filings.toolsCover and table of contents
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Cover and table of contents
| UNITED STATES | ||
| SECURITIES AND EXCHANGE COMMISSION | ||
| WASHINGTON, DC 20549 | ||
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-12215
Quest Diagnostics Incorporated
| Delaware | 16-1387862 | ||||||||||||||||
| (State of Incorporation) | (I.R.S. Employer Identification Number) | ||||||||||||||||
| 500 Plaza Drive | |||||||||||||||||
| Secaucus, | NJ | 07094 | |||||||||||||||
| (973) | 520-2700 |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 Par Value | DGX | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 15, 2022, there were outstanding 116,606,294 shares of the registrant’s common stock, $.01 par value.
PART I - FINANCIAL INFORMATION
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(unaudited)
(in millions, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues | $ | 2,453 | $ | 2,550 | $ | 5,064 | $ | 5,270 | |||||||||||||||
| Operating costs and expenses and other operating income: | |||||||||||||||||||||||
| Cost of services | 1,611 | 1,565 | 3,257 | 3,191 | |||||||||||||||||||
| Selling, general and administrative | 422 | 429 | 847 | 836 | |||||||||||||||||||
| Amortization of intangible assets | 27 | 25 | 54 | 52 | |||||||||||||||||||
| Other operating expense (income), net | 5 | (2) | 5 | (2) | |||||||||||||||||||
| Total operating costs and expenses, net | 2,065 | 2,017 | 4,163 | 4,077 | |||||||||||||||||||
| Operating income | 388 | 533 | 901 | 1,193 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense, net | (36) | (38) | (73) | (76) | |||||||||||||||||||
| Other (expense) income, net | (29) | 322 | (53) | 326 | |||||||||||||||||||
| Total non-operating (expense) income, net | (65) | 284 | (126) | 250 | |||||||||||||||||||
| Income before income taxes and equity in earnings of equity method investees | 323 | 817 | 775 | 1,443 | |||||||||||||||||||
| Income tax expense | (77) | (177) | (187) | (330) | |||||||||||||||||||
| Equity in earnings of equity method investees, net of taxes | 4 | 10 | 35 | 27 | |||||||||||||||||||
| Net income | 250 | 650 | 623 | 1,140 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 16 | 19 | 34 | 40 | |||||||||||||||||||
| Net income attributable to Quest Diagnostics | $ | 234 | $ | 631 | $ | 589 | $ | 1,100 | |||||||||||||||
| Earnings per share attributable to Quest Diagnostics’ common stockholders: | |||||||||||||||||||||||
| Basic | $ | 2.00 | $ | 5.05 | $ | 4.97 | $ | 8.52 | |||||||||||||||
| Diluted | $ | 1.96 | $ | 4.96 | $ | 4.88 | $ | 8.38 | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 117 | 125 | 118 | 129 | |||||||||||||||||||
| Diluted | 119 | 127 | 120 | 131 | |||||||||||||||||||
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(unaudited)
(in millions)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | 250 | $ | 650 | $ | 623 | $ | 1,140 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment | (7) | 21 | (9) | 18 | |||||||||||||||||||
| Net change in available-for-sale debt securities, net of taxes | — | — | — | (7) | |||||||||||||||||||
| Other comprehensive (loss) income | (7) | 21 | (9) | 11 | |||||||||||||||||||
| Comprehensive income | 243 | 671 | 614 | 1,151 | |||||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 16 | 19 | 34 | 40 | |||||||||||||||||||
| Comprehensive income attributable to Quest Diagnostics | $ | 227 | $ | 652 | $ | 580 | $ | 1,111 |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2022 AND DECEMBER 31, 2021
(unaudited)
(in millions, except per share data)
| June 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 790 | $ | 872 | |||||||
| Accounts receivable, net of allowance for credit losses of $29 and $31 as of June 30, 2022 and December 31, 2021, respectively | 1,293 | 1,438 | |||||||||
| Inventories | 187 | 208 | |||||||||
| Prepaid expenses and other current assets | 156 | 223 | |||||||||
| Total current assets | 2,426 | 2,741 | |||||||||
| Property, plant and equipment, net | 1,664 | 1,707 | |||||||||
| Operating lease right-of-use assets | 599 | 597 | |||||||||
| Goodwill | 7,195 | 7,095 | |||||||||
| Intangible assets, net | 1,144 | 1,167 | |||||||||
| Investments in equity method investees | 147 | 141 | |||||||||
| Other assets | 137 | 163 | |||||||||
| Total assets | $ | 13,312 | $ | 13,611 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | 1,420 | $ | 1,600 | |||||||
| Current portion of long-term debt | 2 | 2 | |||||||||
| Current portion of long-term operating lease liabilities | 155 | 151 | |||||||||
| Total current liabilities | 1,577 | 1,753 | |||||||||
| Long-term debt | 3,983 | 4,010 | |||||||||
| Long-term operating lease liabilities | 497 | 494 | |||||||||
| Other liabilities | 728 | 792 | |||||||||
| Commitments and contingencies | |||||||||||
| Redeemable noncontrolling interest | 77 | 79 | |||||||||
| Stockholders’ equity: | |||||||||||
| Quest Diagnostics stockholders’ equity: | |||||||||||
| Common stock, par value $0.01 per share; 600 shares authorized as of both June 30, 2022 and December 31, 2021; 162 shares issued as of both June 30, 2022 and December 31, 2021 | 2 | 2 | |||||||||
| Additional paid-in capital | 2,250 | 2,260 | |||||||||
| Retained earnings | 8,083 | 7,649 | |||||||||
| Accumulated other comprehensive loss | (23) | (14) | |||||||||
| Treasury stock, at cost; 45 and 43 shares as of June 30, 2022 and December 31, 2021, respectively | (3,901) | (3,453) | |||||||||
| Total Quest Diagnostics stockholders’ equity | 6,411 | 6,444 | |||||||||
| Noncontrolling interests | 39 | 39 | |||||||||
| Total stockholders’ equity | 6,450 | 6,483 | |||||||||
| Total liabilities and stockholders’ equity | $ | 13,312 | $ | 13,611 |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(unaudited)
(in millions)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 623 | $ | 1,140 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 213 | 201 | |||||||||
| Provision for credit losses | 1 | 2 | |||||||||
| Deferred income tax benefit | (20) | (89) | |||||||||
| Stock-based compensation expense | 37 | 39 | |||||||||
| Gain on disposition of investment | — | (314) | |||||||||
| Other, net | 33 | 1 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 150 | 265 | |||||||||
| Accounts payable and accrued expenses | (201) | (199) | |||||||||
| Income taxes payable | (4) | 85 | |||||||||
| Other assets and liabilities, net | 50 | 60 | |||||||||
| Net cash provided by operating activities | 882 | 1,191 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Business acquisitions, net of cash acquired | (106) | (231) | |||||||||
| Capital expenditures | (139) | (170) | |||||||||
| Proceeds from disposition of investment | — | 755 | |||||||||
| Increase in investments and other assets | (6) | (10) | |||||||||
| Net cash (used in) provided by investing activities | (251) | 344 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments of debt | (1) | (1) | |||||||||
| Purchases of treasury stock | (573) | (1,910) | |||||||||
| Exercise of stock options | 68 | 68 | |||||||||
| Employee payroll tax withholdings on stock issued under stock-based compensation plans | (27) | (22) | |||||||||
| Dividends paid | (152) | (156) | |||||||||
