and a reduction in higher priced anatomic pathology testing; and pricing changes in connection with several large contract extensions entered into last year and in the first half of this year.
For the nine months ended September 30, 2010, revenues for our clinical testing business were 1.2% below the prior year level. Clinical testing volume, measured by the number of requisitions, decreased 1.4%. We believe that clinical testing volume was adversely affected by a general slowdown in physician office visits compared to the prior year, and severe weather in the first quarter of 2010. Revenue per requisition increased 0.2% for the nine months ended September 30, 2010, with the increase primarily driven by an increased mix of gene-based and esoteric testing and an increase in the number of tests ordered by requisition, partially offset by the 1.9% Medicare fee schedule decrease, which went into effect on January 1, 2010 and served to reduce revenue per requisition by 0.4%; business and payer mix changes, including an increase in lower priced drugs-of-abuse testing and a decrease in higher priced anatomic pathology testing; and pricing changes in connection with several large contract extensions entered into last year and in the first half of this year.
Our businesses other than clinical laboratory testing accounted for approximately 8% of our net revenues for the three and nine months ended September 30, 2010. These businesses contain most of our international operations and include our risk assessment services, clinical trials testing, healthcare information technology, and diagnostic products businesses. Revenues for the three months ended September 30, 2010 were 2.3% below the prior year period, principally due to the performance of our risk assessment business. For the nine months ended September 30, 2010, aggregate revenues for these businesses approximated the prior year level.
Total operating costs and expenses for the three months ended September 30, 2010 decreased $21.1 million, compared to the third quarter of 2009, and increased as a percentage of net revenues to 81.9% compared to 81.6% in 2009. Total operating costs and expenses for the nine months ended September 30, 2010 decreased by $34.7 million from the prior year period and increased as a percentage of net revenues to 81.9% compared to 81.7% in 2009.
Lower revenues in our clinical testing business, partially offset by actions we have taken to reduce our cost structure, reduced costs for performance-based compensation and continued progress in reducing bad debt expense served to increase total operating costs as a percentage of net revenues for the three months ended September 30, 2010.
Lower revenues in our clinical testing business, including the impact of severe weather in the first quarter of 2010, and charges associated with actions we have taken to adjust our cost structure, partially offset by reduced costs for performance-based compensation, improved experience associated with professional liability claims and continued progress in reducing bad debt expense served to increase total operating costs as a percentage of net revenues for the nine months ended September 30, 2010. During the first quarter of 2010, we recorded $17.3 million of pre-tax charges, principally associated with workforce reductions, of which $4.5 million was recorded in cost of services and $12.8 million was recorded in selling, general and administrative expenses. In addition, operating costs for the nine months ended September 30, 2009 include a $15.5 million gain related to an insurance settlement for storm related losses, which served to decrease total operating costs as a percentage of net revenues for the nine months ended September 30, 2009.
Also, year-over-year comparisons for the nine months ended September 30, 2010 were favorably impacted by approximately $4.0 million associated with investment gains and losses on investments in our supplemental deferred compensation plans. Under our supplemental deferred compensation plans, employee compensation deferrals, together with Company matching contributions, are invested in a variety of investments held in trusts. Gains and losses associated with the investments are recorded in earnings within “other income (expense), net.” A corresponding and offsetting adjustment is also recorded to the deferred compensation obligation to reflect investment gains and losses earned by the employee. Such adjustments to the deferred compensation obligation are recorded in earnings principally within “selling, general and administrative expenses” and offset the amount of investment gains and losses recorded in “other income (expense), net.” Results for the three and nine months ended September 30, 2010 included an increase in operating costs of $3.8 million and $2.4 million, respectively, representing an increase in the deferred compensation obligation to reflect investment gains earned by employees participating in our deferred compensation plans. Results for the three and nine months ended September 30, 2009 included an increase in operating costs of $3.8 million and $6.4 million, respectively, representing an increase in the deferred compensation obligation to reflect investment gains earned by employees participating in our deferred compensation plans.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 58.5% of net revenues for the three months ended September 30, 2010, increasing from 57.9% of net revenues in the prior year period. For the nine months ended September 30, 2010, cost of services, as a percentage of net revenues, was 58.4%, increasing from 58.0% of net revenues in the prior year period. Lower revenues, and investments made in patient service centers and additional phlebotomists to increase service and convenience for patients in our clinical testing business, partially offset by reduced performance-based compensation and actions taken to reduce our cost structure, contributed to the increase in cost of services as a percentage of net revenue for the three months ended September 30, 2010. The increase for the nine months ended September 30, 2010 primarily reflects lower revenues in our clinical testing business, including the impact of severe weather in the first quarter of 2010, and charges associated with workforce reductions in response to lower testing volume, partially offset by reduced performance-based compensation and actions taken to reduce our cost structure.
