HemoCue is the leading international provider in near patient testing for hemoglobin, with a growing share in professional glucose and microalbumin testing. In addition, HemoCue is currently developing new tests including a near patient test to determine white blood cell counts. This acquisition complements our near patient testing for infectious disease and cancer, including new tests for colorectal cancer screening and herpes simplex type 2. The acquisition will increase our presence in the growing near patient testing market and leverage HemoCue’s international presence to reach new markets around the world.
On August 31, 2006, we completed the acquisition of Enterix Inc. (“Enterix”), a privately held Australia-based company that developed and manufactures the InSure™ Fecal Immunochemical Test, an FDA-cleared test for use in screening for colorectal cancer and other sources of lower gastrointestinal bleeding, for approximately $44 million in cash, as described in Note 2 to the interim consolidated financial statements.
On July 3, 2006, we completed the acquisition of Focus Technologies Holding Company (“Focus Diagnostics”) in an all-cash transaction valued at $208 million, including approximately $3 million of assumed debt. We financed the acquisition and related transaction costs and the repayment of substantially all of Focus Diagnostics’ outstanding debt with $135 million of borrowings under our secured receivables credit facility and with cash on-hand, as described in Note 2 to the interim consolidated financial statements.
Focus Diagnostics is a leading provider of infectious and immunologic disease testing and develops and markets diagnostic products. It offers its reference testing services and diagnostic products to large academic medical centers, hospitals and commercial laboratories.
Our clinical testing business currently represents our one reportable business segment. The clinical testing business accounted for greater than 90% of revenues from continuing operations in 2007 and 2006, respectively. Our other operating segments consist of our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. On April 19, 2006, we decided to discontinue the operations of a test kit manufacturing subsidiary, NID. During the third quarter of 2006, we completed our wind down of NID and classified the operations of NID as discontinued operations for all periods presented. Our business segment information is disclosed in Note 10 to the interim consolidated financial statements.
Income from continuing operations for the three months ended June 30, 2007 was $142 million, or $0.73 per diluted share, compared to $156 million, or $0.78 per diluted share, in 2006. Income from continuing operations for the six months ended June 30, 2007 was $249 million, or $1.28 per diluted share, compared to $311 million, or $1.55 per diluted share in 2006. These decreases in income from continuing operations were principally associated with our change in contract status with UNH.
Results for the three and six months ended June 30, 2007 include pre-tax charges of $3.5 million, or $0.01 per share, and $14.2 million, or $0.04 per share, respectively, associated with workforce reductions in response to reduced volume levels. Results for the six months ended June 30, 2007 include a pre-tax charge of $4.0 million, or $0.01 per share, related to in-process research and development expense associated with the HemoCue acquisition. In addition, results for the six months ended June 30, 2007 were unfavorably impacted by severe storms in the central part of the United States, which reduced revenues by approximately $13 million and operating income by approximately $10 million, or $0.03 per share.
Results for the six months ended June 30, 2006 include pre-tax charges of $27 million, or $0.08 per share, recorded in the first quarter primarily associated with integration activities. In addition, the year-to-date results for 2006 include pre-tax net gains of $4 million, or $0.01 per diluted share, consisting of a first quarter gain of $16 million, or $0.05 per diluted share, related to the sale of an investment partially offset by a second quarter loss of $12 million, or $0.04 per diluted share, related to the write-off of an investment.
Net Revenues
Net revenues for the three months ended June 30, 2007 were $1.6 billion, 3.7% above the prior year level. Net revenues for the six months ended June 30, 2007 were $3.2 billion, an increase of 1% over the prior year level. The acquisition of AmeriPath contributed 4.4% and 2.2% to revenue growth for the three and six months ended June 30, 2007, respectively. Our acquisitions of Focus Diagnostics, Enterix and HemoCue contributed about 2% to revenue growth for the three and six months ended June 30, 2007. The impact of our change in status with UNH reduced reported revenue growth by an estimated 4.4% and 4.6% for the three and six months ended June 30, 2007, respectively.
For the three months ended June 30, 2007, revenues in our clinical testing business, which accounts for over 90% of our total revenues, were 2.1% above the prior year level, with AmeriPath contributing 4.8% growth. Volume, measured by the number of requisitions, declined 6.0% for the three months ended June 30, 2007, primarily due to our change in status with UNH, partially offset by the impact of the AmeriPath acquisition, which increased volume by about 2%. Revenue per requisition increased 8.6% for the three months ended June 30, 2007 and was impacted by the results of AmeriPath, which contributed 3.1% to the improvement.