| Distributions to noncontrolling interest partners | (36) | (53) | |||||||||
| Other financing activities, net | 8 | (59) | |||||||||
| Net cash used in financing activities | (713) | (2,133) | |||||||||
| Net change in cash and cash equivalents and restricted cash | (82) | (598) | |||||||||
| Cash and cash equivalents and restricted cash, beginning of period | 872 | 1,158 | |||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 790 | $ | 560 | |||||||
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(unaudited)
(in millions)
| For the Three Months Ended June 30, 2022 | Quest Diagnostics Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Common Stock Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Compre- hensive Loss | Treasury Stock, at Cost | Non- controlling Interests | Total Stock- holders’ Equity | Redeemable Non-controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 117 | $ | 2 | $ | 2,226 | $ | 7,926 | $ | (16) | $ | (3,761) | $ | 38 | $ | 6,415 | $ | 78 | |||||||||||||||||||||||||||||||||||||||
| Net income | 234 | 14 | 248 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (7) | (7) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (77) | (77) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest partners | (13) | (13) | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 1 | 6 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 19 | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1 | 4 | 54 | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (1) | (200) | (200) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 117 | $ | 2 | $ | 2,250 | $ | 8,083 | $ | (23) | $ | (3,901) | $ | 39 | $ | 6,450 | $ | 77 | |||||||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, 2022 | Quest Diagnostics Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Common Stock Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Compre- hensive Loss | Treasury Stock, at Cost | Non- controlling Interests | Total Stock- holders’ Equity | Redeemable Non-controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 119 | $ | 2 | $ | 2,260 | $ | 7,649 | $ | (14) | $ | (3,453) | $ | 39 | $ | 6,483 | $ | 79 | |||||||||||||||||||||||||||||||||||||||
| Net income | 589 | 30 | 619 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (9) | (9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (155) | (155) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest partners | (30) | (30) | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 1 | (40) | 54 | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 37 | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1 | 3 | 65 | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans | (10) | (17) | (27) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (4) | (550) | (550) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 117 | $ | 2 | $ | 2,250 | $ | 8,083 | $ | (23) | $ | (3,901) | $ | 39 | $ | 6,450 | $ | 77 |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(unaudited)
(in millions)
| For the Three Months Ended June 30, 2021 | Quest Diagnostics Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Common Stock Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Compre- hensive Loss | Treasury Stock, at Cost | Non- controlling Interests | Total Stock- holders’ Equity | Redeemable Non-controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 131 | $ | 2 | $ | 2,824 | $ | 9,690 | $ | (31) | $ | (5,740) | $ | 45 | $ | 6,790 | $ | 79 | |||||||||||||||||||||||||||||||||||||||
| Net income | 631 | 17 | 648 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | 21 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (75) | (75) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest partners | (21) | (21) | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 2 | 4 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 21 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 9 | 42 | 51 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans | (1) | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (9) | (300) | (1,200) | (1,500) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 122 | $ | 2 | $ | 2,555 | $ | 10,246 | $ | (10) | $ | (6,894) | $ | 41 | $ | 5,940 | $ | 78 | |||||||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, 2021 | Quest Diagnostics Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Common Stock Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Compre- hensive Loss | Treasury Stock, at Cost | Non- controlling Interests | Total Stock- holders’ Equity | Redeemable Non-controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 133 | $ | 2 | $ | 2,841 | $ | 9,303 | $ | (21) | $ | (5,366) | $ | 50 | $ | 6,809 | $ | 82 | |||||||||||||||||||||||||||||||||||||||
| Net income | 1,100 | 34 | 1,134 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | 11 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | (157) | (157) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest partners | (43) | (43) | (10) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | (27) | 38 | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 39 | 39 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1 | 12 | 56 | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares to cover employee payroll tax withholdings on stock issued under stock-based compensation plans | (10) | (12) | (22) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | (12) | (300) | (1,610) | (1,910) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 122 | $ | 2 | $ | 2,555 | $ | 10,246 | $ | (10) | $ | (6,894) | $ | 41 | $ | 5,940 | $ | 78 |
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in millions, unless otherwise indicated)
1. DESCRIPTION OF BUSINESS
Background
Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") empower people to take action to improve health outcomes. The Company uses its 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. The Company's diagnostic information services business ("DIS") provides information and insights based on an industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. The Company provides 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"). The Company offers the broadest access in the United States to diagnostic information services through its nationwide network of laboratories, patient service centers and phlebotomists in physician offices and the Company's connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. The Company is the world's leading provider of diagnostic information services. The Company provides interpretive consultation with one of the largest medical and scientific staffs in the industry. The Company's Diagnostic Solutions businesses ("DS") are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited consolidated financial statements reflect all adjustments which in the opinion of management are necessary for a fair statement of results of operations, comprehensive income, financial condition, cash flows and stockholders' equity for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s 2021 Annual Report on Form 10-K. The year-end balance sheet data was derived from the audited consolidated financial statements as of December 31, 2021 but does not include all the disclosures required by accounting principles generally accepted in the United States (“GAAP”).
