DGX 03.31.2012 10-Q
Table of Contents                                             

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012
Commission file number 001-12215

Quest Diagnostics Incorporated

Three Giralda Farms
Madison, NJ 07940
(973) 520-2700

Delaware
(State of Incorporation)

16-1387862
(I.R.S. Employer Identification Number)

 

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 such 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 19, 2012, there were outstanding 158,650,374 shares of the registrant’s common stock, $.01 par value.

Table of Contents                                             

PART I - FINANCIAL INFORMATION
 
 
Page
Item 1. Financial Statements
 
 
 
 
 
Index to consolidated financial statements filed as part of this report:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
Table of Contents                                             


QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(unaudited)
(in thousands, except per share data)
 
Three Months Ended March 31,
 
2012
 
2011
Net revenues
$
1,936,456

 
$
1,821,577

 
 
 
 
Operating costs and expenses:
 

 
 

Cost of services
1,116,538

 
1,096,998

Selling, general and administrative
500,641

 
447,858

Amortization of intangible assets
20,231

 
9,849

Other operating (income) expense, net
(539
)
 
235,912

Total operating costs and expenses
1,636,871

 
1,790,617

 
 
 
 
Operating income
299,585

 
30,960

 
 
 
 
Other income (expense):
 

 
 

Interest expense, net
(42,333
)
 
(37,929
)
Equity earnings in unconsolidated joint ventures
7,609

 
7,699

Other income, net
4,757

 
2,208

Total non-operating expenses, net
(29,967
)
 
(28,022
)
 
 
 
 
Income from continuing operations before taxes
269,618

 
2,938

Income tax expense
101,377

 
49,226

Income (loss) from continuing operations
168,241

 
(46,288
)
Income (loss) from discontinued operations, net of taxes
274

 
(374
)
Net income (loss)
168,515

 
(46,662
)
 
 
 
 
Less: Net income attributable to noncontrolling interests
9,397

 
7,199

Net income (loss) attributable to Quest Diagnostics
$
159,118

 
$
(53,861
)
 
 
 
 
Amounts attributable to Quest Diagnostics’ stockholders:
 

 
 

Income (loss) from continuing operations
$
158,844

 
$
(53,487
)
Income (loss) from discontinued operations, net of taxes
274

 
(374
)
Net income (loss)
$
159,118

 
$
(53,861
)
 
 
 
 
Earnings (loss) per share attributable to Quest Diagnostics’ common stockholders - basic:
 

 
 

Income (loss) from continuing operations
$
1.00

 
$
(0.33
)
Income (loss) from discontinued operations
—

 
—

Net income (loss)
$
1.00

 
$
(0.33
)
 
 
 
 
Earnings (loss) per share attributable to Quest Diagnostics’ common stockholders - diluted:
 

 
 

Income (loss) from continuing operations
$
0.99

 
$
(0.33
)
Income (loss) from discontinued operations
—

 
—

Net income (loss)
$
0.99

 
$
(0.33
)
 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
158,293

 
161,489

Diluted
159,706

 
161,489

 
 
 
 
Dividends per common share
$
0.17

 
$
0.10

The accompanying notes are an integral part of these statements.

2
Table of Contents                                             

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(unaudited)
(in thousands)

 
Three Months Ended March 31,
 
2012
 
2011
Net income (loss)
$
168,515

 
$
(46,662
)
 
 
 
 
Other comprehensive income (loss):
 
 
 
   Currency translation
18,216

 
24,504

   Market valuation, net of tax
201

 
(1,250
)
   Net deferred loss on cash flow hedges
210

 
(1,671
)
   Other comprehensive income
18,627

 
21,583

 
 
 
 
Comprehensive income (loss)
187,142

 
(25,079
)
Less: Comprehensive income attributable to noncontrolling interests
9,397

 
7,199

Comprehensive income (loss) attributable to Quest Diagnostics
$
177,745

 
$
(32,278
)
The accompanying notes are an integral part of these statements.


3
Table of Contents                                             

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2012 AND DECEMBER 31, 2011
(in thousands, except per share data)
 
March 31,
2012
 
December 31,
2011
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
145,439

 
$
164,886

Accounts receivable, net of allowance for doubtful accounts of $249,513 and $237,339 at March 31, 2012 and December 31, 2011, respectively
973,888

 
906,455

Inventories
88,262

 
89,132

Deferred income taxes
171,815

 
153,328

Prepaid expenses and other current assets
139,200

 
87,459

Total current assets
1,518,604

 
1,401,260

Property, plant and equipment, net
781,427

 
799,771

Goodwill
5,835,075

 
5,795,765

Intangible assets, net
1,041,513

 
1,035,612

Other assets
274,825

 
280,971

Total assets
$
9,451,444

 
$
9,313,379

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
971,092

 
$
906,764

Short-term borrowings and current portion of long-term debt
554,356

 
654,395

Total current liabilities
1,525,448

 
1,561,159

Long-term debt
3,365,257

 
3,370,522

Other liabilities
664,682

 
666,699

Stockholders’ equity:
 

 
 

Quest Diagnostics stockholders’ equity:
 

 
 

Common stock, par value $0.01 per share; 600,000 shares authorized at both March 31, 2012 and December 31, 2011; 215,059 shares and 214,607 shares issued at March 31, 2012 and December 31, 2011, respectively
2,151

 
2,146

Additional paid-in capital
2,347,152

 
2,347,518

Retained earnings
4,395,647

 
4,263,599

Accumulated other comprehensive income (loss)
10,560

 
(8,067
)
Treasury stock, at cost; 56,541 shares and 57,187 shares at March 31, 2012 and December 31, 2011, respectively
(2,886,217
)
 
(2,912,324
)
Total Quest Diagnostics stockholders’ equity
3,869,293

 
3,692,872

Noncontrolling interests
26,764

 
22,127

Total stockholders’ equity
3,896,057

 
3,714,999

Total liabilities and stockholders’ equity
$
9,451,444

 
$
9,313,379

The accompanying notes are an integral part of these statements.

