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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 June 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 July 23, 2004, there were 101,884,157 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 Six Months Ended June 30, 2004 and 2003 2
Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net revenues .............................. $1,297,674 $1,219,935 $2,553,416 $2,312,732
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of services .......................... 747,577 703,124 1,484,858 1,351,221
Selling, general and administrative ....... 307,402 296,062 614,947 575,261
Amortization of intangible assets ......... 2,058 2,068 4,122 4,091
Other operating expense, net .............. 10,618 10 10,591 233
---------- ---------- ---------- ----------
Total operating costs and expenses ..... 1,067,655 1,001,264 2,114,518 1,930,806
---------- ---------- ---------- ----------
Operating income .......................... 230,019 218,671 438,898 381,926
Other income (expense):
Interest expense, net ..................... (16,346) (16,866) (30,990) (30,775)
Minority share of income .................. (5,019) (4,415) (9,473) (8,218)
Equity earnings in unconsolidated joint
ventures ............................... 5,397 4,554 9,954 8,610
Other income (expense), net ............... (1,223) 1,461 (24) 656
---------- ---------- ---------- ----------
Total non-operating expenses, net ...... (17,191) (15,266) (30,533) (29,727)
---------- ---------- ---------- ----------
Income before taxes ....................... 212,828 203,405 408,365 352,199
Income tax expense ........................ 85,999 82,993 165,387 143,751
---------- ---------- ---------- ----------
Net income ................................ $ 126,829 $ 120,412 $ 242,978 $ 208,448
========== ========== ========== ==========
Basic earnings per common share:
Net income ................................ $ 1.23 $ 1.15 $ 2.36 $ 2.03
Weighted average common shares outstanding
- basic ................................ 103,009 105,049 103,075 102,543
Diluted earnings per common share:
Net income ................................ $ 1.20 $ 1.12 $ 2.30 $ 1.98
Weighted average common shares outstanding
- diluted .............................. 105,397 107,677 105,569 105,066
The accompanying notes are an integral part of these statements.
2
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(in thousands, except per share data)
(unaudited)
June 30, December 31,
2004 2003
---------- ------------
Assets
Current assets:
Cash and cash equivalents ................................................ $ 137,802 $ 154,958
Accounts receivable, net of allowance of $202,894 and $211,739 at
June 30, 2004 and December 31, 2003, respectively ..................... 677,710 609,187
Inventories .............................................................. 72,848 72,484
Deferred income taxes .................................................... 97,764 108,975
Prepaid expenses and other current assets ................................ 57,996 50,182
---------- ----------
Total current assets .................................................. 1,044,120 995,786
Property, plant and equipment, net ....................................... 615,301 607,305
Goodwill, net ............................................................ 2,517,338 2,518,875
Intangible assets, net ................................................... 12,760 16,978
Deferred income taxes .................................................... 54,675 49,635
Other assets ............................................................. 102,657 112,839
---------- ----------
Total assets ............................................................. $4,346,851 $4,301,418
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .................................... $ 639,633 $ 649,850
Short-term borrowings and current portion of long-term debt .............. 130,409 73,950
---------- ----------
Total current liabilities ............................................. 770,042 723,800
Long-term debt ........................................................... 971,717 1,028,707
Other liabilities ........................................................ 165,719 154,217
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 June 30, 2004 and December 31,
2003, respectively .................................................... 1,068 1,068
Additional paid-in capital ............................................... 2,231,752 2,267,014
Retained earnings ........................................................ 592,708 380,559
Unearned compensation .................................................... (419) (2,346)
Accumulated other comprehensive income ................................... 1,009 5,947
Treasury stock, at cost; 5,083 and 3,990 shares at June 30, 2004 and
December 31, 2003, respectively ....................................... (386,745) (257,548)
---------- ----------
Total common stockholders' equity ..................................... 2,439,373 2,394,694
---------- ----------
Total liabilities and stockholders' equity ............................... $4,346,851 $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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(in thousands)
(unaudited)
2004 2003
--------- ---------
Cash flows from operating activities:
Net income.............................................................. $ 242,978 $ 208,448
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................... 83,917 74,972
Provision for doubtful accounts......................................... 112,338 113,543
Deferred income tax provision........................................... 9,748 5,891
Minority share of income................................................ 9,473 8,218
Stock compensation expense.............................................. 965 2,876
Tax benefits associated with stock-based compensation plans............. 39,983 9,541
Other, net.............................................................. 2,592 1,442
Changes in operating assets and liabilities:
Accounts receivable.................................................. (180,861) (157,996)
Accounts payable and accrued expenses................................ (461) (63,821)
Integration, settlement and other special charges.................... (16,341) (9,283)