The accounting policies of the Company are the same as those set forth in Note 2 to the audited consolidated financial statements contained in the Company’s 2021 Annual Report on Form 10-K.
The Company's testing volume and revenues have been materially impacted by the COVID-19 pandemic, including periods of significant demand for COVID-19 testing. As a result, operating results for the three and six months ended June 30, 2022 may not be indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share
The Company's unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income attributable to Quest Diagnostics, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding stock options and performance share units granted under the Company's Amended and Restated Employee Long-Term Incentive Plan and outstanding stock options granted under its Amended and Restated Non-Employee Director Long-Term Incentive Plan, as well as the dilutive effect of accelerated share repurchase agreements, if applicable. Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed earnings during the period allocable to participating securities.
New Accounting Standards to be Adopted
In March 2020, the Financial Accounting Standards Board issued a new accounting standard which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform due to the risk of cessation of the London Interbank Offered Rate ("LIBOR"). The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The pronouncement is effective immediately and can be applied to contract modifications through December 31, 2022. To the extent that, prior to December 31, 2022, the Company enters into any contract modifications for which the optional expedients are applied, the adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
3. EARNINGS PER SHARE
The computation of basic and diluted earnings per common share was as follows (in millions, except per share data):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Amounts attributable to Quest Diagnostics’ common stockholders: | |||||||||||||||||||||||
| Net income attributable to Quest Diagnostics | $ | 234 | $ | 631 | $ | 589 | $ | 1,100 | |||||||||||||||
| Less: Earnings allocated to participating securities | 1 | 3 | 2 | 4 | |||||||||||||||||||
| Earnings available to Quest Diagnostics’ common stockholders – basic and diluted | $ | 233 | $ | 628 | $ | 587 | $ | 1,096 | |||||||||||||||
| Weighted average common shares outstanding – basic | 117 | 125 | 118 | 129 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Stock options and performance share units | 2 | 2 | 2 | 2 | |||||||||||||||||||
| Weighted average common shares outstanding – diluted | 119 | 127 | 120 | 131 | |||||||||||||||||||
| Earnings per share attributable to Quest Diagnostics’ common stockholders: | |||||||||||||||||||||||
| Basic | $ | 2.00 | $ | 5.05 | $ | 4.97 | $ | 8.52 | |||||||||||||||
| Diluted | $ | 1.96 | $ | 4.96 | $ | 4.88 | $ | 8.38 | |||||||||||||||
The following securities were not included in the calculation of diluted earnings per share due to their antidilutive effect:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock options and performance share units | 1 | 1 | — | 1 |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
The sum of basic and diluted earnings per share attributable to Quest Diagnostics' common stockholders for the first two quarters of 2021 did not equal the total for the six months ended June 30, 2021 due to both quarterly fluctuations in the Company's earnings and in the weighted average common shares outstanding throughout the period as a result of the impact of share repurchases (see Note 9 for further details regarding the Company's share repurchases).
4. BUSINESS ACQUISITIONS
On February 1, 2022, the Company acquired Pack Health, LLC ("Pack 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. Based on the preliminary purchase price allocation, which may be revised as additional information becomes available during the measurement period, the assets acquired and liabilities assumed consist of $96 million of goodwill (of which $78 million is tax-deductible), $30 million of intangible assets, $5 million of operating lease right-of-use assets, $5 million of operating lease liabilities and $(3) million of working capital. The intangible assets consist primarily of customer-related assets which are being amortized over a useful life of 15 years. For further details regarding the fair value of the contingent consideration, see Note 6.
The acquisition was accounted for under the acquisition method of accounting. As such, the assets acquired and liabilities assumed were recorded based on their estimated fair values as of the closing date. Supplemental pro forma combined financial information has not been presented as the impact of the acquisition is not material to the Company's consolidated financial statements. The goodwill recorded primarily includes the expected synergies resulting from combining the operations of the acquired entity with those of the Company and the value associated with an assembled workforce and other intangible assets that do not qualify for separate recognition. All of the goodwill acquired in connection with the acquisition has been allocated to the Company's DIS business. For further details regarding business segment information, see Note 12.
On December 13, 2021, the Company completed the acquisition of assets of Labtech Diagnostics, LLC ("Labtech"), an independent clinical diagnostic laboratory provider serving physicians and patients primarily in South Carolina, North Carolina, Florida and Georgia, and recorded the assets acquired and liabilities assumed based on a preliminary purchase price allocation. During the six months ended June 30, 2022, the Company revised its purchase price allocation and recorded an $8 million increase to goodwill, a $3 million increase to customer-related intangible assets, a $1 million decrease to inventories and a $10 million increase to the estimated contingent consideration accrual. These adjustments did not have a material impact on the Company's consolidated results of operations. For further details regarding the fair value of the contingent consideration, see Note 6.
