Senior Vice President and Chief Financial Officer€¦ · Hospital lab volumes now booked as Quest...
Transcript of Senior Vice President and Chief Financial Officer€¦ · Hospital lab volumes now booked as Quest...
Quest by the Numbers: Capital Efficient, Profitable Growth
Mark Guinan
Senior Vice President
and Chief Financial Officer
Confidential | Internal Use Only 2
SAFE HARBOR DISCLOSURE
The statements in the following presentation that are not historical facts may be forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date that they are made and which reflect management’s current
estimates, projections, expectations or beliefs and which involve risks and uncertainties that could
cause actual results and outcomes to be materially different. Risks and uncertainties that may
affect the future results of the Company include, but are not limited to, adverse results from
pending or future government investigations, lawsuits or private actions, the competitive
environment, changes in government regulations, changing relationships with customers, payers,
suppliers or strategic partners and other factors discussed in the Company's most recently filed
Annual Report on Form 10-K and in any of the Company's subsequently filed Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, including those discussed in the “Business,” “Risk
Factors,” “Cautionary Factors that May Affect Future Results” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” sections of those reports.
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In 2014, we outlined the following revenue & EPS expectations
What we said: What we’re doing: Based on the midpoint of our 2016 guidance we’re
on track to deliver the following 2-yr CAGRs:
Grow 2-5% REVENUE
Grow 8-10% EARNINGS
• Includes anticipated M&A of 1-2%
• Organic growth to accelerate
>2% Grow
REVENUE
by
~8% Grow
EARNINGS
by
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And here’s a quick recap of the last two years…
Revenue EPS (including amortization)
1.3% 1.0%
0.7% 1.8%
2015 2016 YTD
$4.05
$4.39
$4.72
Nov. 2014Guidance Midpoint
2015 2016 GuidanceMidpoint
2.0%
2.8%
Growth from
acquisitions
Organic
growth
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Providing color on key financial topics
PLS
Hospital outreach acquisition
PSC footprint & cost savings opportunities
Invigorate savings
PAMA
Equity earnings & unconsolidated JVs
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Behind the Numbers
Hospitals account for ~60%
of the $79 billion
U.S. lab market
Hospital Health System
Lab Market
$48 billion Reference
$4 billion
Hospital
Outreach
$17 billion Inpatient
$27 billion
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Behind the Numbers
Hospitals account for ~60%
of the $79 billion
U.S. lab market
PLS
PLS strategy targets the Inpatient portion of the lab market
Hospital Health System
Lab Market
$48 billion
Hospital
Outreach
$17 billion Inpatient
$27 billion
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Behind the Numbers: PLS Key PLS highlights
Expands Quest’s total addressable market
Organic business win, not an acquisition
Hospital lab volumes now booked as Quest volumes
Quest often becomes sole reference partner
PLS can lead to acquisition of hospital’s outreach lab
Margin and revenue per requisition implications
Lower margins because Quest shares savings with hospital
Lower revenue per requisition
– Often more routine testing with fewer tests per requisition
– Only billing for our costs plus a reasonable margin
– Don’t have draw, billing, and bad debt costs which account for >20%
of requisition costs
Recognized revenue dependent on the scope of services
Hospital beds 300
Hospital lab spend $10 mln
Targeted lab savings 15%
Lab savings to hospital $1.5 mln
Quest recognized revenue $8.5 mln
Quest cost of sales $7.2 mln
Quest operating margin 15%
PLS Partner
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Behind the Numbers
Hospitals account for ~60%
of the $79 billion
U.S. lab market
