The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward, with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar transactions, and about one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our Annual Report on Form 10-K for the year ended December 31, 2008.
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 2009 and 2008. 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 10 to the interim consolidated financial statements.
Income from continuing operations for the three months ended June 30, 2009 was $188 million, or $1.00 per diluted share, compared to $162 million, or $0.83 per diluted share, in 2008. Income from continuing operations for the six months ended June 30, 2009 was $357 million, or $1.89 per diluted share, compared to $303 million, or $1.54 per diluted share, in 2008. These increases in income from continuing operations were principally driven by improved operating performance and to a lesser degree by lower interest expense.
Results for the three and six months ended June 30, 2009 include a $15.5 million gain, or $0.05 per diluted share, associated with an insurance settlement for storm related losses, offset by a $6.3 million charge, or $0.02 per diluted share, associated with the early extinguishment of debt and a $7.0 million charge, or $0.02 per diluted share, associated with the write-down of an investment.
Net revenues for the three months ended June 30, 2009 grew by 3.5% over the prior year level to $1.9 billion. Net revenues for the six months ended June 30, 2009 were $3.7 billion, 2.4% above the prior year level. Changes in foreign exchange rates reduced revenue growth for the three and six months ended June 30, 2009 by 0.7% and 0.8%, respectively.
For the second quarter of 2009, revenues for our clinical testing business, which accounts for over 90% of our net revenues, grew 4% above the prior year level. Pre-employment drug testing, which is part of the clinical testing business, reduced revenues by about 0.7%. Clinical testing volume, measured by the number of requisitions, decreased 0.6% for the quarter ended June 30, 2009. Pre-employment drug testing, which accounted for approximately 6% of our total clinical testing volume, declined 24% and reduced consolidated volume by 1.7%. The volume decrease in pre-employment drug testing is principally due to reduced hiring by employers served by this business. In addition, our decision to exit certain laboratory management agreements that did not meet our profitability thresholds reduced volume by 0.7%. Lastly, the second quarter of 2009 had fewer business days than the prior year which we estimate reduced volume by 0.6%. After giving consideration to these factors, underlying volume grew about 2.5% for the quarter ended June 30, 2009, up from approximately 1.5% growth in
the first quarter of 2009. Revenue per requisition increased 4.6% for the three months ended June 30, 2009, with the increase continuing to be primarily driven by a positive test mix and a benefit of about 0.5% from the Medicare laboratory fee increase which went into effect January 1, 2009.
For the six months ended June 30, 2009, clinical testing revenues grew 3.1% above the prior year level. Pre-employment drug testing reduced revenues by about 0.7%. Clinical testing volume, measured by the number of requisitions, decreased 1.2% for the six months ended June 30, 2009. Pre-employment drug testing, which accounted for 5% of our total clinical testing volume, declined 25% and reduced consolidated volume by 1.7%. The volume decrease in pre-employment drug testing is principally due to reduced hiring by employers served by this business. In addition, our decision to exit certain laboratory management agreements that did not meet our profitability thresholds reduced volume by 0.8%. Lastly, the six months ended June 30, 2009 had fewer business days than the prior year which we estimate reduced volume by 0.7%. After giving consideration to these factors, underlying volume grew about 2.0% for the six months ended June 30, 2009. Revenue per requisition increased 4.4% for the six months ended June 30, 2009, with the increase primarily driven by a positive test mix and a benefit of about 0.5% from the Medicare laboratory fee increase which went into effect January 1, 2009.
Our businesses other than clinical laboratory testing accounted for approximately 8% of our net revenues for the three and six months ended June 30, 2009. These businesses include our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. These businesses contain most of our international operations and, in the aggregate, reported revenues for the three and six ended June 30, 2009 were 1.8% and 4.7%, respectively, below the prior year periods, with the decline more than accounted for by the impact of foreign exchange rates which reduced the combined revenues of these businesses by approximately 6% and 7%, respectively, for the three and six months ended June 30, 2009.