4
Table of Contents                                             

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(unaudited)
(in thousands)

 
Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 

 
 

Net income (loss)
$
168,515

 
$
(46,662
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
72,174

 
63,365

Provision for doubtful accounts
80,718

 
77,376

Deferred income tax benefit
(15,437
)
 
(38,766
)
Stock-based compensation expense
20,068

 
18,945

Excess tax benefits from stock-based compensation arrangements
(3,298
)
 
(4,680
)
Provision for special charge
—

 
236,000

Other, net
(197
)
 
3,474

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(147,174
)
 
(171,275
)
Accounts payable and accrued expenses
(116,209
)
 
(47,126
)
Income taxes payable
112,039

 
78,676

Other assets and liabilities, net
(9,932
)
 
(8,747
)
Net cash provided by operating activities
161,267

 
160,580

 
 
 
 
Cash flows from investing activities:
 

 
 

Business acquisitions, net of cash acquired
(50,556
)
 
—

Capital expenditures
(29,998
)
 
(38,991
)
Increase in investments and other assets
(2,689
)
 
(1,762
)
Net cash used in investing activities
(83,243
)
 
(40,753
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
365,000

 
1,818,329

Repayments of debt
(467,312
)
 
(576,891
)
Purchases of treasury stock
(50,000
)
 
(835,001
)
Exercise of stock options
64,399

 
53,788

Excess tax benefits from stock-based compensation arrangements
3,298

 
4,680

Dividends paid
(26,900
)
 
(17,136
)
Distributions to noncontrolling interests
(5,884
)
 
(5,268
)
Other financing activities
19,928

 
(17,387
)
Net cash (used in) provided by financing activities
(97,471
)
 
425,114

 
 
 
 
Net change in cash and cash equivalents
(19,447
)
 
544,941

Cash and cash equivalents, beginning of period
164,886

 
449,301

Cash and cash equivalents, end of period
$
145,439

 
$
994,242


The accompanying notes are an integral part of these statements.


5
Table of Contents                                             

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(unaudited)
(in thousands)
 
 
 
Quest Diagnostics Stockholders’ Equity
 
 
 
 
 
Shares of
Common Stock
Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Compre-
hensive Income (Loss)
 
Treasury
Stock, at
Cost
 
Non-
controlling
Interests
 
Total Stock-
holders’
Equity
Balance, December 31, 2011
157,420

 
$
2,146

 
$
2,347,518

 
$
4,263,599

 
$
(8,067
)
 
$
(2,912,324
)
 
$
22,127

 
$
3,714,999

Net income


 


 


 
159,118

 


 


 
9,397

 
168,515

Other comprehensive income, net of tax


 


 


 


 
18,627

 


 


 
18,627

Dividends declared


 


 


 
(27,070
)
 


 


 


 
(27,070
)
Distributions to noncontrolling interests


 


 


 


 


 


 
(5,884
)
 
(5,884
)
Issuance of common stock under benefit plans
851

 
8

 
659

 


 


 
3,920

 


 
4,587

Stock-based compensation expense


 


 
19,258

 


 


 
810

 


 
20,068

Exercise of stock options
1,401

 


 
(6,978
)
 


 


 
71,377

 


 
64,399

Shares to cover employee payroll tax withholdings on stock issued under benefit plans
(307
)
 
(3
)
 
(17,730
)
 


 


 


 


 
(17,733
)
Tax benefits associated with stock-based compensation plans


 


 
4,425

 


 


 


 


 
4,425

Purchases of treasury stock
(847
)
 


 


 


 


 
(50,000
)
 


 
(50,000
)
Other


 


 


 


 


 


 
1,124

 
1,124

Balance, March 31, 2012
158,518

 
$
2,151

 
$
2,347,152

 
$
4,395,647

 
$
10,560

 
$
(2,886,217
)
 
$
26,764

 
$
3,896,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Quest Diagnostics Stockholders’ Equity
 
 
 
 
 
Shares of
Common
Stock
Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Compre-
hensive
Income
 
Treasury
Stock, at
Cost
 
Non-
controlling
Interests
 
Total Stock-
holders’
Equity
Balance, December 31, 2010
170,717

 
$
2,142

 
$
2,311,421

 
$
3,867,420

 
$
10,626

 
$
(2,158,129
)
 
$
20,645

 
$
4,054,125

Net income (loss)
 

 
 

 
 

 
(53,861
)
 
 

 
 

 
7,199

 
(46,662
)
Other comprehensive income, net of tax


 


 


 


 
21,583

 


 


 
21,583

Dividends declared
 

 
 

 
 

 
(15,763
)
 
 

 
 

 
 

 
(15,763
)
Distributions to noncontrolling interests
 

 
 

 
 

 
 

 
 

 
 

 
(5,268
)
 
(5,268
)
Issuance of common stock under benefit plans
839

 
7

 
562

 
 

 
 

 
4,098

 
 

 
4,667

Stock-based compensation expense
 

 
 

 
18,121

 
 

 
 

 
824

 
 

 
18,945

Exercise of stock options
1,285

 
 

 
(11,032
)
 
 

 
 

 
64,820

 
 

 
53,788

Shares to cover employee payroll tax withholdings on stock issued under benefit plans
(334
)
 
(3
)
 
(19,010
)
 
 

 
 

 
 

 
 

 
(19,013
)
Tax benefits associated with stock-based compensation plans
 

 
 

 
5,765

 
 

 
 

 
 

 
 

 
5,765

Purchases of treasury stock
(15,378
)
 
 

 
 

 
 

 
 

 
(835,001
)
 
 

 
(835,001
)
Other
 

 
 

 
 

 
 

 
 

 
 

 
838

 
838

Balance, March 31, 2011
157,129

 
$
2,146

 
$
2,305,827

 
$
3,797,796

 
$
32,209

 
$
(2,923,388
)
 
$
23,414

 
$
3,238,004


The accompanying notes are an integral part of these statements.

6
Table of Contents                                             

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands unless otherwise indicated)

1.    DESCRIPTION OF BUSINESS
    
Background
    
Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") is the world's leading provider of diagnostic testing, information and services, providing insights that enable patients and physicians to make better healthcare decisions. Quest Diagnostics offers patients and physicians the broadest access to diagnostic laboratory services through the Company's nationwide network of laboratories and patient service centers. The Company provides interpretive consultation through the largest medical and scientific staff in the industry, with hundreds of M.D.s and Ph.D.s, primarily
located in the United States. Quest Diagnostics is the leading provider of clinical testing, including gene-based and esoteric testing, and anatomic pathology services, and the leading provider of risk assessment services for the life insurance industry in North America. The Company is also a leading provider of testing for clinical trials and testing for drugs-of-abuse. The Company's diagnostics products business manufactures and markets diagnostic test kits and specialized point-of-care testing. Quest Diagnostics empowers healthcare organizations and clinicians with robust information technology solutions.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
    
The interim consolidated financial statements reflect all adjustments which in the opinion of management are necessary for a fair statement of results of operations, comprehensive income, financial condition, cash flows and stockholders' equity 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 2011 Annual Report on Form 10-K.
    