Income taxes payable................................................. 4,920 29,769
Other assets and liabilities, net.................................... 8,873 4,078
--------- ---------
Net cash provided by operating activities............................... 318,124 227,678
--------- ---------
Cash flows from investing activities:
Business acquisitions, net of cash acquired............................. -- (237,411)
Capital expenditures.................................................... (90,847) (75,806)
Proceeds from disposition of assets..................................... 4,741 3,402
Increase in investments and other assets................................ (2,876) (11,114)
--------- ---------
Net cash used in investing activities................................... (88,982) (320,929)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings................................................ 304,921 450,000
Repayments of debt...................................................... (305,637) (354,539)
Purchases of treasury stock............................................. (271,103) (10,065)
Exercise of stock options............................................... 66,839 9,207
Dividends paid.......................................................... (30,943) --
Distributions to minority partners...................................... (8,314) (6,262)
Financing costs paid.................................................... (2,061) (4,227)
Other................................................................... -- 429
--------- ---------
Net cash (used in) provided by financing activities..................... (246,298) 84,543
--------- ---------
Net change in cash and cash equivalents................................. (17,156) (8,708)
Cash and cash equivalents, beginning of period.......................... 154,958 96,777
--------- ---------
Cash and cash equivalents, end of period................................ $ 137,802 $ 88,069
========= =========
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.
Certain amounts reported in the Company's consolidated statements of operations
for the three and six months ended June 30, 2003 have been reclassified to
conform to the 2004 presentation, which reports operating income on the face of
the consolidated statements of operations.
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. Potentially dilutive common shares include
outstanding stock options and restricted common shares granted under the
Company's Employee Equity Participation Program. These dilutive securities
increased the weighted average common shares outstanding by 2.4 million shares
and 2.5 million shares for the three and six months ended June 30, 2004,
respectively. For the three and six months ended June 30, 2003, these dilutive
securities increased the weighted average common shares outstanding by 2.6
million and 2.5 million shares, respectively.
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 $0.5 million and $1.3 million for the three months ended June 30, 2004 and
2003, respectively, and $1.0 million and $2.9 million for the six months ended
June 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income:
Net income, as reported........................... $126,829 $120,412 $242,978 $208,448
Add: Stock-based compensation under APB 25........ 417 1,340 965 2,876
Deduct: Total stock-based compensation expense
determined under fair value method for all
awards, net of related tax effects............. (10,796) (13,124) (21,760) (27,929)
-------- ------- -------- --------
Pro forma net income.............................. $116,450 $108,628 $222,183 $183,395
======== ======== ======== ========
Earnings per common share:
Basic - as reported............................... $ 1.23 $ 1.15 $ 2.36 $ 2.03
-------- -------- -------- --------
Basic - pro forma................................. $ 1.13 $ 1.03 $ 2.16 $ 1.79
-------- -------- -------- --------
Diluted - as reported............................. $ 1.20 $ 1.12 $ 2.30 $ 1.98
-------- -------- -------- --------
Diluted - pro forma............................... $ 1.11 $ 1.02 $ 2.12 $ 1.77
-------- -------- -------- --------
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 Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
-------- -------- ------- -------
Dividend yield...................... 0.7% 0.0% 0.7% 0.0%
Risk-free interest rate............. 3.7% 2.6% 3.1% 2.8%
Expected volatility................. 47.1% 48.5% 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 share when holders of the security are entitled to receive contingent
interest.
6
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
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 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
six months ended June 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 the three and six months ended June 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.
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. As of June 30, 2004 and December 31,
2003, accruals related to the Unilab integration plan totaled approximately $5
million and $7 million, respectively. While the majority of the accrued costs at
June 30, 2004 are expected to be paid during the remainder of 2004, there are
certain severance costs that have payment terms extending into 2005.
The following unaudited pro forma combined financial information for the
three and six months ended June 30, 2003, assumes that the acquisition of Unilab
and the related Divestiture were completed on January 1, 2003 (in thousands,
except per share data):
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
------------------ ----------------
Pro forma Pro forma
------------------ ----------------
Net revenues........................................... $1,215,626 $2,378,649
Net income............................................. 119,959 216,675
Basic earnings per common share:
Net income............................................. $ 1.14 $ 2.07
Weighted average common shares outstanding - basic..... 105,049 104,816
Diluted earnings per common share:
Net income............................................. $ 1.11 $ 2.02
Weighted average common shares outstanding - diluted... 107,677 107,360
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 six months
ended June 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.