For the six months ended June 30, 2007, clinical testing revenues were one-half percent below the prior year level, and were favorably impacted by the acquisition of AmeriPath, which contributed growth of 2.4% . For the six months ended June 30, 2007, revenue per requisition improved 6.6% and was favorably impacted by the acquisition of AmeriPath, which contributed 1.6% to the improvement. Volume declined 6.6% for the six months ended June 30, 2007, primarily due to our change in status with UNH partially offset by the impact of the AmeriPath acquisition, which contributed 1% of volume growth.
We estimate that revenues declined approximately 4.4% and 4.6% during the three and six months ended June 30, 2007, respectively, due to our change in status with UNH, with volume reduced by an estimated 6.9% and 6.5% for the three and six months ended June 30, 2007, respectively. This decrease was partially offset by a positive impact to revenue per requisition estimated at 2.0% and 1.5% for the three and six months ended June 30, 2007, respectively, associated with higher reimbursement on the retained UNH work. Almost a one-half percent of the second quarter increase was associated with corrections UNH made to its reimbursement rates.
Our businesses other than clinical laboratory testing accounted for approximately 9% of our net revenues for the three and six months ended June 30, 2007. These businesses include our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. The revenues for these businesses as a group grew 22% and 19% for the three and six months ended June 30, 2007, respectively, as compared to the prior year periods, with the increase primarily driven by our acquisitions of HemoCue, Focus Diagnostics and Enterix.
Operating Costs and Expenses
Total operating costs and expenses for the three and six months ended June 30, 2007 increased $83 million and $114 million, respectively, from the prior year periods. While costs were reduced associated with lower volume levels and actions taken to reduce the size of our workforce, costs increased associated with annual compensation adjustments, increased expenditures to maintain and improve service levels, and costs associated with clarifying for patients, physicians and employers significant misinformation which had circulated about the UNH contract change. In addition, costs associated with the acquired operations of AmeriPath, Focus Diagnostics, Enterix and HemoCue increased costs by approximately $98 million and $125 million for the three and six months ended June 30, 2007, respectively. Results for the three months ended June 30, 2007 include $3.5 million of costs associated with workforce reductions ($2.5 million included in costs of services and $1.0 million in selling, general and administrative). Results for the six months ended June 30, 2007 include $14.2 million of
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costs associated with workforce reductions ($6.4 million included in costs of services and $7.8 million in selling, general and administrative) and $4.0 million of in-process research and development costs associated with the acquisition of HemoCue, which was recorded in other operating (income) expense, net.
For the six months ended June 30, 2006, $26.8 million in special charges are reflected in other operating (income) expense, net and relate principally to costs associated with integrating LabOne, which we acquired in November 2005, and consolidating our operations in California into our new facility in West Hills.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 59.0% of net revenues for the three months ended June 30, 2007, increasing from 58.5% of net revenues in the prior year period. For the six months ended June 30, 2007, cost of services as a percentage of net revenues, increased to 60.0% from 58.8% in the prior year period. The increases over the prior year are primarily due to lower volumes in our clinical testing business and costs associated with workforce reductions. Partially offsetting these increases were improvements related to the increase in average revenue per requisition and efficiency gains resulting from our Six Sigma, standardization and consolidation initiatives.
Selling, general and administrative expenses, which include the costs of the sales force, billing operations, bad debt expense, and general management and administrative support, were 24.1% of net revenues for the three months ended June 30, 2007, compared to 22.6% in the prior year period. For the six months ended June 30, 2007, selling, general and administrative expenses, as a percentage of net revenues increased to 24.6% from 22.5% in the prior year period. The increases over the prior year periods are primarily due to lower volume levels in our clinical testing business; increased billing and bad debt expense associated with having to bill patients for a portion of the retained UNH work; costs associated with workforce reductions; and costs associated with efforts to retain business and clarify for patients, physicians and employers misinformation regarding the UNH contract change.
For the three months ended June 30, 2007 and 2006, bad debt expense was 4.3% and 3.8% of net revenues, respectively. The higher bad debt rate was principally driven by AmeriPath, which contributed approximately 0.3% of the increase. AmeriPath carries a higher bad debt rate than the rest of our business, primarily due to its revenue and customer mix.
For the six months ended June 30, 2007 and 2006, bad debt expense was 4.4% and 3.9% of net revenues, respectively. The higher bad debt rate was principally driven by higher bad debt expense associated with billing patients directly for a portion of the UNH volume.
Other operating (income) expense, net represents miscellaneous income and expense items related to operating activities, including gains and losses associated with the disposal of operating assets and provisions for restructurings and other special charges. For the six months ended June 30, 2007, other operating (income) expense, net includes a $4.0 million charge related to in-process research and development expense recorded in connection with the acquisition of HemoCue.
For the six months ended June 30, 2006, other operating (income) expense, net includes a charge of $20.7 million associated with the integration of LabOne. In addition, other operating (income) expense, net for the six months ended June 30, 2006 includes a $4.1 million charge related to consolidating our operations in California into a new facility.
Operating Income
Operating income for the three months ended June 30, 2007 was $272 million, or 16.6% of net revenues, compared to $297 million, or 18.8% of net revenues, in the prior year period. For the six months ended June 30, 2007, operating income was $473 million, or 14.9% of net revenues, compared to $556 million, or 17.7% of net revenues in the prior year period. The decreases from the prior year periods are primarily due to lower volume levels in our clinical testing business, and the various items which served to increase costs of sales and selling, general and administrative costs as a percentage of revenues.
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Other Income (Expense)
Interest expense, net for the three and six months ended June 30, 2007 increased $17 million and $20 million, respectively, over the prior year periods. The increases were primarily due to additional interest expense associated with borrowings to fund acquisitions. See Note 5 to the interim consolidated financial statements for a discussion of our outstanding debt.
Other income (expense), net represents miscellaneous income and expense items related to non-operating activities such as gains and losses associated with investments and other non-operating assets. For the three and six months ended June 30, 2006, other income (expense), net includes a second quarter charge of $12.3 million associated with the write-down of an investment. For the six months ended June 30, 2006, other income (expense), net includes a first quarter gain of $15.8 million on the sale of an investment.
Discontinued Operations
Our discontinued operations are comprised of NID, a test kit manufacturing subsidiary. During the fourth quarter of 2005, NID instituted its second voluntary product hold within a six-month period, due to quality issues, which adversely impacted the operating performance of NID. As a result, we evaluated a number of strategic options for NID. On April 19, 2006, we decided to discontinue NID’s operations. During the third quarter of 2006, we completed the wind down of NID’s operations. Results of NID are reported as discontinued operations for all periods presented.
Loss from discontinued operations, net of tax, for the three months ended June 30, 2007 was $0.6 million, with no impact to diluted earnings per share, compared to $24 million, or $0.12 per diluted share in 2006. Loss from discontinued operations, net of tax, for the six months ended June 30, 2007 was $2.2 million, or $0.01 per diluted share, compared to $34 million, or $0.17 per diluted share in 2006. Results for the three and six months ended June 30, 2007 reflect expenses associated with the on-going government investigation of NID. Results for the three and six months ended June 30, 2006 reflect losses from NID’s operations, due to its voluntary product hold instituted late in the second quarter of 2005 in connection with a quality review of all its products and pre-tax charges of $28.3 million recorded in the second quarter of 2006, primarily related to the wind-down of NID’s operations. These charges included: inventory write-offs of $7.4 million; asset impairment charges of $4.6 million; employee severance costs of $5.3 million; contract termination costs of $6.0 million; and costs to support activities to wind-down the business, comprised primarily of employee costs and professional fees of $5.0 million.
The government continues to investigate NID. Any costs resulting from this review will be included in discontinued operations. While we do not believe that these matters will have a material adverse impact on our overall financial condition, their final resolution could be material to our results of operations or cash flows in the period in which the impact of such matters is determined or paid. See Note 6 to the interim consolidated financial statements for a further description of these matters.
Quantitative and Qualitative Disclosures About Market Risk
We address our exposure to market risks, principally the market risk of changes in interest rates, through a controlled program of risk management that may include the use of derivative financial instruments. We do not hold or issue derivative financial instruments for trading purposes. We do not believe that our foreign exchange exposure is material to our financial condition or results of operations. See Note 2 to the Consolidated Financial Statements in our 2006 Annual Report on Form 10-K for additional discussion of our financial instruments and hedging activities.
