Quest Diagnostics Reports Third Quarter 2021 Financial Results, Raises Outlook for Full Year 2021

(a)

For further details impacting the year-over-year comparisons related to operating income, operating income as a percentage of net
revenues, net income attributable to Quest Diagnostics, and diluted EPS, see note 2 of the financial tables attached below.

(b)

The sum of reported and adjusted diluted EPS for the first three quarters of 2021 did not equal the totals for the nine months ended September 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 accelerated share repurchase agreements ("ASRs") that the company entered into during April 2021.

Notes to Financial Tables

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Net income attributable to Quest Diagnostics

$

505

$

568

$

1,605

$

852

Less: earnings allocated to participating securities

2

2

6

3

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

$

503

$

566

$

1,599

$

849

Weighted average common shares outstanding - basic

123

135

127

134

Effect of dilutive securities:

Stock options and performance share units

2

2

2

2

Weighted average common shares outstanding - diluted

125

137

129

136

Earnings per share attributable to Quest Diagnostics' common
   stockholders:

Basic

$

4.11

$

4.20

$

12.63

$

6.33

Diluted

$

4.02

$

4.14

$

12.41

$

6.25

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

Three Months Ended September 30, 2021

(dollars in millions, except per share data)

Operating income

Operating
income as a
percentage of
net revenues

Income tax
expense (f)

Equity in earnings of equity method investees, net of taxes

Net income attributable to Quest Diagnostics

Diluted EPS

As reported

$

652

23.5

%

$

(153)

$

26

$

505

$

4.02

Restructuring and
integration charges (a)

13

0.5

(4)

—

9

0.08

Other (b)

4

0.1

12

(3)

(29)

(0.25)

Amortization expense

25

0.9

(6)

—

19

0.15

ETB

—

—

(6)

—

(6)

(0.04)

As adjusted

$

694

25.0

%

$

(157)

$

23

$

498

$

3.96

Nine Months Ended September 30, 2021

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (f)

Equity in earnings of equity method investees, net of taxes

Net income attributable to Quest Diagnostics

Diluted EPS

As reported

$

1,845

22.9

%

$

(483)

$

53

$

1,605

$

12.41

Restructuring and
integration charges (a)

51

0.6

(13)

—

38

0.30

Other (b)

9

0.1

8

5

(20)

(0.18)

Gain on sale of
ownership in joint
venture (c)

—

—

55

—

(259)

(2.00)

COVID-19 impact (d)

4

0.1

(1)

—

3

0.03

Amortization expense

77

1.0

(20)

2

59

0.46

ETB

—

—

(15)

—

(15)

(0.11)

As adjusted

$

1,986

24.7

%

$

(469)

$

60

$

1,411

$

10.91

Three Months Ended September 30, 2020

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (f)

Equity in earnings of equity method investees, net of taxes

Net income attributable to Quest Diagnostics

Diluted EPS

As reported

$

718

25.8

%

$

(177)

$

15

$

568

$

4.14

Restructuring and
integration charges (a)

18

0.6

(4)

—

14

0.10

COVID-19 impact (d)

68

2.5

(18)

1

52

0.39

Gain on remeasurement
of equity interest (e)

—

—

7

—

(63)

(0.46)

Amortization expense

27

0.9

(7)

3

23

0.16

ETB

—

—

(3)

—

(3)

(0.02)

As adjusted

$

831

29.8

%

$

(202)

$

19

$

591

$

4.31

Nine Months Ended September 30, 2020

(dollars in millions, except per share data)

Operating income

Operating income as a percentage of net revenues

Income tax expense (f)

Equity in earnings of equity method investees, net of taxes

Net income attributable to Quest Diagnostics

Diluted EPS

As reported

$

1,176

18.3

%

$

(269)

$

33

$

852

$

6.25

Restructuring and
integration charges (a)

43

0.7

(9)

—

34

0.25

COVID-19 impact (d)

54

0.8

(11)

(2)

39

0.29

Gain on remeasurement
of equity interest (e)

—

—

7

—

(63)

(0.46)

Amortization expense

77

1.2

(21)

9

65

0.47

ETB

—

—

(15)

—

(15)

(0.11)

As adjusted

$

1,350

21.0

%

$

(318)

$

40

$

912

$

6.69

(a)

For both the three and nine months ended September 30, 2021 and 2020, represents costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.  The following table summarizes the pre-tax impact of restructuring and integration charges on the company's consolidated statements of operations:

(b)

For the three months ended September 30, 2021, the pre-tax impact primarily represents gains associated with changes in the carrying value of our strategic investments and costs associated with donations, contributions and other financial support through Quest for Health Equity.  For the nine months ended September 30, 2021, the pre-tax impact primarily represents gains associated with changes in the carrying value of our strategic investments, costs associated with donations, contributions and other financial support through Quest for Health Equity, and a non-cash impairment charge to the carrying value of an equity method investment.

