SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2004
Commission file number 1-12215
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, NJ 07608
(201) 393-5000
Delaware
(State of Incorporation)
16-1387862
(I.R.S. Employer Identification Number)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of October 26, 2004, there were 101,199,780 outstanding shares of the
registrant's common stock, $.01 par value.
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Index to consolidated financial statements filed as part of this report:
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2004 and 2003 2
Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" 24
Item 4. Controls and Procedures
Controls and Procedures 24
1
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net revenues ............................ $1,289,897 $1,221,221 $3,843,313 $3,533,953
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of services ........................ 748,424 711,180 2,233,282 2,062,401
Selling, general and administrative ..... 308,248 292,413 923,195 867,674
Amortization of intangible assets ....... 1,664 2,055 5,786 6,146
Other operating (income) expense, net ... (142) (1,950) 10,449 (1,717)
---------- ---------- ---------- ----------
Total operating costs and expenses ... 1,058,194 1,003,698 3,172,712 2,934,504
---------- ---------- ---------- ----------
Operating income ........................ 231,703 217,523 670,601 599,449
Other income (expense):
Interest expense, net ................... (13,630) (14,472) (44,620) (45,247)
Minority share of income ................ (4,893) (4,607) (14,366) (12,825)
Equity earnings in unconsolidated
joint ventures ....................... 5,548 4,371 15,502 12,981
Other income (expense), net ............. 3 (62) (21) 594
---------- ---------- ---------- ----------
Total non-operating expenses, net .... (12,972) (14,770) (43,505) (44,497)
---------- ---------- ---------- ----------
Income before taxes ..................... 218,731 202,753 627,096 554,952
Income tax expense ...................... 88,587 82,729 253,974 226,480
---------- ---------- ---------- ----------
Net income .............................. $ 130,144 $ 120,024 $ 373,122 $ 328,472
========== ========== ========== ==========
Basic earnings per common share:
Net income .............................. $ 1.29 $ 1.15 $ 3.64 $ 3.18
Weighted average common shares
outstanding - basic .................. 101,244 104,787 102,465 103,291
Diluted earnings per common share:
Net income .............................. $ 1.26 $ 1.12 $ 3.56 $ 3.10
Weighted average common shares
outstanding - diluted ................ 103,272 107,278 104,799 105,804
The accompanying notes are an integral part of these statements.
2
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(in thousands, except per share data)
(unaudited)
September 30, December 31,
2004 2003
------------- ------------
Assets
Current assets:
Cash and cash equivalents ....................... $ 201,036 $ 154,958
Accounts receivable, net of allowance of
$205,584 and $211,739 at September 30,
2004 and December 31, 2003, respectively ..... 686,045 609,187
Inventories ..................................... 73,219 72,484
Deferred income taxes ........................... 98,242 108,975
Prepaid expenses and other current assets ....... 54,293 50,182
---------- ----------
Total current assets ........................ 1,112,835 995,786
Property, plant and equipment, net .............. 618,001 607,305
Goodwill, net ................................... 2,517,338 2,518,875
Intangible assets, net .......................... 12,378 16,978
Deferred income taxes ........................... 33,031 49,635
Other assets .................................... 101,375 112,839
---------- ----------
Total assets .................................... $4,394,958 $4,301,418
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........... $ 649,710 $ 649,850
Short-term borrowings and current portion
of long-term debt ............................ 130,182 73,950
---------- ----------
Total current liabilities ................... 779,892 723,800
Long-term debt .................................. 971,810 1,028,707
Other liabilities ............................... 165,572 154,217
Commitments and contingencies
Common stockholders' equity:
Common stock, par value $0.01 per share;
300,000 shares authorized; 106,797 and
106,804 shares issued at September 30,
2004 and December 31, 2003, respectively ..... 1,068 1,068
Additional paid-in capital ...................... 2,214,259 2,267,014
Retained earnings ............................... 707,684 380,559
Unearned compensation ........................... (205) (2,346)
Accumulated other comprehensive income .......... 190 5,947
Treasury stock, at cost; 5,760 and 3,990
shares at September 30, 2004 and
December 31, 2003, respectively .............. (445,312) (257,548)
---------- ----------
Total common stockholders' equity ........... 2,477,684 2,394,694
---------- ----------
Total liabilities and stockholders' equity ...... $4,394,958 $4,301,418
========== ==========
The accompanying notes are an integral part of these statements.
3
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(in thousands)
(unaudited)
2004 2003
--------- ---------
Cash flows from operating activities:
Net income ............................................. $ 373,122 $ 328,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 126,455 113,500
Provision for doubtful accounts ........................ 172,027 172,102
Deferred income tax provision .......................... 31,391 16,589
Minority share of income ............................... 14,366 12,825
Stock compensation expense ............................. 1,179 4,093
Tax benefits associated with stock-based
compensation plans .................................. 54,156 17,880
Other, net ............................................. 2,526 (1,791)
Changes in operating assets and liabilities:
Accounts receivable ................................. (248,885) (231,991)
Accounts payable and accrued expenses ............... (10,251) (67,359)
Integration, settlement and other special charges ... (17,426) (13,769)
Income taxes payable ................................ 27,161 43,707
Other assets and liabilities, net ................... 9,386 6,255
--------- ---------
Net cash provided by operating activities .............. 535,207 400,513
--------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired ............ -- (237,538)
Capital expenditures ................................... (134,146) (121,690)
Proceeds from disposition of assets .................... 7,551 9,034
Increase in investments and other assets ............... (3,177) (11,450)
--------- ---------
Net cash used in investing activities .................. (129,772) (361,644)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings ............................... 304,921 450,000
Repayments of debt ..................................... (305,908) (372,806)
Purchases of treasury stock ............................ (381,145) (124,081)
Exercise of stock options .............................. 83,085 16,773
Dividends paid ......................................... (46,214) --
Distributions to minority partners ..................... (11,982) (10,580)
Financing costs paid ................................... (2,114) (4,227)
Other .................................................. -- 343
--------- ---------
Net cash used in financing activities .................. (359,357) (44,578)
--------- ---------
Net change in cash and cash equivalents ................ 46,078 (5,709)
Cash and cash equivalents, beginning of period ......... 154,958 96,777
--------- ---------
Cash and cash equivalents, end of period ............... $ 201,036 $ 91,068
========= =========
The accompanying notes are an integral part of these statements.
4
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, unless otherwise indicated)
(unaudited)
1. BASIS OF PRESENTATION
Background
Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or
the "Company") is the largest clinical laboratory testing business in the United
States. As the nation's leading provider of diagnostic testing and related
services for the healthcare industry, Quest Diagnostics offers a broad range of
clinical laboratory testing services to physicians, hospitals, managed care
organizations, employers, governmental institutions and other commercial
clinical laboratories. Quest Diagnostics is the leading provider of esoteric
testing, including gene-based testing, and testing for drugs of abuse. The
Company is also a leading provider of anatomic pathology services and testing to
support clinical trials of new pharmaceuticals worldwide. Through the Company's
national network of laboratories and patient service centers, and its esoteric
testing laboratories and development facilities, Quest Diagnostics offers
comprehensive and innovative diagnostic testing, information and related
services used by physicians and other healthcare customers to diagnose, treat
and monitor diseases and other medical conditions.
On an annual basis, Quest Diagnostics processes over 130 million
requisitions for testing through its extensive network of laboratories and
patient service centers in virtually every major metropolitan area throughout
the United States.
Basis of Presentation
The interim consolidated financial statements reflect all adjustments,
which in the opinion of management are necessary for a fair statement of
financial condition and results of operations for the periods presented. Except
as otherwise disclosed, all such adjustments are of a normal recurring nature.