Operating Costs and Expenses
Total operating costs and expenses for the three months ended June 30, 2009 increased $12.7 million compared to the second quarter of 2008, and decreased as a percentage of net revenues to 81% compared to 83% in 2008. Total operating costs and expenses for the six months ended June 30, 2009 decreased $4.8 million from the prior year period and decreased as a percentage of net revenues to 82% compared to 84% in 2008. Lower testing volume in our clinical testing business, actions we have taken to improve our operating efficiency and reduce the size of our workforce, and discrete cost containment actions taken during the first half of 2009 have enabled us to realize reduced costs year-to-date and a modest cost increase for the quarter on increased net revenues. These efforts, coupled with higher revenue per requisition, served to reduce operating costs and expenses as a percentage of net revenues.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 57.9% of net revenues for the three months ended June 30, 2009, decreasing from 59.0% of net revenues in the prior year period. For the six months ended June 30, 2009, cost of services, as a percentage of net revenues, was 58.1% of net revenues, decreasing from 59.1% of net revenues in the prior year period. These improvements over the prior year reflect 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 23.6% of net revenues for the three months ended June 30, 2009, compared to 23.8% in the prior year period. For the six months ended June 30, 2009, selling, general and administrative expenses, as a percentage of net revenues, decreased to 23.5% from 24.1% in the prior year period. These improvements were primarily due to actions taken to reduce our cost structure and higher revenue per requisition.
For both the three months ended June 30, 2009 and 2008, bad debt expense was 4.4% of net revenues. For the six months ended June 30, 2009, bad debt expense was 4.5% compared to 4.6% of net revenues in the prior year period. Continued progress in our billing and collection processes has resulted in stable bad debt, and improvements in 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.
Other operating income, 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
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restructurings and other special charges. For the three and six months ended June 30, 2009, other operating income, net includes a $15.5 million second quarter gain related to an insurance settlement for storm related losses.
Operating Income
Operating income for the three months ended June 30, 2009 was $359 million, or 18.9% of net revenues, compared to $308 million, or 16.8% of net revenues, in the prior year period. For the six months ended June 30, 2009, operating income was $680 million, or 18.3% of net revenues, compared to $588 million, or 16.2% of net revenues in the prior year period. The improvements in operating income, as a percentage of net revenues, were primarily due to a more profitable revenue mix, resulting in higher revenue per requisition and progress we are making with our cost reduction program, as well as discrete cost containment actions we took during the first quarter of 2009. In addition, operating income for the three and six months ended June 30, 2009 includes a $15.5 million gain related to an insurance settlement for storm related losses, which contributed approximately 80 basis points and 40 basis points, respectively, to the improvement in operating income as a percentage of net revenues. The operating income percentage for the three and six months ended June 30, 2009 also reflects the impact of the various items which served to reduce cost of services and selling, general and administrative expenses as a percentage of net revenues.
Other Income (Expense)
Interest expense, net for the three and six months ended June 30, 2009 decreased $9 million and $17 million, respectively, compared to the prior year periods. These decreases were primarily due to lower interest rates on our variable-interest rate debt, as well as lower average outstanding debt balances in the first half of 2009, compared to the prior year periods.
Other (expense) income, 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, 2009, other (expense) income, net includes a charge of $7.0 million associated with the write-down of an investment and a $6.3 million charge associated with the early extinguishment of debt.
Income Tax Expense
The effective income tax rate for the three and six months ended June 30, 2009 was above the prior year periods by 1.2% and 0.7%, respectively. These increases were primarily due to the favorable resolution of certain tax contingencies in the second quarter of 2008.
