Quest Diagnostics (DGX) reported adjusted EPS of $1.12 during the second quarter of fiscal 2011, a penny below the Zacks Consensus Estimate but higher than last year's $1.07.
Adjusted EPS takes into account 10 cents per share of transaction and integration costs associated with the Athena Diagnostics and Celera transactions. An 11.8% decline in the number of outstanding shares had a favorable impact on earnings.
Revenues for the quarter increased 1.5% year over year to $1.9 billion, in line with the Zacks Consensus Estimate. The two acquisitions contributed 2.5% to revenue growth. While clinical testing volume (measured by the number of requisitions) during the quarter decreased 0.9% compared with the year-ago period, revenue per requisition increased 1.6%. This is significant since Quest Diagnostics has been recording lower revenue per requisition over the past four consecutive quarters. The drop in volume however came as a disappointment after recording positive growth for the past two quarters.
Adjusted operating margin for the reported quarter declined to 17.7% on an adjusted operating income of $337 million, compared with 19.5% in the year-ago period on operating income of $366 million. Higher operating costs and expenses resulted in the lower operating margin.
Quest Diagnostics also announced a cost reduction plan to prepare for upcoming growth opportunities. The company aims to reduce its cost structure by $500 million over the next 3 years, targeting a 20% operating margin goal.
Quest exited the quarter with $184.2 million in cash and cash equivalents, down from $449.3 million at the end of December 2010. Cash flow from operations during the quarter was $60 million, which was hurt by a MediCal settlement payment and costs associated with recent acquisitions. Before these items, cash flow from operations was $271 million, up from $209 million in the corresponding period last year.
With the recent acquisition of Athena Diagnostics from Thermo Fisher Scientific (TMO), Quest is confident of strengthening its presence in the neurology diagnostics market. In addition, the acquisition of Celera will bolster its cardiovascular testing portfolio.
Lowers Outlook
Quest Diagnostics updated its outlook for 2011. The company lowered the high end of its adjusted EPS expectation by 10 cents to $4.25–$4.35, banking on a 1.5% revenue growth (previous guidance of 2%). Moreover, Quest Diagnostics expects adjusted operating margin to be around 17.5% (previous guidance of 17.5%−18%) and to generate $900 million in cash from operations (after considering the MediCal settlement). In addition, the company lowered its capital expenditure guidance by $20 million to $220 million.
Recommendation
Quest Diagnostics has been adopting strategies such as making suitable acquisitions, increasing sales force and targeting additional geographies to drive its top line. The cost cutting initiative might be another attempt by the company to drive its bottom line. However, despite these acquisitions, the drop in revenue guidance for fiscal 2011 disappoints us. The company faces tough competition from Laboratory Corporation of America Holdings (LH).
Quest Diagnostics has been adopting strategies like suitable and timely acquisitions, sales force expansion and forays into additional geographies to drive its top line. The cost-cutting initiative might be yet another attempt by the company to drive its bottom line. Notwithstanding expected synergies from these acquisitions, the drop in revenue guidance for fiscal 2011 however disappoints us. The company faces tough competition from LH.
We currently have a Neutral recommendation on Quest Diagnostics.
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