The interim consolidated financial statements have been compiled without audit.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. These interim consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's 2003 Annual Report on Form 10-K.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income by the
weighted average common shares outstanding. Diluted earnings per common share is
calculated by dividing net income by the weighted average common shares
outstanding after giving effect to all potentially dilutive common shares
outstanding during the period. The if-converted method is used in determining
the dilutive effect of the Company's 1 3/4% contingent convertible debentures
(the "Debentures") in periods when the holders of such securities are permitted
to exercise their conversion rights. Other potentially dilutive securities
include outstanding stock options and restricted common shares granted under the
Company's Employee Equity Participation Program. These securities increased the
weighted average common shares outstanding by 2.0 million shares and 2.3 million
shares for the three and nine months ended September 30, 2004, respectively. For
both the three and nine months ended September 30, 2003, these securities
increased the weighted average common shares outstanding by 2.5 million shares.
Stock-Based Compensation
The Company has chosen to adopt the disclosure only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"), and continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Under this approach, the cost of
restricted stock awards is expensed over their vesting period, while the imputed
cost of stock option grants and discounts offered under the Company's Employee
Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of
the individual grants, but not charged to expense. Stock-based compensation
expense recorded in accordance with APB 25, related to restricted stock awards,
was $0.2 million and $1.2 million for the three months ended September 30, 2004
and 2003, respectively, and $1.2 million and $4.1 million for the nine months
ended September 30, 2004 and 2003, respectively.
5
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
The following table presents net income and basic and diluted earnings per
common share, had the Company elected to recognize compensation cost based on
the fair value at the grant dates for stock option awards and discounts granted
for stock purchases under the Company's ESPP, consistent with the method
prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share
data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income:
Net income, as reported .............. $130,144 $120,024 $373,122 $328,472
Add: Stock-based compensation under
APB 25 ............................ 214 1,217 1,179 4,093
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of
related tax effects ............... (11,770) (12,215) (33,531) (40,144)
-------- -------- -------- --------
Pro forma net income ................. $118,588 $109,026 $340,770 $292,421
======== ======== ======== ========
Earnings per common share:
Basic - as reported .................. $ 1.29 $ 1.15 $ 3.64 $ 3.18
-------- -------- -------- --------
Basic - pro forma .................... $ 1.17 $ 1.04 $ 3.33 $ 2.83
-------- -------- -------- --------
Diluted - as reported ................ $ 1.26 $ 1.12 $ 3.56 $ 3.10
-------- -------- -------- --------
Diluted - pro forma .................. $ 1.15 $ 1.03 $ 3.27 $ 2.80
-------- -------- -------- --------
The fair value of each option grant was estimated on the date of grant
currently calculated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Dividend yield ....................... 0.7% 0.0% 0.7% 0.0%
Risk-free interest rate .............. 3.7% 3.3% 3.1% 2.8%
Expected volatility .................. 46.6% 48.1% 47.2% 48.1%
Expected holding period, in years .... 5 5 5 5
New Accounting Standards
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", as revised
in December 2003 ("FIN 46"). FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. Historically, entities
generally were not consolidated unless the entity was controlled through voting
interests. FIN 46 also requires disclosures about variable interest entities
that a company is not required to consolidate but in which it has a significant
variable interest. The adoption of FIN 46 did not have an impact on the
Company's consolidated financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 03-6, "Participating Securities and the Two-Class Method
under FASB Statement No. 128, Earnings Per Share", ("Issue 03-6"), effective
June 30, 2004. Issue 03-6 requires the use of the two-class method to compute
earnings per share for companies that have issued securities other than common
stock that contractually entitle the holder to participate in dividends and
earnings of the company when, and if, it declares dividends on its common stock.
The contingent interest feature of the Debentures represents a participation
right, thereby qualifying the Debentures as a participating security and
requiring the use of the two-class method for purposes of calculating earnings
per common share when holders of the security are entitled to receive contingent
interest. The holders of the Debentures will receive contingent interest, and
the Company would be required to utilize the two-class method, if the Debentures
trade at a price greater than or equal to 120% of the principal amount of the
Debentures (or $1,200
6
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
per Debenture) for periods specified under the indenture. For the periods
presented, the holders of the Debentures were not entitled to contingent
interest and as such, the two-class method has not been utilized to compute
earnings per common share. For purposes of presenting diluted earnings per
common share, a company would reflect the more dilutive effect of either the
if-converted or the two-class methods. Had utilization of the two-class method
been required, basic and diluted earnings per common share for the three and
nine months ended September 30, 2004, as presented, would have been reduced by
approximately 3%. The if-converted method is used in determining the dilutive
effect of the Debentures in periods when the holders of such securities are
permitted to exercise their conversion rights. For the periods presented, the
holders of the Debentures did not have the ability to exercise their conversion
rights. Had the use of the if-converted method been required to give effect to
the conversion of the Debentures, diluted earnings per common share for the
three and nine months ended September 30, 2004 would have been reduced by
approximately 2%. As such, the use of the two-class method would have resulted
in an additional 1% dilution beyond the 2% dilution calculated using the
if-converted method.
In September 2004, the EITF reached a final consensus on Issue 04-8, "The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share",
("Issue 04-8"), effective December 31, 2004. Issue 04-8 requires that the
Debentures be included in the dilutive earnings per common share calculation (if
dilutive) using the if-converted method, regardless of whether the holders of
these securities are permitted to exercise their conversion rights, and be
applied by retroactively restating previously reported diluted earnings per
common share. As noted above, the use of the if-converted method to account for
the impact of the Debentures would have reduced diluted earnings per common
share by approximately 2%. The Company expects that this change in accounting
will reduce diluted earnings per common share for the three and twelve months
ended December 31, 2004 by approximately $0.03 and $0.10, respectively, and
for the three and twelve months ended December 31, 2003 by $0.02 and $0.08,
respectively.
2. BUSINESS ACQUISITION
On February 28, 2003, the Company completed the acquisition of Unilab
Corporation ("Unilab"), the leading commercial clinical laboratory in
California. In connection with the acquisition of Unilab, the Company entered
into an agreement to sell to Laboratory Corporation of America Holdings, Inc.,
certain assets in northern California (the "Divestiture"). During the fourth
quarter of 2003, the Company finalized its plan related to the integration of
Unilab into the Company's laboratory network. As part of the plan, and following
the Divestiture, the Company closed its previously owned clinical laboratory in
the San Francisco Bay area and completed the integration of remaining customers
in the northern California area to Unilab's laboratories in San Jose and
Sacramento. The Company currently operates two laboratories in the Los Angeles
metropolitan area. The Company plans to open a new regional laboratory in the
Los Angeles metropolitan area and then integrate its business in the Los Angeles
metropolitan area into the new facility.
The following unaudited pro forma combined financial information for the
nine months ended September 30, 2003, assumes that the acquisition of Unilab and
the related Divestiture were completed on January 1, 2003 (in thousands, except
per share data):
Nine Months Ended
September 30, 2003
------------------
Pro forma
------------------
Net revenues ......................... $3,599,870
Net income ........................... 336,698
Basic earnings per common share:
Net income ........................... $ 3.21
Weighted average common shares
outstanding - basic ............... 104,807
Diluted earnings per common share:
Net income ........................... $ 3.14
Weighted average common shares
outstanding - diluted ............. 107,333
7
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
The unaudited pro forma combined financial information presented above
reflects certain reclassifications to the historical financial statements of
Unilab to conform the acquired company's accounting policies and classification
of certain costs and expenses to that of Quest Diagnostics. These adjustments
had no impact on pro forma net income. Pro forma results for the nine months
ended September 30, 2003 exclude $14.5 million of direct transaction costs,
which were incurred and expensed by Unilab immediately prior to the closing of
the Unilab acquisition.