For details regarding the Company's 2021 acquisitions, see Note 5 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
5. DISPOSITION
On April 1, 2021, the Company sold its 40% ownership interest in Q2 Solutions® ("Q2 Solutions"), its clinical trials central laboratory services joint venture, to IQVIA Holdings, Inc. ("IQVIA"), its joint venture partner, for $760 million in an all-cash transaction. Prior to the transaction, the Company accounted for its minority interest as an equity method investment. As a result of the transaction, during the three months ended June 30, 2021, the Company recorded a $314 million pre-tax gain in other (expense) income, net in the consolidated statement of operations based on the difference between the net sales proceeds and the carrying value of the investment, including $20 million of cumulative translation losses which were previously recorded in accumulated other comprehensive loss. During the three months ended June 30, 2021, the Company also recorded $55 million of income tax expense related to the gain, consisting of $127 million of current income tax expense, partially offset by $72 million of deferred income tax benefit.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
6. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:
| Basis of Fair Value Measurements | |||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets/Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||||||||
| June 30, 2022 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Deferred compensation trading securities | $ | 65 | $ | 65 | $ | — | $ | — | |||||||||||||||
| Cash surrender value of life insurance policies | 46 | — | 46 | — | |||||||||||||||||||
| Equity investments | 17 | 17 | — | — | |||||||||||||||||||
| Total | $ | 128 | $ | 82 | $ | 46 | $ | — | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation liabilities | $ | 119 | $ | — | $ | 119 | $ | — | |||||||||||||||
| Contingent consideration | 39 | — | — | 39 | |||||||||||||||||||
| Total | $ | 158 | $ | — | $ | 119 | $ | 39 | |||||||||||||||
| Redeemable noncontrolling interest | $ | 77 | $ | — | $ | — | $ | 77 |
| Basis of Fair Value Measurements | |||||||||||||||||||||||
| December 31, 2021 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Deferred compensation trading securities | $ | 77 | $ | 77 | $ | — | $ | — | |||||||||||||||
| Cash surrender value of life insurance policies | 57 | — | 57 | — | |||||||||||||||||||
| Equity investments | 44 | 44 | — | — | |||||||||||||||||||
| Available-for-sale debt securities | 1 | — | — | 1 | |||||||||||||||||||
| Total | $ | 179 | $ | 121 | $ | 57 | $ | 1 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation liabilities | $ | 143 | $ | — | $ | 143 | $ | — | |||||||||||||||
| Contingent consideration | 5 | — | — | 5 | |||||||||||||||||||
| Total | $ | 148 | $ | — | $ | 143 | $ | 5 | |||||||||||||||
| Redeemable noncontrolling interest | $ | 79 | $ | — | $ | — | $ | 79 |
A detailed description regarding the Company's fair value measurements is contained in Note 7 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
The Company offers certain employees the opportunity to participate in a non-qualified supplemental deferred compensation plan. A participant's deferrals, together with Company matching credits, are invested in a variety of participant-directed stock and bond mutual funds that are classified as trading securities. The trading securities are classified within Level
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
1 of the fair value hierarchy because the changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held, exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the trading securities.
The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation program. A participant's deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program's liability. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation obligation are classified within Level 2 of the fair value hierarchy because their inputs are derived principally from observable market data by correlation to the hypothetical investments. Deferrals under the plan currently may only be made by participants who made deferrals under the plan in 2017.
The Company's investment portfolio primarily includes equity investments comprised mostly of strategic holdings in companies concentrated in the life sciences and healthcare industries. Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) with readily determinable fair values are measured at fair value in prepaid expenses and other current assets in the Company's consolidated balance sheet. Such equity investments are classified within Level 1 of the fair value hierarchy because the changes in the fair values of the securities are measured using quoted prices in active markets based on the market price per share multiplied by the number of shares held, exclusive of any transaction costs.
The Company's available-for-sale debt securities are measured at fair value using discounted cash flows. These fair value measurements are classified within Level 3 of the fair value hierarchy as the fair value is based on significant inputs that are not observable. Significant inputs include cash flows projections and a discount rate.
In connection with the acquisitions of Pack Health and Labtech, the Company has contingent consideration obligations, with a potential maximum aggregate payment of $40 million, that are to be paid based on the achievement of certain testing volume or revenue benchmarks. As of June 30, 2022, the fair value of these contingent consideration accruals totaled $39 million. These contingent consideration accruals are measured at fair value using either an option-pricing method or a Monte Carlo method and are classified within Level 3 of the fair value hierarchy as the fair value is determined based on significant inputs that are not observable. Significant inputs include management’s estimate of volume or revenue and other market inputs, including comparable company revenue volatility (7.5%) and a discount rate (ranging from 2.5% to 3.0%). During the three months ended June 30, 2022, the contingent consideration accruals were increased primarily as a result of actual performance during the quarter, resulting in a $6 million loss recorded in other operating expense (income), net.
For further details regarding the Company's acquisitions, see Note 5 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K and Note 4.
The following table provides a reconciliation of the beginning and ending balances of liabilities using significant unobservable inputs (Level 3):
| Contingent Consideration | |||||||||||||||||
| Balance, December 31, 2021 | $ | 5 | |||||||||||||||
| Purchases, additions and issuances | 28 | ||||||||||||||||
| Total fair value adjustments included in earnings - realized/unrealized | 6 | ||||||||||||||||
| Balance, June 30, 2022 | $ | 39 | |||||||||||||||
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass Memorial Medical Center ("UMass") on July 1, 2015, the Company granted UMass the right to require the Company to purchase all of its interest in the
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
subsidiary at fair value commencing July 1, 2020. As of June 30, 2022, the redeemable noncontrolling interest was presented at its fair value. The fair value measurement of the redeemable noncontrolling interest is classified within Level 3 of the fair value hierarchy because the fair value is based on a discounted cash flow analysis that takes into account, among other items, the joint venture's expected future cash flows, long term growth rates, and a discount rate commensurate with economic risk.
The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. As of June 30, 2022 and December 31, 2021, the fair value of the Company’s debt was estimated at $3.8 billion and $4.4 billion, respectively. Principally all of the Company's debt is classified within Level 1 of the fair value hierarchy because the fair value of the debt is estimated based on rates currently offered to the Company with identical terms and maturities, using quoted active market prices and yields, taking into account the underlying terms of the debt instruments.
7. GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill for the six months ended June 30, 2022 and for the year ended December 31, 2021 were as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||
| Balance, beginning of period | $ | 7,095 | $ | 6,873 | |||||||
| Goodwill acquired during the period | 97 | 228 | |||||||||
| Adjustments to goodwill | 3 | (6) | |||||||||
| Balance, end of period | $ | 7,195 | $ | 7,095 |
Principally all of the Company’s goodwill as of June 30, 2022 and December 31, 2021 was associated with its DIS business.