7
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill at June 30, 2004 and December 31, 2003 consisted of the following:
June 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 six month
period ended June 30, 2004 and for the year ended December 31, 2003 are as
follows:
June 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 June 30, 2004 and December 31, 2003 consisted of the
following:
June 30, 2004 December 31, 2003
--------------------------------- --------------------------------
Weighted
Average
Amortization Accumulated Accumulated
Period Cost Amortization Net Cost Amortization Net
------------ -------- ------------ ------- ------- ----------- -------
Non-compete
agreements.... 5 years $44,942 $(40,811) $ 4,131 $44,942 $(37,947) $ 6,995
Customer lists... 15 years 42,225 (36,477) 5,748 42,225 (35,568) 6,657
Other............ 10 years 5,600 (2,719) 2,881 5,895 (2,569) 3,326
------- ------ ------- ------- -------- -------
Total......... 10 years $92,767 $(80,007) $12,760 $93,062 $(76,084) $16,978
======= ======== ======= ======= ======== =======
Amortization expense related to intangible assets was $2,058 and $2,068
for the three months ended June 30, 2004 and 2003, respectively. For the six
months ended June 30, 2004 and 2003, amortization expense related to intangible
assets was $4,122 and $4,091, 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 June 30, 2004 is as
follows:
Fiscal Year Ending
December 31,
- --------------------
Remainder of 2004... $ 2,478
2005................ 3,148
2006................ 1,872
2007................ 1,037
2008................ 847
2009................ 750
Thereafter.......... 2,628
-------
Total............. $12,760
=======
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 rating. As of
June 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
credit 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 June 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 three and six months ended
June 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 $61 million at June 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 filed under the qui
tam provisions of the civil False Claims Act. Some of the proceedings against
the Company involve claims that are substantial in amount.
Although management believes that established reserves for billing-related
claims are sufficient, including qui tam cases of which management is aware, 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" as to which it has not been provided with a copy of
the complaint and accordingly cannot determine the extent of any potential
liability.
In addition to the billing-related settlement reserves discussed above, 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 cannot predict the outcome of such
proceedings or any claims made against the Company, management does not
anticipate that the ultimate outcome of the various 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 proceedings or claims are resolved.
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 six months ended June 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.................... 242,978 $242,978
Other comprehensive loss...... (4,938) (4,938)
--------
Comprehensive income....... $238,040
========
Dividends declared ........... (30,829)
Issuance of common stock
under benefit plans........ 93 1 1,777 962 4,310
Exercise of stock options..... 2,081 (70,757) 137,596
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......... 39,983
Amortization of unearned
compensation............... 965
Purchases of treasury stock .. (3,198) (271,103)
------- ------ ---------- -------- ------- ------- ---------
Balance,
June 30, 2004.............. 101,714 $1,068 $2,231,752 $592,708 $ (419) $ 1,009 $(386,745)
======= ====== ========== ======== ======= ======= =========
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. For the three months ended June 30, 2004, the Company repurchased
approximately 2.7 million shares of its common stock at an average price of
$85.34 per share for a total of $226 million. For the six months ended June 30,
2004, the Company repurchased approximately 3.2 million shares of its common
stock at an average price of $84.76 per share for a total of $271 million.