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill at September 30, 2004 and December 31, 2003 consisted of the
following:
September 30, December 31,
2004 2003
------------- ------------
Goodwill ............................. $2,705,391 $2,706,928
Less: accumulated amortization ....... (188,053) (188,053)
---------- ----------
Goodwill, net ........................ $2,517,338 $2,518,875
========== ==========
The changes in the gross carrying amount of goodwill for the nine month
period ended September 30, 2004 and for the year ended December 31, 2003 are as
follows:
September 30, December 31,
2004 2003
------------- ------------
Balance at beginning of period ....... $2,706,928 $1,976,903
Goodwill acquired during the period .. -- 730,025
Other ................................ (1,537) --
---------- ----------
Balance at end of period ............. $2,705,391 $2,706,928
========== ==========
Intangible assets at September 30, 2004 and December 31, 2003 consisted of
the following:
Weighted September 30, 2004 December 31, 2003
Average -------------------------------- --------------------------------
Amortization Accumulated Accumulated
Period Cost Amortization Net Cost Amortization Net
------------ ------- ------------ ------- ------- ------------ -------
Non-compete agreements ............... 5 years $44,942 $(41,910) $ 3,032 $44,942 $(37,947) $ 6,995
Customer lists ....................... 15 years 42,225 (36,931) 5,294 42,225 (35,568) 6,657
Other ................................ 10 years 6,850 (2,798) 4,052 5,895 (2,569) 3,326
------- -------- ------- ------- -------- -------
Total ............................. 10 years $94,017 $(81,639) $12,378 $93,062 $(76,084) $16,978
======= ======== ======= ======= ======== =======
Amortization expense related to intangible assets was $1,664 and $2,055 for
the three months ended September 30, 2004 and 2003, respectively. For the nine
months ended September 30, 2004 and 2003, amortization expense related to
intangible assets was $5,786 and $6,146, respectively.
8
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
The estimated amortization expense related to intangible assets for each of
the five succeeding fiscal years and thereafter as of September 30, 2004 is as
follows:
Fiscal Year Ending
December 31,
- ---------------------------
Remainder of 2004.......... $ 986
2005....................... 3,704
2006....................... 2,428
2007....................... 1,038
2008....................... 847
2009....................... 750
Thereafter................. 2,625
-------
Total................... $12,378
=======
4. DEBT
Term Loan due December 2008
On December 19, 2003, the Company entered into a new $75 million amortizing
term loan facility (the "term loan due December 2008"), which was funded on
January 12, 2004 and the proceeds of which were used to repay $75 million of
outstanding principal under the Company's term loan due June 2007. Interest is
based on LIBOR plus an applicable margin that can fluctuate over a range of up
to 119 basis points, based on changes in the Company's public debt ratings. As
of September 30, 2004, the Company's borrowing rate for LIBOR-based loans was
LIBOR plus 0.55%. The term loan due December 2008 requires principal repayments
of the initial amount borrowed equal to 20% on each of the third and fourth
anniversary dates of the funding and the remainder of the outstanding balance on
December 31, 2008. The term loan due December 2008 is guaranteed by the
Company's wholly owned subsidiaries that operate clinical laboratories in the
United States (the "Subsidiary Guarantors").
2004 Debt Refinancings
On April 20, 2004, the Company entered into a new $500 million senior
unsecured revolving credit facility which replaced a $325 million unsecured
revolving credit facility. Under the new $500 million senior unsecured revolving
credit facility (the "Credit Facility"), which matures in April 2009, interest
is based on certain published rates plus an applicable margin that will vary
over an approximate range of 90 basis points based on changes in the Company's
public debt ratings. At the option of the Company, it may elect to enter into
LIBOR-based interest rate contracts for periods up to 180 days. Interest on any
outstanding amounts not covered under the LIBOR-based interest rate contracts is
based on an alternate base rate, which is calculated by reference to the prime
rate or federal funds rate. As of September 30, 2004, the Company's borrowing
rate for LIBOR-based loans was LIBOR plus 0.625%. The Credit Facility is
guaranteed by the Subsidiary Guarantors. The Credit Facility contains various
covenants, including the maintenance of certain financial ratios, which could
impact the Company's ability to, among other things, incur additional
indebtedness.
In addition, on April 20, 2004, the Company entered into a new $300 million
receivables securitization facility which replaced a $250 million receivables
securitization facility that matured in April 2004. The new $300 million
receivables securitization facility (the "Secured Receivables Credit Facility")
matures in April 2007. Interest on the Secured Receivables Credit Facility is
based on rates that are intended to approximate commercial paper rates for
highly rated issuers. The Secured Receivables Credit Facility is supported by
one-year back-up facilities provided by two banks on a committed basis.
Borrowings outstanding under the Secured Receivables Credit Facility, if any,
are classified as a current liability on the Company's consolidated balance
sheet since the lenders fund the borrowings through the issuance of commercial
paper which matures at various dates within one year from the date of issuance
and the term of the one-year back-up facilities described above.
9
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
On April 30, 2004, the Company repaid the remaining $230 million of
principal outstanding under its term loan due June 2007 with $100 million of
borrowings under the Credit Facility and $130 million of borrowings under the
Secured Receivables Credit Facility.
In conjunction with the debt refinancings, the Company recorded a $2.9
million charge to earnings in the second quarter of 2004 representing the
write-off of deferred financing costs associated with the debt that was
refinanced. The $2.9 million charge was included in interest expense, net within
the consolidated statements of operations for the nine months ended September
30, 2004.
5. COMMITMENTS AND CONTINGENCIES
The Company has standby letters of credit issued under its $68 million
letter of credit lines to ensure its performance or payment to third parties,
which amounted to $55 million at September 30, 2004. The letters of credit,
which are renewed annually, primarily represent collateral for current and
future automobile liability and workers' compensation loss payments.
The Company has entered into several settlement agreements with various
government and private payers during recent years relating to industry-wide
billing and marketing practices that had been substantially discontinued by the
mid-1990s. The Company is aware of certain pending lawsuits relating to billing
practices filed under the qui tam provisions of the civil False Claims Act and
other state and local statutes. Some of the proceedings against the Company
involve claims that are substantial in amount.
On October 25, 2004, the Company and its test kit manufacturing
subsidiary, Nichols Institute Diagnostics, each received a subpoena from the
United States Attorney's office for the Eastern District of New York. The
subpoenas seek the production of various business records, including documents
related to tests cleared by the Food and Drug Administration for parathyroid
hormone, or PTH, levels. The Company intends to cooperate with the government's
investigation. Nichols Institute Diagnostics manufactures and markets diagnostic
test kits and systems primarily for esoteric testing. These tests are sold
principally to hospitals, clinical laboratories and dialysis centers. Quest
Diagnostics' net revenues from sales of the PTH test kits and related PTH
laboratory testing are estimated to be less than 1% of consolidated net
revenues.
In addition, the Company is involved in various legal proceedings
arising in the ordinary course of business. Some of the proceedings against the
Company involve claims that are substantial in amount.
Although management believes that established reserves for legal matters
are sufficient, it is possible that additional information (such as the
indication by the government of criminal activity, additional tests being
questioned or other changes in the government's or private claimants' theories
of wrongdoing) may become available which may cause the final resolution of
these matters to exceed established reserves by an amount which could be
material to the Company's results of operations and cash flows in the period
in which such claims are settled. The Company does not believe that these
issues will have a material adverse effect on its overall financial position.
However, the Company understands that there may be pending qui tam claims
brought by former employees or other "whistle blowers", or other pending
claims as to which the Company has not been provided with a copy of the
complaint and accordingly cannot determine the extent of any potential
liability.
As a general matter, providers of clinical laboratory testing services may
be subject to lawsuits alleging negligence or other similar legal claims. These
suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on the Company's client base and
reputation. The Company maintains various liability insurance programs for
claims that could result from providing or failing to provide clinical
laboratory testing services, including inaccurate testing results and other
exposures. The Company's insurance coverage limits its maximum exposure on
individual claims; however, the Company is essentially self-insured for a
significant portion of these claims. The basis for claims reserves incorporates
actuarially determined losses based upon the Company's historical and projected
loss experience. Management believes that present insurance coverage and
reserves are sufficient to cover currently estimated exposures. Although
management cannot predict the outcome of any claims made against the Company,
management does not anticipate that the ultimate outcome of any such proceedings
or claims will have a material adverse effect on the Company's financial
position but may be material to the Company's results of operations and cash
flows in the period in which such claims are resolved.