At June 30, 2007 and December 31, 2006, the fair value of our debt was estimated at approximately $3.9 billion and $1.6 billion, respectively, using quoted market prices and yields for the same or similar types of borrowings, taking into account the underlying terms of the debt instruments. At June 30, 2007, the carrying value exceeded the estimated fair value of the debt by approximately $8.2 million. At December 31, 2006, the estimated fair value exceeded the carrying value of the debt by approximately $0.4 million. A hypothetical 10% increase in interest rates (representing approximately 61 and 59 basis points at June 30, 2007 and December 31, 2006,
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respectively) would potentially reduce the estimated fair value of our debt by approximately $84 million and $33 million at June 30, 2007 and December 31, 2006, respectively.
Borrowings under our senior unsecured revolving credit facility, our secured receivables credit facility, our term loan due December 2008 and our term loan due May 2012 are subject to variable interest rates. Interest on our secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly-rated issuers. Interest rates on our senior unsecured revolving credit facility, term loan due December 2008 and term loan due May 2012 are subject to a pricing schedule that can fluctuate based on changes in our credit ratings. As such, our borrowing cost under these credit arrangements will be subject to both fluctuations in interest rates and changes in our credit ratings. As of June 30, 2007, the borrowing rate under these credit facilities were: for our senior unsecured credit facility, the borrowing rate was LIBOR plus 0.40%; for our term loan due December 2008, the borrowing rate was LIBOR plus 0.55%; and for our term loan due May 2012, the borrowing rate was LIBOR plus 0.50% . At June 30, 2007, the LIBOR rate was 5.32% . At June 30, 2007, there was $1.5 billion outstanding under our term loan due May 2012, $60 million outstanding under our term loan due December 2008, $350 million outstanding under our secured receivables credit facility and no borrowings outstanding under our $750 million senior unsecured revolving credit facility. Based on our net exposure to interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing approximately 53 basis points) would impact annual net interest expense by approximately $10 million, assuming no changes to the debt outstanding at June 30, 2007. For details regarding our outstanding debt, see Note 5 to the interim consolidated financial statements included in this report and Note 10 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.
Risk Associated with Investment Portfolio
Our investment portfolio includes equity investments in publicly held companies that are classified as available-for-sale securities and other strategic equity holdings in privately held companies. These securities are exposed to price fluctuations and are generally concentrated in the life sciences industry. The carrying values of our available-for-sale equity securities and privately held securities were $26.7 million at June 30, 2007.
We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings in privately held companies cannot be easily quantified, as our ability to realize returns on investments depends on, among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity events such as initial public offerings, mergers or private sales.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2007 totaled $122 million compared to $150 million at December 31, 2006. Cash flows from operating activities in 2007 were $280 million, which together with cash flows from financing activities of $1.3 billion and cash on-hand, were used to fund investing activities of $1.6 billion. Cash and cash equivalents at June 30, 2006 totaled $151 million, compared to $92 million at December 31, 2005. Cash flows from operating activities in 2006 were $411 million, which were used to fund investing and financing activities of $76 million and $277 million, respectively.
Cash Flows from Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2007 was $280 million compared to $411 million in the prior year period. This decrease was primarily due to lower earnings in the current year and increased payments associated with variable compensation earned in the prior year coupled with a decrease in accounts payable and accrued expense. In addition, cash flow from operating activities for the six months ended June 30, 2007 was reduced by $57 million of fees and other expenses paid in connection with the acquisition of AmeriPath. Days sales outstanding, a measure of billing and collection efficiency, were 51 days at June 30, 2007 compared to 47 days at March 31, 2007 and 48 days at December 31, 2006. Substantially all of the increase in days sales outstanding is related to the impact of AmeriPath. We expect AmeriPath’s impact on our days sales outstanding to decrease to approximately 2 days by year-end and less than that over time.
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Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2007 was $1.6 billion, consisting principally of $1.2 billion related to the acquisition of AmeriPath, $307 million related to the acquisition of HemoCue and capital expenditures of $89 million.
Net cash used in investing activities for the six months ended June 30, 2006 was $76 million, consisting of capital expenditures of $88 million, partially offset by $16 million in proceeds received in connection with the sale of an investment during the first quarter of 2006.