For the six months ended June 30, 2022, goodwill acquired was principally associated with the acquisition of Pack Health, and adjustments to goodwill primarily related to an adjustment of the purchase price allocation for Labtech (see Note 4), partially offset by foreign currency translation. For the year ended December 31, 2021, goodwill acquired was principally associated with the acquisitions of the assets of the outreach laboratory services business of Mercy Health and the assets of Labtech (see Note 5 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K), and adjustments to goodwill related to foreign currency translation.
Intangible assets as of June 30, 2022 and December 31, 2021 consisted of the following:
| Weighted Average Amortization Period (in years) | June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||||||
| Amortizing intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Customer-related | 17 | $ | 1,609 | $ | (773) | $ | 836 | $ | 1,581 | $ | (726) | $ | 855 | ||||||||||||||||||||||||||||
| Non-compete agreements | 9 | 3 | (3) | — | 3 | (2) | 1 | ||||||||||||||||||||||||||||||||||
| Technology | 14 | 139 | (78) | 61 | 141 | (74) | 67 | ||||||||||||||||||||||||||||||||||
| Other | 6 | 114 | (103) | 11 | 109 | (101) | 8 | ||||||||||||||||||||||||||||||||||
| Total | 17 | 1,865 | (957) | 908 | 1,834 | (903) | 931 | ||||||||||||||||||||||||||||||||||
| Intangible assets not subject to amortization: | |||||||||||||||||||||||||||||||||||||||||
| Trade names | 235 | — | 235 | 235 | — | 235 | |||||||||||||||||||||||||||||||||||
| Other | 1 | — | 1 | 1 | — | 1 | |||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 2,101 | $ | (957) | $ | 1,144 | $ | 2,070 | $ | (903) | $ | 1,167 |
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2022 is as follows:
| Year Ending December 31, | |||||
| Remainder of 2022 | $ | 53 | |||
| 2023 | 106 | ||||
| 2024 | 102 | ||||
| 2025 | 101 | ||||
| 2026 | 95 | ||||
| 2027 | 84 | ||||
| Thereafter | 367 | ||||
| Total | $ | 908 |
8. FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, from time to time, to manage its exposure to market risks for changes in interest rates and foreign currencies. This strategy includes the use of interest rate swap agreements, forward-starting interest rate swap agreements, interest rate lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments that contain credit-risk-related contingent features or requirements to post collateral.
Interest Rate Risk
The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company's debt obligations consist of fixed-rate and, from time to time, variable-rate debt instruments. The Company's primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has historically entered into interest rate swap agreements.
Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense, net.
Interest Rate Derivatives – Cash Flow Hedges
From time to time, the Company has entered into various interest rate lock agreements and forward-starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows attributable to changes in interest rates.
Interest Rate Derivatives – Fair Value Hedges
Historically, the Company has entered into various fixed-to-variable interest rate swap agreements in order to convert a portion of the Company's long-term debt into variable interest rate debt. All such fixed-to-variable interest rate swap agreements have been terminated and proceeds from the terminations have been reflected as basis adjustments to the hedged debt instruments and are being amortized as a reduction of interest expense, net over the remaining terms of such debt instruments.
As of June 30, 2022 and December 31, 2021, the following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges included in the carrying amount of long-term debt:
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
| Hedge Accounting Basis Adjustment (a) | |||||||||||||||||||||||||||||
| Balance Sheet Classification | June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
| Long-term debt | $ | 32 | $ | 38 |
(a) As of both June 30, 2022 and December 31, 2021, the entire balance is associated with remaining unamortized hedging adjustments on discontinued relationships.
A detailed description regarding the Company's use of derivative financial instruments is contained in Note 15 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
9. STOCKHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
Stockholders' Equity
Changes in Accumulated Other Comprehensive Loss by Component
Comprehensive income (loss) includes:
-
Foreign currency translation adjustments;
-
Net deferred gains (losses) on cash flow hedges, which represent deferred gains (losses), net of tax, on interest rate-related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 8); and
-
Net changes in available-for-sale debt securities, which represent unrealized holding gains (losses), net of tax on available-for-sale debt securities.
For the three and six months ended June 30, 2022 and 2021, the tax effects related to the deferred gains (losses) on cash flow hedges and net changes in available-for-sale debt securities were not material. Foreign currency translation adjustments related to indefinite investments in non-U.S. subsidiaries are not adjusted for income taxes.
Dividend Program
During each of the first and second quarters of 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.66 per common share. During each of the four quarters of 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.62 per common share.
Share Repurchase Program
In February 2022, the Company's Board of Directors increased the size of its share repurchase program by $1 billion. As of June 30, 2022, $1.1 billion remained available under the Company’s share repurchase authorization. The share repurchase authorization has no set expiration or termination date.
Share Repurchases
For the six months ended June 30, 2022, the Company repurchased 4.0 million shares of its common stock for $550 million.
For the six months ended June 30, 2021, the Company repurchased 12.5 million shares of its common stock for $1.6 billion, including 9.1 million shares repurchased under accelerated share repurchase agreements ("ASRs") as follows.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
In April 2021, the Company entered into ASRs with several financial institutions to repurchase its common stock as part of its share repurchase program. Each of the ASRs was structured to permit the Company to purchase shares immediately with the final purchase price of those shares determined by the volume-weighted average price of the Company's common stock, less a fixed discount, during the repurchase period, which ended during the fourth quarter of 2021. For the six months ended June 30, 2021, the Company paid $1.5 billion to the financial institutions and received 9.1 million shares of its common stock at an initial price of $132.27 per share for a value of $1.2 billion, which represented 80% of the total value of shares to be repurchased under the ASRs.