10
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
6. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the nine months ended September 30,
2004 were as follows:
Accumulated
Shares of Other
Common Additional Compre- Treasury Compre-
Stock Common Paid-In Retained Unearned hensive Stock, at hensive
Outstanding Stock Capital Earnings Compensation Income Cost Income
-----------------------------------------------------------------------------------------
Balance,
December 31, 2003 .......... 102,814 $1,068 $2,267,014 $380,559 $(2,346) $ 5,947 $(257,548)
Net income .................... 373,122 $373,122
Other comprehensive loss ...... (5,757) (5,757)
--------
Comprehensive income ....... $367,365
========
Dividends declared ............ (45,997)
Issuance of common stock
under benefit plans ........ 144 1 1,524 962 8,126
Exercise of stock options ..... 2,701 (102,170) 185,255
Shares to cover employee
payroll tax withholdings
on stock issued under
benefit plans .............. (76) (1) (6,265)
Tax benefits associated
with stock-based
compensation plans ......... 54,156
Amortization of unearned
compensation ............... 1,179
Purchases of treasury stock ... (4,546) (381,145)
-------------------------------------------------------------------------------
Balance,
September 30, 2004 ......... 101,037 $1,068 $2,214,259 $707,684 $ (205) $ 190 $(445,312)
===============================================================================
In 2003, the Company's Board of Directors authorized a share repurchase
program, which permits the Company to purchase up to $600 million of its common
stock. In July 2004, the Company's Board of Directors authorized the Company to
purchase up to an additional $300 million of its common stock. For the three
months ended September 30, 2004, the Company repurchased approximately 1.3
million shares of its common stock at an average price of $81.64 per share for a
total of $110 million. For the nine months ended September 30, 2004, the Company
repurchased approximately 4.5 million shares of its common stock at an average
price of $83.84 per share for a total of $381 million. Through September 30,
2004, the Company has repurchased approximately 8.5 million shares of its common
stock at an average price of $74.82 for a total of $639 million. At September
30, 2004, $261 million of the share repurchase authorization remained available.
For the three and nine months ended September 30, 2004, the Company reissued
approximately 0.7 million shares and 2.8 million shares, respectively, in
connection with employee benefit plans.
During the first quarter of 2004, the Company's Board of Directors declared
a quarterly cash dividend of $0.15 per common share payable on April 21, 2004 to
shareholders of record on April 7, 2004. The quarterly dividend was paid on
April 21, 2004 and totaled $15.5 million. During the second quarter of 2004, the
Company's Board of Directors declared a quarterly cash dividend of $0.15 per
common share payable on July 21, 2004 to shareholders of record on July 7, 2004
and totaled $15.3 million. During the third quarter of 2004, the Company's Board
of Directors declared a quarterly cash dividend of $0.15 per common share
payable on October 22, 2004 to shareholders of record on October 8, 2004 and
totaled $15.2 million.
11
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Changes in stockholders' equity for the nine months ended September 30,
2003 were as follows:
Accumulated
Other
Shares of Retained Compre-
Common Additional Earnings hensive Treasury Compre-
Stock Common Paid-In (Accumulated Unearned Income Stock, at hensive
Outstanding Stock Capital Deficit) Compensation (Loss) Cost Income
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2002 .......... 97,963 $ 980 $1,817,511 $(40,772) $(3,332) $(5,524) $ --
Net income .................... 328,472 $328,472
Other comprehensive
income ..................... 4,862 4,862
--------
Comprehensive income ....... $333,334
========
Shares issued to acquire
Unilab ..................... 7,055 71 372,393
Fair value of Unilab
converted options .......... 8,452
Issuance of common stock
under benefit plans ........ 329 3 14,527 (4,365)
Exercise of stock options ..... 928 9 16,764
Shares to cover employee
payroll tax withholdings
on stock issued under
benefit plans .............. (174) (2) (9,328)
Tax benefits associated with
stock-based compensation
plans ...................... 17,880
Amortization of unearned
compensation ............... 4,093
Purchases of treasury stock ... (2,355) (141,334)
-----------------------------------------------------------------------------------
Balance,
September 30, 2003 ......... 103,746 $1,061 $2,238,199 $287,700 $(3,604) $ (662) $(141,334)
===================================================================================
12
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
7. SUPPLEMENTAL CASH FLOW & OTHER DATA
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Depreciation expense ................ $ 40,874 $ 36,473 $120,669 $107,354
Interest expense .................... (14,067) (14,580) (45,885) (45,758)
Interest income ..................... 437 108 1,265 511
-------- -------- -------- --------
Interest expense, net ............... (13,630) (14,472) (44,620) (45,247)
Interest paid ....................... 21,505 22,455 47,420 55,000
Income taxes paid ................... 30,952 49,637 143,343 150,267
Businesses acquired:
Fair value of assets acquired ....... $ -- $ 1,129 $ -- $978,995
Fair value of liabilities assumed ... -- 1,129 -- 280,639
Non-cash financing activities:
Treasury stock purchases not
settled .......................... $ -- $ 17,253 $ -- $ 17,253
Fair value of common stock issued
to acquire Unilab ................ -- -- -- 372,464
Fair value of converted options
issued in conjunction with the
Unilab acquisition ............... -- -- -- 8,452
8. SUMMARIZED FINANCIAL INFORMATION
The Company's 6 3/4% senior notes due 2006, 7 1/2% senior notes due 2011
and 1 3/4% contingent convertible debentures due 2021 are guaranteed by the
Subsidiary Guarantors. With the exception of Quest Diagnostics Receivables
Incorporated (see paragraph below), the non-guarantor subsidiaries are primarily
foreign subsidiaries and less than wholly owned subsidiaries.
In conjunction with the receivables securitization, the Company formed a
new wholly owned non-guarantor subsidiary, Quest Diagnostics Receivables
Incorporated ("QDRI"). Through March 31, 2004, the Company and the Subsidiary
Guarantors, with the exception of American Medical Laboratories, Incorporated
("AML") and Unilab, transferred all private domestic receivables (principally
excluding receivables due from Medicare, Medicaid and other federal programs,
and receivables due from customers of its joint ventures) to QDRI. In
conjunction with the Company's new $300 million Secured Receivables Credit
Facility, effective in the second quarter of 2004, the Company and the
Subsidiary Guarantors, including AML and Unilab, transfer all private domestic
receivables to QDRI. QDRI utilizes the transferred receivables to collateralize
the Company's Secured Receivables Credit Facility. The Company and the
Subsidiary Guarantors provide collection services to QDRI. QDRI uses cash
collections principally to purchase new receivables from the Company and the
Subsidiary Guarantors.
The following condensed consolidating financial data illustrates the
composition of the combined guarantors. Investments in subsidiaries are
accounted for by the parent using the equity method for purposes of the
supplemental consolidating presentation. Earnings (losses) of subsidiaries are
therefore reflected in the parent's investment accounts and earnings. The
principal elimination entries relate to investments in subsidiaries and
intercompany balances and transactions. On February 28, 2003, Quest Diagnostics
acquired Unilab, which has been included in the accompanying condensed
consolidating financial data, subsequent to the closing of the acquisition, as a
Subsidiary Guarantor.