Through June 30, 2004, the Company has repurchased approximately 7.2 million
shares of its common stock at an average price of $73.54 for a total of $529
million. At June 30, 2004, $71 million of the share repurchase authorization
remained available. In July 2004, the Company's Board of Directors authorized
the Company to purchase up to an additional $300 million of its common stock,
bringing the total available for repurchases under the combined authorizations
to $371 million as of July 22, 2004. For the three and six months ended
June 30, 2004, the Company reissued approximately 1.0 million shares and
2.1 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 approximately $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 approximately $15.3 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 six months ended June 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.................... 208,448 $208,448
Other comprehensive income.... 3,190 3,190
--------
Comprehensive income....... $211,638
========
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........ 274 3 11,630 (5,041)
Exercise of stock options..... 453 4 9,203
Shares to cover employee
payroll tax
withholdings on stock
issued under benefit
plans...................... (170) (2) (9,099)
Tax benefits associated
with stock-based
compensation plans......... 9,541
Amortization of unearned
compensation............... 3,301
Purchases of treasury stock... (162) (10,065)
------- ------ ---------- -------- ------- ------- --------
Balance,
June 30, 2003.............. 105,413 $1,056 $2,219,631 $167,676 $(5,072) $(2,334) $(10,065)
======= ====== ========== ======== ======= ======= ========
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 Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Depreciation expense........................... $ 40,789 $ 36,203 $ 79,795 $ 70,881
Interest expense............................... (16,768) (16,993) (31,818) (31,178)
Interest income................................ 422 127 828 403
-------- -------- -------- --------
Interest expense, net.......................... (16,346) (16,866) (30,990) (30,775)
Interest paid.................................. 4,012 5,434 25,915 32,545
Income taxes paid.............................. 108,820 93,432 112,391 100,630
Businesses acquired:
Fair value of assets acquired.................. $ -- $ 5,102 $ -- $977,866
Fair value of liabilities assumed.............. -- 4,161 -- 279,510
Non-cash financing activities:
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 June 30, 2004
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues................................... $209,548 $1,021,661 $133,259 $(66,794) $1,297,674
Operating costs and expenses:
Cost of services............................ 115,462 586,962 45,153 -- 747,577
Selling, general and administrative......... 27,528 220,894 63,927 (4,947) 307,402
Amortization of intangible assets........... 503 1,546 9 -- 2,058
Royalty (income) expense.................... (82,968) 82,968 -- -- --
Other operating (income) expense, net....... 10,622 3 (7) -- 10,618
-------- ---------- -------- -------- -----------
Total operating costs and expenses....... 71,147 892,373 109,082 (4,947) 1,067,655
-------- ---------- -------- -------- -----------
Operating income............................... 138,401 129,288 24,177 (61,847) 230,019
Non-operating expenses, net.................... (20,832) (57,301) (905) 61,847 (17,191)
-------- ---------- -------- -------- ----------
Income before taxes............................ 117,569 71,987 23,272 -- 212,828
Income tax expense............................. 47,280 28,795 9,924 -- 85,999
-------- ---------- -------- -------- ----------
Income before equity earnings.................. 70,289 43,192 13,348 -- 126,829
Equity earnings from subsidiaries.............. 56,540 -- -- (56,540) --
-------- ---------- -------- -------- ----------
Net income..................................... $126,829 $ 43,192 $ 13,348 $(56,540) $ 126,829
======== ========== ======== ======== ==========
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues................................... $203,649 $956,955 $122,729 $(63,398) $1,219,935
Operating costs and expenses:
Cost of services............................ 113,864 548,495 40,765 -- 703,124
Selling, general and administrative......... 18,045 225,769 56,210 (3,962) 296,062
Amortization of intangible assets........... 821 1,247 -- -- 2,068
Royalty (income) expense.................... (70,661) 70,661 -- -- --
Other operating (income) expense, net....... -- (4) 14 -- 10
-------- -------- -------- -------- ----------
Total operating costs and expenses....... 62,069 846,168 96,989 (3,962) 1,001,264
-------- -------- -------- -------- ----------
Operating income............................... 141,580 110,787 25,740 (59,436) 218,671
Non-operating expenses, net.................... (17,539) (55,761) (1,402) 59,436 (15,266)
-------- -------- -------- -------- ----------
Income before taxes............................ 124,041 55,026 24,338 -- 203,405
Income tax expense............................. 50,928 22,009 10,056 -- 82,993
-------- -------- -------- -------- ----------
Income before equity earnings.................. 73,113 33,017 14,282 -- 120,412
Equity earnings from subsidiaries.............. 47,299 -- -- (47,299) --
-------- -------- -------- --------- ----------
Net income..................................... $120,412 $ 33,017 $ 14,282 $(47,299) $ 120,412