The year-end balance sheet data was derived from the audited financial statements as of December 31, 2011, but does not include all the disclosures required by accounting principles generally accepted in the United States (“GAAP”).

Use of Estimates
    
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
    
Earnings Per Share

The Company’s unvested restricted common stock and unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. In calculating losses on a fully diluted basis, certain potentially dilutive securities, which would otherwise reduce the loss per share, are excluded from the calculation. Potentially dilutive common shares include the dilutive effect of outstanding stock options and performance share units granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Non-Employee Director Long-Term Incentive Plan. Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed earnings during the period allocable to participating securities.

    

7
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


Adoption of New Accounting Standards
    
On January 1, 2012, the Company adopted an amendment issued by the Financial Accounting Standards Board ("FASB") to the accounting standards related to fair value measurements and disclosure requirements. This standard provides certain amendments to the existing guidance on the use and application of fair value measurements and maintains a definition of fair value that is based on the notion of exit price. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2012, the Company adopted amendments issued by the FASB to the accounting standards related to the presentation of comprehensive income. These standards revise the manner in which entities present comprehensive income in their financial statements and remove the option to present items of other comprehensive income in the statement of changes in stockholders’ equity. These standards require an entity to report components of comprehensive income in either (1) a continuous statement of comprehensive income, or (2) two separate but consecutive statements of net income and other comprehensive income. The Company modified its financial statements presentation using the latter alternative.

On January 1, 2012, the Company adopted revised guidance issued by the FASB related to the testing of goodwill for impairment. Under the revised guidance, an entity has the option to perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value prior to performing the two-step quantitative goodwill impairment test. If, based on the qualitative factors, an entity determines that the fair value of the reporting unit is greater than its carrying amount, then the entity would not be required to perform the two-step quantitative impairment test for that reporting unit. However, if the qualitative assessment indicates that it is not more-likely-than-not that the reporting unit’s fair value exceeds its carrying value, then the quantitative assessment must be performed. An entity is permitted to perform the qualitative assessment on none, some or all of its reporting units and may also elect to bypass the qualitative assessment and begin with the quantitative assessment of goodwill impairment. This amendment did not have a material impact on the Company’s consolidated financial statements.


8
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


    
3.    EARNINGS (LOSS) PER SHARE

The computation of basic and diluted earnings (loss) per common share was as follows (in thousands, except per share data):
 
Three Months Ended March 31,
 
2012
 
2011
Amounts attributable to Quest Diagnostics’ stockholders:
 

 
 

Income (loss) from continuing operations
$
158,844

 
$
(53,487
)
Income (loss) from discontinued operations, net of taxes
274

 
(374
)
Net income (loss) attributable to Quest Diagnostics’ common stockholders
$
159,118

 
$
(53,861
)
 
 
 
 
Income (loss) from continuing operations
$
158,844

 
$
(53,487
)
Less: Earnings allocated to participating securities
604

 
90

Earnings (loss) available to Quest Diagnostics’ common stockholders – basic and diluted
$
158,240

 
$
(53,577
)
 
 
 
 
Weighted average common shares outstanding – basic
158,293

 
161,489

Effect of dilutive securities:
 

 
 

Stock options and performance share units
1,413

 
—

Weighted average common shares outstanding – diluted
159,706

 
161,489

 
 
 
 
Earnings (loss) per share attributable to Quest Diagnostics’ common stockholders – basic:
 

 
 

Income (loss) from continuing operations
$
1.00

 
$
(0.33
)
Income (loss) from discontinued operations
—

 
—

Net income (loss)
$
1.00

 
$
(0.33
)
 
 
 
 
Earnings (loss) per share attributable to Quest Diagnostics’ common stockholders – diluted:
 

 
 

Income (loss) from continuing operations
$
0.99

 
$
(0.33
)
Income (loss) from discontinued operations
—

 
—

Net income (loss)
$
0.99

 
$
(0.33
)

The following securities were not included in the calculation of diluted earnings per share due to their antidilutive effect (shares in thousands):
 
Three Months Ended March 31,
 
2012
 
2011
Stock options and performance share units
1,995

 
3,746


    

9
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)



4.     FAIR VALUE MEASUREMENTS

The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:
 
 
 
Basis of Fair Value Measurements
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets /
Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
March 31, 2012
 

 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Interest rate swaps
$
51,265

 
$
—

 
$
51,265

 
$
—

Trading securities
50,155

 
50,155

 
—

 
—

Cash surrender value of life insurance policies
23,357

 
—

 
23,357

 
—

Available-for-sale equity securities
975

 
—

 
—

 
975

Foreign currency forward contracts
482

 
—

 
482

 
—

Total
$
126,234

 
$
50,155

 
$
75,104

 
$
975

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Deferred compensation liabilities
$
77,726

 
$
—

 
$
77,726

 
$
—

Foreign currency forward contracts
461

 
—

 
461

 
—

Total
$
78,187

 
$
—

 
$
78,187

 
$
—

 
 
 
Basis of Fair Value Measurements
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets /
Liabilities
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
December 31, 2011
 

 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 
 
 
 
 
Interest rate swaps
$
56,520

 
$
—

 
$
56,520

 
$
—

Trading securities
46,926

 
46,926

 
—

 
—

Cash surrender value of life insurance policies
20,936

 
—

 
20,936

 
—

Available-for-sale equity securities
646

 
—

 
—

 
646

Foreign currency forward contracts
180

 
—

 
180

 
—

Total
$
125,208

 
$
46,926

 
$
77,636

 
$
646

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Deferred compensation liabilities
$
71,688

 
$
—

 
$
71,688

 
$
—

Foreign currency forward contracts
1,648

 
—

 
1,648

 
—

Total
$
73,336

 
$
—

 
$
73,336

 
$
—


A full description regarding the Company's fair value measurements is contained in Note 5 to the Consolidated Financial Statements in the Company's 2011 Annual Report on Form 10-K.    