Shares Reissued from Treasury Stock
For each of the six months ended June 30, 2022 and 2021, the Company reissued 1.2 million shares from treasury stock under its Employee Stock Purchase Plan and its stock-based compensation program. For details regarding the Company's stock ownership and compensation plans, see Note 17 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
Redeemable Noncontrolling Interest
In connection with the sale of an 18.9% noncontrolling interest in a subsidiary to UMass on July 1, 2015, the Company granted UMass the right to require the Company to purchase all of its interest in the subsidiary at fair value commencing July 1, 2020. The subsidiary performs diagnostic information services in a defined territory within the state of Massachusetts. Since the redemption of the noncontrolling interest is outside of the Company's control, it has been presented outside of stockholders' equity at the greater of its carrying amount or its fair value. As of June 30, 2022 and December 31, 2021, the redeemable noncontrolling interest was presented at its fair value. For further details regarding the fair value of the redeemable noncontrolling interest, see Note 6.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
10. SUPPLEMENTAL CASH FLOW AND OTHER DATA
Supplemental cash flow and other data for the three and six months ended June 30, 2022 and 2021 was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Depreciation expense | $ | 80 | $ | 75 | $ | 159 | $ | 149 | |||||||||||||||
| Amortization expense | 27 | 25 | 54 | 52 | |||||||||||||||||||
| Depreciation and amortization expense | $ | 107 | $ | 100 | $ | 213 | $ | 201 | |||||||||||||||
| Interest expense | $ | (38) | $ | (38) | $ | (75) | $ | (76) | |||||||||||||||
| Interest income | 2 | — | 2 | — | |||||||||||||||||||
| Interest expense, net | $ | (36) | $ | (38) | $ | (73) | $ | (76) | |||||||||||||||
| Interest paid | $ | 46 | $ | 46 | $ | 78 | $ | 78 | |||||||||||||||
| Income taxes paid | $ | 159 | $ | 328 | $ | 182 | $ | 335 | |||||||||||||||
| Accounts payable associated with capital expenditures | $ | 23 | $ | 20 | $ | 23 | $ | 20 | |||||||||||||||
| Dividends payable | $ | 77 | $ | 77 | $ | 77 | $ | 77 | |||||||||||||||
| Businesses acquired: | |||||||||||||||||||||||
| Fair value of assets acquired | $ | 1 | $ | 234 | $ | 143 | $ | 234 | |||||||||||||||
| Fair value of liabilities assumed | — | 3 | 15 | 3 | |||||||||||||||||||
| Fair value of net assets acquired | 1 | 231 | 128 | 231 | |||||||||||||||||||
| Merger consideration payable | — | — | (18) | — | |||||||||||||||||||
| Cash paid for business acquisitions | 1 | 231 | 110 | 231 | |||||||||||||||||||
| Less: Cash acquired | — | — | 4 | — | |||||||||||||||||||
| Business acquisitions, net of cash acquired | $ | 1 | $ | 231 | $ | 106 | $ | 231 | |||||||||||||||
| Leases: | |||||||||||||||||||||||
| Leased assets obtained in exchange for new operating lease liabilities | $ | 21 | $ | 33 | $ | 84 | $ | 69 | |||||||||||||||
During the six months ended June 30, 2022, the Company amended a real estate lease and, based on the updated terms, the classification of the lease changed from a finance lease to an operating lease. As a result, the Company recorded a $31 million operating lease right-of-use asset.
11. COMMITMENTS AND CONTINGENCIES
Letters of Credit
The Company can issue letters of credit totaling $100 million under its $600 million secured receivables credit facility and $150 million under its $750 million senior unsecured revolving credit facility. For further discussion regarding the Company's secured receivables credit facility and senior unsecured revolving credit facility, see Note 13 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
In support of its risk management program, $70 million in letters of credit under the secured receivables credit facility were outstanding as of June 30, 2022, providing collateral for current and future automobile liability and workers’ compensation loss payments.
Contingent Lease Obligations
The Company remains subject to contingent obligations under certain real estate leases for which no liability has been recorded. For further details, see Note 18 to the audited consolidated financial statements in the Company’s 2021 Annual Report on Form 10-K.
Certain Legal Matters
The Company may incur losses associated with these proceedings and investigations, but it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, fines, penalties, or other resolution of these proceedings and investigations based on the stage of these proceedings and investigations, the absence of specific allegations as to alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and/or the lack of resolution of significant factual and legal issues. The Company has insurance coverage rights in place (limited in amount; subject to deductible) for certain potential costs and liabilities related to these proceedings and investigations.
401(k) Plan Lawsuit
In 2020, two putative class action lawsuits were filed in the U.S. District Court for New Jersey against the Company and other defendants with respect to the Company’s 401(k) plan. The complaint alleges, among other things, that the fiduciaries of the 401(k) plan breached their duties by failing to disclose the expenses and risks of plan investment options, allowing unreasonable administration expenses to be charged to plan participants, and selecting and retaining high cost and poor performing investments. In October 2020, the court consolidated the two lawsuits under the caption In re: Quest Diagnostics ERISA Litigation and plaintiffs filed a consolidated amended complaint. In May 2021, the court denied the Company's motion to dismiss the complaint.
AMCA Data Security Incident
On June 3, 2019, the Company reported that Retrieval-Masters Creditors Bureau, Inc./American Medical Collection Agency (“AMCA”) had informed the Company and Optum360 LLC that an unauthorized user had access to AMCA’s system between August 1, 2018 and March 30, 2019 (the “AMCA Data Security Incident”). Optum360 provides revenue management services to the Company, and AMCA provided debt collection services to Optum360. AMCA first informed the Company of the AMCA Data Security Incident on May 14, 2019. AMCA’s affected system included financial information (e.g., credit card numbers and bank account information), medical information and other personal information (e.g., social security numbers). Test results were not included. Neither Optum360’s nor the Company’s systems or databases were involved in the incident. AMCA also informed the Company that information pertaining to other laboratories’ customers was also affected. Following announcement of the AMCA Data Security Incident, AMCA sought protection under the U.S. bankruptcy laws. The bankruptcy proceeding has been dismissed.
