QUEST DIAGNOSTICS INCORPORATED Our Company
Diagnostic Information Services
Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. Our diagnostic information services business ("DIS") provides information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. We provide services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers and accountable care organizations ("ACOs"). We offer the broadest access inthe United States to diagnostic information services through our nationwide network of laboratories, patient service centers and phlebotomists in physician offices and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up over 95% of our consolidated net revenues.
We assess our revenue performance for the DIS business based upon, among other factors, volume (measured by test requisitions) and revenue per requisition.
Each requisition accompanies patient specimens, indicating the test(s) to be
performed and the party to be billed for the test(s). Management utilizes
requisition data to assist with assessing the growth of the business. Therefore,
we believe that the change in the number of requisitions from period to period
is useful information for investors as it allows them to assess our growth.
Revenue per requisition is impacted by various factors, including, among
other items, the impact of fee schedule changes (i.e. unit price), test mix,
payer mix, and the number of tests per requisition. Management utilizes revenue
per requisition data in order to assist with assessing various factors impacting
the performance of the business, including pricing and trends impacting mix.
Therefore, we believe that the change in this metric from period to period is
useful information for investors as it allows them to assess such factors, which
are relevant to assessing the revenue performance of the business.
Diagnostic Solutions
In our Diagnostic Solutions ("DS") businesses, which represents the balance
of our consolidated net revenues, we are the leading provider of risk assessment
services for the life insurance industry and we offer healthcare organizations
and clinicians robust information technology solutions.
Second Quarter Highlights
•Our total net revenues of$1.83 billion were down 6.4% from the prior year period. •In DIS: •Revenues of$1.76 billion decreased by 5.7% compared to the prior year period, driven by a decrease in organic volume (volume excluding the impact of acquisitions); partially offset by an increase in revenue per requisition and the impact of acquisitions. •Volume, measured by the number of requisitions, decreased by 17.7% compared to the prior year period, with organic volume down approximately 18.2%, partially offset by volume associated with recent acquisitions of 0.5%. Organic volume was negatively impacted by a material decline in testing volumes due to the COVID-19 pandemic, with testing volumes in the base business (which excludes COVID-19 molecular and antibody testing) down approximately 34% compared to the prior year period. •Revenue per requisition increased by 15.3% compared to the prior year period driven, in large part, by reimbursement for COVID-19 molecular testing. •DS revenues of$63 million decreased by 21.8% compared to the prior year period. •Income from continuing operations attributable toQuest Diagnostics' stockholders was$185 million , or$1.36 per diluted share, in 2020, compared to$206 million , or$1.51 per diluted share, in the prior year period. •For the six months endedJune 30, 2020 , net cash provided by operating activities was$602 million , compared to$596 million in the prior year period. 29 -------------------------------------------------------------------------------- Table of Contents Impact of COVID - 19 As a novel strain of coronavirus ("COVID-19") continues to spread and severely impact the economy ofthe United States and other countries around the world, we are committed to being a part of the coordinated public and private sector response to this unprecedented challenge. We have made substantial investments to expand the amount of COVID-19 testing available to the country and are currently capable of performing up to 130,000 COVID-19 molecular diagnostic tests per day to aid in the diagnosis of COVID-19 and approximately 200,000 COVID-19 antibody tests per day to aid in the detection of immune response. Despite our increase in capacity, surging demand for COVID-19 molecular diagnostic tests recently has increased faster than our capacity to perform the testing, which has impacted the time it takes for us to deliver test results to patients. We are continuing to invest in ways to increase our ability to bring more COVID-19 molecular testing to patients and speed the delivery of test results. However, global supply constraints have limited, and may continue to limit, our ability to do so. In the near future, we expect to have the capacity to perform approximately 150,000 molecular diagnostic tests per day. We have been effectively managing challenges in the global supply chain; and, at this point, we have sufficient supplies to conduct our business.
We have put preparedness plans in place at our facilities to maintain continuity of operations, while also taking steps to keep colleagues and customers healthy and safe. In line with recommendations to reduce large gatherings and increase social distancing, we have transitioned many office-based colleagues to a remote work environment.
During January and February 2020 , we experienced growth in DIS revenues and
volumes compared to the prior year period. However, in March and April 2020 , we
experienced a material decline in testing volumes due to the COVID-19 pandemic.