Hospital Health System
Lab Market
$48 billion
Inpatient
$27 billion
Hospital
Outreach
$17 billion
Hospital Outreach Acquisitions
Hospital outreach acquisitions target the outreach portion of the lab market
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Behind the Numbers: Hospital outreach acquisition
Creates long term partnership with hospital, not like a standard
acquisition
Asset worth different amounts to different purchasers based on
cost structure
Earn deal out on cost synergies
Deal includes non-compete
Outreach acquisition can lead to PLS
agreement and/or reference work
Can reduce costs for health plans and expand
access
Requisition
Volume (000s)
Revenue per
Requisition
Revenue
(000s)
Operating
Margin
Operating
Income (000s)
Net
Income (000s)
1,000 $75 $75,000
5%
$3,750 $3,125
900
$45 $40,500
25% $10,125
$6,325
Quest acquires for $60 million
~10x
1.5x
Assume some
attrition
Lower rates to
Quest fee schedule
Very attractive
OM
Quest P&L following acquisition
Target Outreach Lab
~20x
0.8x
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Behind the Numbers: PSC footprint & cost savings opportunities
23%
77%
62%
38%
Percentage of PSCs
by Location Type
Percentage of PSCs
by Number of FTEs
~2,200 PSCs in Quest’s Network
Retail
Location
Medical /
Office
Building
1-2 FTE
3+ FTES
PSC Expense
2015
Supplies / Other
Rent
Labor
~11%
~71%
~18%
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Invigorate savings
Expected Run Rate Savings
Invigorate savings contributed to P&L each year since 2012
($ millions)
$169
$271 $245 $232 ~$200 $215
$520
$752
$990
$1,100+
$0
$200
$400
$600
$800
$1,000
$1,200
2012 2013 2014 2015 2016E
Realized Run rate
$1.3 billion
SAVINGS
2017 beyond
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Behind the Numbers
Quest
revenue
exposure to
CLFS
Approximate
2015 CLFS
Revenue
Reimbursement
Pressure
Potential
Quest
Impact
Incremental price
headwind on
Quest
12% $900 mln Low-single-digit $23 mln 30 bps
Mid-single-digit $45 mln 60 bps
High-single-digit $72 mln 96 bps
Max (10%) $90 mln 120 bps
PAMA headwinds manageable
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Behind the Numbers
Consolidated and unconsolidated joint ventures
Consolidated JVs: Unconsolidated JVs:
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Behind the Numbers
Consolidated and unconsolidated joint ventures
15
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Behind the Numbers
Consolidated and unconsolidated joint ventures
16
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GAAP EPS vs. adjusted EPS: A snapshot since 2013
Net income
($ Millions)
EPS EPS
(ex amort)
GAAP Adjusted GAAP Adj. incl.amort
GAAP Adj. examort
Cumulative 2013 – Q3 2016
∆
∆
∆
$2,564
$2,359
$205
$17.38
$16.04
$1.34
$17.38 $17.43
($0.05)
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Return the majority of free cash flow to shareholders through dividends and share buybacks
$436
$636 $559
$750
$1,222
$319
$436
$664
2013 2014 2015 2016E
FCF Div./Buyback
50% 78% 89% % of FCF: 280%
Share Buybacks
Repurchased $1.8 billion
of shares since 2013
Existing authorization to
buyback shares up to
$532m
Dividend
Increasing 12.5% today
to $1.80 annually
2%+ yield
Increased 6x since 2011
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$0.10
$0.17
$0.30 $0.33
$0.38 $0.40
$0.45
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
We’ve increased the dividend for the 6th consecutive year
Dividend History since 2011
Announced:
10/25/11
+70%
Announced:
11/16/12
+76.5%
Announced:
1/30/14
+10%
Announced:
1/29/15
+15.1%
Announced:
1/28/16
+5.3%
Announced:
11/11/16
+12.5%
1/6
/2011
4/1
/2011
6/3
0/2
011
10/5
/2011
1/5
/2012
3/3
0/2
012
6/2
9/2
012
9/2
7/2
012
1/9
/2013
3/2
8/2
013
6/2
8/2
013
9/2
7/2
013
1/3
/2014
4/4
/2014
7/7
/2014
10/3
/2014
1/9
/2015
4/6
/2015
7/6
/2015
10/2
/2015
1/8
/2016
4/4
/2016
7/1
/2016
9/3
0/2
016
1/2
5/2
017
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Well-positioned to accelerate growth and create value
U.S.
