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| DGX > SEC Filings for DGX > Form 10-Q on 24-Apr-2009 | All Recent SEC Filings |
24-Apr-2009
Quarterly Report
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward, with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar transactions, and about one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our Annual Report on Form 10-K for the year ended December 31, 2008.
Our clinical testing business currently represents our one reportable business segment. The clinical testing business accounted for more than 90% of net revenues from continuing operations in both 2009 and 2008. Our other operating segments consist of our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. Our business segment information is disclosed in Note 8 to the interim consolidated financial statements.
Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008
Income from continuing operations for the three months ended March 31, 2009 was $169 million, or $0.89 per diluted share, compared to $141 million, or $0.72 per diluted share, in 2008. The increase in income from continuing operations was principally driven by improved operating performance and to a lesser degree by lower interest expense.
Net revenues for the three months ended March 31, 2009 grew by 1.3% over the prior year level to $1.8 billion.
For the first quarter of 2009, revenues for our clinical testing business, which accounts for over 90% of our net revenues, grew 2.2% above the prior year level. Pre-employment drug testing, which is part of the clinical testing business, reduced revenues by about 0.8% . Clinical testing volume, measured by the number of requisitions, decreased 1.9% for the quarter ended March 31, 2009. Pre-employment drug testing, which accounted for approximately 5% of our total clinical testing volume in 2009, declined approximately 25% and reduced consolidated volume by approximately 1.7% . The volume decrease in pre-employment drug testing is principally due to reduced hiring by employers served by this business. In addition, our decision to exit certain laboratory management agreements that did not meet our profitability thresholds reduced volume by approximately 0.9% . Lastly, the first quarter of 2009 had fewer business days than the prior year which we estimate reduced volume by approximately 0.8% . After giving consideration to these factors, underlying volume grew about 1.5% for the quarter ended March 31, 2009, which is consistent with the rate of volume growth we experienced as we exited 2008. Revenue per requisition increased 4.1% for the three months ended March 31, 2009, with the increase primarily driven by a positive test mix and a benefit of about 0.5% from the Medicare laboratory fee increase which went into effect January 1, 2009.
Our businesses other than clinical laboratory testing accounted for approximately 8% and 9% of our net revenues for the three months ended March 31, 2009 and 2008, respectively. These businesses include our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. These businesses contain most of our international operations
Total operating costs and expenses for the three months ended March 31, 2009 decreased $17.4 million from the prior year period. These decreases were primarily due to lower testing volume in our clinical testing business, actions we have taken to improve our operating efficiency and reduce the size of our workforce, and discrete cost containment actions taken in the first quarter of 2009, partially offset by costs associated with annual compensation adjustments.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 58.3% of net revenues for the three months ended March 31, 2009, decreasing from 59.3% of net revenues in the prior year period. The improvement over the prior year reflects actions taken to reduce our cost structure and higher revenue per requisition.
Selling, general and administrative expenses, which include the costs of the sales force, billing operations, bad debt expense, and general management and administrative support, were 23.5% of net revenues for the three months ended March 31, 2009, compared to 24.4% in the prior year period. This improvement was primarily due to actions taken to reduce our cost structure, higher revenue per requisition and improvement in bad debt.
For the three months ended March 31, 2009, bad debt expense was 4.5% of net revenues, compared to 4.8% in the prior year period. Continued progress in our billing and collection processes has resulted in improvements in bad debt, days sales outstanding and the cost of our billing operation. With our disciplined approach, we expect to see continued strong performance in our billing and collection metrics, despite a slowing economy.
Operating income for the three months ended March 31, 2009 was $321 million, or 17.8% of net revenues, compared to $280 million, or 15.7% of net revenues, in the prior year period. The improvement in operating income, as a percentage of net revenues, was primarily due to a more profitable revenue mix, resulting in higher revenue per requisition and progress we are making with our cost reduction program, as well as discrete cost containment actions we took during the quarter. In addition, the operating income percentage for the three months ended March 31, 2009, reflects the impact of the various items which served to reduce cost of services and selling, general and administrative expenses as a percentage of revenues.
Interest expense, net for the three months ended March 31, 2009 decreased $8 million over the prior year period. The decrease was primarily due to lower interest rates on our variable-interest rate debt, as well as lower average outstanding debt balances in the first quarter of 2009, compared to the prior year period.
Loss from discontinued operations, net of taxes, for the three months ended March 31, 2009 was $1.7 million, or $0.01 per diluted share, compared to $1.1 million, or $0.01 per diluted share in 2008. On April 15, 2009, the Company finalized the resolution of the previously disclosed federal government investigation related to NID, a test kit subsidiary voluntarily closed in 2006, and entered into a settlement agreement with the federal government. In the second quarter of 2009, payments totaling $308 million, which had been previously reserved, were funded out of cash on-hand and available credit facilities. See Note 6 and Note 7 to the interim consolidated financial statements for further details.
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