During the last two weeks of March, volumes declined in excess of 40% compared
to the prior year period, inclusive of COVID-19 testing, which continued in
April with volume declines in the range of 50 to 60% compared to the prior year
period as government policies were implemented to reduce the transmission of
COVID-19. During May and June 2020 , we began to experience a recovery in base
testing volumes (which excludes COVID-19 molecular and antibody testing), as
well as growing demand for COVID-19 testing services. The recovery in base
testing volumes was more significant in the geographies where governmental
policies designed to reduce the transmission of COVID-19 were eased more quickly
than other geographies. Volumes in our base business (which excludes COVID-19
molecular and antibody testing) for the second quarter of 2020 decreased
approximately 34% compared to the prior year period, which was partially offset
by COVID-19 molecular and antibody testing, as well as an increase in revenue
per requisition driven in large part by reimbursement for COVID-19 molecular
testing.
DIS revenues were positively impacted in the period as a result of the April
2020 announcement by the Centers for Medicare and Medicaid Services that it
would increase the reimbursement for certain COVID-19 molecular tests making use
of high-throughput technologies developed by the private sector that allow for
increased testing capacity, faster results, and more effective means of
combatting the spread of the virus to $100 per test, effective April 14, 2020
through the duration of the COVID-19 national emergency. If the current public
health emergency is not renewed, reimbursement for such tests will revert to the
initial rate of $51 per test.
Federal, state and local governmental policies and initiatives designed to
reduce the transmission of COVID-19 have resulted in, among other things, a
significant reduction in physician office visits, the cancellation of elective
medical procedures, customers closing or severely curtailing their operations
(voluntarily or in response to government orders), and the adoption of
work-from-home policies, all of which have had, and we believe will continue to
have, an impact on our operating results, financial position and cash flows,
including continued declines in base testing volumes (which excludes COVID-19
molecular and antibody testing). It is also possible that we will experience an
adverse impact on cash collections as a result of the impact of the COVID-19
pandemic.
In order to mitigate the impact that the COVID-19 pandemic had on our
business, we implemented a series of temporary actions in April 2020 to manage
our workforce costs and preserve cash including temporary salary reductions;
suspension of certain benefits; reduced hours for employees whose work has
significantly declined; and approved furloughs for employees with diminished
work requirements who expressed an interest. Recently, as our testing volumes
started to recover, we have recalled the vast majority of employees from
furlough and reinstated full working hours for almost all employees who were
asked to work reduced hours. Salary has been restored for the majority of exempt
employees that had temporary salary reductions, with the remainder scheduled to
be restored by the end of July 2020 .
We believe the COVID-19 pandemic's impact on our consolidated results of
operations, financial position and cash flows will be primarily driven by: the
severity and duration of the COVID-19 pandemic; the COVID-19 pandemic's impact
on the U.S. healthcare system and the U.S. economy; and the timing, scope and
effectiveness of federal, state and local governmental responses to the COVID-19
pandemic. We may also be impacted by changes in the severity of the COVID-19
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pandemic at different times in the various cities and regions where we operate
and offer services. Even after the COVID-19 pandemic has moderated and the
business and social distancing restrictions have eased, we may continue to
experience similar adverse effects to our businesses, consolidated results of
operations, financial position and cash flows resulting from a recessionary
economic environment that may persist. In the longer term, given the many
challenges that hospitals will face, we may have more opportunities to partner
with hospitals to help achieve their laboratory strategies, and the COVID-19
pandemic may also be a further catalyst for consolidation in the laboratory
testing industry.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
In March 2020 , in response to the COVID-19 pandemic, the CARES Act was
signed into law. The CARES Act provides numerous tax provisions and other
stimulus measures, including temporary changes regarding the prior and future
utilization of net operating losses, temporary changes to the prior and future
limitations on interest deductions, temporary suspension of certain payment
requirements for the employer portion of Social Security taxes, technical
corrections from prior tax legislation for tax depreciation of certain qualified
improvement property, and the creation of certain payroll tax credits associated
with the retention of employees. During the three months ended June 30, 2020 , we
started taking advantage of the temporary suspension of payment requirements for
the employer portion of Social Security taxes.
