Dismal 4Q for Quest Diagnostics

Leading diagnostic testing company, Quest Diagnostics (DGX) reported earnings per share ("EPS") from continuing operations of 87 cents in the fourth quarter of 2012, down considerably from $1.16 in the year-ago period. However, after taking into account certain charges related to restructuring and integration (14 cents), adjusted EPS from continuing operations came in at $1.01, down 15.8% year over year. This does not exclude the impact of Hurricane Sandy that reduced the EPS by 6 cents.

The Zacks Consensus Estimate for the quarter’s EPS was $1.06. The year-ago quarter had incurred a cost of 2 cents per share each, related to restructuring and integration as well as CEO succession costs. For the full year, adjusted EPS from continuing operations was $4.36, down 2 cents from the year-ago adjusted figure and remained below the Zacks Consensus Estimate of $4.49.

Revenues from continuing operations for the fourth quarter were down 4.0% year over year to $1.77 billion, missing the Zacks Consensus Estimate of $1.82 billion. As announced earlier, the impact of Hurricane Sandy reduced the quarter’s revenues by an expected $21 million. Sales for fiscal 2012 remained at $7.4 billion, flat year over year as well as in line with the Zacks Consensus Estimate.

We believe that the overall soft industry trends leading to low volume growth was a dampener for the company. We expect this challenging scenario to adversely affect Quest Diagnostics’ peer Laboratory Corporation of America Holdings (LH) as well, which is scheduled to release its fourth-quarter and fiscal 2012 results on Feb 8, 2013.

Notably, earlier in Dec 2012, Quest Diagnostics sold its OralDNA Labs salivary-diagnostics business to Access Genetics and recently announced the plan to divest its HemoCue diagnostic products business. Accordingly, revenues from these two businesses are reported as discontinued operations in its fourth-quarter and fiscal 2012 results. The company believes that these divestitures will allow it to refocus its resources toward core diagnostic information services.

Among operating costs, cost of services during the reported quarter stood at $1.07 billion, flat year over year. Selling, general and administrative (SG&A) expenses dropped 4.5% to $421 million. Other operating income was $3.3 million, compared to expense of $0.2 million in the year-ago quarter. Adjusted operating margin in the quarter contracted 232 basis points (bps) to 15.98% on adjusted operating income of $283.5 million.

Quest Diagnostics exited the quarter with $295.