    

10
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


Investments in available-for-sale equity securities consist of the revaluation of an existing investment in unregistered common shares of a publicly-held company. This investment is classified within Level 3 because the unregistered securities contain restrictions on their sale, and therefore, the fair value measurement reflects a discount for the effect of the restriction.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. At March 31, 2012 and December 31, 2011, the fair value of the Company’s debt was estimated at $4.3 billion and $4.4 billion, respectively, using quoted market prices and yields for the same or similar types of borrowings, taking into account the underlying terms of the debt instruments. At March 31, 2012 and December 31, 2011, the estimated fair value exceeded the carrying value of the debt by $367 million and $387 million, respectively.

5.    SETTLEMENT OF CALIFORNIA LAWSUIT

On May 9, 2011, the Company announced an agreement in principle to settle, and on May 19, 2011, the Company finalized a settlement of, a qui tam case filed by a competitor under the California False Claims Act in California state court (the "California Lawsuit") related to the Company's billing practices to Medi-Cal, the California Medicaid program. While denying liability, in order to avoid the uncertainty, expense and risks of litigation, the Company agreed to resolve these matters for $241 million. As a result of the agreement in principle, the Company recorded a pre-tax charge to earnings in the first quarter of 2011 of $236 million (the "Medi-Cal charge"), which represented the cost to resolve the matters noted above and related claims, less amounts previously reserved for related matters. The Company funded the $241 million payment in the second quarter of 2011 with cash on hand and borrowings under its existing credit facilities.           

6.    TAXES ON INCOME

Income tax expense for the three months ended March 31, 2012 and 2011 was $101.4 million and $49.2 million, respectively. The decrease in the effective income tax rate for the three months ended March 31, 2012, compared to the prior year period, is primarily due to the Medi-Cal charge in the first quarter of 2011 (see Note 5), a portion for which a tax benefit was not recorded.

7.    GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the three months ended March 31, 2012 and for the year ended December 31, 2011 are as follows:
 
March 31,
2012
 
December 31,
2011
Balance at beginning of period
$
5,795,765

 
$
5,101,938

Goodwill acquired during the period
28,144

 
701,087

Increase (decrease) related to foreign currency translation
11,166

 
(7,260
)
Balance at end of period
$
5,835,075

 
$
5,795,765


Approximately 90% of the Company’s goodwill as of March 31, 2012 and December 31, 2011 was associated with its clinical testing business.

For the three months ended March 31, 2012, goodwill acquired was principally associated with the acquisition of S.E.D. Medical Laboratories. Of the all-cash purchase price of $50.5 million, approximately $28 million and $19 million, respectively, represented goodwill, which is deductible for tax purposes, and intangible assets, principally comprised of customer-related intangibles.

For the year ended December 31, 2011, goodwill acquired was principally associated with the Athena Diagnostics ("Athena") and Celera Corporation ("Celera") acquisitions. A full description of the Company’s acquisitions is contained in Note 4 to the Consolidated Financial Statements in the Company’s 2011 Annual Report on Form 10-K.
    

11
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


Intangible assets at March 31, 2012 and December 31, 2011 consisted of the following:
 
Weighted
Average
Amortization
Period
 
March 31, 2012
 
December 31, 2011
 
 
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Amortizing intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Customer-related intangibles
19 years
 
$
650,070

 
$
(201,986
)
 
$
448,084

 
$
630,671

 
$
(193,131
)
 
$
437,540

Non-compete agreements
4 years
 
46,176

 
(17,356
)
 
28,820

 
45,798

 
(14,633
)
 
31,165

Technology
14 years
 
167,708

 
(32,109
)
 
135,599

 
165,113

 
(27,929
)
 
137,184

Other
8 years
 
149,799

 
(29,110
)
 
120,689

 
146,613

 
(23,552
)
 
123,061

Total
16 years
 
1,013,753

 
(280,561
)
 
733,192

 
988,195

 
(259,245
)
 
728,950

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets not subject to amortization:
 
 

 
 

 
 

 
 

 
 

Tradenames
 
 
302,892

 
—

 
302,892

 
300,648

 
—

 
300,648

In-process research and development
 
 
4,270

 
—

 
4,270

 
5,250

 
—

 
5,250

Other
 
 
1,159

 
—

 
1,159

 
764

 
—

 
764

Total intangible assets
 
$
1,322,074

 
$
(280,561
)
 
$
1,041,513

 
$
1,294,857

 
$
(259,245
)
 
$
1,035,612


Amortization expense related to intangible assets was $20.2 million and $9.8 million for the three months ended March 31, 2012 and 2011, respectively.

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of March 31, 2012 is as follows:
Fiscal Year Ending December 31,
 

Remainder of 2012
$
59,857

2013
78,205

2014
75,850

2015
64,487

2016
57,777

2017
53,187

Thereafter
343,829

Total
$
733,192


8.    FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to manage its exposure to market risks for changes in interest rates and foreign currencies. This strategy includes the use of interest rate swap agreements, forward starting interest rate swap agreements, treasury lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative purposes. The Company does not enter into derivative financial instruments that contain credit-risk-related contingent features or requirements to post collateral.


12
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


A summary of the fair values of derivative instruments in the consolidated balance sheets is stated in the table below:
 
March 31, 2012
 
December 31, 2011
 
Balance Sheet
Classification
 
Fair Value
 
Balance Sheet
Classification
 
Fair Value
Derivatives Designated as Hedging Instruments
 
 
 

 
 
 
 

Asset Derivatives:
 
 
 

 
 
 
 

Interest rate swaps
Other assets
 
$
51,265

 
Other assets
 
$
56,520

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 

 
 
 
 

Asset Derivatives:
 
 
 

 
 
 
 

Foreign currency forward contracts
Other current assets
 
482

 
Other current assets
 
180

Liability Derivatives:
 
 
 

 
 
 
 

Foreign currency forward contracts
Other current liabilities
 
461

 
Other current liabilities
 
1,648

 
 
 
 
 
 
 
 
Total Net Derivatives Asset
 
 
$
51,286

 
 
 
$
55,052


A full description regarding the Company's use of derivative financial instruments is contained in Note 12 to the Consolidated Financial Statements in the Company's 2011 Annual Report on Form 10-K.    