======== ======== ======== ========= ==========
14
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2004
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues................................... $ 409,773 $2,013,982 $254,917 $(125,256) $2,553,416
Operating costs and expenses:
Cost of services............................ 236,282 1,160,797 87,779 -- 1,484,858
Selling, general and administrative......... 55,444 446,519 122,262 (9,278) 614,947
Amortization of intangible assets........... 1,026 3,078 18 -- 4,122
Royalty (income) expense.................... (163,967) 163,967 -- -- --
Other operating expense, net................ 9,886 22 683 -- 10,591
--------- ---------- -------- --------- ----------
Total operating costs and expenses....... 138,671 1,774,383 210,742 (9,278) 2,114,518
--------- ---------- -------- --------- -----------
Operating income............................... 271,102 239,599 44,175 (115,978) 438,898
Non-operating expenses, net.................... (35,528) (109,020) (1,963) 115,978 (30,533)
--------- ---------- -------- --------- ----------
Income before taxes............................ 235,574 130,579 42,212 -- 408,365
Income tax expense............................. 96,985 52,232 16,170 -- 165,387
--------- ---------- -------- --------- ----------
Income before equity earnings.................. 138,589 78,347 26,042 -- 242,978
Equity earnings from subsidiaries.............. 104,389 -- -- (104,389) --
--------- ---------- -------- --------- ----------
Net income..................................... $ 242,978 $ 78,347 $ 26,042 $(104,389) $ 242,978
========= ========== ======== ========= ==========
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues................................... $ 395,280 $1,806,325 $235,709 $(124,582) $2,312,732
Operating costs and expenses:
Cost of services............................ 229,370 1,044,281 77,570 -- 1,351,221
Selling, general and administrative......... 37,272 432,808 112,967 (7,786) 575,261
Amortization of intangible assets........... 1,110 2,981 -- -- 4,091
Royalty (income) expense.................... (139,965) 139,965 -- -- --
Other operating (income) expense, net....... -- (7) 240 -- 233
--------- ---------- -------- --------- ----------
Total operating costs and expenses....... 127,787 1,620,028 190,777 (7,786) 1,930,806
--------- ---------- -------- --------- ----------
Operating income............................... 267,493 186,297 44,932 (116,796) 381,926
Non-operating expenses, net.................... (34,839) (108,865) (2,819) 116,796 (29,727)
--------- ---------- -------- --------- ----------
Income before taxes............................ 232,654 77,432 42,113 -- 352,199
Income tax expense............................. 95,119 30,972 17,660 -- 143,751
--------- ---------- -------- --------- ----------
Income before equity earnings.................. 137,535 46,460 24,453 -- 208,448
Equity earnings from subsidiaries.............. 70,913 -- -- (70,913) --
--------- ---------- -------- --------- ----------
Net income..................................... $ 208,448 $ 46,460 $ 24,453 $ (70,913) $ 208,448
========= ========== ======== ========= ==========
15
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)
Condensed Consolidating Balance Sheet
June 30, 2004
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
---------- ---------- ------------ ------------ ------------
Assets
Current assets:
Cash and cash equivalents................ $ 123,002 $ 2,869 $ 11,931 $ -- $ 137,802
Accounts receivable, net................. 21,965 85,097 570,648 -- 677,710
Other current assets..................... 33,324 107,655 87,629 -- 228,608
---------- ---------- --------- ----------- ----------
Total current assets.................. 178,291 195,621 670,208 -- 1,044,120
Property, plant and equipment, net....... 222,820 365,745 26,736 -- 615,301
Goodwill and intangible assets, net ..... 157,355 2,327,350 45,393 -- 2,530,098
Intercompany receivable (payable)........ 637,737 (228,221) (409,516) -- --
Investment in subsidiaries............... 2,022,950 -- -- (2,022,950) --
Other assets............................. 50,207 69,036 38,089 - 157,332
---------- ---------- --------- ----------- ----------
Total assets.......................... $3,269,360 $2,729,531 $ 370,910 $(2,022,950) $4,346,851
========== ========== ========= =========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.... $ 355,033 $ 256,690 $ 27,910 $ -- $ 639,633
Short-term borrowings and current
portion of long-term debt.............. -- 488 129,921 -- 130,409
---------- ---------- --------- ----------- ----------
Total current liabilities............. 355,033 257,178 157,831 -- 770,042
Long-term debt........................... 416,004 553,757 1,956 -- 971,717
Other liabilities........................ 58,950 83,327 23,442 -- 165,719
Common stockholders' equity.............. 2,439,373 1,835,269 187,681 (2,022,950) 2,439,373
---------- ---------- --------- ----------- ----------
Total liabilities and stockholders'
equity............................. $3,269,360 $2,729,531 $ 370,910 $(2,022,950) $4,346,851
========== ========== ========= =========== ==========
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
Six Months Ended June 30, 2004
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income .............................. $ 242,978 $ 78,347 $ 26,042 $(104,389) $ 242,978