Discontinued Operations
Income from discontinued operations, net of taxes, for the three months ended June 30, 2009 was $0.1 million, or $0.00 per diluted share, compared to a loss of $0.9 million, or $0.01 per diluted share in 2008. Loss from discontinued operations, net of taxes, for the six months ended June 30, 2009 was $1.6 million, or $0.01 per diluted share, compared to $2.0 million, or $0.01 per diluted share in the prior year. On April 15, 2009, the Company finalized the resolution of the previously disclosed federal government investigation related to NID, a test kit subsidiary voluntarily closed in 2006, and entered into a settlement agreement with the federal government. In the second quarter of 2009, payments totaling $308 million, which had been previously reserved, were funded out of cash on-hand and available credit facilities. See Note 8 and Note 9 to the interim consolidated financial statements for further details.
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 includes the use of derivative financial instruments. We do not hold or issue derivative financial instruments for trading purposes. We believe that our exposures to foreign exchange impacts and changes in commodities prices are not material to our consolidated financial condition or results of operations. See Note 4 to the interim consolidated financial statements for additional discussion of our financial instruments and hedging activities.
At June 30, 2009 and December 31, 2008, the fair value of our debt was estimated at approximately $3.1 billion and $2.9 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, 2009, the estimated fair
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value exceeded the carrying value of the debt by $31 million. At December 31, 2008, the carrying value exceeded the estimated fair value of the debt by $155 million. A hypothetical 10% increase in interest rates on our total debt portfolio (representing approximately 45 and 53 basis points at June 30, 2009 and December 31, 2008, respectively) would potentially reduce the estimated fair value of our debt by approximately $66 million and $75 million at June 30, 2009 and December 31, 2008, respectively.
Borrowings under our senior unsecured revolving credit facility, our secured receivables credit facility 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 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 costs under these credit arrangements will be subject to both fluctuations in interest rates and changes in our credit ratings. As of June 30, 2009, the borrowing rates under these credit facilities were: for our secured receivables credit facility, 1.28%; for our senior unsecured credit facility, LIBOR plus 0.40%; and for our term loan due May 2012, LIBOR plus 0.50%. At June 30, 2009, the weighted average LIBOR rate was 0.31%. At June 30, 2009, there was $1.1 billion outstanding under our term loan due May 2012, $200 million outstanding under our $500 million secured receivables credit facility and no borrowings outstanding under 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 a portion of our term loan due May 2012 for periods ranging through October 2009. As of June 30, 2009, variable-to-fixed interest rate swap agreements on $200 million of the term loan due May 2012 remain in place through October 2009 with fixed interest rates ranging from 5.13% to 5.27%. Based on our net exposure to interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing approximately 5 basis points) would impact annual net interest expense by approximately $1 million, assuming no changes to the debt outstanding at June 30, 2009.
The fair value of the interest rate swap agreements at June 30, 2009 was a liability of $3.9 million. A hypothetical 10% increase or decrease in interest rates (representing approximately 8 basis points) would not have a material impact on the fair value of the liability of these instruments at June 30, 2009.
For details regarding our outstanding debt, see Note 5 to the interim consolidated financial statements and Note 9 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. For details regarding our financial instruments, see Note 4 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 values of our available-for-sale equity securities and privately held securities were $8 million at June 30, 2009.
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.
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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 2 to the interim consolidated financial statements for further details.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2009 totaled $119 million compared to $254 million at December 31, 2008. 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. For the six months ended June 30, 2009, cash flows from operating activities of $264 million, together with cash on-hand, were used to fund investing and financing activities of $94 million and $304 million, respectively. Cash and cash equivalents at June 30, 2008 totaled $143 million, compared to $168 million at December 31, 2007. For the six months ended June 30, 2008, cash flows from operating activities of $371 million, together with cash on-hand, were used to fund investing and financing activities of $69 million and $326 million, respectively.
Cash Flows from Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2009 was $264 million compared to $371 million in the prior year period. For the six months ended June 30, 2009, cash flows from operating activities includes second quarter 2009 payments totaling $308 million associated with the final settlement agreement related to the federal government’s investigation related to NID (see Note 8). After giving consideration to the settlement payments, underlying cash flows from operating activities exceeded the prior year level, primarily driven by higher earnings in the current year. Days sales outstanding, a measure of billing and collection efficiency, were 43 days at June 30, 2009 compared to 46 days at June 30, 2008 and 44 days at December 31, 2008.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2009 was $94 million, consisting principally of capital expenditures of $76 million.