Lab Market
Accelerate
Growth
Drive Operational
Excellence
$79 billion
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2017-2020: Looking beyond 2016
Expect to continue accelerating top line growth
– Total revenue 3-5%
– Acquisitions 1-2%
Earnings growth faster than revenue in the mid-to-high single-digit range
High single-digit FCF growth
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KEY TAKEAWAYS
Invigorate savings continue to be key source of value creation
Revenue growth continues to accelerate
Our commitment remains to return a majority of FCF through
dividends & buybacks
Appendix
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Non-GAAP Reconciliations
The following non-GAAP measures for: (i) equivalent revenue growth; (ii) adjusted income
from continuing operations; (iii) adjusted diluted EPS; (iv) adjusted diluted EPS excluding
amortization expense; (v) free cash flow; and (vi) percentage of free cash flow returned to
shareholders are presented because management believes those measures are useful
adjuncts to GAAP results. Non-GAAP, or “adjusted”, measures should not be considered
as an alternative to the corresponding measures determined under GAAP. Management
may use these non-GAAP measures to evaluate our performance period over period and
relative to competitors, to analyze the underlying trends in our business, to establish
operational budgets and forecasts or for incentive compensation purposes. We believe that
these non-GAAP measures are useful to investors and analysts to evaluate our
performance period over period and relative to competitors, as well as to analyze the
underlying trends in our business and to assess our performance. The following tables
reconcile reported GAAP measures to non-GAAP adjusted measures:
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Equivalent Revenue Growth The following tables reconcile equivalent revenue growth/(decline) and its components to the
corresponding measures determined under GAAP:
Year Ended December 31, 2015
$ % Growth Equivalent
% Growth
(dollars in millions)
Prior year net revenues $ 7,435
Revenue growth/(decline)
impacts:
Organic (a) 51 0.7 % 0.7 %
Business acquisitions (b) 94 1.3 1.3
Business dispositions (c) (87 ) (1.2 ) N/A
Current year net revenues $ 7,493 0.8 % 2.0 %
Nine Months Ended September 30, 2016
$ %
Growth
Equivalent
% Growth
(dollars in millions)
Prior year net revenues $ 5,644
Revenue growth/(decline)
impacts:
Organic (a) 98 1.8 % 1.8 %
Business acquisitions (b) 57 1.0 1.0
Business dispositions (d) (145 ) (2.6 ) N/A
Current year net revenues $ 5,654 0.2 % 2.8 %
a) Represents the estimated revenue growth/(decline) excluding the impact of business acquisitions and business dispositions. b) Represents the estimated impact of our business acquisitions on revenue growth. c) Represents clinical trials testing revenues reported in the third and fourth quarters of 2014 as a result of the contribution of our clinical clinical trials testing business to Q2 Solutions, the
clinical trials joint venture with Quintiles Transnational Holdings Inc, effective July 1, 2015. d) Represents clinical trials testing reported revenues for the first and second quarters of 2015, Celera products reported revenues for the first, second and third quarters of 2015 and
Focus Diagnostics products revenues subsequent to April 2015 through the third quarter of 2015. In 2015, the company contributed its clinical trials testing business to the Q2 Solutions joint venture. In 2016, the company wound down its Celera products business and completed its exit from the products business as a result of the sale of its Focus Diagnostics products business on May 13, 2016.
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Adjusted Income from Continuing Operations, Adjusted Diluted EPS and Adjusted Diluted EPS Excluding Amortization Expense The following tables reconcile adjusting income from continuing operations, adjusted diluted EPS and adjusted diluted EPS
excluding amortization expense to the corresponding measures determined under accounting principles GAAP:
Year Ended December 31,
Nine Months Ended
September 30, Cumulative
Total 2013 2014 2015 2016
(dollars in millions)
Adjusted income from continuing operations:
Income from continuing operations attributable to Quest
Diagnostics' common stockholders $ 814
$ 551
$ 709
$ 490
$ 2,564
Loss (gain) on disposition of business (a) 40 — (334 ) (118 ) (412 )
Gain on sale of royalty rights (b) (474 ) — — — (474 )
Retirement of debt and related refinancing charges (c) —
—
150
48
198
Restructuring and integration charges (d) 115 121 110 58 404
Other (e) — 15 32 (6 ) 41
Income tax expense (benefit) associated with the special
items (f) 117
(89 ) (27 ) 37
38
Adjusted income from continuing operations $ 612 $ 598 $ 640 $ 509 $ 2,359
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Adjusted Income from Continuing Operations, Adjusted Diluted EPS and Adjusted Diluted EPS Excluding Amortization Expense
Year Ended December 31,
Nine Months Ended
September 30, Cumulative
Total 2013 2014 2015 2016
(dollars in millions)
Adjusted diluted EPS excluding amortization expense:
Diluted earnings per common share $ 5.31 $ 3.78 $ 4.87 $ 3.42 $ 17.38
Loss (gain) on disposition of business (a)
(f) 0.17
—
(1.30 ) (0.24 ) (1.37 )
Gain on sale of royalty rights (b) (f) (1.95 ) — — — (1.95 )
Retirement of debt and related
refinancing charges (c) (f) —
—
0.62
0.21
0.83
Restructuring and integration charges (d)
(f) 0.47
0.53
0.46
0.25
1.71
Other (e) (f) — 0.09 0.14 (0.09 ) 0.14
Certain income tax benefits (g) (f) — (0.30 ) (0.40 ) — (0.70 )
Adjusted diluted EPS 4.00 4.10 4.39 3.55 16.04
Amortization expense (h) 0.32 0.40 0.38 0.29 1.39
Adjusted diluted EPS excluding
amortization expense $ 4.32
$ 4.50
$ 4.77
$ 3.84
$ 17.43
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a) For the year ended December 31, 2013, represents the $40 million pre-tax loss, or $25 million after-tax, associated with the sale of our Enterix products business. For the year ended December 31, 2015, represents the $334 million pre-tax gain, or $289 million after-tax, associated with the contribution of our clinical trials testing business to the Q2 Solutions joint venture. For the nine months ended September 30, 2016, represents the $118 million pre-tax gain, or $34 million after-tax, associated with the sale of our Focus Diagnostics products business.
