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, accountable care organizations ("ACOs"), and direct contract entities ("DCEs"). 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 greater than 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). 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 uses number of requisitions and revenue per requisition data to assist with assessing the growth and performance of the business, including understanding trends affecting number of requisitions, pricing and test mix. Therefore, we believe that information related to changes in these metrics from period to period are useful information for investors as it allows them to assess the performance of the business.
Diagnostic Solutions
In our Diagnostic Solutions ("DS") businesses, which represent the balance of our consolidated net revenues, we offer a variety of solutions for life insurers and healthcare organizations and clinicians. We are the leading provider of risk assessment services for the life insurance industry. In addition, we offer healthcare organizations and clinicians robust information technology solutions. First Quarter Highlights Three Months EndedMarch 31, 2022 2021 (dollars in
millions, except per share data)
Net revenues$2,611 $2,720 Base business revenues (a)$2,012 $1,892 COVID-19 testing revenues$599 $828 DIS revenues$2,541 $2,643 Revenue per requisition change (5.2)% 20.5% Requisition volume change 1.3% 25.6% Organic requisition volume change -% 21.6% DS revenues$70 $77 Net income attributable to Quest Diagnostics$355 $469 Diluted earnings per share$2.92 $3.46 Net cash provided by operating activities$480 $731
(a) Excludes COVID-19 testing.
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The impact that the COVID-19 pandemic had on our DIS revenues, including requisition volume and revenue per requisition are discussed further below under "Impact of COVID-19" and "Results of Operations".
For further discussion of the year-over-year changes for the three months
ended
Impact of COVID - 19
As a novel strain of coronavirus (COVID-19) continues to 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 and maintain the amount of COVID-19 testing available to the country. We have been effectively managing challenges in the global supply chain; and, at this point, we have sufficient supplies to conduct our business. Due to the COVID-19 pandemic, we have experienced significant volatility, including periods of material decline compared to prior year periods in testing volume in our base business (which excludes COVID-19 testing) and periods of significant demand for COVID-19 testing services, with demand generally fluctuating in line with changes in the prevalence of the virus and related variants. Additionally, compared to historical levels, our revenue per requisition has been positively impacted by COVID-19 molecular testing. InMarch 2022 , theU.S. Health Resources and Services Administration ("HRSA") informed providers that, afterMarch 22, 2022 , it would stop accepting claims for testing and treatment for uninsured individuals under the HRSA COVID-19 Uninsured Program and that claims submitted prior to that date would be subject to eligibility and availability of funds. For the three months endedMarch 31, 2022 , revenue for testing of uninsured individuals under the HRSA COVID-19 Uninsured Program represented approximately 12% of our COVID-19 testing revenue. As ofMarch 31, 2022 , less than 5% of our net accounts receivable was associated with claims for reimbursement for COVID-19 testing of uninsured individuals. Although we believe that our estimates for contractual allowances and patient price concessions are appropriate, actual results could differ from those estimates. For further details on revenue and receivables, see Note 12 to the interim unaudited consolidated financial statements.
Acquisition of
OnFebruary 1, 2022 , we completed the acquisition ofPack Health , a patient engagement company that helps individuals adopt healthier behaviors to improve outcomes, in an all cash transaction for$123 million , net of$4 million cash acquired, which consisted of cash consideration of$105 million and contingent consideration initially estimated at$18 million . The contingent consideration arrangement is dependent upon the achievement of certain revenue benchmarks. The acquired business is included in our DIS business.
For further details, see Note 4 to the interim unaudited consolidated financial statements.
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 achieve savings and productivity improvements of approximately 3% of our costs. 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 have identified key themes to change how we operate including reducing denials and patient price 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. 23
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For the three months endedMarch 31, 2022 , we incurred$11 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 savings and productivity improvements.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies from those disclosed in our 2021 Annual Report on Form 10-K.
Impact of New Accounting Standards
The adoption of new accounting standards, if any, 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, if any, is also discussed in Note 2 to the interim unaudited consolidated financial statements.
