Leading diagnostic testing company,
) reported earnings per share ("EPS") from continuing operations
of 72 cents in the first quarter of 2013, down considerably from
97 cents in the year-ago period. However, after taking into
account certain charges related to restructuring and integration
(17 cents), adjusted EPS from continuing operations were 89
cents. Adjusted EPS was down 15.3% year over year, missing the
Zacks Consensus Estimate of $1.04 as well. The year-ago quarter
had incurred a cost of 8 cents per share, related to
restructuring and integration as well as CEO succession
Revenues from continuing operations for the first quarter were
down 6.4% year over year to $1.79 billion, marginally missing the
Zacks Consensus Estimate of $1.87 billion. We believe that the
overall soft industry trends leading to low volume growth was a
dampener for the company. In the reported quarter, volume
(measured by the number of requisitions) declined 3.4% year over
We expect this challenging scenario to adversely affect Quest
Laboratory Corporation of America Holdings
) as well, which is scheduled to release its first-quarter and
fiscal 2013 results on Apr19, 2013. Revenue per requisition was
down 3.4% primarily due to reduced reimbursement.
Notably, as a part of its strategy to align assets in the core
diagnostics information service business, Quest Diagnostics
completed the divesture of its HemoCue diagnostics products
business earlier this month. The company announced that
Radiometer Medical ApS purchased this business for $300 million
plus customary adjustments for cash balances. Last December,
Quest Diagnostics also sold its OralDNA Labs salivary-diagnostics
business to Access Genetics. The company believes that these
divestitures will allow it to refocus its resources toward core
diagnostic information services.
In addition, in a separate press release today, the company
declared that it has entered into a definitive agreement to
acquire lab-related clinical outreach service operations of
Dignity Health in Calif. and Nev. The company believes that this
acquisition, which is expected to close in Jun 2013, is
consistent with its goal of contributing 1%-2% revenue growth a
year through accretive acquisitions. Although financial terms of
the deal were not disclosed, Quest Diagnostics believes the
transaction to be neutral to its 2013 adjusted EPS and slight
accretive to that of 2014.
Coming back to the quarter's earnings, among operating costs,
cost of services during the reported quarter stood at $1.09
billion, down 1.5% year over year. Selling, general and
administrative (SG&A) expenses dropped 7.3% to $448 million.
Other operating income was $0.6 million, compared to expense of
$0.4 million in the year-ago quarter. However, adjusted operating
margin in the quarter contracted 280 basis points (bps) to 13.79%
on adjusted operating income of $246.3 million.
Quest Diagnostics exited the first quarter with $133.6 million
in cash and cash equivalents, down from $295.6 million at the end
of fiscal 2012. Cash provided by operating activities for the
quarter was $47.2 million compared with $161.3 million in
year-ago quarter. The company is focused on enhancing
shareholders' value and improving returns on capital. During the
reported quarter, Quest Diagnostics repurchased shares worth $62
million and reduced outstanding debt by $207 million.
Quest Diagnostics provided an updated fiscal 2013 outlook. The
company expects to report flat year-over-year revenues in fiscal
2013 compared with the earlier projected band of nil to 1%. The
current Zacks Consensus Estimate of $7.39 billion remains almost
in line with the guided range. EPS is still expected to remain in
the range of $4.35−$4.55. The Zacks Consensus Estimate of $4.46
falls within the range. Moreover, the company reiterated its
expectation of $250 million of capital expenditure and $1.0
billion as cash provided by operations.
We remain cautious about the company as it is continuously
witnessing challenges with testing volume. Concerns also linger
about the soft industry trends due to a decline in physician
office visits, flat pricing and low organic revenue. Moreover, a
disappointing fiscal 2013 revenue guidance reflected the fact
that the industry trend will not improve in the near future,
which adds to our concerns.
However, we are optimistic regarding the company's strategy to
refocus on Diagnostic Information Services along with the
organizational structure developed by the company's new CEO,
Steve Rusckowski. We also expect this to run successfully adding
synergies to its ongoing $500 million restructuring initiative,
associated with its Invigorate program. The stock retains a Zacks
Rank #3 (Hold).
Other Stocks to Consider
While we prefer to remain on the sidelines on Quest
Diagnostics, other medical device stocks worth a look are
). Both the stocks carry a Zacks Rank #1 (Strong Buy).
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