Net cash used in investing activities for the six months ended June 30, 2008 was $69 million, consisting principally of capital expenditures of $95 million, partially offset by $23 million related to the receipt of a payment from an escrow fund established at the time of an acquisition in 2007, and proceeds from the sale of an investment in the first quarter of 2008.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months ended June 30, 2009 was $304 million, consisting primarily of purchases of treasury stock totaling $250 million, dividend payments of $38 million and a decrease in book overdrafts of $20 million, partially offset by $19 million in proceeds from the exercise of stock options, including related tax benefits. The $250 million of treasury stock purchases represents 5.6 million shares of our common stock purchased at an average price of $44.48 per share. Cash flows from financing activities for the six months ended June 30, 2009 also included a net reduction of debt of $1 million, consisting of $510 million of borrowings and $511 million of repayments. Borrowings under our secured receivables credit facility totaled $510 million and were used primarily to fund the NID settlement payments totaling $308 million and $150 million to fund the retirement of debt in connection with our June 2009 debt tender. Debt repayments of $511 million consisted primarily of the repayment of $310 million on our secured receivables credit facility, and $174 million aggregate principal amount of our 5.125% senior notes due 2010 and $26 million aggregate principal amount of our 7.50% senior notes due 2011.
Net cash used in financing activities for the six months ended June 30, 2008 was $326 million, consisting primarily of net reductions of debt of $284 million and dividend payments of $39 million. Net debt reductions
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included the repayment of $168 million on our term loan due May 31, 2012, $120 million on our secured receivables credit facility and $15 million on our term loan due December 31, 2008, offset partially by borrowings of $20 million on our secured receivables credit facility.
Dividend Program
During each of the quarters of 2009 and 2008, our Board of Directors declared a quarterly cash dividend of $0.10 per common share. On May 14, 2009, our Board of Directors declared a quarterly cash dividend per common share of $0.10, paid on July 20, 2009. 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
In January 2009, our Board of Directors authorized $500 million of additional share repurchases. The share repurchase authorization has no set expiration or termination date. We did not repurchase any shares of our common stock during the three months ended June 30, 2009. For the six months ended June 30, 2009, we repurchased 5.6 million shares of our common stock at an average price of $44.48 per share for $250 million, including 4.5 million shares repurchased from SB Holdings Capital Inc., a wholly-owned subsidiary of GlaxoSmithKline plc., at an average price of $44.33 per share for $200 million. For the three and six months ended June 30, 2009, the Company reissued 0.4 million shares and 0.9 million shares, respectively, for employee benefit plans. Since its inception in May 2003, we have repurchased approximately 55 million shares of our common stock at an average price of $45.33 for $2.5 billion under our share repurchase program. At June 30, 2009, $250 million of share repurchase authorization remained available.
Contractual Obligations and Commitments
The following table summarizes certain of our contractual obligations as of June 30, 2009:
| | | | | | | | | | | | | | | | |
| | Payments due by period | |
| |
| |
| | (in thousands) | |
Contractual Obligations | | Total | | Remainder
of 2009 | | 1-3 years | | 3 –5 years | | After 5 years | |
| |
| |
| |
| |
| |
| |
|
Outstanding debt | | $ | 3,065,525 | | $ | 201,800 | | $ | 1,006,675 | | $ | 560,000 | | $ | 1,297,050 | |
Capital lease obligations | | | 17,211 | | | 1,566 | | | 3,222 | | | 1,974 | | | 10,449 | |
Interest payments on outstanding debt | | | 1,305,062 | | | 66,399 | | | 236,214 | | | 166,289 | | | 836,160 | |
Operating leases | | | 713,194 | | | 98,601 | | | 285,005 | | | 139,235 | | | 190,353 | |
Purchase obligations | | | 110,218 | | | 29,369 | | | 69,984 | | | 10,396 | | | 469 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total contractual obligations | | $ | 5,211,210 | | $ | 397,735 | | $ | 1,601,100 | | $ | 877,894 | | $ | 2,334,481 | |
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Interest payments on our outstanding debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of June 30, 2009 applied to the June 30, 2009 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 9 to the Consolidated Financial Statements in our 2008 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, 2008 is contained in Note 14 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K.