The following table summaries the pre-tax impact of these other items on the company's consolidated statement of operations:

(c)

For the nine months ended September 30, 2021, the pre-tax impact represents a gain of $314 million recorded in other income, net following the sale of the company's 40% ownership interest in Q² Solutions®, its clinical trials central laboratory services joint venture, to IQVIA Holdings, Inc., its joint venture partner, for $760 million in an all-cash transaction. 

(d)

For the nine months ended September 30, 2021 and both the three and nine months ended September 30, 2020, the pre-tax impact represents the impact of certain items resulting from the COVID-19 pandemic.  For the nine months ended September 30, 2021, includes incremental costs incurred to protect the health and safety of the company's employees and customers.  For the three months ended September 30, 2020, the pre-tax impact principally includes the reversal of $65 million of income previously recognized during the second quarter of 2020 attributable to the receipt of funds from the government that were appropriated to healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which funds were returned during the three months ended December 31, 2020 and, to a lesser extent, incremental costs incurred primarily to protect the health and safety of the company's employees and customers.  For the nine months ended September 30, 2020, the pre-tax impact principally includes expense associated with a 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 the company's employees and customers. 

The following table summarizes the pre-tax impact of these COVID-19 items on the company's consolidated statements of operations:

(e)

For the three and nine months ended September 30, 2020, the pre-tax impact represents a gain of $70 million recognized in other income, net based on the difference between the fair value and the carrying value of an equity interest. On August 1, 2020, the company completed its acquisition of the remaining 56% interest in Mid America Clinical Laboratories, LLC ("MACL") from its joint venture partners. As a result of the transaction, the company remeasured its previously held minority interest in MACL to fair value and recognized a gain.

(f)

For restructuring and integration charges, COVID-19 impacts, other items and amortization expense, income tax impacts, where recorded, were primarily calculated using combined statutory income tax rates of 25.5% for both 2021 and 2020.  For the gain on sale of ownership in joint venture in 2021, income tax expense on the transaction resulted in an effective income rate of 17.6%.  For the gain on remeasurement of equity interest in 2020, income tax expense on the transaction resulted in an effective income tax rate of 11.8%.     

3)

In April 2021, the company entered into ASRs with several financial institutions to repurchase $1.5 billion of the company's common stock as part of its share repurchase program.  For the nine months ended September 30, 2021, the company paid $1.5 billion to the financial institutions and received an initial amount of 9.1 million shares of its common stock, for a value of $1.2 billion, which represents 80% of the total value of shares to be repurchased under the ASRs.  The specific number of shares that the company ultimately will purchase under the ASRs will be based on the average of the daily volume-weighted average price per share of the company's common stock during a repurchase period.  For the nine months ended September 30, 2021, the company repurchased 12.5 million shares of its common stock for a value of $1.6 billion, including 9.1 million shares repurchased under ASRs.  There were no shares repurchased during the three months ended September 30, 2021.  In each of February and March 2021, the company's Board of Directors increased the size of its share repurchase program by $1 billion.  As of September 30, 2021, $1.3 billion remained available under the company's share repurchase authorization. 

4)

For the three and nine months ended September 30, 2020, net cash provided by operating activities includes $73 million and $138 million, respectively, that the company received from the funds that were appropriated to healthcare providers under the CARES Act, which funds were returned during the fourth quarter of 2020.

5)

The outlook for adjusted diluted EPS represents management's estimates for the full year 2021 before the impact of special items. Further impacts to earnings related to special items may occur throughout 2021.  Additionally, the amount of ETB is dependent upon employee stock option exercises and the company's stock price, and changes in the carrying value of our strategic investments are based on fluctuations in the investee's stock price, both of which are difficult to predict.  The following table reconciles our full year 2021 outlook for adjusted diluted EPS to the corresponding amounts determined under GAAP:

(a)

Represents estimated pre-tax charges of $75 million primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business.  Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(b)

Represents estimated pre-tax charges of $4 million associated with the impact of certain items resulting from the COVID-19 pandemic.  Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(c)

Represents the estimated impact of amortization expense on the calculation of adjusted diluted EPS.  Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(d)

Represents estimated pre-tax charges of $18 million associated with donations, contributions and other financial support through Quest for Health Equity.  Income tax benefits were calculated using a combined statutory income tax rate of 25.5%.

(e)

Represents a pre-tax gain of $314 million recorded in other income, net following the sale of the company's 40% ownership interest in Q² Solutions®.   Income tax expense on the transaction resulted in an effective income tax rate of 17.6%.

(f)

Represents net pre-tax gains of $38 million associated with changes in the carrying value of our strategic investments partially offset by a non-cash impairment charge to the carrying value of an equity method investment.  Income tax expense was calculated using a combined statutory income tax rate of 25.5%.