Numerous putative class action lawsuits were filed against the Company related to the AMCA Data Security Incident. The U.S. Judicial Panel on Multidistrict Litigation transferred the cases that were then still pending to, and consolidated them for pre-trial proceedings in, the U.S. District Court for New Jersey. In November 2019, the plaintiffs in the multidistrict proceeding filed a consolidated putative class action complaint against the Company and Optum360 that named additional individuals as plaintiffs and that asserted a variety of common law and statutory claims in connection with the AMCA Data Security Incident. In January 2020, the Company moved to dismiss the consolidated complaint; the motion to dismiss was granted in part and denied in part.
In addition, the Company has been notified that numerous state attorney general offices were investigating or otherwise seeking information and/or documents, and that certain U.S. senators were seeking information, from the Company related to the AMCA Data Security Incident.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
ReproSource Fertility Diagnostics, Inc.
ReproSource Fertility Diagnostics, Inc. (“ReproSource”), a subsidiary of the Company, is subject to two putative class action lawsuits: Bickham v. ReproSource Fertility Diagnostics, Inc. (U.S. District Court for Massachusetts) and Gordon v. ReproSource Fertility Diagnostics, Inc. (U.S. District Court for Nevada). The class actions are related to a data security incident that occurred in August 2021 in which an unauthorized party may have accessed or acquired protected health information and personally identifiable information of ReproSource patients. The complaints generally allege that ReproSource, among other claims, failed to adequately safeguard customers’ private information. ReproSource has moved to dismiss both complaints and to transfer the Gordon complaint to the U.S. District Court for Massachusetts. In addition, the Company has been notified that certain federal and state governmental authorities, including the Office of Civil Rights of the U.S. Department of Health and Human Services and attorney general offices from three states, are investigating or otherwise seeking information and/or documents related to the incident.
Other Legal Matters
In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with the Company's activities as a provider of diagnostic testing, information and services. These actions could involve claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages, and could have an adverse impact on the Company's client base and reputation.
The Company is also involved, from time to time, in other reviews, investigations and proceedings by governmental agencies regarding the Company's business which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
The federal or state governments may bring claims based on the Company's current practices, which it believes are lawful. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers. The Company is aware of lawsuits, and from time to time has received subpoenas, related to billing or other practices based on the False Claims Act or other federal and state statutes, regulations or other laws. The Company understands that there may be other pending qui tam claims brought by former employees or other "whistleblowers" as to which the Company cannot determine the extent of any potential liability.
Management cannot predict the outcome of such matters. Although management does not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company's financial condition, given the high degree of judgment involved in establishing loss estimates related to these types of matters, the outcome of such matters may be material to the Company's consolidated results of operations or cash flows in the period in which the impact of such matters is determined or paid.
These matters are in different stages. Some of these matters are in their early stages. Matters may involve responding to and cooperating with various government investigations and related subpoenas. As of June 30, 2022, the Company does not believe that material losses related to legal matters are probable.
Reserves for legal matters totaled $3 million and $4 million as of June 30, 2022 and December 31, 2021, respectively.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
Reserves for General and Professional Liability Claims
As a general matter, providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on the Company's client base and reputation. The Company maintains various liability insurance coverages for, among other things, claims that could result from providing, or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. The Company's insurance coverage limits its maximum exposure on individual claims; however, the Company is essentially self-insured for a significant portion of these claims.
The Company is subject to a series of individual claims brought by persons in Ireland related to allegations stemming from pap smear screening services performed by the Company. In general, claimants have alleged that the results of certain pap smear screening tests performed by the Company and other providers, pursuant to a program coordinated by the Irish government, were incorrect for individuals who were later diagnosed with cervical cancer. The Irish government and an independent scoping inquiry commissioned by the Irish government found that the Company’s performance of its screening services for the Irish cervical cancer screening program were in accordance with both Ireland’s requirements and international standards. The Company has settled claims made by certain individuals, is a party in multiple lawsuits and may be served as a party in additional lawsuits. The Company does not believe that the resolution of existing or future claims will have a material adverse effect on its financial position or liquidity, but the ultimate outcomes of these claims are unpredictable and subject to significant uncertainties.
Reserves for such matters, including those associated with both asserted and incurred but not reported claims, are established on an undiscounted basis by considering actuarially determined losses based upon the Company's historical and projected loss experience. Such reserves totaled $157 million and $159 million as of June 30, 2022 and December 31, 2021, respectively.
While the basis for claims reserves is actuarially determined losses based upon the Company's historical and projected loss experience, the process of analyzing, assessing and establishing reserve estimates relative to these types of claims involves a high degree of judgment. Although the Company believes that its present reserves and insurance coverage are sufficient to cover currently estimated exposures, it is possible that the Company may incur liabilities in excess of its recorded reserves or insurance coverage. Changes in the facts and circumstances associated with claims could have a material impact on the Company’s results of operations (principally costs of services), cash flows and financial condition in the period that reserve estimates are adjusted or paid.
12. BUSINESS SEGMENT INFORMATION
The Company's DIS business is the only reportable segment based on the manner in which the Chief Executive Officer, who is the Company's chief operating decision maker ("CODM"), assesses performance and allocates resources across the organization. The DIS business provides diagnostic information services to a broad range of customers, including patients, clinicians, hospitals, IDNs, health plans, employers, ACOs and DCEs. The Company is the world's leading provider of diagnostic information services, which includes providing 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. The DIS business accounted for greater than 95% of net revenues in 2022 and 2021.
All other operating segments include the Company's DS businesses, which consist of its risk assessment services and healthcare information technology businesses. The Company's DS businesses are the leading provider of risk assessment services for the life insurance industry and offer healthcare organizations and clinicians robust information technology solutions.
As of June 30, 2022, substantially all of the Company’s services were provided within the United States, and substantially all of the Company’s assets were located within the United States.
