Our clinical testing business currently represents our one reportable business segment. The clinical testing business accounted for more than 90% of net revenues from continuing operations in both 2008 and 2007. 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. Our business segment information is disclosed in Note 9 to the interim consolidated financial statements.
Income from continuing operations for the three months ended September 30, 2008 was $160 million, or $0.81 per diluted share, compared to $150 million, or $0.77 per diluted share, in 2007. Income from continuing operations for the nine months ended September 30, 2008 was $463 million, or $2.36 per diluted share, compared to $400 million, or $2.05 per diluted share, in 2007. These increases in income from continuing operations were principally driven by revenue growth and actions we have taken to reduce our cost structure.
Results for the three and nine months ended September 30, 2008 include a reduction to operating income estimated at approximately $8 million, or $0.02 per diluted share associated with the impact of hurricanes in the third quarter, and a third quarter charge of $8.9 million, or $0.03 per diluted share, associated with the write-down of an equity investment. In addition, the favorable resolution of certain tax contingencies increased diluted earnings per share by $0.01 for the nine months ended September 30, 2008.
During the first quarter of 2007, the Company became a non-contracted provider to United Healthcare Group Inc., (“UNH”). As a result of the change in status, the Company’s revenues and earnings were significantly impacted for the first quarter and full year 2007. However, the ongoing profit impact was successfully mitigated by the end of 2007 as a result of actions taken to reduce costs, and higher reimbursement for the testing we continued to perform for UNH members as a non-contracted provider.
Net revenues for the three months ended September 30, 2008 grew by 3.4% over the prior year level to $1.8 billion. Net revenues for the nine months ended September 30, 2008 were $5.4 billion, 10.4% above the prior year level. The acquisition of AmeriPath, which was completed on May 31, 2007, contributed approximately 6.8% to revenue growth for the nine months ended September 30, 2008. We estimate that the impact of hurricanes in the third quarter of 2008 reduced consolidated revenue growth for the three and nine months ended September 30, 2008 by approximately 0.5% and 0.2%, respectively. While the UNH contract change took effect as of January 1, 2007, much of the loss of volume and change in revenues took place over the course of the first quarter last year. Therefore, there continues to be a carry-over impact in comparing the nine months ended September 30, 2008 volume and revenues to that of the prior year. We estimate that the carry-over impact of our change in status with UNH reduced 2008 revenue growth for the nine months ended September 30, 2008 by less than 1%.
Our clinical testing business, which accounts for over 90% of our net revenues, grew 3.0% above the prior year level for the three months ended September 30, 2008. Volume, measured by the number of requisitions, increased 0.7% for the three months ended September 30, 2008. We estimate that the impact of the hurricanes in the third quarter of 2008 reduced volume growth for the quarter by approximately 0.5% . After adjusting for the impact of the hurricanes, we estimate the underlying volume growth to be about 1.3%. This is despite an almost 10% decline in pre-employment drug testing volume which accounted for
approximately 7% of our total volume. We believe the volume decrease in pre-employment drug testing is principally due to slower hiring by the employers served by this business. Revenue per requisition increased 2.3% for the three months ended September 30, 2008, primarily driven by a positive test mix, partially offset by price reductions on various health plan contracts.
For the nine months ended September 30, 2008, clinical testing revenues grew 10.5% above the prior year level, with AmeriPath contributing 7.3% growth. Volume, measured by the number of requisitions, increased 3.7%, primarily due to the impact of the AmeriPath acquisition, which contributed about 3.2% volume growth. We estimate that the impact of our change in status with UNH and the hurricanes reduced volume growth by approximately 1% and 0.2%, respectively, for the nine months ended September 30, 2008. After adjusting for the impact of the UNH contract change and the hurricanes, results for the nine months ended September 30, 2008 reflect underlying volume growth of between one and two percent. Revenue per requisition increased 6.5% for the nine months ended September 30, 2008 and was impacted by the results of AmeriPath, which contributed 4.0% to the improvement. The balance of the increase was primarily driven by a positive test mix, partially offset by price reductions on various health plan contracts.
�� Our businesses other than clinical testing accounted for approximately 9% of our net revenues for the three and nine months ended September 30, 2008. 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 7% and 10% for the three and nine months ended September 30, 2008, respectively, with the increase primarily driven by a strong performance of our healthcare information technology and point-of-care businesses during the third quarter of 2008 and our healthcare information technology, point-of-care and clinical trials testing businesses for the nine months ended September 30, 2008.
Operating Costs and Expenses
Total operating costs and expenses for the three and nine months ended September 30, 2008 increased $49 million and $389 million, respectively, from the prior year periods. For the three and nine months ended September 30, 2008, operating costs increased as a result of higher costs associated with annual compensation adjustments. In addition, operating costs for the nine months ended September 30, 2008 increased primarily due to costs associated with the acquired operations of AmeriPath. These increases were partially offset by actions taken to improve our operating efficiency and reduce the size of our workforce as part of our cost reduction program announced in 2007.
Results for the nine months ended September 30, 2007 reflect first quarter costs of $10.7 million associated with workforce reductions ($3.9 million included in cost of services and $6.8 million included in selling, general and administrative), $4 million of in-process research and development costs associated with the acquisition of HemoCue, which was recorded in “other operating (income) expense, net”, and costs associated with efforts to retain business and clarify for patients, physicians and employers misinformation regarding the UNH contract change.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 58.7% of net revenues for the three months ended September 30, 2008, compared to 58.1% of net revenues in the prior year period. The majority of the increase over the prior year is due to the impact of hurricanes which adversely impacted our operations during the third quarter of 2008. For the nine months ended September 30, 2008, cost of services, as a percentage of net revenues, was 59.0%, compared to 59.3% in the prior year period. The improvement over the prior year for the nine months ended September 30, 2008 reflects actions taken to reduce our cost structure and higher revenue per requisition.
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 23.4% of net revenues for the three months ended September 30, 2008, compared to 24.0% in the prior year period. For the nine months ended September 30, 2008, selling, general and administrative expenses, as a percentage of net revenues, decreased to 23.9% from 24.4% in the prior year period. These improvements were primarily due to actions taken to reduce our cost structure and higher revenue per requisition, and for the nine months ended September 30, 2008, partially offset by the impact of the acquired operations of AmeriPath. In addition, selling, general and administrative expenses for the nine months ended September 30, 2007 included first quarter costs associated with
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efforts to retain business and clarify for patients, physicians and employers misinformation regarding the UNH contract change.
For the three months ended September 30, 2008 and 2007, bad debt expense was 4.4% and 4.8% of net revenues, respectively. For the nine months ended September 30, 2008, bad debt expense was 4.6% compared to 4.5% of net revenues in 2007. The inclusion of AmeriPath, which carries a higher bad debt rate than the rest of our business, primarily due to its revenue and customer mix, increased the consolidated bad debt rate by approximately half a percent for the nine months ended September 30, 2008. We continue to make progress in our billing and collection processes, resulting in improvements in bad debt, days sales outstanding and the cost of our billing operation. With our disciplined approach, we expect to see continued strong performance in our billing and collection metrics, despite a slowing economy.
Amortization of intangible assets was $8.8 million for the three months ended September 30, 2008, similar to the prior year period. Amortization of intangible assets for the nine months ended September 30, 2008 increased $9.2 million over the prior year period. This increase was primarily due to the amortization of intangible assets acquired in conjunction with the acquisition of AmeriPath.
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 nine months ended September 30, 2007, other operating (income) expense, net includes a $4.0 million first quarter charge related to in-process research and development expense recorded in connection with the acquisition of HemoCue.
Operating Income
Operating income for the three months ended September 30, 2008 was $317 million, or 17.4% of net revenues, compared to $306 million, or 17.3% of net revenues, in the prior year period. For the nine months ended September 30, 2008, operating income was $905 million, or 16.6% of net revenues, compared to $779 million, or 15.8% of net revenues in the prior year period. The increases in operating income, as a percentage of net revenues, were primarily due to actions we have taken to reduce our cost structure, and for the nine months ended September 30, 2008, were partially offset by the impact of the acquired operations of AmeriPath. Results for the three and nine months ended September 30, 2008 include a reduction to operating income estimated at approximately $8 million associated with the impact of hurricanes in the third quarter. In addition, the operating income percentage for the three and nine months ended September 30, 2008, reflects the impact of the various items which impacted cost of services and selling, general and administrative expenses as a percentage of net revenues.
Other Income (Expense)
Interest expense, net for the three months ended September 30, 2008 decreased by $15.6 million over the prior year period, reflecting lower outstanding debt levels during the third quarter of 2008, primarily as a result of debt repayments. For the nine months ended September 30, 2008, interest expense, net increased by $11.8 million. This increase was primarily due to additional interest expense associated with borrowings used to fund the acquisition of AmeriPath.
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 nine months ended September 30, 2008, other income (expense), net includes a third quarter charge of $8.9 million associated with the write-down of an equity investment.
Income Tax Expense
The effective income tax rate for the three and nine months ended September 30, 2008 decreased 0.6% and 0.5%, respectively, compared to the prior year periods. These decreases were primarily due to the favorable resolution of certain tax contingencies.
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Discontinued Operations
During the third quarter of 2008, the Company and NID, a former test kit manufacturing subsidiary of the Company, reached an agreement in principle with the United States Attorney’s Office to settle the previously disclosed federal government investigation involving NID and the Company regarding NID test kits and tests performed using those test kits.
The agreement in principle provides for a comprehensive settlement of federal claims. As part of the agreement, NID, which was closed in 2006, is expected to enter a guilty plea to a single count of felony misbranding. The terms of the settlement are subject to the final negotiation and execution of definitive agreements, which may include a corporate integrity agreement, and the approval by the United States Department of Justice and the United States Department of Health and Human Services and satisfactory resolution of related state claims. There can be no assurance, however, when or whether a settlement may be finalized, or as to its terms. If a settlement is not finalized, the Company would defend itself and NID and could incur significant costs in doing so.
As a result of the agreement in principle, during the third quarter, the Company recorded a charge of $73 million in discontinued operations to increase its reserve for the settlement and related matters, bringing the total reserve to $314 million as of September 30, 2008. The Company has recorded deferred tax benefits of $57 million on the reserve, including $24 million recorded during the third quarter of 2008, reflecting the Company’s current estimate of the portion of the reserve expected to be deductible for tax purposes. The reserve reflects the Company’s current estimate of the expected probable loss with respect to these matters, assuming the settlement is finalized. If a settlement is not finalized, the eventual losses related to these matters could be materially different than the amount reserved and could be material to the Company’s results of operations, cash flows and financial condition in the period that such matters are determined or paid.
Loss from discontinued operations, net of taxes, for the three months ended September 30, 2008 was $49 million, or $0.25 per diluted share, compared to $52 million, or $0.27 per diluted share in the prior year. Loss from discontinued operations, net of taxes, for the nine months ended September 30, 2008 was $51 million, or $0.26 per diluted share, compared to $55 million, or $0.28 per diluted share in the prior year. Results for the three and nine months ended September 30, 2008 and 2007 reflect charges of $73 million and $51 million, respectively, to reserve for the settlement and related matters in connection with various government claims, which is more fully described in Notes 6 and 8 to the interim consolidated financial statements.
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 11 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K for additional discussion of our financial instruments and hedging activities.
At September 30, 2008 and December 31, 2007, the fair value of our debt was estimated at $3.1 billion and $3.6 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 September 30, 2008, the carrying value exceeded the estimated fair value of the debt by $42.8 million and at December 31, 2007, the estimated fair value exceeded the carrying value of the debt by $59.1 million. A hypothetical 10% increase in interest rates on our total debt portfolio (representing approximately 57 and 61 basis points at September 30, 2008 and December 31, 2007, respectively) would potentially reduce the estimated fair value of our debt by approximately $75 million and $78 million at September 30, 2008 and December 31, 2007, 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
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interest rates and changes in our credit ratings. As of September 30, 2008, the borrowing rates under these credit facilities were: for our secured receivables credit facility, 0.33%; for our senior unsecured credit facility, LIBOR plus 0.40%; for our term loan due December 2008, LIBOR plus 0.55%; and for our term loan due May 2012, LIBOR plus 0.50% . At September 30, 2008, the LIBOR rate was 3.93% . At September 30, 2008, there was $1.1 billion outstanding under our term loan due May 2012, $45 million outstanding under our term loan due December 2008, and no borrowings outstanding under our secured receivables credit facility and our $750 million senior unsecured revolving credit facility.
We have entered into various variable-to-fixed interest rate swap agreements, whereby we fixed the interest rates on $500 million of our term loan due May 2012 for periods through October 2009. The fixed interest rates range from 5.095% to 5.267% . Based on our net exposure to interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing approximately 35 basis points) would impact annual net interest expense by approximately $2.3 million, assuming no changes to the debt outstanding at September 30, 2008.
The fair value of the interest rate swap agreements at September 30, 2008 was a liability of $5.3 million. A hypothetical 10% decrease in interest rates (representing approximately 34 basis points) would potentially increase the fair value of the liability of these instruments by approximately $1 million. A hypothetical 10% increase in interest rates would potentially decrease the fair value of the liability of these instruments by approximately $1 million. For details regarding our outstanding debt and our financial instruments, see Notes 10 and 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 and Note 7 to the interim consolidated financial statements.
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 value of our available-for-sale equity securities and privately held securities was $14 million at September 30, 2008.
We regularly evaluate the fair value measurements of our equity investments to determine if losses in value are other than temporary and if an impairment loss has been incurred. The evaluation considers if the security has the ability to recover and, if so, the estimated recovery period. Other factors that are considered in this evaluation include the amount of the other-than-temporary decline and its duration, the issuer’s financial condition and short-term prospects and whether the market decline was caused by overall economic conditions or conditions specific to the individual security.
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.
Fair Value Measurements
On January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). Adoption of this accounting standard did not have a material effect on our financial position, results of operations or cash flows. See Note 1 to the interim consolidated financial statements for further details.
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) became effective for the Company on January 1, 2008. As of January 1, 2008 and for the period ended September 30, 2008, the Company has elected not to apply the fair value option to any of its financial assets or financial liabilities on-hand because the Company does not believe that application of SFAS 159’s fair value option is appropriate given the nature of its business operations. See Note 1 to the interim consolidated financial statements for further details.
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Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2008 totaled $287 million compared to $168 million at December 31, 2007. Cash and cash equivalents consist of highly liquid short-term investments, including time deposits with highly-rated banks, and various insured money market funds, including those that invest in U.S. Treasury securities. The Company has not suffered any losses associated with its cash and cash equivalents. Cash flows from operating activities in 2008 were $700 million, which were used to fund investing and financing activities of $116 million and $465 million, respectively. Cash and cash equivalents at September 30, 2007 totaled $165 million, compared to $150 million at December 31, 2006. Cash flows from operating activities in 2007 were $572 million, which together with cash flows from financing activities of $1.1 billion, were used to fund investing activities of $1.7 billion.
Cash Flows from Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2008 was $700 million compared to $572 million in the prior year period. This increase was principally due to higher earnings in the current year, a smaller increase in accounts receivable, and a smaller decrease in accounts payable and accrued expenses. Net cash provided by operating activities for the nine months ended September 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 45 days at September 30, 2008 compared to 48 days at December 31, 2007.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2008 was $116 million, consisting principally of capital expenditures of $140 million, partially offset by $23 million related to the receipt of a payment from an escrow fund established at the time of the acquisition of HemoCue.
Net cash used in investing activities for the nine months ended September 30, 2007 was $1.7 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 $143 million.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2008 was $465 million, consisting primarily of net reductions of debt of $413 million. Debt repayments of $435 million, consisting primarily of the repayment of $120 million on our secured receivables credit facility, $15 million on our term loan due December 31, 2008 and $293 million on our term loan due May 31, 2012, were partially offset by borrowings of $20 million on our secured receivables credit facility. In addition, cash flows from financing activities included $30 million in proceeds from the exercise of stock options, including related tax benefits, offset by dividend payments of $58 million.
Since the completion of the AmeriPath acquisition in May 2007, we have reduced our total debt by $831million.
Net cash provided by financing activities for the nine months ended September 30, 2007 was $1.1 billion, primarily associated with new borrowings and repayments related to the acquisitions of AmeriPath and HemoCue. Net cash provided by financing activities in 2007 also included $81 million in proceeds from the exercise of stock options, including related tax benefits, offset by purchases of treasury stock totaling $146 million and dividend payments of $58 million. The $146 million of treasury stock purchases represents 2.8 million shares of our common stock purchased at an average price of $52.14 per share.
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Dividend Program
During each of the quarters of 2008 and 2007, our Board of Directors declared a quarterly cash dividend of $0.10 per common share. On August 5, 2008, our Board of Directors declared a quarterly cash dividend per common share of $0.10, paid on October 20, 2008. 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
We did not purchase any shares of our common stock during the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the Company repurchased 2.8 million shares of its common stock at an average price of $52.14 per share for $146 million. Through September 30, 2008, we have repurchased approximately 44.1 million shares of our common stock at an average price of $45.35 for $2 billion under our share repurchase program. At September 30, 2008, the total available for repurchases under the remaining authorizations was $104 million.
Contractual Obligations and Commitments
The following table summarizes certain of our contractual obligations as of September 30, 2008:
| | | | Payments due by period |
| | | | (in thousands) |
| | | | | | | Remainder | | | | | | | | | |
| Contractual Obligations | | | Total | | | of 2008 | | | 1-3 years | | | 3-5 years | | | After 5 years |
| |
| Long-term debt | | $ | 3,109,890 | | $ | 45,000 | | $ | 401,486 | | $ | 1,366,696 | | $ | 1,296,708 |
| Capital lease obligations | | | 18,450 | | | 336 | | | 2,420 | | | 2,289 | | | 13,405 |
| Interest payments on outstanding debt | | | 1,516,474 | | | 43,593 | | | 331,675 | | | 222,428 | | | 918,778 |
| Operating leases | | | 679,486 | | | 52,941 | | | 305,592 | | | 169,076 | | | 151,877 |
| Purchase obligations | | | 64,912 | | | 11,293 | | | 41,648 | | | 11,425 | | | 546 |
| Total contractual obligations | | $ | 5,389,212 | | $ | 153,163 | | $ | 1,082,821 | | $ | 1,771,914 | | $ | 2,381,314 |
Interest payments on our long-term debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of September 30, 2008 applied to the September 30, 2008 balances, which are assumed to remain outstanding through their maturity dates.
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 2007 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, 2007 is contained in Note 15 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K. Also refer to Note 7 to the interim consolidated financial statements for an update of our indebtedness.
As of September 30, 2008, our total liabilities for unrecognized tax benefits were approximately $86 million, which were excluded from the table above. Based upon the expiration of statutes of limitations, settlements and/or the conclusion of tax examinations, we believe it is reasonably possible that this amount may decrease by up to $47 million within the next twelve months. For the remainder, we cannot make reasonably reliable estimates of the timing of the future payments of these liabilities. See Note 5 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K for information regarding our contingent tax liability reserves.
Our credit agreements relating to our senior unsecured revolving credit facility, our term loan due December 2008 and our term loan due May 2012 contain various covenants and conditions, including the maintenance of certain financial ratios, that could impact our ability to, among other things, incur additional indebtedness. We do not expect these covenants to adversely impact our ability to execute our growth strategy or conduct normal business operations.
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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 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 $200 million and $220 million during 2008 for capital expenditures to support and expand our existing operations, principally related to investments in information technology, equipment, and facility upgrades. During the first nine months of 2008, we continued to make investments in support of our plans to develop and deploy standard systems across both the AmeriPath practices and our clinical laboratories. We have completed the enhancements to the AmeriPath laboratory and billing systems and began deployment of the enhanced systems during the second quarter of 2008. These investments will enable significant productivity gains and improved customer service.
In June 2008, we amended our existing receivables securitization facility and increased it from $375 million to $400 million. The secured receivables credit facility is supported by back-up facilities provided on a committed basis by two banks: (a) $125 million, which matures on December 13, 2008 and (b) $275 million, which matures on June 10, 2009. Interest on the secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly-rated issuers. We plan to replace the $125 million portion of our secured receivables credit facility which expires on December 13, 2008 with another bank, if such financing is available and offers acceptable terms. Given the recent tightening in the credit markets, including markets for asset-backed commercial paper, which serves as the underlying funding source for banks participating in this facility, there can be no assurance that we can timely replace the $125 million portion of the facility expiring on December 13, 2008. There were no borrowings outstanding under this credit facility at September 30, 2008, and if the $125 million portion of the facility cannot be replaced, we do not expect it to impact our ability to fund our operations.
As of September 30, 2008, $1.2 billion of borrowing capacity was available under our existing credit facilities, consisting of $400 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. No borrowings are currently outstanding under either facility.
We believe the banks participating in our various credit facilities are predominantly highly-rated banks, and that the entire amounts under the credit facilities are currently available to us. Should as a result of a bank failure, one or several banks no longer participate in either of our credit facilities, which we do not anticipate, we would not expect it to impact our ability to fund operations. We expect to continue to generate positive cash flow despite a slowing economy, and have only $50 million of debt maturing over the next twelve months. We expect to be able to fund payments associated with the agreement in principle related to NID, out of cash on-hand and available credit facilities.
We believe that cash and cash equivalents on-hand, and cash from operations, together with 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.
Impact of New Accounting Standards
In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”
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(“FSP FAS 157-3”). In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and in March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” The impact of these accounting standards is discussed in Note 1 to the interim consolidated financial statements.
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. Risks and uncertainties that may affect our future results 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 and strategic partners and other factors discussed in “Business” in Part I, Item 1, “Risk Factors” and “Cautionary Factors That May Affect Future Results” in Item I, Part 1A, “Legal Proceedings” in Part I, Item 3, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A in our 2007 Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” in our 2008 Quarterly Reports on Form 10-Q and other items throughout the 2007 Form 10-K and our 2008 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
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) | Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness 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). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. |
| |
| (b) | During the third quarter of 2008, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 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
The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the third quarter of 2008.
| ISSUER PURCHASES OF EQUITY SECURITIES |
| |
| | | | | | | | | | Approximate Dollar |
| | | | | | | | Total Number of | | Value of Shares that |
| | | | | | | | Shares Purchased as | | May Yet Be |
| | | | Total Number | | Average | | Part of Publicly | | Purchased Under the |
| | | | of Shares | | Price Paid | | Announced Plans or | | Plans or Programs |
| | Period | | Purchased | | per Share | | Programs | | (in thousands) |
| | July 1, 2008 - July 31, 2008 | | | | | | | | |
| | Share Repurchase Program (A) | | - | | N/A | | - | | $104,038 |
| | Employee Transactions (B) | | - | | N/A | | N/A | | N/A |
| | August 1, 2008 - August 31, 2008 | | | | | | | | |
| | Share Repurchase Program (A) | | - | | N/A | | - | | $104,038 |
| | Employee Transactions (B) | | 992 | | $54.63 | | N/A | | N/A |
| | September 1, 2008 - September 30, 2008 | | | | | | | | |
| | Share Repurchase Program (A) | | - | | N/A | | - | | $104,038 |
| | Employee Transactions (B) | | 93 | | $53.21 | | N/A | | N/A |
| | Total | | | | | | | | |
| | Share Repurchase Program (A) | | - | | N/A | | - | | $104,038 |
| | Employee Transactions (B) | | 1,085 | | $54.51 | | N/A | | N/A |
| (A) | Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $2.1 billion of share repurchases of our common stock. |
| | |
| (B) | Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options (granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Director Long-Term Incentive Plan, collectively the “Stock Compensation Plans”) who exercised options; (2) restricted common shares withheld (under the terms of grants under the Stock Compensation Plans) to offset tax withholding obligations thatoccur upon vesting and release of the restricted common shares; and (3) shares withheld (under the terms of grants under the Stock Compensation Plans) to offset tax withholding obligations that occur upon the deliveryof outstanding common shares underlying restricted stock units and performance share units. |
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Item 6. Exhibits
| Exhibits: | | |
| 10.1 | | Amendment No. 4 to the Letter of Agreement between SmithKline Beecham Corporation and Quest |
| | | Diagnostics Incorporated |
| | | |
| 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 |
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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.
October 23, 2008
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 | |
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