The CARES Act also includes a number of benefits that are applicable to us and other healthcare providers including, but not limited to:
•providing coverage for COVID-19 testing at no out-of-pocket cost to nearly all
patients;
•providing clinical laboratories a one-year reprieve from the reporting
requirements under the Protecting Access to Medicare Act ("PAMA") as well as a
one-year delay of reimbursement rate reductions for clinical laboratory services
provided under Medicare that were scheduled to take place in 2021. Further
revisions of the Medicare Clinical Laboratory Fee Schedule for years after 2021
will be based on future surveys of market rates. Reimbursement reduction from
2022-2024 is capped by PAMA at 15% annually;
•appropriating $100 billion to health care providers for related expenses or
lost revenues that are attributable to the COVID-19 pandemic. In April 2020 , we
received approximately $65 million from the initial tranche of funds from the
government that were distributed to health care providers. In addition, pursuant
to certain rules and regulations promulgated by the U.S. Department of Health
and Human Services ("HHS"), we applied for additional funds to be distributed by
the government under the original $100 billion appropriation to healthcare
providers under the CARES Act.
•suspending Medicare sequestration from May 2020 to December 2020 . We estimate
that the suspension of Medicare sequestration will result in a small benefit to
us in the form of higher reimbursement rates for diagnostic testing services
performed on behalf of Medicare beneficiaries.
Retirement of Debt
During January 2020 , we redeemed in full the outstanding indebtedness under
our senior notes due January 2020 and senior notes due March 2020 using proceeds
from the issuance, in December 2019 , of the 2.95% senior notes due June 2030 ,
along with cash on hand. For the six months ended June 30, 2020 , we recorded a
loss on retirement of debt, principally comprised of premiums paid, of $1
million in other income (expense), net.
Senior Notes Offering
During
For further details regarding our debt, see Note 8 to the interim unaudited consolidated financial statements.
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Acquisition of
On January 21, 2020 , we completed the acquisition of Blueprint Genetics Oy
("Blueprint Genetics"), in an all cash transaction for $108 million , net of $3
million cash acquired. Blueprint Genetics is a leading specialty genetic testing
company with deep expertise in gene variant interpretation based on next
generation sequencing and proprietary bioinformatics. Through the acquisition,
we acquired all of Blueprint Genetics' operations. The acquired business is
included in our DIS business.
Acquisition of the Outreach Laboratory Services Business of
On April 6, 2020 , we completed the acquisition of select assets which
constitute substantially all of the operations of Memorial Hermann Diagnostic
Laboratories , the outreach laboratory division of Memorial Hermann Health System
("Memorial Hermann") in an all cash transaction for $120 million . Memorial
Hermann is a not-for-profit health system in Southeast Texas . The acquired
business is included in our DIS business.
Agreement to Acquire Remaining 56% Interest in
On June 22, 2020 , we entered into definitive agreements with our joint
venture partners to acquire their remaining 56% interest in Mid America Clinical
Laboratories, LLC ("MACL"), which we currently account for as an equity method
investment. Closing of the transaction, which is expected to occur during the
third quarter of 2020, remains subject to customary closing conditions. Upon
close of the transaction, MACL will become a wholly owned subsidiary of the
Company and we expect to remeasure our previously held equity interest in MACL
to its acquisition date fair value and recognize a gain in our consolidated
statements of operations.
For further details regarding our acquisitions, see Note 5 to the interim unaudited consolidated financial statements and Note 6 to the audited consolidated financial statements in our 2019 Annual Report on Form 10-K.
Invigorate Program
We are engaged in a multi-year program called Invigorate, which is designed
to reduce our cost structure and improve our performance. We currently aim
annually to save approximately 3% of our costs. We are assessing whether the
COVID-19 pandemic will impact our ability to achieve that objective in 2020.
Invigorate has consisted of several flagship programs, with structured plans
in each, to drive savings and improve performance across the customer value
chain. These flagship programs include: organization excellence; information
technology excellence; procurement excellence; field and customer service
excellence; lab excellence; and revenue services excellence. In addition to
these programs, we identified key themes to change how we operate including
reducing denials and patient concessions; further digitizing our business;
standardization and automation; and optimization initiatives in our lab network
and patient service center network. We believe that our efforts to standardize
our information technology systems, equipment and data also foster our efforts
to strengthen our foundation for growth and support the value creation
initiatives of our clinical franchises by enhancing our operational flexibility,
empowering and enhancing the customer experience, facilitating the delivery of
actionable insights and bolstering our large data platform.