13
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2004
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Net revenues .............................. $208,270 $1,016,843 $ 131,491 $(66,707) $ 1,289,897
Operating costs and expenses:
Cost of services ....................... 111,829 592,352 44,243 -- 748,424
Selling, general and administrative .... 22,871 221,531 68,788 (4,942) 308,248
Amortization of intangible assets ...... 381 1,274 9 -- 1,664
Royalty (income) expense ............... (83,418) 83,418 -- -- --
Other operating income, net ............ (3) (3) (136) -- (142)
-------- ---------- --------- -------- -----------
Total operating costs and expenses .. 51,660 898,572 112,904 (4,942) 1,058,194
-------- ---------- --------- -------- -----------
Operating income .......................... 156,610 118,271 18,587 (61,765) 231,703
Non-operating expenses, net ............... (18,611) (55,217) (909) 61,765 (12,972)
-------- ---------- --------- -------- -----------
Income before taxes ....................... 137,999 63,054 17,678 -- 218,731
Income tax expense ........................ 56,127 25,221 7,239 -- 88,587
-------- ---------- --------- -------- -----------
Income before equity earnings ............. 81,872 37,833 10,439 -- 130,144
Equity earnings from subsidiaries ......... 48,272 -- -- (48,272) --
-------- ---------- --------- -------- -----------
Net income ................................ $130,144 $ 37,833 $ 10,439 $(48,272) $ 130,144
======== ========== ========= ======== ===========
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------
Net revenues .............................. $199,163 $962,175 $113,763 $(53,880) $1,221,221
Operating costs and expenses:
Cost of services ....................... 118,426 551,450 41,304 -- 711,180
Selling, general and administrative .... 17,602 223,405 55,398 (3,992) 292,413
Amortization of intangible assets ...... 218 1,828 9 -- 2,055
Royalty (income) expense ............... (73,098) 73,098 -- -- --
Other operating (income) expense, net .. -- (2,217) 267 -- (1,950)
-------- -------- -------- -------- ----------
Total operating costs and expenses .. 63,148 847,564 96,978 (3,992) 1,003,698
-------- -------- -------- -------- ----------
Operating income .......................... 136,015 114,611 16,785 (49,888) 217,523
Non-operating expenses, net ............... (15,953) (47,250) (1,455) 49,888 (14,770)
-------- -------- -------- -------- ----------
Income before taxes ....................... 120,062 67,361 15,330 -- 202,753
Income tax expense ........................ 49,813 26,945 5,971 -- 82,729
-------- -------- -------- -------- ----------
Income before equity earnings ............. 70,249 40,416 9,359 -- 120,024
Equity earnings from subsidiaries ......... 49,775 -- -- (49,775) --
-------- -------- -------- -------- ----------
Net income ................................ $120,024 $ 40,416 $ 9,359 $(49,775) $ 120,024
======== ======== ======== ======== ==========
14
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2004
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net revenues ............................... $ 618,043 $3,030,825 $386,408 $(191,963) $3,843,313
Operating costs and expenses:
Cost of services ........................ 348,111 1,753,149 132,022 -- 2,233,282
Selling, general and administrative ..... 78,315 668,050 191,050 (14,220) 923,195
Amortization of intangible assets ....... 1,407 4,352 27 -- 5,786
Royalty (income) expense ................ (247,385) 247,385 -- -- --
Other operating expense, net ............ 9,883 19 547 -- 10,449
--------- ---------- -------- --------- ----------
Total operating costs and expenses ... 190,331 2,672,955 323,646 (14,220) 3,172,712
--------- ---------- -------- --------- ----------
Operating income ........................... 427,712 357,870 62,762 (177,743) 670,601
Non-operating expenses, net ................ (54,139) (164,237) (2,872) 177,743 (43,505)
--------- ---------- -------- --------- ----------
Income before taxes ........................ 373,573 193,633 59,890 -- 627,096
Income tax expense ......................... 153,112 77,453 23,409 -- 253,974
--------- ---------- -------- --------- ----------
Income before equity earnings .............. 220,461 116,180 36,481 -- 373,122
Equity earnings from subsidiaries .......... 152,661 -- -- (152,661) --
--------- ---------- -------- --------- ----------
Net income ................................. $ 373,122 $ 116,180 $ 36,481 $(152,661) $ 373,122
========= ========== ======== ========= ==========
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net revenues ............................... $ 594,443 $2,768,500 $349,472 $(178,462) $3,533,953
Operating costs and expenses:
Cost of services ........................ 347,796 1,595,731 118,874 -- 2,062,401
Selling, general and administrative ..... 54,874 656,213 168,365 (11,778) 867,674
Amortization of intangible assets ....... 1,328 4,809 9 -- 6,146
Royalty (income) expense ................ (213,063) 213,063 -- -- --
Other operating (income) expense, net ... -- (2,224) 507 -- (1,717)
--------- ---------- -------- --------- ----------
Total operating costs and expenses ... 190,935 2,467,592 287,755 (11,778) 2,934,504
--------- ---------- -------- --------- ----------
Operating income ........................... 403,508 300,908 61,717 (166,684) 599,449
Non-operating expenses, net ................ (50,792) (156,115) (4,274) 166,684 (44,497)
--------- ---------- -------- --------- ----------
Income before taxes ........................ 352,716 144,793 57,443 -- 554,952
Income tax expense ......................... 144,932 57,917 23,631 -- 226,480
--------- ---------- -------- --------- ----------
Income before equity earnings .............. 207,784 86,876 33,812 -- 328,472
Equity earnings from subsidiaries .......... 120,688 -- -- (120,688) --
--------- ---------- -------- --------- ----------
Net income ................................. $ 328,472 $ 86,876 $ 33,812 $(120,688) $ 328,472
========= ========== ======== ========= ==========
15
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Balance Sheet
September 30, 2004
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
---------- ---------- ------------ ------------ ------------
Assets
Current assets:
Cash and cash equivalents ................. $ 185,315 $ 3,237 $ 12,484 $ -- $ 201,036
Accounts receivable, net .................. 25,504 92,070 568,471 -- 686,045
Other current assets ...................... 30,802 106,955 87,997 -- 225,754
---------- ---------- --------- ----------- ----------
Total current assets ................... 241,621 202,262 668,952 -- 1,112,835
Property, plant and equipment, net ........ 218,687 373,889 25,425 -- 618,001
Goodwill and intangible assets, net ....... 158,289 2,326,043 45,384 -- 2,529,716
Intercompany receivable (payable) ......... 606,013 (205,733) (400,280) -- --
Investment in subsidiaries ................ 2,065,716 -- -- (2,065,716) --
Other assets .............................. 42,421 54,011 37,974 -- 134,406
---------- ---------- --------- ----------- ----------
Total assets ........................... $3,332,747 $2,750,472 $ 377,455 $(2,065,716) $4,394,958
========== ========== ========= =========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ..... $ 379,253 $ 241,987 $ 28,470 $ -- $ 649,710
Short-term borrowings and current portion
of long-term debt ....................... -- 261 129,921 -- 130,182
---------- ---------- --------- ----------- ----------
Total current liabilities .............. 379,253 242,248 158,391 -- 779,892
Long-term debt ............................ 416,092 553,762 1,956 -- 971,810
Other liabilities ......................... 59,718 81,360 24,494 -- 165,572
Common stockholders' equity ............... 2,477,684 1,873,102 192,614 (2,065,716) 2,477,684
---------- ---------- --------- ----------- ----------
Total liabilities and stockholders'
equity .............................. $3,332,747 $2,750,472 $ 377,455 $(2,065,716) $4,394,958
========== ========== ========= =========== ==========
Condensed Consolidating Balance Sheet
December 31, 2003
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
---------- ---------- ------------ ------------ ------------
Assets
Current assets:
Cash and cash equivalents ................. $ 141,588 $ 1,991 $ 11,379 $ -- $ 154,958
Accounts receivable, net .................. 17,919 164,247 427,021 -- 609,187
Other current assets ...................... 36,576 114,758 80,307 -- 231,641
---------- ---------- --------- ----------- ----------
Total current assets ................... 196,083 280,996 518,707 -- 995,786
Property, plant and equipment, net ........ 228,109 350,196 29,000 -- 607,305
Goodwill and intangible assets, net ....... 158,295 2,332,147 45,411 -- 2,535,853
Intercompany receivable (payable) ......... 510,958 (106,078) (404,880) -- --
Investment in subsidiaries ................ 1,929,235 -- -- (1,929,235) --
Other assets .............................. 73,398 50,053 39,023 -- 162,474
---------- ---------- --------- ----------- ----------
Total assets ........................... $3,096,078 $2,907,314 $ 227,261 $(1,929,235) $4,301,418
========== ========== ========= =========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ..... $ 337,635 $ 281,753 $ 30,462 $ -- $ 649,850
Current portion of long-term debt ......... -- 73,950 -- -- 73,950
---------- ---------- --------- ----------- ----------
Total current liabilities .............. 337,635 355,703 30,462 -- 723,800
Long-term debt ............................ 315,844 710,908 1,955 -- 1,028,707
Other liabilities ......................... 47,905 83,781 22,531 -- 154,217
Common stockholders' equity ............... 2,394,694 1,756,922 172,313 (1,929,235) 2,394,694
---------- ---------- --------- ----------- ----------
Total liabilities and stockholders'
equity .............................. $3,096,078 $2,907,314 $ 227,261 $(1,929,235) $4,301,418
========== ========== ========= =========== ==========
16
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2004
