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.


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


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


Providing color on key financial topics

PLS

Hospital outreach acquisition

PSC footprint & cost savings opportunities

Invigorate savings

PAMA

Equity earnings & unconsolidated JVs


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


Behind the Numbers


of the $79 billion

U.S. lab market

PLS

PLS strategy targets the Inpatient portion of the lab market


Lab Market

$48 billion

Hospital

Outreach

$17 billion Inpatient

$27 billion


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


Behind the Numbers


of the $79 billion

U.S. lab market


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


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


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%


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


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


Behind the Numbers

Consolidated and unconsolidated joint ventures

Consolidated JVs: Unconsolidated JVs:

http://www.q2labsolutions.com/


Behind the Numbers


15


Behind the Numbers


16


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)


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


$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


Well-positioned to accelerate growth and create value

U.S.

Lab Market

Accelerate

Growth

Drive Operational

Excellence

$79 billion


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


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


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:


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


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.


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


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


Adjusted Income from Continuing Operations, Adjusted Diluted EPS and Adjusted Diluted EPS Excluding Amortization Expense


Nine Months Ended

September 30, Cumulative

Total 2013 2014 2015 2016


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


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.


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:


Nine Months

Ended

September

30,

2013 2014 2015 2016


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


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:


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


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:


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 %


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.


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:


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

Senior Vice President and Chief Financial Officer€¦ · Hospital lab volumes now booked as Quest...

Documents

Transcript of Senior Vice President and Chief Financial Officer€¦ · Hospital lab volumes now booked as Quest...