For the six months ended June 30, 2020 , we incurred $21 million of pre-tax
charges under our Invigorate program primarily consisting of systems conversion
and integration costs, all of which result in cash expenditures. Additional
restructuring charges may be incurred in future periods as we identify
additional opportunities to achieve further cost savings.
For further details of the Invigorate program and associated costs, see Note 4 to the interim unaudited consolidated financial statements.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies from those disclosed in our 2019 Annual Report on Form 10-K except for the adoption of new accounting standards as described in Note 2 to the interim unaudited consolidated financial statements.
Revenues and accounts receivable associated with DIS
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The process for estimating revenues and the ultimate collection of
receivables associated with our DIS business involves significant assumptions
and judgments. We recognize as revenue the amount of consideration to which we
expect to be entitled upon completion of the testing process, when results are
reported, or when services have been rendered. We estimate the amount of
consideration we expect to be entitled to receive from customer groups, using
the portfolio approach, in exchange for providing services. These estimates
include the impact of contractual allowances, including payer denials, and price
concessions. The portfolios determined using the portfolio approach consist of
the following customers:
•Healthcare Insurers
•Government Payers
•Client Payers
•Patients
We have a standardized approach to estimate the amount of consideration that
we expect to be entitled to; this standardized approach considers, among other
things, the impact of contractual allowances, including payer denials, and price
concessions. Historical collection and payer reimbursement experience (along
with the period the receivables have been outstanding), as well as other factors
including current market conditions, are integral parts of the estimation
process related to revenues and receivables. Adjustments to our estimated
contractual allowances and implicit price concessions are recorded in the
current period as changes in estimates. Further adjustments, based on actual
receipts, may be recorded upon settlement.
Although we believe that our estimates for contractual allowances and patient price concessions as well as our allowance for credit losses are appropriate, it is possible that we will experience an adverse impact on cash collections as a result of the impact of the COVID-19 pandemic. For further details on revenue and receivables, see Note 15 to the interim unaudited consolidated financial statements.
Accounting for and recoverability of goodwill
We do not amortize goodwill, but evaluate the recoverability and measure the
potential impairment of our goodwill annually, or more frequently, in the case
of other events that indicate a potential impairment.
Goodwill is evaluated for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be impaired. The
annual impairment test includes an option to perform a qualitative assessment of
whether it is more likely than not that a reporting unit's fair value is less
than its carrying value; the qualitative analysis may be performed prior to, or
as an alternative to, performing a quantitative goodwill impairment test. In
evaluating whether it is more likely than not that the fair value of a reporting
unit is less than its carrying value, we assess relevant events and
circumstances, such as: (a) macroeconomic conditions; (b) industry and market
considerations; (c) cost factors; (d) overall financial performance; (e) other
relevant entity-specific events; (f) events affecting a reporting unit; and (g)
a sustained decrease in share price. If, after assessing the totality of events
or circumstances, we determine that it is more likely than not that the fair
value of a reporting unit is less than its carrying value, we are required to
perform the quantitative goodwill impairment test. Otherwise, no further
analysis is required.
On a quarterly basis, we perform a review of our business to determine if
events or changes in circumstances have occurred that indicate that it is more
likely than not that the fair value of a reporting unit is less than its
carrying value. If such events or changes in circumstances were deemed to have
occurred, we would perform an impairment test of goodwill and record any noted
impairment loss. In conjunction with the preparation of our June 30, 2020
financial statements, we performed such review and concluded that no impairment
test was necessary. However, should the impact of the COVID-19 pandemic be
significantly worse than currently expected, it is possible that we could incur
impairment charges in the future.
Impact of New Accounting Standards
The adoption of new accounting standards is discussed in Note 2 to the interim unaudited consolidated financial statements.
The impact of recent accounting pronouncements not yet effective on our consolidated financial statements is discussed in Note 2 to the interim unaudited consolidated financial statements.