Interest Rate Risk
    
The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company's debt obligations consist of fixed-rate and variable-rate debt instruments. The Company's primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense.

Interest Rate Derivatives – Cash Flow Hedges
    
The Company has entered into various interest rate lock agreements and forward starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated with the variability in future cash flows attributable to changes in interest rates. The total net loss, net of taxes, recognized in accumulated other comprehensive income (loss), related to the Company's cash flow hedges as of March 31, 2012 and December 31, 2011 was $7.4 million and $7.7 million, respectively. The loss recognized on the Company's cash flow hedges for the three months ended March 31, 2012 and 2011, as a result of ineffectiveness, was not material. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $1.3 million.

Interest Rate Derivatives – Fair Value Hedges

The Company maintains various fixed-to-variable interest rate swaps which have an aggregate notional amount of $550 million and variable interest rates based on six-month LIBOR plus 0.54% and one-month LIBOR plus 1.33%. These derivative financial instruments are accounted for as fair value hedges of a portion of the Senior Notes due 2016 and a portion of the Senior Notes due 2020 and effectively convert that portion of the debt into variable interest rate debt. These interest rate swaps are classified as assets with fair values of $51.3 million and $56.5 million at March 31, 2012 and December 31, 2011, respectively. Since inception, the fair value hedges have been effective; therefore, there is no impact on earnings for the three months ended March 31, 2012 and 2011 as a result of hedge ineffectiveness.

    

13
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


Foreign Currency Risk
    
The Company is exposed to market risk for changes in foreign exchange rates primarily under certain intercompany receivables and payables. Foreign exchange forward contracts are used to mitigate the exposure of the eventual net cash inflows or outflows resulting from these intercompany transactions. The objective is to hedge a portion of the forecasted foreign currency risk over a rolling 12-month time horizon to mitigate the eventual impacts of changes in foreign exchange rates on the cash flows of the intercompany transactions. As of March 31, 2012, the gross notional amount of foreign currency forward contracts in U.S. dollars was $34.4 million and principally consists of contracts in Swedish krona. The Company does not designate these derivative instruments as hedges under current accounting standards unless the benefits of doing so are material. The Company's foreign exchange exposure is not material to the Company's consolidated financial condition or results of operations. The Company does not hedge its net investment in non-U.S. subsidiaries because it views those investments as long-term in nature.

9.    STOCKHOLDERS’ EQUITY
    
Components of Comprehensive Income (Loss)

The market valuation adjustments represent unrealized holding gains (losses) on available-for-sale securities, net of taxes. The net deferred loss on cash flow hedges represents deferred losses on the Company’s interest rate related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 8). For the three months ended March 31, 2012 and 2011, the tax effects related to the market valuation adjustments and deferred losses were not material. Foreign currency translation adjustments are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries.
    
Dividend Program
    
Through the third quarter of 2011, the Company's Board of Directors declared a quarterly cash dividend of $0.10 per common share. In October 2011, the Company's Board of Directors declared an increase in the quarterly cash dividend from $0.10 per common share to $0.17 per common share. During the first quarter of 2012, the Company's Board of Directors declared a quarterly cash dividend of $0.17 per common share.
    
Share Repurchase Plan
    
In January 2012, the Company’s Board of Directors authorized the Company to repurchase an additional $1 billion of the Company’s common stock, increasing the total available authorization at that time to $1.1 billion. The share repurchase authorization has no set expiration or termination date.
    
For the three months ended March 31, 2012, the Company repurchased 847 thousand shares of its common stock at an average price of $59.00 per share for a total of $50 million. For the three months ended March 31, 2012, the Company reissued 1.5 million shares for employee benefit plans. At March 31, 2012, $1.0 billion remained available under the Company’s share repurchase authorizations.
    
For the three months ended March 31, 2011, the Company repurchased 15.4 million shares of its common stock from SB Holdings Capital Inc., a wholly-owned subsidiary of GlaxoSmithKline plc., at an average price of $54.30 per share for a total of $835 million. For the three months ended March 31, 2011, the Company reissued 1.4 million shares for employee benefit plans.



14
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


10.    SUPPLEMENTAL CASH FLOW & OTHER DATA
 
Three Months Ended March 31,
 
2012
 
2011
Depreciation expense
$
51,943

 
$
53,516

 
 
 
 
Interest expense
(42,987
)
 
(38,280
)
Interest income
654

 
351

Interest expense, net
(42,333
)
 
(37,929
)
 
 
 
 
Interest paid
49,782

 
55,044

Income taxes paid
10,253

 
10,602

 
 
 
 
Assets acquired under capital leases
1,192

 
821

 
 
 
 
Businesses acquired:
 

 
 

Fair value of assets acquired
50,800

 
—

Fair value of liabilities assumed
269

 
—

Fair value of net assets acquired
50,531

 
—

Merger consideration paid
25

 
—

Cash paid for business acquisitions
50,556

 
—

Less: Cash acquired
—

 
—

Business acquisitions, net of cash acquired
$
50,556

 
$
—


11.     COMMITMENTS AND CONTINGENCIES

The Company has a line of credit with a financial institution totaling $85 million for the issuance of letters of credit (the “Letter of Credit Line”). The Letter of Credit Line, which is renewed annually, matures on November 18, 2012.
    
In support of its risk management program, to ensure the Company’s performance or payment to third parties, $62 million in letters of credit were outstanding at March 31, 2012. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments. In addition, $5 million of bank guarantees were outstanding at March 31, 2012 in support of certain foreign operations.
    
Contingent Lease Obligations
    
The Company is subject to contingent obligations under certain leases and other instruments incurred in connection with real estate activities and other operations associated with LabOne, Inc., which the Company acquired in 2005, and certain of its predecessor companies. No liability has been recorded for any of these potential contingent obligations. See Note 16 to the Consolidated Financial Statements contained in the Company’s 2011 Annual Report on Form 10-K for further details.

Other Legal Matters

The Company is involved in various legal proceedings. Some of the proceedings against the Company involve claims that could be substantial in amount.