b) Represents the $474 million pre-tax gain, or $298 million after-tax, associated with the sale of our ibrutinib royalty rights.
c) For the year ended December 31, 2015, represents $150 million of pre-tax charges, or $90 million after-tax, associated with the retirement of debt resulting from the March 2015 cash tender offer and April 2015 redemption. For the nine months ended September 30, 2016, represents $48 million of pre-tax charges, or $30 million after-tax, associated with the retirement of debt resulting from the March 2016 cash tender offer.
d) For the years ended December 31, 2013 to 2015, represents costs, primarily associated with workforce reductions and professional fees, incurred in connection with further restructuring and integrating our business. For the nine months ended September 30, 2016, represents costs, primarily associated with systems conversions and integrations, incurred in connection with further restructuring and integrating our business.
e) For the year ended December 31, 2014, represents represents costs incurred related to certain legal matters, partially offset by a pre-tax gain of $9 million associated with a decrease in the fair value of the contingent consideration accrual associated with the Summit Health, Inc. acquisition. For the year ended December 31, 2015, primarily represents non-cash asset impairment charges and other costs associated with Celera Products and the winding down of another subsidiary as well as costs incurred related to certain legal matters, partially offset by a pre-tax gain of $13 million associated with a decrease in the fair value of the contingent consideration accrual associated with our Summit Health, Inc. acquisition. For the nine months ended September 30, 2016, primarily represents a net pre-tax gain of $6 million consisting of a gain on escrow recovery associated with an acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters.
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f) The following table summarizes the income tax expense (benefit) associated with the special items:
For the loss on disposition of business in 2013, income tax benefits were calculated using a combined tax rate of 35.9%. For the gain on disposition of business in
2015, the income tax expense was calculated using a combined tax rate of 43.3%. For the gain on disposition of business in 2016, income tax expense resulted in a
combined tax rate of 71.4%, which was significantly in excess of the combined statutory rate due to a lower tax basis in the assets sold, specifically the goodwill
associated with the disposition.
For the gain on sale of royalty rights in 2013, income tax expense was calculated using a combined tax rate of 37.1%.
For the retirement of debt and related refinancing charges in 2015, income tax benefits were calculated using a combined tax rate of 40%. For the retirement of debt
and related refinancing charges in 2016, income tax benefits were calculated such that the combined tax rate for the full year was 38.9%.
For the restructuring and integration charges and other items, income tax impacts, where recorded, were calculated using combined tax rates of 38.9% for 2016,
38.9% for 2015, 38.2% for 2014 and 38.2% for 2013.
Income tax expense (benefit) associated with the special items:
Year Ended December 31,
Nine Months
Ended
September
30,
2013 2014 2015 2016
(dollars in millions)
Loss (gain) on disposition of business $ (15 ) $ — $ 145 $ 84
Gain on sale of royalty rights 176 — — —
Retirement of debt and related refinancing charges — — (60 ) (18 )
Restructuring and integration charges (44 ) (44 ) (43 ) (23 )
Certain income tax benefits (g) — (44 ) (58 ) —
Other — (1 ) (11 ) (6 )
$ 117 $ (89 ) $ (27 ) $ 37
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g) For the year ended December 31, 2014, represents a benefit associated with the favorable resolution of certain tax contingencies. For the year ended December
31, 2015, represents the recognition of a deferred income tax benefit associated with winding down a subsidiary.