Selling, general and administrative expenses, which include the costs of the sales force, billing operations, bad debt expense, and general management and administrative support was 22.9% of net revenues for the three months ended September 30, 2010, compared to 23.3% in the prior year period. For the nine months ended September 30, 2010, selling, general and administrative expenses, as a percentage of net revenues, was 23.0% compared to 23.4% in the prior year period. The improvement in selling, general, and administrative expenses as a percentage of net revenues for the three months ended September 30, 2010 primarily reflects the impact of actions we have taken to adjust our cost structure in response to lower testing volume, reduced performance-based compensation and improvements in bad debt expense, partially offset by the impact of reduced revenues. The improvement for the nine months ended September 30, 2010 primarily reflects the impact of cost reduction measures to adjust our cost structure in response to lower testing volume, reduced performance-based compensation and improvements in bad debt expense, partially offset by charges associated with workforce reductions.
For the three months ended September 30, 2010, bad debt expense was 4.0% compared to 4.4% of net revenues in the prior year period. For the nine months ended September 30, 2010, bad debt expense was 4.0% compared to 4.4% of net revenues in the prior year period. Continued progress in our billing and collection processes has resulted in improvements in bad debt and the cost of our billing operation.
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, 2009, other operating (income) expense, net includes a $15.5 million gain associated with an insurance settlement for storm related losses.
Operating Income
Operating income for the three months ended September 30, 2010 was $337 million, or 18.1% of net revenues, compared to $348 million, or 18.4% of net revenues, in the prior year period. For the nine months ended September 30, 2010, operating income was $1.0 billion, or 18.1% of net revenues, compared to $1.0 billion, or 18.3% of net revenues, in the prior year period. For the three months ended September 30, 2010, the decrease in operating margin primarily reflects the impact of lower revenues in our clinical testing business, partially offset by actions we have taken to reduce our cost structure, reduced costs for performance-based compensation and continued progress in reducing bad debt expense. For the nine months ended September 30, 2010, the decrease in operating income, as a percentage of net revenues, primarily reflects the impact of lower revenues in our clinical testing business, including the estimated impact of severe weather in the first quarter of 2010, and charges associated with workforce reductions, partially offset by actions taken to adjust our cost structure, reduced performance-based compensation, improved experience associated with professional liability claims and lower bad debt expense. The estimated impact of severe weather combined with charges associated with actions we have taken to adjust our cost structure adversely impacted the year-over-year change in operating income as a percentage of net revenues by approximately 60 basis points compared to the prior year-to-date period. In addition, the year-over-year change in operating income as a percentage of net revenues for the nine months ended September 30, 2009 was also adversely impacted by a $15.5 million gain related to an insurance settlement for storm related losses, which served to increase operating income as a percentage of net revenues for the nine months ended September 30, 2009.
Other Income (Expense)
Interest expense, net for the three months ended September 30, 2010 increased $3.1 million compared to the prior year period. The increase was primarily due to higher outstanding debt in 2010 compared to the prior year period.
28
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, 2010, other income (expense), net reflects net gains of $3.8 million and $2.4 million, respectively, associated with investments held in trusts pursuant to our supplemental deferred compensation plans.
For the three and nine months ended September 30, 2009, other income (expense), net includes gains of $3.8 million and $6.4 million, respectively, associated with investments held in trusts pursuant to our supplemental deferred compensation plans. Additionally, for the nine months ended September 30, 2009, other income (expense), net includes a charge of $7.0 million associated with the write-down of an investment and a charge of $7.6 million associated with the early extinguishment of debt.
Income Tax Expense
The effective income tax rates for the three months ended September 30, 2010 and 2009 were 33.1% and 38.4% respectively. The effective income tax rates for the nine months ended September 30, 2010 and 2009 were 36.4% and 38.4%, respectively. The decrease in the effective income tax rate for the three and nine months ended September 30, 2010, compared to the prior year, is primarily due to the favorable resolution of certain tax contingencies.
Discontinued Operations
Results from discontinued operations, net of taxes, for the three months ended September 30, 2010 and 2009, were a loss of $0.4 million and income of $0.5 million, respectively, with no impact on diluted earnings per share. For the nine months ended September 30, 2010 and 2009, loss from discontinued operations, net of taxes was $0.7 million with no impact on diluted earnings per share, and $1.0 million, or ($0.01) per diluted share, respectively. See Note 10 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.
At September 30, 2010 and December 31, 2009, the fair value of our debt was estimated at approximately $3.4 billion and $3.3 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, 2010 and December 31, 2009, the estimated fair value exceeded the carrying value of the debt by $203 million and $151 million, respectively. A hypothetical 10% increase in interest rates (representing 45 basis points at September 30, 2010 and 46 basis points at December 31, 2009) would potentially reduce the estimated fair value of our debt by $86 million and $96 million at September 30, 2010 and December 31, 2009, 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 September 30, 2010, the borrowing rates under these credit facilities were: for our secured receivables credit facility, 1.38%; for our senior unsecured credit facility, LIBOR plus 0.40%; and for our term loan due May 2012, LIBOR plus 0.40%. At September 30, 2010, the weighted average LIBOR was 0.26%. At September 30, 2010, there was $742 million outstanding under our term loan due May 2012, and no borrowings outstanding under our $750 million senior unsecured revolving credit facility or our $525 million secured receivables credit facility.
Our objective is to mitigate the variability in cash outflows that result from changes in interest rates by maintaining a balanced mix of fixed-rate and variable-rate debt obligations. In order to achieve these objectives, we have entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net payments are recognized as an adjustment to interest expense.
29
In November 2009, we entered into various fixed-to-variable interest rate swap agreements that effectively convert a portion of our 4.75% Senior Notes due 2020 to variable-interest rate debt based on LIBOR plus 1.33%. At September 30, 2010, the interest rate swap agreements which expire in January 2020 have a notional amount totaling $350 million. The fixed-to-variable interest rate swap agreements are accounted for as fair value hedges of a portion of our outstanding 4.75% Senior Notes due 2020. Based on our net exposure to interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing 3 basis points) would impact annual interest expense by $0.3 million, assuming no changes to the debt outstanding at September 30, 2010.
The fair value of the fixed-to-variable interest rate swap agreements at September 30, 2010 was an asset of $31 million. A hypothetical 10% change in interest rates (representing 25 basis points) would potentially change the fair value of the asset of these instruments by approximately $8 million.
For details regarding our outstanding debt, see Note 10 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. For details regarding our derivative financial instruments, see Note 6 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 $12.3 million at September 30, 2010.
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.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2010 totaled $369 million compared to $534 million at December 31, 2009. Cash and cash equivalents consist of cash and highly liquid short-term investments. For the nine months ended September 30, 2010, cash flows from operating activities of $778 million, together with cash on-hand, were used to fund investing and financing activities of $140 million and $804 million, respectively. Cash and cash equivalents at September 30, 2009 totaled $247 million compared to $254 million at December 31, 2008. For the nine months ended September 30, 2009, cash flows from operating activities of $637 million, together with cash on-hand, were used to fund investing and financing activities of $140 million and $504 million, respectively.
Cash Flows from Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2010 was $778 million compared to $637 million in the prior year period. For the nine months ended September 30, 2009, cash flows from operating activities includes payments primarily made in the second quarter of 2009 totaling $314 million in connection with the NID settlement (see Note 10 to the interim consolidated financial statements), or $239 million net of an associated reduction in estimated tax payments. After giving consideration to the settlement payments, net of the associated reduction in tax payments, underlying cash flows from operating activities decreased in comparison to the prior year level, primarily driven by the timing of variable compensation and accrued expenses. Days sales outstanding, a measure of billing and collection efficiency, were 43 days at September 30, 2010 and December 31, 2009.
30
Cash Flows from Investing Activities
Net cash used in investing activities for both the nine months ended September 30, 2010 and 2009 was $140 million and consisted principally of capital expenditures.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2010 was $804 million, consisting primarily of purchases of treasury stock totaling $750 million, dividend payments of $54 million and distributions to noncontrolling interests of $26 million, partially offset by $41 million in proceeds from the exercise of stock options, including related tax benefits. The $750 million of treasury stock purchases represents 14.7 million shares of our common stock purchased at an average price of $51.04 per share, including 4.5 million shares purchased in the first quarter at an average price of $56.21 for $251 million under an accelerated share repurchase transaction with a bank.
Net cash used in financing activities for the nine months ended September 30, 2009 was $504 million, consisting primarily of purchases of treasury stock totaling $350 million, net debt reductions of $108 million, dividend payments of $56 million and distributions to noncontrolling interests of $23 million, partially offset by $50 million in proceeds from the exercise of stock options, including related tax benefits. The $350 million of treasury stock purchases represents 7.5 million shares of our common stock purchased at an average price of $46.86 per share. The net reduction of debt of $108 million consists of $510 million of borrowings and $618 million of repayments. Borrowings under our secured receivables credit facility totaled $510 million and were used primarily to fund the NID settlement payments totaling $314 million and retire debt of $150 million in connection with our June 2009 debt tender. Debt repayments of $618 million consisted primarily of the repayment of $410 million on our secured receivables credit facility, $174 million of our 5.125% senior notes due 2010 and $26 million of our 7.50% senior notes due 2011.
Dividend Program
During each of the quarters of 2010 and 2009, our Board of Directors declared a quarterly cash dividend of $0.10 per common share. On August 11, 2010, our Board of Directors declared a quarterly cash dividend per common share of $0.10, paid on October 19, 2010. 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 2010, our Board of Directors authorized $750 million of additional share repurchases. For the three months ended September 30, 2010, we repurchased 7.0 million shares of our common stock at an average price of $46.64 per share for $324 million. For the nine months ended September 30, 2010, we repurchased 14.7 million shares of our common stock at an average price of $51.04 per share for $750 million, including 4.5 million shares purchased in the first quarter at an average price of $56.21 per share for $251 million under an accelerated share repurchase transaction with a bank. For the three and nine months ended September 30, 2010, we reissued 0.1 million shares and 1.7 million shares, respectively, for employee benefit plans. Since its inception in May 2003, we have repurchased approximately 74 million shares of our common stock at an average price of $47.13 for $3.5 billion under our share repurchase program. At September 30, 2010, our share repurchase authorization was fully utilized.
On October 20, 2010, our Board of Directors authorized $250 million of additional share repurchases, which have no set expiration or termination date.
31
Contractual Obligations and Commitments
The following table summarizes certain of our contractual obligations as of September 30, 2010:
| | | | | | | | | | | | | | | | |
| | Payments due by period | |
| |
| |
| | (in thousands) | |
Contractual Obligations | | Total | | Remainder
of 2010 | | 1-3 years | | 3-5 years | | After 5 years | |
| |
| |
| |
| |
| |
| |
|
Outstanding debt | | $ | 3,116,802 | | $ | 165,534 | | $ | 901,268 | | $ | — | | $ | 2,050,000 | |
Capital lease obligations | | | 39,114 | | | 1,470 | | | 12,706 | | | 11,270 | | | 13,668 | |
Interest payments on outstanding debt | | | 1,660,331 | | | 32,396 | | | 231,512 | | | 322,211 | | | 1,074,212 | |
Operating leases | | | 667,239 | | | 50,114 | | | 281,989 | | | 147,952 | | | 187,184 | |
Purchase obligations | | | 102,248 | | | 13,680 | | | 67,890 | | | 17,175 | | | 3,503 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total contractual obligations | | $ | 5,585,734 | | $ | 263,194 | | $ | 1,495,365 | | $ | 498,608 | | $ | 3,328,567 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest payments on our outstanding debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of September 30, 2010 applied to the September 30, 2010 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 2009 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, 2009 is contained in Note 15 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.
As of September 30, 2010, our total liabilities for unrecognized tax benefits were approximately $156 million, which were excluded from the table above. We believe it is reasonably possible that our liabilities for unrecognized tax benefits may decrease by $21 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 5 to the Consolidated Financial Statements in our 2009 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 September 30, 2010, 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 in all material respects 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 2010 for capital expenditures, including assets under capitalized leases, to support and expand our existing operations, principally related to investments in information technology, equipment, and facility upgrades.
32
As of September 30, 2010, $1.3 billion of borrowing capacity was available under our existing credit facilities, consisting of $525 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 10, 2010. We expect to replace or extend the facility upon its maturity. If we are unable to replace or extend 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 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 and other obligations, 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.
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables, and an amendment to the accounting standards related to certain revenue arrangements that include software elements. In January 2010, the FASB issued an amendment to the accounting standards related to the disclosures about an entity’s use of fair value measurements. In August 2010, the FASB issued an amendment to the accounting standards related to the accounting for insurance recoveries, and an amendment to the accounting standards related to the financial statement disclosure of the amount of charity care provided by a healthcare entity. The impact of these accounting standards is discussed in Note 2 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,” “Risk Factors,” “Cautionary Factors That May Affect Future Results,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk” in our 2009 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 our 2010 Quarterly Reports on Form 10-Q and other items throughout the 2009 Form 10-K and our 2010 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
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.
33
During the third quarter of 2010, 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.
34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to the interim consolidated financial statements for information regarding the status of legal proceedings involving the Company.
Item 1A. Risk Factors
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, 2009, investors should consider the following risk factor before deciding to invest in any securities issued by the Company.
U.S. healthcare reform legislation may result in significant change, and our business could be adversely impacted if we fail to adapt.
Government oversight of and attention to the healthcare industry in the United States is significant and increasing. In March 2010, U.S. federal legislation was enacted to reform healthcare. The legislation provides for reductions in the Medicare clinical laboratory fee schedule of 1.75% for five years beginning in 2011 and also includes a productivity adjustment which reduces the CPI market basket update beginning in 2011. In 2009, approximately 12% of our consolidated revenues were reimbursed by Medicare under the clinical laboratory fee schedule. The legislation imposes an excise tax on the seller for the sale of certain medical devices in the United States, including those purchased and used by laboratories, beginning in 2013. The legislation establishes the Independent Payment Advisory Board, which will be responsible, beginning in 2014, annually to submit proposals aimed at reducing Medicare cost growth while preserving quality. These proposals automatically will be implemented unless Congress enacts alternative proposals that achieve the same savings targets. Further, the legislation calls for a Center for Medicare and Medicaid Innovation that will examine alternative payment methodologies and conduct demonstration programs. The legislation provides for extensive health insurance reforms, including the elimination of pre-existing condition exclusions and other limitations on coverage, fixed percentages on medical loss ratios, expansion in Medicaid and other programs, employer mandates, individual mandates, creation of state and regional health insurance exchanges, and tax subsidies for individuals to help cover the cost of individual insurance coverage. The legislation also permits the establishment of accountable care organizations, a new healthcare delivery model. While the ultimate impact of the legislation on the healthcare industry is unknown, it is likely to be extensive and may result in significant change. Our failure to adapt to these changes could have a material adverse effect on our business.
35
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 2010.
| | | | | | | | | | | | | |
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) | |
| |
| |
| |
| |
| |
July 1, 2010 – July 31, 2010 | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | 2,298,000 | | $ | 46.00 | | | 2,298,000 | | $ | 218,578 | |
Employee Transactions (B) | | | 128 | | $ | 49.44 | | | N/A | | | N/A | |
August 1, 2010 – August 31, 2010 | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | 3,535,524 | | $ | 47.16 | | | 3,535,524 | | $ | 51,828 | |
Employee Transactions (B) | | | 1,152 | | $ | 47.43 | | | N/A | | | N/A | |
September 1, 2010 – September 30, 2010 | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | 1,118,525 | | $ | 46.29 | | | 1,118,525 | | $ | 50 | |
Employee Transactions (B) | | | 950 | | $ | 47.36 | | | N/A | | | N/A | |
Total | | | | | | | | | | | | | |
Share Repurchase Program (A) | | | 6,952,049 | | $ | 46.64 | | | 6,952,049 | | $ | 50 | |
Employee Transactions (B) | | | 2,230 | | $ | 47.52 | | | N/A | | | N/A | |
| | |
| (A) | In January 2010, our Board of Directors authorized the Company to repurchase an additional $750 million of the Company’s common stock. Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $3.5 billion of share repurchases of our common stock through September 30, 2010. At September 30, 2010, we utilized our entire share repurchase authorization through that date. On October 20, 2010, our Board of Directors authorized $250 million of additional share repurchases, which have no set expiration or termination date. |
| | |
| (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. |
36
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 |
| 101.INS | dgx-20100930.xml |
| | |
| 101.SCH | dgx-20100930.xsd |
| | |
| 101.CAL | dgx-20100930_cal.xml |
| | |
| 101.DEF | dgx-20100930_def.xml |
| | |
| 101.LAB | dgx-20100930_lab.xml |
| | |
| 101.PRE | dgx-20100930_pre.xml |
| | |
| 101.REF | dgx-20100930_ref.xml |
37
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 26, 2010
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 | |
38