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Results of Operations
The following tables set forth certain results of operations data for the
periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 $ Change % Change 2020 2019 $ Change % Change
(dollars in millions, except per share amounts)
Net revenues:
DIS business $ 1,764 $ 1,872 $ (108) (5.7) %
(4.8) % DS businesses 63 81 (18) (21.8) 141 160 (19) (12.0) Total net revenues$ 1,827 $ 1,953 $ (126)
(6.4) %
(5.1) % Operating costs and expenses and other operating income: Cost of services$ 1,221 $ 1,265 $ (44)
(3.5) %
(0.7) % Selling, general and administrative 360 362 (2) (0.5) 707 746 (39) (5.2) Amortization of intangible assets 25 25 - 4.2 50 49 1 2.6 Other operating income, net (62) (6) (56) NM (57) (15) (42) NM Total operating costs and expenses, net$ 1,544 $ 1,646 $ (102) (6.2) %$ 3,191 $ 3,289 $ (98) (3.0) % Operating income$ 283 $ 307 $ (24) (7.6) %$ 458 $ 555 $ (97) (17.5) % Other income (expense): Interest expense, net$ (41) $ (45) $ 4
(9.7) %
(8.2) % Other income (expense), net 13 3 10 NM (3) 12 (15) NM Total non-operating expenses, net$ (28) $ (42) $ 14 (33.6) %$ (85) $ (77) $ (8) 9.5 % Income tax expense$ (66) $ (63) $ (3) 4.5 %$ (92) $ (113) $ 21 (19.3) % Effective income tax rate 25.5 % 23.6 % 24.4 % 23.6 % Equity in earnings of equity method investees, net of taxes$ 4 $ 17 $ (13)
(76.9) %
(41.8) % Amounts attributable toQuest Diagnostics' common stockholders: Income from continuing operations$ 185 $ 206 $ (21)
(10.1) %
(23.3) % Income from discontinued operations, net of taxes $ -$ 20 $ (20) NM $ -$ 20 $ (20) NM Diluted earnings per common share from continuing operations attributable toQuest Diagnostics' common stockholders$ 1.36 $ 1.51 $ (0.15) (9.7) %$ 2.09 $ 2.71 $ (0.62) (23.0) % NM - Not Meaningful 34
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The following table sets forth certain results of operations data as a percentage of net revenues for the periods presented:
Six Months Ended
Three Months Ended June 30, June 30,
2020 2019 2020 2019
Net revenues:
DIS business 96.5 % 95.9 % 96.1 % 95.8 %
DS businesses 3.5 4.1 3.9 4.2
Total net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses and other operating
income:
Cost of services 66.8 % 64.8 % 68.3 % 65.3 %
Selling, general and administrative 19.7 18.6 19.4 19.4
Amortization of intangible assets 1.4 1.3 1.4 1.3
Other operating income, net (3.4) (0.4) (1.6) (0.4)
Total operating costs and expenses, net 84.5 % 84.3 % 87.5 % 85.6 %
Operating income 15.5 % 15.7 % 12.5 % 14.4 %
Operating Results
Results for the three months ended
•pre-tax amortization expense of$28 million ($25 million in amortization of intangible assets and$3 million in equity in earnings of equity method investees, net of taxes) or$0.16 per diluted share; and •pre-tax charges of$9 million ($3 million in cost of services and$6 million in selling, general and administrative expenses), or$0.06 per diluted share, representing costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a pre-tax net gain of$26 million (a$62 million gain in other operating income, net and a$3 million gain in equity in earnings of equity method investees, net of taxes, partially offset by$34 million of charges in cost of services and$5 million of charges in selling, general and administrative expenses), or$0.13 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic including$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 CARES Act, partially offset by expense associated with a one-time 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 our employees and customers; and •excess tax benefits associated with stock-based compensation arrangements of$4 million , or$0.03 per diluted share, recorded in income tax expense.
Results for the six months ended
•pre-tax amortization expense of$56 million ($50 million in amortization of intangible assets and$6 million in equity in earnings of equity method investees, net of taxes) or$0.31 per diluted share; and •pre-tax charges of$25 million ($10 million in cost of services and$15 million in selling, general and administrative expenses), or$0.15 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a pre-tax net gain of$17 million (a$57 million gain in other operating income, net and a$3 million gain in equity in earnings of equity method investees, net of taxes, partially offset by$35 million of charges in cost of services, and$8 million of charges in selling, general and administrative expenses ), or$0.10 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic including$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 CARES Act, partially offset by expense associated with a one-time 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 our employees and customers; and 35 -------------------------------------------------------------------------------- Table of Contents •excess tax benefits associated with stock-based compensation arrangements of$12 million , or$0.09 per diluted share, recorded in income tax expense.