As of June 30, 2009, our total liabilities for unrecognized tax benefits were approximately $120 million, which were excluded from the table above. The increase in liabilities for unrecognized tax benefits since December 31, 2008 is primarily due to certain unrecognized tax benefits of $57 million associated with the NID settlement. We believe it is reasonably possible that our liabilities for unrecognized tax benefits may decrease by approximately $5 million within the next twelve months, primarily as a result of the expiration of statues of limitations, settlements and/or the conclusion of tax examinations on certain tax positions. For the remainder, we cannot make reasonably reliable estimates of the timing of the future payments of these liabilities. See Note 4 to
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the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K for information regarding our contingent tax liability reserves.
Our credit agreements 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. As of June 30, 2009, we were in compliance with the various financial covenants included in our credit agreements and we do not expect these covenants to adversely impact our ability to execute our growth strategy or conduct normal business operations.
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 approximately $200 million during 2009 for capital expenditures to support and expand our existing operations, principally related to investments in information technology, equipment, and facility upgrades.
As of June 30, 2009, $1.1 billion of borrowing capacity was available under our existing credit facilities, consisting of $300 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility. Our secured receivables credit facility matures on December 11, 2009. If we are unable to refinance or extend the term of our current secured receivables credit facility, we may need to utilize our senior unsecured revolving credit facility or seek additional financing through other financing arrangements.
We believe the banks participating in our various credit facilities are predominantly highly-rated banks, and that the amounts under the credit facilities are currently available to us. Should one or several banks no longer participate in either of our credit facilities, 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.
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 April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” 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,
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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 2008 Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Risk Factors” in Part II, Item 1A in our 2009 Quarterly Reports on Form 10-Q and other items throughout the 2008 Form 10-K and our 2009 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
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Item 4. | Controls and Procedures |
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(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. |
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(b) | During the second quarter of 2009, 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
See Note 8 to the interim consolidated financial statements for information regarding the status of legal proceedings involving the Company.
In addition to the risk factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, investors should consider the following risk factor before deciding to invest in any securities issued by the Company.
If we fail to comply with the requirements of our corporate integrity agreement, we could be subject to suspension or termination from participation in federal healthcare programs and substantial monetary penalties.
As part of a settlement with the U.S. Department of Justice and other federal government agencies, in April 2009 the Company entered into a five-year Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General. The Corporate Integrity Agreement provides, among other things, that the Company continue to maintain a compliance program, overseen by the Company’s Board of Directors, regarding federal healthcare program requirements and FDA requirements, including written policies and procedures, a written Code of Conduct and employee training and education. The Company is subject to periodic reporting, external review and certification requirements regarding compliance with the Corporate Integrity Agreement. Failure of the Company to comply with the obligations under the Corporate Integrity Agreement could result in exclusion from participation in certain federal healthcare programs, financial penalties and damage to the Company’s reputation.
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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 second quarter of 2009.