Cash Flows from Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2007 was $1.3 billion, primarily associated with new borrowings and repayments related to the acquisitions of AmeriPath and HemoCue.
During the first quarter of 2007, we entered into an interim credit facility (the “Interim Credit Facility”) and borrowed $450 million to finance the acquisition of HemoCue and to repay substantially all of HemoCue’s outstanding debt.
During the second quarter of 2007, we borrowed $1.6 billion under a new five-year term loan facility and $780 million under a new bridge loan facility to finance the acquisition of AmeriPath and repay the interim credit facility used to finance the HemoCue acquisition.
In connection with the acquisition of AmeriPath, we repaid substantially all of AmeriPath’s outstanding debt and related accrued interest. On May 21, 2007, we commenced a cash tender offer and consent solicitation for the $350 million 10.5% Senior Subordinated Notes of AmeriPath, Inc. due 2013 (“the AmeriPath subordinated senior notes”). In conjunction with the cash tender offer, approximately $348 million in aggregate principal amount, or 99.4% of the $350 million of outstanding senior subordinated notes, was tendered. We made payments of $386 million to holders with respect to the cash tender offer and consent solicitation, including tender premium and related solicitation fees and accrued interest.
We completed an $800 million senior notes offering in June 2007 (the “2007 Senior Notes”). The 2007 Senior Notes were sold in two tranches: (a) $375 million of 6.40% senior notes due 2017 and (b) $425 million of 6.95% senior notes due 2037. We used the net proceeds from the 2007 Senior Notes offering together with cash on hand, to repay the $780 million of borrowings under the bridge loan facility. The 2007 Senior Notes do not have a sinking fund requirement and are fully and unconditionally guaranteed on a senior, unsecured basis, by certain of the Company's domestic, wholly owned subsidiaries. The 2007 Senior Notes, term loans and the bridge loan are further described in Note 5 to the interim consolidated financial statements.
During the second quarter of 2007, we also borrowed $50 million under our secured receivables credit facility which together with cash on-hand, was used to repay $90 million of borrowings outstanding under the new $1.6 billion five-year term loan.
Net cash provided by financing activities for the six months ended June 30, 2007, also included $33 million in proceeds from the exercise of stock options, including related tax benefits, offset by purchases of treasury stock totaling $105 million and dividend payments of $39 million. The $105 million of treasury stock represents 2.1 million shares of our common stock purchased at an average price of $50.98 per share.
Net cash used in financing activities for the six months ended June 30, 2006 was $277 million, consisting primarily of purchases of treasury stock totaling $254 million, repayment of $60 million of principal outstanding under our secured receivables credit facility and dividend payments of $38 million, partially offset by $99 million in proceeds from the exercise of stock options, including related tax benefits. The $254 million in treasury stock purchases represents 4.6 million shares of our common stock purchased at an average price of $55.13 per share.
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Dividend Program
During each of the quarters of 2007 and 2006, our Board of Directors declared a quarterly cash dividend of $0.10 per common share. On May 8, 2007, our Board of Directors declared a quarterly cash dividend per common share of $0.10, payable on July 18, 2007. We expect to fund future dividend payments with cash flows from operations, and do not expect the dividend to have a material impact on our ability to finance future growth.
Share Repurchase Plan
For the six months ended June 30, 2007, we repurchased 2.1 million shares of our common stock at an average price of $50.98 per share for $105 million. Through June 30, 2007, we have repurchased approximately 43.4 million shares of our common stock at an average price of $45.18 for $2.0 billion under our share repurchase program. At June 30, 2007, the total available for repurchases under the remaining authorizations was $145 million.
Contractual Obligations and Commitments
The following table summarizes certain of our contractual obligations as of June 30, 2007.