Results for the three months ended
•pre-tax amortization expense of$30 million ($25 million in amortization of intangible assets and$5 million in equity in earnings of equity method investees, net of taxes) or$0.16 per diluted share; and •pre-tax charges of$26 million ($11 million in cost of services and$15 million in selling, general and administrative expenses), or$0.14 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a net pre-tax gain of$6 million in other operating income, net, or$0.04 per diluted share, primarily due to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition; and •excess tax benefits associated with stock-based compensation arrangements of$5 million , or$0.04 per diluted share, recorded in income tax expense.
Results for the six months ended
•pre-tax amortization expense of$59 million ($49 million in amortization of intangible assets and$10 million in equity in earnings of equity method investees, net of taxes) or$0.32 per diluted share; and •pre-tax charges of$48 million ($22 million in cost of services and$26 million in selling, general and administrative expenses), or$0.26 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a net pre-tax gain of$14 million (a$15 million gain in other operating income, net offset by a$1 million charge in selling, general and administrative expenses), or$0.10 per diluted share, primarily due to a gain associated with an insurance claim for hurricane related losses and a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition partially offset by non-cash asset impairment charges; and •excess tax benefit associated with stock-based compensation arrangements of$8 million , or$0.06 per diluted share, recorded in income tax expense.
Net Revenues
Net revenues for the three months ended
DIS revenues for the three months ended
•Organic revenue decreased approximately 6.6% compared to the prior year period, which was partially offset by the impact of recent acquisitions which contributed approximately 0.9% to DIS revenue. •DIS volume decreased by 17.7% compared to the prior year period, with organic volume down approximately 18.2%, partially offset by volume associated with recent acquisitions of 0.5%. Organic volume was negatively impacted by a material decline in testing volumes due to the COVID-19 pandemic, partially offset by COVID-19 molecular and antibody testing. Testing volumes in the base business (which excludes COVID-19 molecular and antibody testing) declined approximately 34% for the three months endedJune 30, 2020 compared to the prior year period. •Revenue per requisition increased by 15.3% compared to the prior year period primarily due to favorable mix, driven in large part by reimbursement for COVID-19 molecular testing; partially offset by reimbursement pressure, including unit price reductions associated with PAMA and all other sources, of approximately 1.8%.
Net revenues for the six months ended
DIS revenues for the six months ended
•Organic revenue decreased approximately 5.5% compared to the prior year period, which was partially offset by the impact of recent acquisitions which contributed approximately 0.7% to DIS revenues.
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•DIS volume decreased by 10.2% compared to the prior year period, with organic
volume down approximately 10.5%, partially offset by volume associated with
recent acquisitions of 0.3%. Organic volume was negatively impacted by a
material decline in testing volumes due to the COVID-19 pandemic, partially
offset by COVID-19 molecular and antibody testing as well as an extra business
day in 2020 and the impact of weather in the prior year period, both of which
favorably impacted the comparison by 1.0%. Testing volumes in the base business
(which excludes COVID-19 molecular and antibody testing) declined approximately
19% for the six months ended June 30, 2020 compared to the prior year period.
•Revenue per requisition increased by 6.4% compared to the prior year period
primarily due to favorable mix, driven in large part by reimbursement for
COVID-19 molecular testing; partially offset by reimbursement pressure,
including unit price reductions associated with PAMA and all other sources, of
approximately 2.0%.
Cost of Services
Cost of services consists principally of costs for obtaining, transporting
and testing specimens as well as facility costs used for the delivery of our
services.
For the three months ended June 30, 2020 , cost of services decreased by $44
million compared to the prior year period. The decrease was primarily driven by
lower compensation and benefit costs as a result of a series of temporary
actions implemented to manage our workforce costs. These decreases were
partially offset by higher supplies expense, due to mix and a higher supply cost
associated with COVID-19 molecular testing, and incremental costs incurred
related to the COVID-19 pandemic including expense associated with a one-time
payment to eligible employees to help offset expenses they incurred as a result
of COVID-19 and incremental costs incurred primarily to protect the health and
safety of our employees and customers.