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income ................................. $ 373,122 $116,180 $ 36,481 $(152,661) $ 373,122
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization ........... 42,786 76,047 7,622 -- 126,455
Provision for doubtful accounts ......... 3,662 34,724 133,641 -- 172,027
Other, net .............................. (59,065) 406 9,616 152,661 103,618
Changes in operating assets and
liabilities .......................... 69,567 (50,924) (258,658) -- (240,015)
--------- -------- --------- --------- ---------
Net cash provided by (used in) operating
activities .............................. 430,072 176,433 (71,298) -- 535,207
Net cash used in investing activities ...... (140,390) (78,038) (5,466) 94,122 (129,772)
Net cash (used in) provided by financing
activities .............................. (245,955) (97,149) 77,869 (94,122) (359,357)
--------- -------- --------- --------- ---------
Net change in cash and cash equivalents .... 43,727 1,246 1,105 -- 46,078
Cash and cash equivalents, beginning
of period ............................... 141,588 1,991 11,379 -- 154,958
--------- -------- --------- --------- ---------
Cash and cash equivalents, end of period ... $ 185,315 $ 3,237 $ 12,484 $ -- $ 201,036
========= ======== ========= ========= =========
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income ................................. $ 328,472 $ 86,876 $ 33,812 $(120,688) $ 328,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........... 39,945 67,017 6,538 -- 113,500
Provision for doubtful accounts ......... 4,468 47,867 119,767 -- 172,102
Other, net .............................. (76,240) (6,874) 12,022 120,688 49,596
Changes in operating assets and
liabilities .......................... (15,149) (140,340) (107,668) -- (263,157)
--------- --------- --------- --------- ---------
Net cash provided by operating
activities .............................. 281,496 54,546 64,471 -- 400,513
Net cash used in investing activities ...... (265,518) (62,282) (13,202) (20,642) (361,644)
Net cash (used in) provided by financing
activities .............................. (15,692) 3,526 (53,054) 20,642 (44,578)
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents .... 286 (4,210) (1,785) -- (5,709)
Cash and cash equivalents, beginning
of period ............................... 79,015 7,377 10,385 -- 96,777
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ... $ 79,301 $ 3,167 $ 8,600 $ -- $ 91,068
========= ========= ========= ========= =========
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
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 it 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 2003 Annual
Report on Form 10-K.
Integration of Unilab Corporation
On February 28, 2003, we completed the acquisition of Unilab Corporation,
or Unilab, the leading commercial clinical laboratory in California. In
connection with the acquisition of Unilab, we entered into an agreement to sell
to Laboratory Corporation of America Holdings, Inc., certain assets in northern
California, or the Divestiture. During the fourth quarter of 2003, we finalized
our plan related to the integration of Unilab into our laboratory network. As
part of the plan, and following the Divestiture, we closed our previously owned
clinical laboratory in the San Francisco Bay area and completed the integration
of remaining customers in the northern California area to Unilab's laboratories
in San Jose and Sacramento. We currently operate two laboratories in the Los
Angeles metropolitan area. We plan to open a new regional laboratory in the Los
Angeles metropolitan area and then integrate our business in the Los Angeles
metropolitan area into the new facility.
Results of Operations
Three and Nine Months Ended September 30, 2004 Compared with Three and Nine
Months Ended September 30, 2003
Net income for the three months ended September 30, 2004 increased to $130
million from $120 million for the prior year period. For the nine months ended
September 30, 2004, net income increased to $373 million from $328 million for
the prior year period. These increases in earnings were primarily attributable
to revenue growth and efficiencies generated from our Six Sixma and
standardization initiatives, partially offset by investments in our operations.
During the quarter ended September 30, 2004, we estimate the impact of
hurricanes on our business in the southeastern part of the United States
reduced revenue growth by slightly more than one-half of a percent and reduced
earnings per common share by $0.03. In addition, for the nine-month period
ended September 30, 2004, the increase in earnings was partially offset by the
impact of $13.2 million in pre-tax charges recorded in the second quarter of
2004. Of the $13.2 million of charges incurred in the second quarter of 2004,
$10.3 million related to the acceleration of certain pension obligations in
connection with the CEO succession process with the remaining $2.9 million
representing the write-off of deferred financing costs associated with the
refinancing of our bank debt and credit facility. These charges served to
reduce reported net income for the nine months ended September 30, 2004 by
$7.9 million.
Net Revenues
Net revenues for the three months ended September 30, 2004 grew by 5.6%
over the prior year level. This increase was driven by improvements in testing
volumes and increases in average revenue per requisition, partially offset by
the impact of hurricanes, which we estimate reduced revenue growth by slightly
more than one-half of a percent. Net revenues for the nine months ended
September 30, 2004 grew by 8.8% over the prior year level and include nine
months of Unilab's results, which was acquired on February 28, 2003, compared to
seven months of Unilab's results in the prior year. Pro forma revenue growth,
assuming that the Unilab acquisition and the related Divestiture had been
completed on January 1, 2003, was 6.8% for the nine months ended September 30,
2004.
For the three and nine months ended September 30, 2004, clinical testing
volume, measured by the number of requisitions, increased 3.3% and 5.3%,
respectively, compared to the prior year periods. The improvement in testing
18
volume for the three months ended September 30, 2004 reflects an estimated
reduction of just over one-half of a percent due to hurricanes. On a pro forma
basis, assuming that the Unilab acquisition and the Divestiture had been
completed on January 1, 2003, testing volume increased 2.8% for the nine months
ended September 30, 2004.
Average revenue per requisition improved 1.9% and 2.9% for the three and
nine months ended September 30, 2004, respectively, compared to the prior year
periods. These improvements are primarily attributable to a continuing shift in
test mix to higher value testing, including gene-based testing, and increases in
the number of tests ordered per requisition. The improvement for the third
quarter reflects a slower rate of growth than reported in the first half of
2004, and reflects about one-half of a percent reduction from a shift in payer
mix associated with certain new business. The inclusion of Unilab's results
subsequent to February 28, 2003 served to reduce average revenue per requisition
by approximately 0.5% for the nine months ended September 30, 2004, reflecting
Unilab's lower revenue per requisition.
Drugs of abuse testing, which is among our lowest priced services and
accounts for approximately 6% of our volume and 3% of our consolidated net
revenues, grew for the third consecutive quarter after several years of decline.
The growth in drugs of abuse testing contributed to the shift in payer mix
referenced above.
Our businesses, other than clinical laboratory testing, which represent
approximately 4% of our consolidated net revenues, grew approximately 15% and
20% during the three and nine months ended September 30, 2004, respectively,
compared to the prior year periods and contributed approximately one-half of a
percent to reported net revenue growth in both periods.
Operating Costs and Expenses
Total operating costs and expenses for the three and nine months ended
September 30, 2004 increased $54 million and $238 million, respectively, from
the prior year periods primarily due to increases in our clinical testing
volume. The increased costs were primarily in the areas of employee compensation
and benefits and testing supplies. While our cost structure has been favorably
impacted by efficiencies generated from our Six Sigma and standardization
initiatives, we continue to make investments to further improve customer service
levels and pursue our overall business strategy.
Cost of services, which includes the costs of obtaining, transporting and
testing specimens, was 58.0% of net revenues for the three months ended
September 30, 2004, decreasing from 58.2% of net revenues in the prior year
period. For the nine months ended September 30, 2004, cost of services, as a
percentage of net revenues, decreased to 58.1% from 58.4% in the prior year
period. This improvement was primarily the result of the increase in average
revenue per requisition and efficiency gains resulting from our Six Sigma and
standardization initiatives. This improvement was partially offset by initial
installation costs associated with deploying our Internet-based orders and
results systems in physicians' offices and an increase in the number of
phlebotomists in our patient service centers to support an increasing percentage
of our volume generated from these sites. At September 30, 2004, nearly 40% of
our orders and more than 50% of our test results were being transmitted via the
Internet. The increase in the number of orders and test results reported via our
Internet-based systems is improving the initial collection of billing
information which is reducing the cost of billing and bad debt expense, both of
which are components of selling, general and administrative expenses.