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | |
Period | | Total Number
of Shares
Purchased | | Average
Price Paid
per Share | | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs | | Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
(in thousands) | |
| |
| |
| |
| |
| |
April 1, 2009 – April 30, 2009 | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | — | | $ | — | | | — | | $ | 250,041 | |
Employee Transactions (B) | | | 124 | | $ | 50.56 | | | N/A | | | N/A | |
May 1, 2009 – May 31, 2009 | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | — | | $ | — | | | — | | $ | 250,041 | |
Employee Transactions (B) | | | 9,957 | | $ | 50.92 | | | N/A | | | N/A | |
June 1, 2009 – June 30, 2009 | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | — | | $ | — | | | — | | $ | 250,041 | |
Employee Transactions (B) | | | 178 | | $ | 52.77 | | | N/A | | | N/A | |
Total | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | — | | $ | — | | | — | | $ | 250,041 | |
Employee Transactions (B) | | | 10,259 | | $ | 50.95 | | | N/A | | | N/A | |
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(A) | In January 2009, our Board of Directors authorized the Company to repurchase an additional $500 million of the Company’s common stock. Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $2.8 billion of share repurchases of our common stock through June 30, 2009. The share repurchase authorization has no set expiration or termination date. |
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(B) | Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of stock options (granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Non-Employee 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 that occur 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 delivery of common shares underlying restricted stock units and performance share units. |
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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 14, 2009. 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 2012 Annual Meeting of Shareholders, by the following votes: |
| | | | | | | | | | |
| | For | | Against | | Abstain | |
| |
| |
| |
| |
Jenne K. Britell, Ph.D. | | | 163,343,417 | | | 4,198,266 | | | 396,745 | |
| | | | | | | | | | |
Gail R. Wilensky, Ph.D. | | | 161,639,429 | | | 5,879,270 | | | 419,872 | |
| | | | | | | | | | |
Mr. John B. Ziegler | | | 161,586,592 | | | 5,916,218 | | | 435,613 | |
| |
| The following persons continue as directors: |
| |
| John C. Baldwin, M.D. |
| Mr. William F. Buehler |
| Ms. Rosanne Haggerty |
| Surya N. Mohapatra, Ph.D. |
| Mr. Gary M. Pfeiffer |
| Daniel C. Stanzione, Ph.D. |
| |
(c) | The amendments to the Employee Long-Term Incentive Plan were approved by the following votes: |
| | | | | | | | | |
| | For | | Against | | Abstain | | Broker Non-Vote | |
| | 141,605,222 | | 14,803,576 | | 413,435 | | 11,116,338 | |
| |
(d) | The amendments to the Long-Term Incentive Plan for Non-Employee Directors were approved by the following votes: |
| | | | | | | | | |
| | For | | Against | | Abstain | | Broker Non-Vote | |
| | 142,281,233 | | 13,816,658 | | 724,343 | | 11,116,337 | |
| |
(e) | 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, 2009, was approved by the following votes: |
| | | | | | | | | |
| | For | | Against | | Abstain | | | |
| | 165,510,615 | | 2,143,193 | | 284,625 | | | |
38
| | | | |
Item 6. | Exhibits | | |
| | | |
| Exhibits: | | |
| | | |
| | 10.1 | | Amendment dated June 26, 2009 to the Stockholders Agreement dated as of August 16, 1999 between Quest Diagnostics Incorporated and SmithKline Beecham plc |
| | | | |
| | 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 |
| | | | |
| | 101.INS | | dgx-20090630.xml |
| | | | |
| | 101.SCH | | dgx-20090630.xsd |
| | | | |
| | 101.CAL | | dgx-20090630_cal.xml |
| | | | |
| | 101.DEF | | dgx-20090630_def.xml |
| | | | |
| | 101.LAB | | dgx-20090630_lab.xml |
| | | | |
| | 101.PRE | | dgx-20090630_pre.xml |
39
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 28, 2009
Quest Diagnostics Incorporated
| | | |
By | /s/ | Surya N. Mohapatra | |
|
|
| |
| | Surya N. Mohapatra, Ph.D. | |
| | Chairman of the Board, President and | |
| | Chief Executive Officer | |
| | | |
By | /s/ | Robert A. Hagemann | |
|
|
| |
| | Robert A. Hagemann | |
| | Senior Vice President and | |
| | Chief Financial Officer | |
40