h) Represents the impact of amortization expense on diluted earnings per common share, net of the income tax benefit. The income tax benefits were primarily
calculated using a combined tax rate of 38.9% for 2016, 38.9% for 2015, 38.2% for 2014 and 38.2% for 2013. The pre-tax amortization expense that is excluded
from the calculation of adjusted diluted EPS excluding amortization expense is recorded in the company's statements of operations as follows:
Year Ended December 31,
Nine Months
Ended
September 30,
2013 2014 2015 2016
Amortization of intangible assets $ 79 $ 94 $ 81 $ 54
Equity in earnings of equity method investees, net of taxes — — 8 12
$ 79 $ 94 $ 89 $ 66
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Adjusted Diluted EPS Progress At Investor Day in 2014, the company provided a growth outlook for adjusted diluted EPS, consisting of
a three year compound annual growth rate of 8-10%. The following table reconciles adjusted diluted
EPS guidance used to measure progress against the Investor Day 2014 adjusted diluted EPS guidance
to the corresponding measures determined under GAAP:
Year Ended December 31,
Compound
Annual
Growth
Rate 2014 2016
Outlook for diluted EPS:
Diluted earnings per common share (a) $ 3.54
$ 4.50 12.8 %
Gain on disposition of business (b) —
(0.24 )
Retirement of debt and related refinancing charges (c) —
0.21
Restructuring and integration charges (d) 0.41
0.34
Other (e) 0.10
(0.09 )
Adjusted diluted EPS (f) $ 4.05
$ 4.72 8.0 %
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a) For the year ended December 31, 2014, represents the mid-point of the full year 2014 reported diluted earnings per common share guidance as stated in Exhibit 99.1 to the company's 8-K filed on October 23, 2014. For the year ended December 31, 2016, represents the mid-point of the full year 2016 reported diluted earnings per common share guidance as stated in Exhibit 99.1 to the company's 8-K filed on October 20, 2016.
b) For the year ended December 31, 2016, represents the $118 million pre-tax gain, or $34 million after-tax, associated with the sale of our Focus Diagnostics products business.
c) For the year ended December 31, 2016, represents $48 million of pre-tax charges, or $30 million after-tax, associated with the retirement of debt resulting from the March 2016 cash tender offer.
d) For the year ended December 31, 2014, represents $91 million of pre-tax costs, or $59 million after-tax, primarily associated with workforce reductions and professional fees, incurred in connection with further restructuring and integrating our business incurred through September 30, 2014. For the year ended December 31, 2016, represents estimated full year pre-tax costs of $80 million, or $49 million after-tax, primarily associated with systems conversions and integration costs incurred in connection with further restructuring and integrating our business.
e) For the year ended December 31, 2014, represents pre-tax costs of $19 million, or $15 million after-tax, principally related to certain legal matters incurred through September 30, 2014. For the year ended December 31, 2016, primarily represents a net pre-tax gain of $6 million consisting of a gain on escrow recovery associated with an acquisition, partially offset by costs associated with winding down subsidiaries, non-cash asset impairment charges and costs incurred related to certain legal matters incurred through September 30, 2016.
f) For the year ended December 31, 2014, represents the mid-point of the full year 2014 adjusted diluted EPS guidance as stated in Exhibit 99.1 to the company's 8-K filed on October 23, 2014. For the year ended December 31, 2016, represents the mid-point of the full year 2016 adjusted diluted EPS excluding amortization expense guidance as stated in Exhibit 99.1 to the company's 8-K filed on October 20, 2016 of $5.10 less the estimated impact of amortization expense of $0.38.
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Free Cash Flow and Cash Returned to Shareholders The following tables reconcile free cash flow and cash returned to shareholders to the
corresponding measures determined under GAAP:
Year Ended December 31,
2013 (a) 2014 (a) 2015 (a) 2016 (b)
Free cash flow: (dollars in millions)
Net cash provided by operating activities $ 667 $ 944 $ 822 $ 1,000
Less: Capital expenditures (231 ) (308 ) (263 ) (250 )
Free cash flow $ 436 $ 636 $ 559 $ 750
Cash returned to shareholders:
Dividends paid $ 185 $ 187 $ 212 $ 224
Purchases of treasury stock 1,037 132 224 440
Cash returned to shareholders $ 1,222 $ 319 $ 436 $ 664
% of free cash flow returned to shareholders 280 % 50 % 78 % 89 %
Net cash provided by (used in) investing activities $ 328 $ (1,025 ) $ (362 )
Net cash (used in) provided by financing activities $ (1,121 ) $ 86
$ (519 )
a) In the second quarter of 2016, the company elected to early adopt the accounting standard update that simplifies several aspects of the accounting for stock-based compensation
award transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and accounting for
forfeitures, effective January 1, 2016. As a result, certain reclassifications have been made to the prior year amounts to conform with the current period presentation.
b) Represent estimated amounts for the full year.
INVESTOR MEETING
2016