Additionally, we believe that the number of physicians who no longer draw blood
in their office continues to increase, which is resulting in an increase in the
number of blood draws in our patient service centers or by our phlebotomists
placed in physicians' offices. This shift has increased our operating costs
associated with our blood draws, but is reducing costs in accessioning and other
parts of our operations due to improved billing information and a reduction in
the number of inadequate patient samples obtained by physician employed
phlebotomists compared to samples collected by our phlebotomists.
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 23.9% of net revenues during the three months ended
September 30, 2004, unchanged from the prior year period. For the nine months
ended September 30, 2004, selling, general and administrative expenses, as a
percentage of net revenues, decreased to 24.0% from 24.6% in the prior year
period. The improvement for the nine-month period was primarily due to
efficiencies from our Six Sigma and standardization initiatives and the
improvement in average revenue per requisition. Partially offsetting these
improvements are additional costs for expanding our sales force and enhancing
their training. During the third quarter of 2004, bad debt expense improved to
4.6% of net revenues, compared to 4.8% in the prior year period. For the nine
months ended September 30, 2004, bad debt expense was 4.5% of net revenues,
compared to 4.9% of net revenues in the prior year period. This decrease
primarily relates to the improved collection of diagnosis, patient and insurance
information necessary to more effectively bill for services performed. We
believe that our Six Sigma and standardization initiatives
19
and the increased use of electronic ordering by our customers will provide
additional opportunities to further improve our overall collection experience
and cost structure.
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. For the nine months ended
September 30, 2004, other operating (income) expense, net includes a $10.3
million charge associated with the acceleration of certain pension obligations
in connection with the CEO succession process. For the three and nine months
ended September 30, 2003, other operating (income) expense, net includes $3.3
million of gains on the sale of certain operating assets, partially offset by a
$1.1 million charge associated with the integration of Unilab.
Operating Income
Operating income for the three months ended September 30, 2004 improved to
$232 million, or 18.0% of net revenues, from $218 million, or 17.8% of net
revenues, in the prior year period. The percentage for the third quarter of 2004
reflects a reduction of approximately 0.6%, contributed equally by the estimated
impact of hurricanes and an increase in bad debt expense compared to the second
quarter of 2004. For the nine months ended September 30, 2004, operating income
improved to $671 million, or 17.4% of net revenues, from $599 million, or 17.0%
of net revenues, in the prior year period. The increases in operating income for
the three and nine months ended September 30, 2004 were principally driven by
revenue growth and efficiencies generated from our Six Sigma and standardization
initiatives, which have reduced both the cost of services and, for the
nine-month period, selling, general and administrative expenses as a percentage
of net revenues. Offsetting these improvements were investments in our
operations and, for the nine-month period, a charge in the second quarter of
2004 of $10.3 million related to the acceleration of certain pension obligations
associated with the CEO succession process. This charge reduced operating
income, as a percentage of net revenues, by 0.3% for the nine months ended
September 30, 2004.
Other Income (Expense)
Interest expense, net for the three and nine months ended September 30,
2004 decreased from the prior year periods primarily due to a reduction in
borrowing costs associated with our 2004 refinancing as well as a reduction in
the amount of debt outstanding, compared to the prior year. In addition,
interest expense, net for the nine months ended September 30, 2004 included a
$2.9 million charge representing the write-off of deferred financing costs
associated with the second quarter 2004 refinancing of our bank debt and credit
facility. Our 2004 debt refinancing, which was done to take advantage of the
improved lending environment and our improved credit profile, is discussed
further in Note 4 to the interim consolidated financial statements.
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.
Impact of Contingent Convertible Debentures on Earnings per Common Share
The if-converted method is used in determining the dilutive effect of our
1 3/4% contingent convertible debentures due 2021, or the Debentures, in periods
when the holders of such securities are permitted to exercise their conversion
rights. As of and for the three and nine months ended September 30, 2004, the
holders of the Debentures did not have the ability to exercise their conversion
rights. Had the requirements to allow the holders to exercise their conversion
rights been met and the Debentures remained outstanding for the entire period,
diluted earnings per common share would have been reduced by approximately 2%
during the three and nine months ended September 30, 2004. See Note 1 to the
interim consolidated financial statements for a discussion of the potential
impact of the Debentures on earnings per common share calculations as a result
of new accounting standards. Also, see Note 11 to the Consolidated Financial
Statements contained in our 2003 Annual Report on Form 10-K for a further
discussion of the Debentures.
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 position or results
of operations. See Note 2 to the Consolidated Financial Statements contained in
our 2003 Annual Report on Form 10-K for additional discussion of our financial
instruments and hedging activities.
20
At both September 30, 2004 and December 31, 2003, the fair value of our
debt was estimated at approximately $1.2 billion, 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, 2004 and December 31,
2003, the estimated fair value exceeded the carrying value of the debt by
approximately $74 million and $86 million, respectively. An assumed 10% increase
in interest rates (representing approximately 45 and 50 basis points at
September 30, 2004 and December 31, 2003, respectively) would reduce the
estimated fair value of our debt by approximately $15 million and $17 million at
September 30, 2004 and December 31, 2003, respectively.
The Debentures have a contingent interest component that will require us to
pay contingent interest based on certain thresholds, as outlined in the
indenture governing the Debentures. The contingent interest component is
considered to be a derivative instrument subject to Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. As such, the derivative was recorded at its fair value
in the consolidated balance sheet and was not material at September 30, 2004 and
December 31, 2003.
Borrowings under our senior unsecured revolving credit facility, our
secured receivables credit facility and our term loan due December 2008 are
subject to variable interest rates. Interest on the 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 are subject to a pricing schedule that can
fluctuate based on changes in our credit rating. As such, our borrowing cost
under these credit arrangements will be subject to both fluctuations in interest
rates and changes in our credit rating. As of September 30, 2004, our borrowing
rates for our LIBOR-based loans ranged from LIBOR plus 0.55% to LIBOR plus
0.625%. At September 30, 2004, there was $130 million of borrowings outstanding
under our $300 million secured receivables credit facility, $100 million of
borrowings outstanding under our $500 million senior unsecured revolving credit
facility and $75 million outstanding under our term loan due December 2008. See
Note 4 to the interim consolidated financial statements for details regarding
the 2004 debt refinancings.
Based on our net exposure to interest rate changes, an assumed 10% change
in interest rates on our variable rate indebtedness (representing approximately
12 basis points) would impact annual net interest expense by approximately $0.6
million, assuming no changes to the debt outstanding at September 30, 2004.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2004 totaled $201 million,
compared to $155 million at December 31, 2003. Cash flows from operating
activities in 2004 were $535 million which were used to fund investing and
financing activities, which required cash of $130 million and $359 million,
respectively. Cash and cash equivalents at September 30, 2003 totaled $91
million, compared to $97 million at December 31, 2002. Cash flows from operating
activities in 2003 provided cash of $401 million which, together with cash
on-hand, were used to fund investing and financing activities, which required
cash of $362 million and $45 million, respectively.
Cash Flows From Operating Activities
Net cash provided by operating activities for the nine months ended
September 30, 2004 was $535 million compared to $401 million in the prior year
period. This increase was primarily due to improved operating performance and
increased tax benefits associated with stock-based compensation plans, partially
offset by an increase in accounts receivable associated with growth in net
revenues. Days sales outstanding, a measure of billing and collection
efficiency, was 48 days at September 30, 2004 unchanged from December 31, 2003.
Cash Flows From Investing Activities
Net cash used in investing activities for the nine months ended September
30, 2004 was $130 million, consisting primarily of capital expenditures of $134
million.
Net cash used in investing activities for the nine months ended September
30, 2003 was $362 million, consisting primarily of acquisition and related
transaction costs of $238 million to acquire the outstanding capital stock of
Unilab, and capital expenditures of $122 million. The acquisition and related
transaction costs included the cash portion of the Unilab purchase price of $297
million and approximately $12 million of transaction costs paid in 2003,
partially offset by $72 million of cash acquired from Unilab.