The following table is a summary of segment information for the three and six months ended June 30, 2022 and 2021. Segment asset information is not presented since it is not used by the CODM at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income (loss) for the segment. General corporate activities included in the table below are comprised of general management and administrative corporate expenses, amortization and impairment of intangible assets and other operating income and expenses,
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
net of certain general corporate activity costs that are allocated to the DIS and DS businesses. The accounting policies of the segments are the same as those of the Company as set forth in Note 2 to the audited consolidated financial statements contained in the Company’s 2021 Annual Report on Form 10-K and Note 2 to the interim unaudited consolidated financial statements.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||
| DIS business | $ | 2,384 | $ | 2,474 | $ | 4,925 | $ | 5,117 | |||||||||||||||
| All other operating segments | 69 | 76 | 139 | 153 | |||||||||||||||||||
| Total net revenues | $ | 2,453 | $ | 2,550 | $ | 5,064 | $ | 5,270 | |||||||||||||||
| Operating earnings (loss): | |||||||||||||||||||||||
| DIS business | $ | 442 | $ | 601 | $ | 1,004 | $ | 1,313 | |||||||||||||||
| All other operating segments | 6 | 9 | 13 | 18 | |||||||||||||||||||
| General corporate activities | (60) | (77) | (116) | (138) | |||||||||||||||||||
| Total operating income | 388 | 533 | 901 | 1,193 | |||||||||||||||||||
| Non-operating (expense) income, net | (65) | 284 | (126) | 250 | |||||||||||||||||||
| Income before income taxes and equity in earnings of equity method investees | 323 | 817 | 775 | 1,443 | |||||||||||||||||||
| Income tax expense | (77) | (177) | (187) | (330) | |||||||||||||||||||
| Equity in earnings of equity method investees, net of taxes | 4 | 10 | 35 | 27 | |||||||||||||||||||
| Net income | 250 | 650 | 623 | 1,140 | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | 16 | 19 | 34 | 40 | |||||||||||||||||||
| Net income attributable to Quest Diagnostics | $ | 234 | $ | 631 | $ | 589 | $ | 1,100 |
Net revenues by major service were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Routine clinical testing and other services | $ | 1,098 | $ | 1,150 | $ | 2,164 | $ | 2,182 | |||||||||||||||
| COVID-19 testing services | 355 | 511 | 954 | 1,339 | |||||||||||||||||||
| Gene-based and esoteric (including advanced diagnostics) testing services | 787 | 673 | 1,526 | 1,326 | |||||||||||||||||||
| Anatomic pathology testing services | 144 | 140 | 281 | 270 | |||||||||||||||||||
| All other | 69 | 76 | 139 | 153 | |||||||||||||||||||
| Total net revenues | $ | 2,453 | $ | 2,550 | $ | 5,064 | $ | 5,270 |
13. REVENUE RECOGNITION
DIS
Net revenues in the Company’s DIS business accounted for over 95% of the Company’s total net revenues for the three and six months ended June 30, 2022 and 2021 and are primarily comprised of a high volume of relatively low-dollar transactions. The DIS business, which provides clinical testing services and other services, satisfies its performance obligations and recognizes revenues primarily upon completion of the testing process (when results are reported) or when services have been rendered. The Company estimates the amount of consideration it expects to be entitled to receive from customer groups in exchange for providing services using the portfolio approach. These estimates include the impact of contractual allowances (including payer denials), and patient price concessions. The portfolios determined using the portfolio approach consist of the
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
following groups of customers: healthcare insurers, government payers (Medicare and Medicaid programs), client payers and patients.
For further details regarding revenue recognition in the Company's DIS business, see Note 3 to the audited consolidated financial statements in the Company's 2021 Annual Report on Form 10-K.
DS
The Company’s DS businesses primarily satisfy their performance obligations and recognize revenues when delivery has occurred or services have been rendered.
Net Revenue and Net Accounts Receivable by Customer Type
The approximate percentage of net revenue by type of customer was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Healthcare insurers: | |||||||||||||||||||||||||||||
| Fee-for-service | 38 | % | 38 | % | 38 | % | 38 | % | |||||||||||||||||||||
| Capitated | 3 | 3 | 3 | 3 | |||||||||||||||||||||||||
| Total healthcare insurers | 41 | 41 | 41 | 41 | |||||||||||||||||||||||||
| Government payers | 11 | 10 | 11 | 10 | |||||||||||||||||||||||||
| Client payers | 34 | 34 | 33 | 34 | |||||||||||||||||||||||||
| Patients (including coinsurance and deductible responsibilities) | 11 | 12 | 12 | 12 | |||||||||||||||||||||||||
| Total DIS | 97 | 97 | 97 | 97 | |||||||||||||||||||||||||
| DS | 3 | 3 | 3 | 3 | |||||||||||||||||||||||||
| Net revenues | 100 | % | 100 | % | 100 | % | 100 | % |
The approximate percentage of net accounts receivable by type of customer was as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||
| Healthcare Insurers | 27 | % | 32 | % | |||||||
| Government Payers | 6 | 6 | |||||||||
| Client Payers | 42 | 38 | |||||||||
| Patients (including coinsurance and deductible responsibilities) | 21 | 21 | |||||||||
| Total DIS | 96 | 97 | |||||||||
| DS | 4 | 3 | |||||||||
| Net accounts receivable | 100 | % | 100 | % |
14. TAXES ON INCOME
For the three months ended June 30, 2022 and 2021, the effective income tax rate was 23.9% and 21.6%, respectively. For the three months ended June 30, 2021, the effective income tax rate benefited from a lower effective income tax rate, 17.6%, on the gain on the sale of the Company's 40% ownership interest in Q2 Solutions (see Note 5). In addition, the effective income tax rate benefited from $4 million and $5 million of excess tax benefits associated with stock-based compensation arrangements for the three months ended June 30, 2022 and 2021, respectively.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(unaudited)
(in millions, unless otherwise indicated)
For the six months ended June 30, 2022 and 2021, the effective income tax rate was 24.2% and 22.9%, respectively. For the six months ended June 30, 2021, the effective income tax rate benefited from a lower effective income tax rate, 17.6%, on the gain on the sale of the Company's 40% ownership interest in Q2 Solutions (see Note 5). In addition, the effective income tax rate benefited from $9 million of excess tax benefits associated with stock-based compensation arrangements for both the six months ended June 30, 2022 and 2021.
Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations