loss carryforwards for which a valuation allowance had previously been established.

3)

For the three months ended March 31, 2019, the company repurchased 0.6 million shares of its common stock for $50 million.  As of March 31, 2019, $0.5 billion remained available under the company's share repurchase authorizations.         

4)

The outlook for adjusted diluted EPS represents management's estimates for the full-year 2019 before the impact of special items, including ETB and amortization expense.  Further impacts to earnings related to special items may occur throughout 2019.  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 2019 outlook for adjusted diluted EPS to the corresponding amounts determined under GAAP:

Diluted earnings per common share

$

5.16

Restructuring and integration charges (a)

0.68

Other

(0.03)

Amortization expense (b)

0.63

ETB

(0.04)

Adjusted diluted EPS

$

6.40

(a)   

Represents estimated full-year pre-tax charges of $125 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 25.5%.

(b)    

Represents the estimated impact of amortization expense for 2019 on the calculation of adjusted diluted EPS.  Amortization expense used in the calculation is as follows (dollars in millions):

Amortization of intangible assets

$

99

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

15

Total pre-tax amortization expense

$

114

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

$

85