21
Cash Flows From Financing Activities
Net cash used in financing activities for the nine months ended September
30, 2004 was $359 million, consisting primarily of purchases of treasury stock
totaling $381 million and dividend payments totaling $46 million, partially
offset by $83 million received from the exercise of stock options. In addition,
we repaid the remaining $305 million of principal outstanding under our term
loan due June 2007 with $100 million of borrowings under our senior unsecured
revolving credit facility, $130 million of borrowings under our secured
receivables credit facility and $75 million of borrowings under our term loan
due December 2008. The $381 million in treasury stock purchases represents 4.5
million shares of our common stock repurchased at an average price of $83.84 per
share.
Net cash used in financing activities for the nine months ended September
30, 2003 was $45 million, consisting primarily of $450 million of borrowings
under our term loan due June 2007, partially offset by debt repayments totaling
$373 million. Borrowings under our term loan due June 2007 were used to
finance the cash portion of the purchase price and related transaction costs
associated with the acquisition of Unilab, and to repay $220 million of debt,
representing substantially all of Unilab's then existing outstanding debt, and
related accrued interest. Of the $220 million, $124 million represents payments
related to our cash tender offer which was completed on March 7, 2003, for all
of the outstanding $100.8 million principal amount of Unilab's 12 3/4% senior
subordinated notes due 2009 and $23 million of related tender premium and
associated tender offer costs. The remaining debt repayments in 2003 consisted
primarily of $127 million of repayments under our term loan due June 2007
and $24 million of capital lease repayments. In addition during the nine
months ended September 30, 2003, we repurchased 2.4 million shares of our common
stock at an average price of $60.00 per share for a total of $141 million. At
September 30, 2003, $17 million of the purchases had not been settled and as
such are not included in "cash flows from financing activities" on the
consolidated statement of cash flows.
Dividend Policy
On October 21, 2003, our Board of Directors declared our first payment of a
quarterly cash dividend of $0.15 per common share, which was paid on January 23,
2004. We have paid a $0.15 per common share dividend each quarter since the
first quarter's payment. 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 2003, our Board of Directors authorized a share repurchase program,
which permitted us to purchase up to $600 million of our common stock. In July
2004, our Board of Directors authorized us to purchase up to an additional $300
million of our common stock. For the three months ended September 30, 2004, we
repurchased approximately 1.3 million shares of our common stock at an average
price of $81.64 per share for a total of $110 million. For the nine months ended
September 30, 2004, we repurchased approximately 4.5 million shares of our
common stock at an average price of $83.84 per share for a total of $381
million. Through September 30, 2004, we have repurchased approximately 8.5
million shares of our common stock at an average price of $74.82 for a total of
$639 million under our share repurchase program. At September 30, 2004, the
total available for repurchases under the remaining authorizations was $261
million.
Contractual Obligations and Commitments
A description of the terms of our indebtedness, related debt service
requirements and our future payments under certain of our contractual
obligations is contained in Note 11 to the Consolidated Financial Statements in
our 2003 Annual Report on Form 10-K. A discussion of our debt refinancings in
April 2004 is contained in Note 4 to the interim consolidated financial
statements. A discussion and analysis regarding our minimum rental commitments
under noncancelable operating leases and noncancelable commitments to purchase
products or services at December 31, 2003 is contained in Note 15 to the
Consolidated Financial Statements in our 2003 Annual Report on Form 10-K. See
Note 5 to the interim consolidated financial statements for information
regarding the status of our remaining contractual obligations and commitments.
Our credit agreements relating to our senior unsecured revolving credit
facility and our term loan due December 2008 contain various covenants and
conditions, including the maintenance of certain financial ratios, that could
impact our
22
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.
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, on a combined
basis, are less than 6% of our consolidated net revenues. Total assets
associated with our unconsolidated joint ventures are less than 3% 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 $180 million to $190 million
during 2004 for capital expenditures to support and expand our existing
operations, principally related to investments in information technology,
equipment, and facility upgrades.
In April 2004, we entered into a new $500 million senior unsecured
revolving credit facility which replaced a $325 million unsecured revolving
credit facility. In addition, we entered into a new $300 million secured
receivables credit facility which replaced a $250 million secured receivables
credit facility that matured in April 2004. See Note 4 to the interim
consolidated financial statements for further details regarding the
refinancings. As of September 30, 2004, $400 million of the $500 million senior
unsecured revolving credit facility and $170 million of the $300 million secured
receivables credit facility remained available to us for future borrowing.
We believe that cash from operations and our borrowing capacity under our
credit facilities will provide sufficient financial flexibility to meet seasonal
working capital requirements and to fund capital expenditures, debt service
requirements, cash dividends on common shares, share repurchases and additional
growth opportunities for the foreseeable future. Our investment grade credit
ratings have had a favorable impact on our cost of and access to capital, and we
believe that our strong financial performance 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 January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", as revised
in December 2003. In March 2004, the Emerging Issues Task Force, or EITF,
reached a final consensus on Issue 03-6, "Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings Per Share". In September
2004, the EITF reached a final consensus on Issue 04-8, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share". The impacts
of these accounting standards are discussed in Note 1 to the interim
consolidated financial statements.
23
Forward-Looking Statements
Some statements and disclosures in this document are forward-looking
statements. Forward-looking statements include all statements that do not relate
solely to historical or current facts and can be identified by the use of words
such as "may", "believe", "will", "expect", "project", "estimate", "anticipate",
"plan" or "continue". These forward-looking statements are based on our current
plans and expectations and are subject to a number of risks and uncertainties
that could significantly cause our plans and expectations, including actual
results, to differ materially from the forward-looking statements. The Private
Securities Litigation Reform Act of 1995 (the "Litigation Reform Act") provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation.
We would like to take advantage of the "safe harbor" provisions of the
Litigation Reform Act in connection with the forward-looking statements included
in this document. The risks and other factors that could cause our actual
financial results to differ materially from those projected, forecasted or
estimated by us in forward-looking statements may include, but are not limited
to, unanticipated expenditures, changing relationships with customers, payers,
suppliers and strategic partners, competitive environment, changes in government
regulations, conditions of the economy and other factors described in our 2003
Annual Report on Form 10-K and subsequent filings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
Item 4. Controls and Procedures
(a) Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are adequate and effective.
(b) During the quarterly period covered by this report, there were no changes
in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 to the interim consolidated financial statements for information
regarding the status of legal proceedings involving the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
- ---------------------------------------------------------------------------------------------------------------
(d) Approximate Dollar Value
(a) Total (c) Total Number of Shares of Shares that May Yet Be
Number of Purchased as Part of Purchased Under the Plans or
Shares (b) Average Price Publicly Announced Plans Programs
Period Purchased Paid per Share or Programs (in thousands)
- ---------------------------------------------------------------------------------------------------------------
July 1, 2004 -
July 31, 2004 409,000 $81.33 409,000 $338,083
- ---------------------------------------------------------------------------------------------------------------
August 1, 2004 -
August 31, 2004 938,900 $81.77 938,900 $261,306
- ---------------------------------------------------------------------------------------------------------------
September 1, 2004 -
September 30, 2004 -- -- -- $261,306
- ---------------------------------------------------------------------------------------------------------------
Total 1,347,900 $81.64 1,347,900 $261,306
- ---------------------------------------------------------------------------------------------------------------
In 2003, our Board of Directors authorized a share repurchase program,
which permits us to purchase up to $600 million of our common stock. In July
2004, our Board of Directors authorized us to purchase up to an additional $300
million of our common stock.
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.
'SS'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.
'SS'1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25
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 29, 2004
Quest Diagnostics Incorporated
By /s/ Surya N. Mohapatra
-------------------------------------
Surya N. Mohapatra, Ph.D.
President and Chief Executive Officer
By /s/ Robert A. Hagemann
-------------------------------------
Robert A. Hagemann
Senior Vice President and
Chief Financial Officer
26
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as................................ 'SS'