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization ........ 28,519 50,474 4,924 -- 83,917
Provision for doubtful accounts ...... 2,409 25,143 84,786 -- 112,338
Other, net ........................... (29,288) (17,501) 5,161 104,389 62,761
Changes in operating assets and
liabilities ...................... (4,162) 24,705 (204,413) -- (183,870)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ........................... 240,456 161,168 (83,500) -- 318,124
Net cash provided by (used in) investing
activities ........................... 107,719 (52,066) (3,957) (140,678) (88,982)
Net cash (used in) provided by financing
activities ........................... (366,761) (108,224) 88,009 140,678 (246,298)
--------- --------- --------- --------- ---------
Net change in cash and cash
equivalents .......................... (18,586) 878 552 -- (17,156)
Cash and cash equivalents, beginning of
period ............................... 141,588 1,991 11,379 -- 154,958
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of
period ............................... $ 123,002 $ 2,869 $ 11,931 $ -- $ 137,802
========= ========= ========= ========= =========
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2003
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Cash flows from operating activities:
Net income .............................. $ 208,448 $ 46,460 $ 24,453 $(70,913) $ 208,448
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization ........ 27,165 43,502 4,305 -- 74,972
Provision for doubtful accounts ...... 2,943 29,917 80,683 -- 113,543
Other, net ........................... (44,043) (12,476) 13,574 70,913 27,968
Changes in operating assets and
liabilities ....................... (33,699) (78,008) (85,546) -- (197,253)
--------- -------- -------- -------- ---------
Net cash provided by operating
activities ........................... 160,814 29,395 37,469 -- 227,678
Net cash used in investing
activities ........................... (260,004) (39,305) (6,306) (15,314) (320,929)
Net cash provided by (used in) financing
activities ........................... 90,845 10,942 (32,558) 15,314 84,543
--------- -------- -------- -------- ---------
Net change in cash and cash
equivalents .......................... (8,345) 1,032 (1,395) -- (8,708)
Cash and cash equivalents, beginning of
period ............................... 79,015 7,377 10,385 -- 96,777
--------- -------- -------- -------- ---------
Cash and cash equivalents, end of
period ............................... $ 70,670 $ 8,409 $ 8,990 $ -- $ 88,069
========= ======== ======== ======== =========
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.
As of June 30, 2004 and December 31, 2003, accruals related to the Unilab
integration plan totaled approximately $5 million and $7 million, respectively.
While the majority of the accrued costs at June 30, 2004 are expected to be paid
during the remainder of 2004, there are certain severance costs that have
payment terms extending into 2005.
Results of Operations
Three and Six Months Ended June 30, 2004 Compared with Three and Six Months
Ended June 30, 2003
Net income for the three months ended June 30, 2004 increased to $127
million from $120 million for the prior year period. For the six months ended
June 30, 2004, net income increased to $243 million from $208 million for the
prior year period. These increases in earnings were primarily attributable to
revenue growth and efficiencies generated from our Six Sigma and standardization
initiatives, partially offset by investments in our operations and 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 recently completed 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 both the three and six months ended June 30, 2004 by
$7.9 million.
Net Revenues
Net revenues for the three months ended June 30, 2004 grew by 6.4% over the
prior year level, driven by increases in average revenue per requisition and
improvements in testing volumes. Net revenues for the six months ended June 30,
2004 grew by 10.4% over the prior year level and include six months of Unilab's
results, which was acquired on February 28, 2003, compared to four 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 7.3% for the six months ended June 30, 2004.
For the three and six months ended June 30, 2004, clinical testing volume,
measured by the number of requisitions, increased 2.1% and 6.4%, respectively,
compared to the prior year periods. On a pro forma basis, assuming that the
Unilab acquisition and the Divestiture had been completed on January 1, 2003,
testing volume increased 2.6% for
18
the six months ended June 30, 2004.
Average revenue per requisition improved 3.7% and 3.4% for the three and
six months ended June 30, 2004, respectively, compared to the prior year
periods, primarily attributable to a continuing shift in test mix to higher
value testing, including gene-based testing, which continued to grow at
approximately 15% over the prior year level, and increases in the number of
tests ordered per requisition. The inclusion of Unilab's results subsequent to
February 28, 2003 served to reduce average revenue per requisition by
approximately 0.7% for the six months ended June 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 second consecutive quarter after several years of
decline. The growth in drugs of abuse testing had an insignificant impact on our
overall volume growth and revenue per requisition for the three and six months
ended June 30, 2004.