In November 2009, the U.S. District Court for the Southern District of New York partially unsealed a civil complaint, U.S. ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated, filed against the Company under the whistleblower provisions of the federal False Claims Act. The complaint alleged, among other things, violations of the federal Anti-Kickback Statute and the federal False Claims Act in connection with the Company's pricing of laboratory services. The complaint seeks damages for alleged false claims associated with laboratory tests reimbursed by government payors, treble

15
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


damages and civil penalties. In March 2011, the district court granted the Company's motion to dismiss the relators' complaint and disqualified the relators and their counsel from pursuing an action based on the facts alleged in the complaint; the relators filed a notice of appeal. The government was given additional time to decide whether to join the case. In July 2011, the government filed a notice declining to intervene in the action and the Court entered a final judgment in the Company's favor. The relators' appeal is pending.

In April 2010, a putative class action was filed against the Company and NID in the U.S. District Court for the Eastern District of New York on behalf of entities that allegedly purchased or paid for certain of NID's test kits. The complaint alleges that certain of NID's test kits were defective and that defendants, among other things, violated RICO and state consumer protection laws. The complaint alleges an unspecified amount of damages. The Company filed a motion to dismiss this complaint.

In August 2010, a shareholder derivative action entitled Cornish v. Quest Diagnostics Incorporated, et al. was filed in New Jersey state court on behalf of the Company against the directors and certain officers of the Company. The complaint alleges that the defendants breached their fiduciary duties in connection with, among other things, alleged overcharges by the Company to Medi-Cal, the California Medicaid program, for testing services, and seeks unspecified compensatory damages and equitable relief. The action was dismissed without prejudice. On July 21, 2011, the action was re-filed. In June 2011 and October 2011, two additional shareholder derivative actions were filed in New Jersey state court raising allegations similar to those in the Cornish case. The Company filed motions to dismiss each of the three complaints. The court granted the Company's motion to dismiss the Cornish complaint; motions to dismiss the two other cases remain pending.

In November 2010, a putative class action entitled Seibert v. Quest Diagnostics Incorporated, et al. was filed against the Company and certain former officers of the Company in New Jersey state court, on behalf of the Company's sales people nationwide who were over forty years old and who either resigned or were terminated after being placed on a performance improvement plan. The complaint alleges that the defendants' conduct violates the New Jersey Law Against Discrimination ("NJLAD"), and seeks, among other things, unspecified damages. The defendants removed the complaint to the United States District Court for the District of New Jersey. The plaintiffs filed an amended complaint that adds claims under ERISA. The Company filed a motion seeking to limit the application of the NJLAD to only those members of the purported class who worked in New Jersey and to dismiss the individual defendants. The motion was granted.

In 2010, a purported class action entitled In re Celera Corp. Securities Litigation was filed in the United States District Court for the Northern District of California against Celera Corporation and certain of its directors and current and former officers. An amended complaint filed in October 2010 alleges that from April 2008 through July 22, 2009, the defendants made false and misleading statements regarding Celera's business and financial results with an intent to defraud investors. The complaint was further amended in 2011 to add allegations regarding a financial restatement. The complaint seeks unspecified damages on behalf of an alleged class of purchasers of Celera's stock during the period in which the alleged misrepresentations were made. The Company's motion to dismiss is pending.

In August 2011, the Company received a subpoena from the U.S. Attorney for the Northern District of Georgia seeking various business records, including records related to the Company's compliance program, certain marketing materials, certain product offerings, and test ordering and other policies. The Company is cooperating with the request.

In January 2012, a putative class action entitled Beery v. Quest Diagnostics Incorporated was filed in the United States District Court for the District of New Jersey against the Company and a subsidiary, on behalf of all female sales representatives employed by the defendants from February 17, 2010 to the present. The amended complaint alleges that the defendants discriminate against these female sales representatives on account of their gender, in violation of the federal civil rights and equal pay acts, and seeks, among other things, injunctive relief and monetary damages.

In September 2009, the Company received a subpoena from the Michigan Attorney General's Office seeking documents relating to the Company's pricing and billing practices as they relate to Michigan's Medicaid program. The Company cooperated with the requests. In January 2012, the State of Michigan intervened as a plaintiff in a civil lawsuit, Michigan ex rel. Hunter Laboratories LLC v. Quest Diagnostics Incorporated, et al., filed in Michigan Superior Court. The suit, originally filed by a competitor laboratory, alleges that the Company overcharged Michigan's Medicaid program.

In addition, the Company and certain of its subsidiaries have received subpoenas from state agencies in three states and from the Office of the Inspector General of the U.S. Department of Health and Human Services which seek documents

16
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


relating to the Company's billing practices. The Company is cooperating with the requests.

The federal or state governments may bring claims based on new theories as to the Company's practices which management believes to be in compliance with law. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers. The Company is aware of certain pending individual or class action lawsuits, and has received several subpoenas, related to billing practices filed under the qui tam provisions of the Civil False Claims Act and/or other federal and state statutes, regulations or other laws. The Company understands that there may be other pending qui tam claims    brought by former employees or other "whistle blowers" as to which the Company cannot determine the extent of any potential liability.

Management cannot predict the outcome of such matters. Although management does not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company's financial condition, given the high degree of judgment involved in establishing loss estimates related to these types of matters, the outcome of such matters may be material to the Company's results of operations or cash flows in the period in which the impact of such matters is determined or paid.
    
Reserves for Legal Matters
    
These matters are in different stages. Some of these matters are in their early stages. Matters may involve responding to and cooperating with various government investigations and related subpoenas. Reserves for legal matters totaled less than $5 million at both March 31, 2012 and December 31, 2011. As of March 31, 2012, the Company does not believe that any losses related to the Other Legal Matters described above are probable. While the Company believes that a reasonable possibility exists that losses may have been incurred related to the Other Legal Matters described above, based on the nature and status of these matters, potential losses, if any, cannot be estimated.

Reserves for General and Professional Liability Claims
    
As a general matter, providers of clinical 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 coverages for, among other things, claims that could result from providing, or failing to provide, clinical 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. Reserves for such matters, including those associated with both asserted and incurred but not reported claims, are established by considering actuarially determined losses based upon the Company's historical and projected loss experience. Such reserves totaled approximately $165 million and $127 million as of March 31, 2012 and December 31, 2011, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures. Management cannot predict the outcome of any claims made against the Company. Although 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 condition, given the high degree of judgment involved in establishing accruals for loss estimates related to these types of matters, the outcome may be material to the Company's results of operations or cash flows in the period in which the impact of such claims is determined or paid.