| | | Payments due by period |
| | | (in thousands) |
| | | | | | | Remainder | | | | | | | | | |
| Contractual Obligations | | Total | | | of 2007 | | 1-3 years | | 3 –5 years | | After 5 years |
| |
| Long-term debt | | $ | 3,530,734 | | $ | - | | $ | 198,580 | | $ | 1,474,057 | | $ | 1,858,097 |
| Capital lease obligations | | | 14,309 | | | - | | | 349 | | | 551 | | | 13,409 |
| Interest payments on long-term debt | | | 1,895,417 | | | 107,649 | | | 423,130 | | | 352,818 | | | 1,011,820 |
| Operating leases | | 789,933 | | | 102,955 | | | 286,633 | | | 168,699 | | | 231,646 |
| Purchase obligations | | 88,060 | | | 17,641 | | | 45,721 | | | 18,354 | | | 6,344 |
| Total contractual obligations | | $ | 6,318,453 | | $ | 228,245 | | $ | 954,413 | | $ | 2,014,479 | | $ | 3,121,316 |
During the three months ended June 30, 2007, we undertook several actions to restructure our debt facilities including the issuance of senior notes, obtaining new commercial bank loans and extinguishing other debt obligations. Interest payments on our long-term debt, of which approximately $1.6 billion is subject to variable interest rates, have been estimated using the interest rates as of June 30, 2007.
A full description of the terms of our indebtedness and related debt service requirements and our future payments under certain of our contractual obligations is contained in Note 10 to the Consolidated Financial Statements in our 2006 Annual Report on Form 10-K. A full discussion and analysis regarding our minimum rental commitments under noncancelable operating leases and noncancelable commitments to purchase products or services at December 31, 2006 is contained in Note 14 to the Consolidated Financial Statements in our 2006 Annual Report on Form 10-K. See Note 5 to the interim consolidated financial statements for an update on our indebtedness and related debt service requirements. See Note 6 to the interim consolidated financial statements for information regarding the status of legal matters involving the Company.
On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. As of June 30, 2007, our total liabilities for unrecognized tax benefits were $87 million. We cannot make reasonably reliable estimates of the timing of the future payments of these liabilities. Therefore, these liabilities have been excluded from the table above. See Note 1 to the interim consolidated financial statements for information regarding our contingent tax liability reserves.
Unconsolidated Joint Ventures
We have investments in unconsolidated joint ventures in Phoenix, Arizona; Indianapolis, Indiana; and Dayton, Ohio, which are accounted for under the equity method of accounting. We believe that our transactions with
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our joint ventures are conducted at arm’s length, reflecting current market conditions and pricing. Total net revenues of our unconsolidated joint ventures equal less than 6% of our consolidated net revenues. Total assets associated with our unconsolidated joint ventures are less than 2% of our consolidated total assets. We have no material unconditional obligations or guarantees to, or in support of, our unconsolidated joint ventures and their operations.
Requirements and Capital Resources
We estimate that we will invest between $210 and $220 million during 2007 for capital expenditures to support and expand our existing operations, principally related to investments in information technology, equipment, and facility upgrades.
In May 2007, we entered into a $750 million senior unsecured revolving credit facility, which matures in May 2012 and replaces our $500 million senior unsecured revolving credit. The senior unsecured revolving credit facility is guaranteed by certain of our domestic, wholly-owned subsidiaries. As of June 30, 2007 we had no borrowings outstanding on this credit facility.
In May 2007, we also increased our existing receivables securitization facility from $300 million to $375 million. This facility matures on May 23, 2008. As of June 30, 2007, we had $350 million outstanding on this credit facility.
As of June 30, 2007, $775 million of borrowing capacity was available under our existing credit facilities.
We believe that cash from operations and our borrowing capacity under our credit facilities will provide sufficient financial flexibility to meet seasonal working capital requirements and to fund capital expenditures, debt service requirements, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future. We believe that our credit profile should provide us with access to additional financing, if necessary, to fund growth opportunities that cannot be funded from existing sources.
Forward-Looking Statements
Some statements and disclosures in this document are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may”, “believe”, “will”, “expect”, “project”, “estimate”, “anticipate”, “plan” or “continue”. These forward-looking statements are based on our current plans and expectations and are subject to a number of risks and uncertainties that could significantly cause our plans and expectations, including actual results, to differ materially from the forward-looking statements. The Private Securities Litigation Reform Act of 1995, or the Litigation Reform Act, provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation.