Our businesses, other than clinical laboratory testing, which represent
approximately 4% of our consolidated net revenues, grew over 15% and 20% during
the three and six months ended June 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 six months ended June
30, 2004 increased $66 million and $184 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 57.6% of net revenues for the three months ended June 30,
2004, unchanged from the prior year period. For the six months ended June 30,
2004, cost of services, as a percentage of net revenues, decreased to 58.2% 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 June 30,
2004, greater than 30% of our orders and greater than 40% of our test results
were being transmitted via the Internet, approximately double the level of a
year ago. 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 our trained phlebotomists
compared to samples collected by physician employed 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, decreased during the three months ended June 30, 2004,
as a percentage of net revenues, to 23.7% from 24.3% in the prior year period.
For the six months ended June 30, 2004, selling, general and administrative
expenses, as a percentage of net revenues, decreased to 24.1% from 24.9% in the
prior year period. The improvements were 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 second
quarter of 2004, bad debt expense improved to 4.3% of net revenues, compared to
4.8% in the prior year period. For the six months ended June 30, 2004, bad debt
expense was 4.4% of net revenues, compared to 4.9% of net revenues in the prior
year period. This improvement primarily relates to the collection of diagnosis,
patient and insurance information necessary to more effectively bill for
services performed. We believe that our Six Sigma and standardization
initiatives and the increased use of electronic ordering by our customers will
provide additional opportunities to further improve our overall collection
experience and cost structure.
19
Other operating 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 three and six months ended June 30,
2004, other operating expense, net includes a $10.3 million charge associated
with the acceleration of certain pension obligations in connection with the
recently completed CEO succession process.
Operating Income
Operating income for the three months ended June 30, 2004 improved to $230
million, or 17.7% of net revenues, from $219 million, or 17.9% of net revenues,
in the prior year period. For the six months ended June 30, 2004, operating
income improved to $439 million, or 17.2% of net revenues, from $382 million, or
16.5% of net revenues, in the prior year period. The increases in operating
income for the three and six months ended June 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
selling, general and administrative expenses as a percentage of net revenues.
Offsetting these improvements were investments in our operations and a charge in
the second quarter of 2004 of $10.3 million related to the acceleration of
certain pension obligations associated with the recently completed CEO
succession process. This charge reduced operating income, as a percentage of net
revenues, by 0.8% and 0.4%, respectively, for the three and six months ended
June 30, 2004.
Other Income (Expense)
Interest expense, net for both the three and six months ended June 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. Serving to
reduce interest expense, net for the three and six months ended June 30, 2004
was a reduction in the amount of debt outstanding during the periods, compared
to the prior year, as well as a reduction in borrowing costs associated with our
2004 refinancing.
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 six months ended June 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 six months ended June 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 a new accounting
standard. 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.
At both June 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 June 30, 2004 and December 31, 2003, the
estimated fair value exceeded the carrying value of the debt by approximately
$70 million and $86 million, respectively. An assumed 10% increase in interest
rates (representing approximately 45 and 50 basis points at June 30, 2004 and
December 31, 2003, respectively) would potentially reduce the estimated fair
value of our debt by approximately $16 million and $17 million at June 30, 2004
and December 31, 2003, respectively.
20
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 June 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 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 June 30, 2004, our borrowing rates
for our LIBOR-based loans ranged from LIBOR plus 0.55% to LIBOR plus 0.625%. At
June 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 $0.4
million, assuming no changes to the debt outstanding at June 30, 2004.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2004 totaled $138 million, compared
to $155 million at December 31, 2003. Cash flows from operating activities in
2004 provided cash of $318 million, which together with cash on-hand were used
to fund investing and financing activities, which required cash of $89 million
and $246 million, respectively. Cash and cash equivalents at June 30, 2003
totaled $88 million, compared to $97 million at December 31, 2002. Cash flows
from operating activities in 2003 provided cash of $228 million, which along
with cash flows from financing activities of $85 million and cash on-hand, were
used to fund investing activities, which required cash of $321 million.
Cash Flows From Operating Activities
Net cash provided by operating activities for the six months ended June 30,
2004 was $318 million compared to $228 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, improved to
47 days at June 30, 2004 from 48 days at December 31, 2003.
Cash Flows From Investing Activities
Net cash used in investing activities for the six months ended June 30,
2004 was $89 million, consisting primarily of capital expenditures of $91
million.