17
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


12.    DISCONTINUED OPERATIONS

Summarized financial information for the discontinued operations of NID, a test kit manufacturing subsidiary which was closed in 2006, is set forth below:
 
Three Months Ended March 31,
 
2012
 
2011
Net revenues
$
—

 
$
—

Income (loss) from discontinued operations before income taxes
981

 
(92
)
Income tax expense
(707
)
 
(282
)
Income (loss) from discontinued operations, net of taxes
$
274

 
$
(374
)

The remaining balance sheet information related to NID was not material at March 31, 2012 and December 31, 2011.

13.    BUSINESS SEGMENT INFORMATION

Clinical testing is an essential element in the delivery of healthcare services. Physicians use clinical tests to assist in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions. Clinical testing is generally categorized as clinical laboratory testing and anatomic pathology services. Clinical laboratory testing is generally performed on whole blood, serum, plasma and other body fluids, such as urine, and specimens such as microbiology samples. Anatomic pathology services are principally for the detection of cancer and are performed on tissues, such as biopsies, and other samples, such as human cells. Customers of the clinical testing business include patients, physicians, hospitals, employers, governmental institutions and other commercial clinical laboratories. The clinical testing business accounted for greater than 90% of net revenues from continuing operations in 2012 and 2011.

All other operating segments include the Company's non-clinical testing businesses and consist of its risk assessment services, clinical trials testing, healthcare information technology, and diagnostics products businesses. The Company's risk assessment services business provides underwriting support services to the life insurance industry including electronic data collection, specimen collection and paramedical examinations, laboratory testing, medical record retrieval, case management, motor vehicle reports, telephone inspections, prescription histories and credit checks. The Company's clinical trials testing business provides clinical testing performed in connection with clinical research trials on new drugs, vaccines and certain medical devices. The Company's healthcare information technology business is a developer and integrator of clinical connectivity and data management solutions for healthcare organizations, physicians and clinicians that can help improve patient care and medical practice. The Company's diagnostics products business manufactures and markets products that enable healthcare professionals to make healthcare diagnoses, including products for point-of-care, or near-patient, testing for the professional market. During the second quarter of 2011, the Company acquired Athena and Celera. Athena is included in the Company's clinical laboratory testing business. The majority of Celera's operations are included in the Company's clinical laboratory testing business, with the remainder in other operating segments. A full description of the Company’s acquisitions is contained in Note 4 to the Consolidated Financial Statements in the Company’s 2011 Annual Report on Form 10-K.

On April 19, 2006, the Company decided to discontinue NID’s operations and results of operations for NID have been classified as discontinued operations for all periods presented (see Note 12).

At March 31, 2012, substantially all of the Company’s services are provided within the United States, and substantially all of the Company’s assets are located within the United States.

The following table is a summary of segment information for the three months ended March 31, 2012 and 2011. Segment asset information is not presented since it is not used by the chief operating decision maker at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income for the segment. General management and administrative corporate expenses, including amortization of intangible assets and the Medi-Cal charge in the first quarter of 2011 of $236 million (see Note 5), are included in general corporate expenses below. The accounting policies of the segments are the same as those of the Company as set forth in Note 2 to the Consolidated Financial Statements contained in the Company’s 2011 Annual Report on Form 10-K and Note 2 to the interim consolidated financial statements.

18
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


 
Three Months Ended March 31,
 
2012
 
2011
Net revenues:
 

 
 

Clinical laboratory testing business
$
1,767,987

 
$
1,662,165

All other operating segments
168,469

 
159,412

Total net revenues
$
1,936,456

 
$
1,821,577

 
 
 
 
Operating earnings (loss):
 

 
 

Clinical laboratory testing business
$
355,715

 
$
310,284

All other operating segments
11,627

 
8,012

General corporate expenses
(67,757
)
 
(287,336
)
Total operating income
299,585

 
30,960

Non-operating expenses, net
(29,967
)
 
(28,022
)
Income from continuing operations before taxes
269,618

 
2,938

Income tax expense
101,377

 
49,226

Income (loss) from continuing operations
168,241

 
(46,288
)
Income (loss) from discontinued operations, net of taxes
274

 
(374
)
Net income (loss)
168,515

 
(46,662
)
Less: Net income attributable to noncontrolling interests
9,397

 
7,199

Net income (loss) attributable to Quest Diagnostics
$
159,118

 
$
(53,861
)

14.     SUMMARIZED FINANCIAL INFORMATION
    
The Company’s floating rate senior notes due 2014, senior notes due 2015, senior notes due 2016, senior notes due 2017, senior notes due 2020, senior notes due 2021, senior notes due 2037 and senior notes due 2040 are fully and unconditionally guaranteed, jointly and severally, by certain of the Company's domestic, wholly-owned subsidiaries (the "Subsidiary Guarantors"). With the exception of Quest Diagnostics Receivables Incorporated (“QDRI”) (see paragraph below), the non-guarantor subsidiaries are primarily foreign subsidiaries and less than wholly-owned subsidiaries.

In conjunction with the Company’s secured receivables credit facility, the Company maintains a wholly-owned non-guarantor subsidiary, QDRI. The Company and certain of its Subsidiary Guarantors transfer certain domestic receivables to QDRI. QDRI utilizes the transferred receivables to collateralize borrowings under 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.