For the six months ended June 30, 2020 , cost of services decreased by
$18 million compared to the prior year period. The decrease was primarily driven
by lower compensation and benefit costs as a result of a series of temporary
actions implemented to manage our workforce costs. These decreases were
partially offset by higher supplies expense, due to mix and a higher supply cost
associated with COVID-19 testing, and incremental costs incurred related to the
COVID-19 pandemic including expense associated with a one-time payment to
eligible employees to help offset expenses they incurred as a result of COVID-19
and incremental costs incurred primarily to protect the health and safety of our
employees and customers.
Selling, General and Administrative Expenses ("SG&A")
SG&A consist principally of the costs associated with our sales and marketing efforts, billing operations, credit loss expense and general management and administrative support as well as administrative facility costs.
SG&A decreased by $2 million for the three months ended June 30, 2020 ,
compared to the prior year period, primarily driven by lower compensation and
benefit costs as a result of a series of temporary actions implemented to manage
our workforce costs, partially offset by an increase in the value of our
deferred compensation obligations.
SG&A decreased by $39 million for the six months ended June 30, 2020 ,
compared to the prior year period primarily driven by a decrease in the value of
our deferred compensation obligations and lower compensation and benefit costs
as a result of a series of temporary actions implemented to manage our workforce
costs.
The change in the value of our deferred compensation obligations is largely
offset by gains or losses due to the changes in the value of the associated
investments, which are recorded in other income (expense), net. For further
details regarding our deferred compensation plans, see Note 17 to the audited
consolidated financial statements in our 2019 Annual Report on Form 10-K.
Amortization Expense
Amortization expense remained constant for the three months ended
Amortization expense increased by
Other Operating Income, Net
Other operating income, net includes miscellaneous income and expense items and other charges related to operating activities.
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For the three and six months ended June 30, 2020 , other operating income,
net primarily represents $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 CARES Act.
Interest Expense, Net
Interest expense, net decreased for both the three and six months ended
Other Income (Expense), Net
Other income (expense), net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments and other non-operating assets.
Other income (expense), net for the three months ended June 30, 2020 and
2019 was $13 million and $3 million , respectively. The increase compared to the
prior year period was primarily due to gains associated with investments in our
deferred compensation plans.
Other income (expense), net for the six months ended June 30, 2020 and 2019
was $(3) million and $12 million , respectively. The change was primarily due to
losses associated with investments in our deferred compensation plans.
Income Tax Expense
Income tax expense for the three months ended June 30, 2020 and 2019 was $66
million and $63 million , respectively. During the three months ended June 30,
2020 and 2019, we recognized $4 million and $5 million , respectively, of excess
tax benefits associated with stock-based compensation arrangements.
Income tax expense for the six months ended June 30, 2020 and 2019 was $92
million and $113 million , respectively. The decrease in income tax expense for
the six months ended June 30, 2020 , compared to the prior year period was
primarily driven by a decrease in income from continuing operations before
income taxes and equity in earnings of equity method investees. During the six
months ended June 30, 2020 and 2019, we recognized $12 million and $8 million ,
respectively, of excess tax benefits associated with stock-based compensation
arrangements.
For both the three and six months ended June 30, 2020 , we utilized the most
likely estimate of our annual income before taxes to determine the annual
effective income tax rate for 2020. As a result of uncertainty associated with
the impact of the COVID-19 pandemic, it is possible that we will experience
variability in the annual projections and, as a result, the annual effective
income tax rate. We will update the annual effective income tax rate each
quarter during 2020 for changes in the latest projections for the Company.
Equity in Earnings of Equity Method Investees, Net of Taxes
Equity in earnings of equity method investees, net of taxes decreased for
the three months ended June 30, 2020 by $13 million compared to the prior year
period primarily due to the impact of the COVID-19 pandemic on our Q2 Solutions
joint venture.
Equity in earnings of equity method investees, net of taxes decreased for
the six months ended June 30, 2020 by $12 million compared to the prior year
period primarily due to the impact of the COVID-19 pandemic on our Q2 Solutions
joint venture.
Discontinued Operations
During the third quarter of 2006, we completed the wind down of Nichols
Institute Diagnostics ("NID"), a test kit manufacturing subsidiary, which has
been classified as discontinued operations for the three and six months ended
June 30, 2019 . Discontinued operations, net of taxes, for the three and six
months ended June 30, 2019 includes discrete tax benefits of $20 million
associated with the favorable resolution of certain tax contingencies related to
NID.
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