Net cash used in investing activities for the six months ended June 30,
2003 was $321 million, consisting primarily of acquisition and related
transaction costs of $237 million to acquire the outstanding capital stock of
Unilab, and capital expenditures of $76 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 in the six months ended June 30, 2004
was $246 million, consisting primarily of purchases of treasury stock totaling
$271 million, and dividend payments totaling $31 million, partially offset by
$67 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 $271 million in treasury stock purchases represents 3.2 million shares of
our common stock repurchased at an average price of $84.76 per share.
Net cash provided by financing activities for the six months ended June 30,
2003 was $85 million, consisting primarily of $450 million of borrowings under
our term loan due June 2007, partially offset by debt repayments totaling $355
million. Borrowings under our term loan facility 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 facility due June
2007 and a $6 million capital lease repayment. During the six months ended June
30, 2003, we repurchased $10 million of our common stock.
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 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. For the
three months ended June 30, 2004, we repurchased approximately 2.7 million
shares of our common stock at an average price of $85.34 per share for a total
of $226 million. For the six months ended June 30, 2004, we repurchased
approximately 3.2 million shares of our common stock at an average price of
$84.76 per share for a total of $271 million. Through June 30, 2004, we have
repurchased approximately 7.2 million shares of our common stock at an average
price of $73.54 for a total of $529 million under our share repurchase program.
In July 2004, our Board of Directors authorized us to purchase up to an
additional $300 million of our common stock, bringing the total available for
repurchases under the combined authorizations to $371 million as of July 22,
2004.
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 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
22
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. On April 30, 2004, we repaid the
remaining $230 million of principal outstanding under our term loan due June
2007 with $100 million of borrowings under the $500 million senior unsecured
revolving credit facility and $130 million of borrowings under the $300 million
secured receivables credit facility. See Note 4 to the interim consolidated
financial statements for further details regarding the refinancings. As of June
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 reached a final
consensus on Issue 03-6, "Participating Securities and the Two-Class Method
under FASB Statement No. 128, 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 government investigations and private claims.
Item 2. Changes in 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 Programs
Period Purchased Paid per Share Plans or Programs (in thousands)
- -----------------------------------------------------------------------------------------------------------
April 1, 2004 -
April 30, 2004 270,500 $84.96 270,500 $274,600
- -----------------------------------------------------------------------------------------------------------
May 1, 2004 -
May 31, 2004 892,900 $86.15 892,900 $197,672
- -----------------------------------------------------------------------------------------------------------
June 1, 2004 -
June 30, 2004 1,487,518 $84.92 1,487,518 $ 71,348
- -----------------------------------------------------------------------------------------------------------
Total 2,650,918 $85.34 2,650,918 $ 71,348
- -----------------------------------------------------------------------------------------------------------
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, bringing the total available for repurchases under
the combined authorizations to $371 million as of July 22, 2004.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on May 4, 2004.
At the meeting the matters described below were approved by the
stockholders.
(b-c) The following nominees for the office of director were elected for terms
expiring at the 2007 Annual Meeting of Stockholders, by the following
votes:
For Withheld
---------- ---------
Dr. John C. Baldwin 84,250,137 7,416,589
Mr. William R. Grant 84,054,787 7,611,939
Dr. Surya N. Mohapatra 84,030,540 4,636,186
The following persons continue as directors:
Mr. William F. Buehler
Mr. James F. Flaherty III
Mr. Kenneth W. Freeman
Ms. Rosanne Haggerty
Dr. Dan C. Stanzione
Dr. Gail R. Wilensky
Mr. John B. Ziegler
25
The appointment of PricewaterhouseCoopers LLP as independent
accountants to audit the financial statements of the Company and its
subsidiaries for the fiscal year ending December 31, 2004, was approved by
the following number of stockholder votes for, against, and abstained:
For: 89,787,655 Against: 1,349,558 Abstained: 528,713
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 First Amendment to Term Loan Credit Agreement dated as April 20,
2004 among Quest Diagnostics Incorporated, certain subsidiary
guarantors of the Company, the lenders party thereto, and Sumitomo
Mitsui Banking Corporation
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
(b) Reports on Form 8-K filed during the second quarter of 2004:
On April 22, 2004, the Company furnished a current report on Form 8-K
reporting its press release of April 22, 2004 announcing, among other
things, its results for the quarter ended March 31, 2004.
On April 22, 2004, the Company filed a current report on Form 8-K
announcing that Surya N. Mohapatra, Ph.D., will be appointed President and
Chief Executive Officer on May 4, 2004, the date of its 2004 Annual Meeting
of Stockholders, completing the CEO succession plan announced in November
2003.
26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
July 30, 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
27
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as................................ 'SS'