Quest blames outside factors for lowering already diminished 2013 expectations

As expected, Quest Diagnostics ($DGX) lowered its outlook for 2013, with reimbursement challenges and declines in healthcare utilization driving down revenue expectations.

The New Jersey company disclosed in its 2013 third quarter earnings that it expects revenue for the year to dip 3.5% below 2012 levels, even after an ongoing reorganization that has included acquisitions. Previous guidance predicted revenue would decline 1% to 2% in 2013 compared to the previous year. For shareholders, that means earnings per share will likely hit between $3.85 to $3.95, versus $4.35 to $4.50 per share predicted in previous guidance.

Also disappointing: Quest said its cash provided by operations will hit $850 million for 2013. That's not chump change by any means, but executives had previously predicted that level would come close to $1 billion.

What happened?

Steve Rusckowski, Quest's president and CEO, largely blamed healthcare utilization and reimbursement. In a statement, he tried to put a positive spin on things but also take ownership of the results.

"We are disappointed with our third quarter performance, particularly after generating revenues early in the period that were in line with our expectations, he said. "Healthcare utilization and reimbursement continue to be a headwind for our industry, and our results reflect that. As we have said previously, 2013 is a building year that will position us well for 2014 and beyond. We remain focused on executing our five-point strategy."

For the quarter, net revenues hit $1.79 billion, down nearly 2% from more than $1.82 billion booked during the same period in 2012. Diagnostic information services revenue dropped 2.4%--alarming, considering this is Quest's main focus as it revamps. That said, recent acquisitions helped the company boost revenue in the division 2% during the quarter, year-over-year. Reported net income from continuing operations climbed to $403 million during the 2013 third quarter, up from $159 million booked over the same period a year ago.

Quest experienced some positive financial gains, in part from unloading its share of Johnson & Johnson's ($JNJ) cancer drug ibrutinib to Royalty Pharma for $485 million. Through 2013, Quest has also snatched up UMass Memorial Medical Center's clinical and anatomic pathology outreach laboratory business, Dignity Health's lab-related clinical outreach operations in California and Nevada, Humana/Concentra's toxicology and clinical laboratory business, and ConVerge Diagnostic Services, a Peabody, MA-based laboratory testing services-company with a large New England presence.

The company's ongoing "Invigorate" revamp strategy has included job cuts, business-unit reorganizations and new management. The goal: to overcome sluggish revenue and save $500 million this year. Additionally, Quest is focused on growing up to 2% annually through strategic acquisitions.

- read the release

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