19
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)



Condensed Consolidating Statement of Operations and Comprehensive Income
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net revenues
$
202,165

 
$
1,615,622

 
$
196,203

 
$
(77,534
)
 
$
1,936,456

Operating costs and expenses:
 
 
 
 
 

 
 

 
 
Cost of services
120,828

 
930,385

 
65,325

 
—

 
1,116,538

Selling, general and administrative
63,878

 
335,493

 
108,969

 
(7,699
)
 
500,641

Amortization of intangible assets
287

 
17,093

 
2,851

 
—

 
20,231

Royalty (income) expense
(108,061
)
 
108,061

 
—

 
—

 
—

Other operating income, net
(146
)
 
(266
)
 
(127
)
 
—

 
(539
)
Total operating costs and expenses
76,786

 
1,390,766

 
177,018

 
(7,699
)
 
1,636,871

Operating income
125,379

 
224,856

 
19,185

 
(69,835
)
 
299,585

Non-operating (expense) income, net
(42,396
)
 
(60,296
)
 
2,890

 
69,835

 
(29,967
)
Income from continuing operations before taxes
82,983

 
164,560

 
22,075

 
—

 
269,618

Income tax expense
31,562

 
64,388

 
5,427

 
—

 
101,377

Income from continuing operations
51,421

 
100,172

 
16,648

 
—

 
168,241

Income from discontinued operations, net of taxes
—

 
274

 
—

 
—

 
274

Equity earnings from subsidiaries
107,697

 
—

 
—

 
(107,697
)
 
—

Net income
159,118

 
100,446

 
16,648

 
(107,697
)
 
168,515

Less: Net income attributable to noncontrolling interests
—

 
—

 
9,397

 
—

 
9,397

Net income attributable to Quest Diagnostics
$
159,118

 
$
100,446

 
$
7,251

 
$
(107,697
)
 
$
159,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
159,118

 
$
100,446

 
$
16,648

 
$
(107,697
)
 
$
168,515

Other comprehensive income, net of tax
411

 
—

 
18,216

 
—

 
18,627

Comprehensive income
159,529

 
100,446

 
34,864

 
(107,697
)
 
187,142

Less: Comprehensive income attributable to noncontrolling interests
—

 
—

 
9,397

 
—

 
9,397

Comprehensive income attributable to Quest Diagnostics
$
159,529

 
$
100,446

 
$
25,467

 
$
(107,697
)
 
$
177,745


20
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2011
 
 
 
 
 
 
 
 
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net revenues
$
198,489

 
$
1,503,344

 
$
191,287

 
$
(71,543
)
 
$
1,821,577

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of services
123,591

 
907,390

 
66,017

 
—

 
1,096,998

Selling, general and administrative
38,436

 
311,729

 
105,053

 
(7,360
)
 
447,858

Amortization of intangible assets
163

 
8,149

 
1,537

 
—

 
9,849

Royalty (income) expense
(102,356
)
 
102,356

 
—

 
—

 
—

Other operating expense (income), net
236,278

 
(214
)
 
(152
)
 
—

 
235,912

Total operating costs and expenses
296,112

 
1,329,410

 
172,455

 
(7,360
)
 
1,790,617

Operating income (loss)
(97,623
)
 
173,934

 
18,832

 
(64,183
)
 
30,960

Non-operating (expense) income, net
(38,420
)
 
(57,154
)
 
3,369

 
64,183

 
(28,022
)
Income (loss) from continuing operations before taxes
(136,043
)
 
116,780

 
22,201

 
—

 
2,938

Income tax (benefit) expense
(3,614
)
 
46,165

 
6,675

 
—

 
49,226

Income (loss) from continuing operations
(132,429
)
 
70,615

 
15,526

 
—

 
(46,288
)
Loss from discontinued operations, net of taxes
—

 
(374
)
 
—

 
—

 
(374
)
Equity earnings from subsidiaries
78,568

 
—

 
—

 
(78,568
)
 
—

Net income (loss)
(53,861
)
 
70,241

 
15,526

 
(78,568
)
 
(46,662
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
7,199

 
—

 
7,199

Net income (loss) attributable to Quest Diagnostics
$
(53,861
)
 
$
70,241

 
$
8,327

 
$
(78,568
)
 
$
(53,861
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(53,861
)
 
$
70,241

 
$
15,526

 
$
(78,568
)
 
$
(46,662
)
Other comprehensive income (loss), net of tax
(2,921
)
 
—

 
24,504

 
—

 
21,583

Comprehensive income (loss)
(56,782
)
 
70,241

 
40,030

 
(78,568
)
 
(25,079
)
Less: Comprehensive income attributable to noncontrolling interests
—

 
—

 
7,199

 
—

 
7,199

Comprehensive income (loss) attributable to Quest Diagnostics
$
(56,782
)
 
$
70,241

 
$
32,831

 
$
(78,568
)
 
$
(32,278
)


21
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)



Condensed Consolidating Balance Sheet
 
 
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
 
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
69,585

 
$
10,885

 
$
64,969

 
$
—

 
$
145,439

Accounts receivable, net
13,135

 
154,586

 
806,167

 
—

 
973,888

Other current assets
99,391

 
215,049

 
86,006

 
(1,169
)
 
399,277

Total current assets
182,111

 
380,520

 
957,142

 
(1,169
)
 
1,518,604

Property, plant and equipment, net
159,936

 
577,264

 
44,227

 
—

 
781,427

Goodwill and intangible assets, net
154,913

 
6,261,035

 
460,640

 
—

 
6,876,588

Intercompany (payable) receivable
(749,903
)
 
919,256

 
(169,353
)
 
—

 
—

Investment in subsidiaries
8,082,783

 
—

 
—

 
(8,082,783
)
 
—

Other assets
297,581

 
40,275

 
50,368

 
(113,399
)
 
274,825

Total assets
$
8,127,421

 
$
8,178,350

 
$
1,343,024

 
$
(8,197,351
)
 
$
9,451,444

 
 

 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
761,802

 
$
173,515

 
$
36,944

 
$
(1,169
)
 
$
971,092

Short-term borrowings and current portion of long-term debt
281,451

 
7,263

 
265,642

 
—

 
554,356

Total current liabilities
1,043,253

 
180,778

 
302,586

 
(1,169
)
 
1,525,448

Long-term debt
3,020,304

 
17,243

 
327,710

 
—

 
3,365,257

Other liabilities
194,571

 
530,659

 
52,851

 
(113,399
)
 
664,682

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Quest Diagnostics stockholders’ equity
3,869,293

 
7,449,670

 
633,113

 
(8,082,783
)
 
3,869,293

Noncontrolling interests
—

 
—

 
26,764

 
—

 
26,764

Total stockholders’ equity
3,869,293

 
7,449,670

 
659,877

 
(8,082,783
)
 
3,896,057

Total liabilities and stockholders’ equity
$
8,127,421

 
$
8,178,350

 
$
1,343,024

 
$
(8,197,351
)
 
$
9,451,444

















22
Table of Contents
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


Condensed Consolidating Balance Sheet
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
 
 
Parent