24 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth certain results of operations data for the periods presented: Three Months Ended March 31, 2022 2021 $ Change % Change (dollars in millions, except per share amounts) Net revenues: DIS business$ 2,541 $ 2,643 $ (102) (3.9) % DS businesses 70 77 (7) (8.9) Total net revenues$ 2,611 $ 2,720 $ (109) (4.0) % Operating costs and expenses and other operating income: Cost of services$ 1,646 $ 1,626 $ 20 1.3 % Selling, general and administrative 425 407 18 4.5 Amortization of intangible assets 27 27 - NM Total operating costs and expenses, net$ 2,098 $ 2,060 $ 38 1.9 % Operating income$ 513 $ 660 $ (147) (22.3) % Other income (expense): Interest expense, net$ (37) $ (38) $ 1 (1.5) % Other (expense) income, net (24) 4 (28) NM Total non-operating expense, net$ (61) $ (34) $ (27) NM Income tax expense$ (110) $ (153) $ 43 (28.5) % Effective income tax rate
24.4 % 24.6 %
Equity in earnings of equity method investees, net of taxes
$ 31 $ 17 $ 14 85.9 % Net income attributable to Quest Diagnostics$ 355 $ 469 $ (114) (24.3) % Diluted earnings per common share attributable to Quest Diagnostics' common stockholders$ 2.92 $ 3.46 $ (0.54) (15.6) % NM - Not Meaningful
The following table sets forth certain results of operations data as a percentage of net revenues for the periods presented:
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Table of Contents Three Months Ended March 31, 2022 2021 Net revenues: DIS business 97.3 % 97.2 % DS businesses 2.7 2.8 Total net revenues 100.0 % 100.0 %
Operating costs and expenses and other operating income: Cost of services
63.0 % 59.8 % Selling, general and administrative 16.3 14.9 Amortization of intangible assets 1.0 1.0 Total operating costs and expenses, net 80.3 % 75.7 % Operating income 19.7 % 24.3 % Operating Results
Results for the three months ended
•pre-tax amortization expense of$27 million or$0.16 per diluted share; •pre-tax charges of$16 million in other (expense) income, net, or$0.10 per diluted share, representing net losses associated with changes in the carrying value of our strategic investments; •pre-tax charges of$12 million ($3 million in cost of services and$9 million in selling, general and administrative expenses), or$0.07 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; and •pre-tax charges of$2 million in selling, general and administrative, or$0.01 per diluted share, primarily representing costs associated with donations, contributions and other financial support through Quest for Health Equity (our initiative with theQuest Diagnostics Foundation to reduce health disparities in underserved communities); partially offset by •excess tax benefits associated with stock-based compensation arrangements of$5 million , or$0.04 per diluted share, recorded in income tax expense.
For the three months ended
Results for the three months ended
•pre-tax amortization expense of$29 million ($27 million in amortization of intangible assets and$2 million in equity in earnings of equity method investees, net of taxes) or$0.16 per diluted share; •pre-tax charges of$17 million ($7 million in cost of services and$10 million in selling, general and administrative expenses), or$0.10 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; •a pre-tax non-cash impairment to the carrying value of an equity method investment of$8 million , or$0.04 per diluted share, recorded in equity in earnings of equity method investees, net of taxes; and •pre-tax charges of$4 million in cost of services, or$0.03 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic including incremental costs incurred primarily to protect the health and safety of our employees and customers; partially offset by •excess tax benefits associated with stock-based compensation arrangements of$4 million , or$0.03 per diluted share, recorded in income tax expense.
Net Revenues
Net revenues for the three months ended
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DIS revenues for the three months ended
•The decrease in revenue compared to the prior year period was driven by a decrease in COVID-19 testing, partially offset by growth in the base business (which excludes COVID-19 testing) and the impact of recent acquisitions. For the three months endedMarch 31, 2022 , recent acquisitions contributed approximately 1.3% to DIS revenues. •Revenues in the base business (including the impact of recent acquisitions) increased by 7.0% compared to the prior year period, as our base business continued to recover from the impact of the COVID-19 pandemic. •DIS volume increased by 1.3% compared to the prior year period driven by growth in the base business, and the impact of recent acquisitions, which contributed approximately 1.3% to DIS volume, partially offset by a decrease in COVID-19 testing. •Testing volume in the base business (including the impact of recent acquisitions) was up 6.2% compared to the prior year period due to the continued recovery from the impact of the COVID-19 pandemic. •Revenue per requisition decreased by 5.2% compared to prior year period driven in large part by the decrease in COVID-19 molecular testing and unit price pressure of less than 1%.
DS revenues for the three months ended
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 endedMarch 31, 2022 , cost of services increased by$20 million compared to the prior year period. The increase was primarily driven by higher compensation and benefits costs (primarily related to wage increases), higher collection expense associated with COVID-19 testing volumes that come in through non-traditional channels, and additional costs associated with our acquisitions. These increases were partially offset by lower supplies expense associated with reduced COVID-19 testing volumes.
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 increased by
The changes in the value of our deferred compensation obligations is largely offset by changes in the value of the associated investments, which are recorded in other (expense) income, net. For further details regarding our deferred compensation plans, see Note 17 to the audited consolidated financial statements included in our 2021 Annual Report on Form 10-K.
Amortization Expense
For the three months ended
Interest Expense, Net
Interest expense, net for the three months ended
Other (Expense) Income, Net
Other (expense) income, 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. 27
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For the three months endedMarch 31, 2022 , other (expense) income, net included$16 million of losses associated with changes in the carrying value of our strategic investments and$8 million of losses associated with investments in our deferred compensation plans.
For the three months ended
Income Tax Expense
Income tax expense for the three months endedMarch 31, 2022 and 2021 was$110 million and$153 million , respectively. The decrease in income tax expense for the three months endedMarch 31, 2022 compared to the prior year period was primarily driven by a decrease in income before income taxes and equity in earnings of equity method investees.
Equity in Earnings of Equity Method Investees, Net of Taxes
Equity in earnings of equity method investees, net of taxes increased for the three months endedMarch 31, 2022 by$14 million compared to the prior year period primarily due to demand for COVID-19 testing services and recovery in the base business of our diagnostic information services joint venture combined with lower equity earnings in the prior year period due to a non-cash impairment to the carrying value of an equity method investment of$8 million , partially offset by$7 million of lower equity earnings in the current year period as a result of theApril 2021 sale of our 40% ownership interest in Q2 Solutions®.
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