We would like to take advantage of the “safe harbor” provisions of the Litigation Reform Act in connection with the forward-looking statements included in this document. The risks and other factors that could cause our actual financial results to differ materially from those projected, forecasted or estimated by us in forward-looking statements may include, but are not limited to, unanticipated expenditures, changing relationships with customers, payers, suppliers and strategic partners, competitive environment, changes in government regulations, conditions of the economy and other factors described in our 2006 Annual Report on Form 10-K and subsequent filings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Item 4. Controls and Procedures
| | a. | Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. |
| | | |
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| | | Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective. |
| |
| | b. | On May 31, 2007, the Company completed the acquisition of AmeriPath. AmeriPath disclosed two “material weaknesses” in internal controls over financial reporting in its 2006 Form 10-K and first quarter 2007 Form 10-Q. The material weaknesses relate to the following: (i) the adequacy of general controls relating to certain AmeriPath information technology systems, and (ii) the adequacy of the support and analysis for accounts receivable allowances. Subsequent to the acquisition of AmeriPath, the Company has revised certain of AmeriPath’s controls, and has implemented oversight procedures related to accounts receivable allowances and general controls in its information technology systems. These changes have been designed to ensure adherence with the Company’s overall methodology, supervision and monitoring processes related to internal control over financial reporting. After giving consideration to the control weaknesses identified at Ameripath, management believes that the financial statements included in the Form 10-Q present fairly in all material respects the Company’s consolidated financial condition, results of operations and cash flows for the periods presented. During the second quarter of 2007, there have been no other changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting. |
| |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to the interim consolidated financial statements for information regarding the status of legal proceedings involving the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
| |
| | | | | | | | | (d) Approximate Dollar |
| | | (a) Total | | | | (c) Total Number of | | Value of Shares that May |
| | | Number of | | (b) Average | | Shares Purchased as Part | | Yet Be Purchased Under the |
| | | Shares | | Price Paid per | | of Publicly Announced | | Plans or Programs |
| Period | | Purchased | | Share | | Plans or Programs | | (in thousands) |
| April 1, 2007 – | | | | | | | | |
| April 30, 2007 | | - | | - | | - | | $144,699 |
| May 1, 2007 – | | | | | | | | |
| May 31, 2007 | | - | | - | | - | | $144,699 |
| June 1, 2007 - | | | | | | | | |
| June 30, 2007 | | - | | - | | - | | $144,699 |
| Total | | - | | - | | - | | $144,699 |
In 2003, our Board of Directors authorized a share repurchase program, which permitted us to purchase up to $600 million of our common stock. In July 2004, our Board of Directors authorized us to purchase up to an additional $300 million of our common stock. Under a separate authorization from our Board of Directors, in December 2004 we repurchased 5.4 million shares of our common stock for approximately $254 million from GlaxoSmithKline plc. In January 2005, our Board of Directors expanded the share repurchase authorization by an additional $350 million. In January 2006, our Board of Directors expanded the share repurchase authorization by an additional $600 million.
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Item 4. Submission of Matters to a Vote of Security Holders
| | (a) | The Annual Meeting of Shareholders of the Company was held on May 8, 2007. At the meeting, the matters described below were approved by the shareholders. |
| | | |
| | (b) | The following nominees for the office of director were elected for terms expiring at the 2010 Annual Meeting of Shareholders, by the following votes: |
| | | | | | | | |
| | | | | For | | Withheld | |
| | | Dr. John C. Baldwin | | 171,178,503 | | 3,379,308 | |
| | | Surya N. Mohapatra, Ph.D. | | 167,535,007 | | 7,022,804 | |
| | | Mr. Gary M. Pfeiffer | | 170,986,821 | | 3,570,990 | |
| | | | | | | | |
| | | | The following persons continue as directors:
Jenne K. Britell, Ph. D.
Mr. William F. Buehler
Ms. Rosanne Haggerty
Daniel C. Stanzione, Ph.D.
Gail R. Wilensky, Ph.D.
Mr. John B. Ziegler | |
| | | | | | | | | |
| | (c) | The ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm to audit the financial statements of the Company and its subsidiaries for the fiscal year ending December 31, 2007, was approved by the following number of shareholder votes for, against, and abstained: |
| |
| | | For: 170,542,286 Against: 2,999,737 Abstained: 1,015,784 |
Item 6. Exhibits
| | Exhibits: |
| | |
| | 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
40
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
July 31, 2007
Quest Diagnostics Incorporated
By/s/ Surya N. Mohapatra
Surya N. Mohapatra, Ph.D.
Chairman, President and
Chief Executive Officer
By/s/ Robert A. Hagemann
Robert A. Hagemann
Senior Vice President and
Chief Financial Officer
41
