Quest Diagnostics (DGX) reported second quarter fiscal 2010 earnings per share (EPS) of $1.07, beating the Zacks Consensus Estimate by a penny. The company had reported an EPS of $1.00 in the second quarter of fiscal 2009. Results for the previous quarter included benefits associated with an insurance recovery (5 cents), offset by charges related to debt repurchase and investment write-off (4 cents).

Revenues for the quarter declined 1.4% year over year to $1.9 billion, driven by a decline in physician office visits. However, the EPS improved over the year-ago period due to the 3.3% reduction in the number of outstanding shares.

Clinical testing revenues, which account for most of Quest’s sales, declined 1.6% compared to the prior year. While clinical testing (measured by the number of requisitions) volume during the quarter declined 1.3%, revenues per requisition were lower by 0.3% compared to the year-ago period.

Operating margin for the reported quarter improved to 19.5%, with an operating income of $365.9 million compared to 18.9% in the year-ago period, with an operating income of $359.3 million. The primary reason for the improvement in margin was the 6.5% reduction in selling, general and administrative expenses, which brought down operating expenses.

Quest Diagnostics exited the quarter with $447.9 million in cash and cash equivalents, down from $534.3 million at the end of December 2009. During the quarter, the company repurchased $175 million of its common shares and made capital expenditures of $49 million.

Based on weak revenues in the second quarter, Quest Diagnostics lowered its outlook for 2010. The company expects earnings from continuing operations in the range of $3.90 – $4.00, down from the earlier guidance of $4.00-$4.20. Moreover, revenues are expected to decline by 1% compared to the earlier projection of 1%–2% growth. Quest Diagnostics expects operating margin to be around 18% and $1.1 billion – $1.2 billion. In addition, the company expects to incur $200 million in capital expenditures.

Quest Diagnostics is confident about its long-term potential. The company continues to remain focused on gene-based and other esoteric testing, which are generally reimbursed at higher levels than routine tests. However, the macro environment concerns us and is negatively impacting testing volume.

We currently have a Neutral recommendation on the stock.
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