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| DGX > SEC Filings for DGX > Form 10-Q on 28-Jul-2009 | All Recent SEC Filings |
28-Jul-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 10 to the interim consolidated financial statements.
Three and Six Months Ended June 30, 2009 Compared with Three and Six Months Ended June 30, 2008
Income from continuing operations for the three months ended June 30, 2009 was $188 million, or $1.00 per diluted share, compared to $162 million, or $0.83 per diluted share, in 2008. Income from continuing operations for the six months ended June 30, 2009 was $357 million, or $1.89 per diluted share, compared to $303 million, or $1.54 per diluted share, in 2008. These increases in income from continuing operations were principally driven by improved operating performance and to a lesser degree by lower interest expense.
Results for the three and six months ended June 30, 2009 include a $15.5 million gain, or $0.05 per diluted share, associated with an insurance settlement for storm related losses, offset by a $6.3 million charge, or $0.02 per diluted share, associated with the early extinguishment of debt and a $7.0 million charge, or $0.02 per diluted share, associated with the write-down of an investment.
Net revenues for the three months ended June 30, 2009 grew by 3.5% over the prior year level to $1.9 billion. Net revenues for the six months ended June 30, 2009 were $3.7 billion, 2.4% above the prior year level. Changes in foreign exchange rates reduced revenue growth for the three and six months ended June 30, 2009 by 0.7% and 0.8%, respectively.
For the second quarter of 2009, revenues for our clinical testing business, which accounts for over 90% of our net revenues, grew 4% above the prior year level. Pre-employment drug testing, which is part of the clinical testing business, reduced revenues by about 0.7%. Clinical testing volume, measured by the number of requisitions, decreased 0.6% for the quarter ended June 30, 2009. Pre-employment drug testing, which accounted for approximately 6% of our total clinical testing volume, declined 24% and reduced consolidated volume by 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 0.7%. Lastly, the second quarter of 2009 had fewer business days than the prior year which we estimate reduced volume by 0.6%. After giving consideration to these factors, underlying volume grew about 2.5% for the quarter ended June 30, 2009, up from approximately 1.5% growth in
For the six months ended June 30, 2009, clinical testing revenues grew 3.1% above the prior year level. Pre-employment drug testing reduced revenues by about 0.7%. Clinical testing volume, measured by the number of requisitions, decreased 1.2% for the six months ended June 30, 2009. Pre-employment drug testing, which accounted for 5% of our total clinical testing volume, declined 25% and reduced consolidated volume by 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 0.8%. Lastly, the six months ended June 30, 2009 had fewer business days than the prior year which we estimate reduced volume by 0.7%. After giving consideration to these factors, underlying volume grew about 2.0% for the six months ended June 30, 2009. Revenue per requisition increased 4.4% for the six months ended June 30, 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% of our net revenues for the three and six months ended June 30, 2009. 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 and, in the aggregate, reported revenues for the three and six ended June 30, 2009 were 1.8% and 4.7%, respectively, below the prior year periods, with the decline more than accounted for by the impact of foreign exchange rates which reduced the combined revenues of these businesses by approximately 6% and 7%, respectively, for the three and six months ended June 30, 2009.
Total operating costs and expenses for the three months ended June 30, 2009 increased $12.7 million compared to the second quarter of 2008, and decreased as a percentage of net revenues to 81% compared to 83% in 2008. Total operating costs and expenses for the six months ended June 30, 2009 decreased $4.8 million from the prior year period and decreased as a percentage of net revenues to 82% compared to 84% in 2008. 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 during the first half of 2009 have enabled us to realize reduced costs year-to-date and a modest cost increase for the quarter on increased net revenues. These efforts, coupled with higher revenue per requisition, served to reduce operating costs and expenses as a percentage of net revenues.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 57.9% of net revenues for the three months ended June 30, 2009, decreasing from 59.0% of net revenues in the prior year period. For the six months ended June 30, 2009, cost of services, as a percentage of net revenues, was 58.1% of net revenues, decreasing from 59.1% of net revenues in the prior year period. These improvements over the prior year reflect 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 23.6% of net revenues for the three months ended June 30, 2009, compared to 23.8% in the prior year period. For the six months ended June 30, 2009, selling, general and administrative expenses, as a percentage of net revenues, decreased to 23.5% from 24.1% in the prior year period. These improvements were primarily due to actions taken to reduce our cost structure and higher revenue per requisition.
For both the three months ended June 30, 2009 and 2008, bad debt expense was 4.4% of net revenues. For the six months ended June 30, 2009, bad debt expense was 4.5% compared to 4.6% of net revenues in the prior year period. Continued progress in our billing and collection processes has resulted in stable bad debt, and improvements in 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.
Other operating income, net represents miscellaneous income and expense items related to operating activities, including gains and losses associated with the disposal of operating assets and provisions for
Operating income for the three months ended June 30, 2009 was $359 million, or 18.9% of net revenues, compared to $308 million, or 16.8% of net revenues, in the prior year period. For the six months ended June 30, 2009, operating income was $680 million, or 18.3% of net revenues, compared to $588 million, or 16.2% of net revenues in the prior year period. The improvements in operating income, as a percentage of net revenues, were 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 first quarter of 2009. In addition, operating income for the three and six months ended June 30, 2009 includes a $15.5 million gain related to an insurance settlement for storm related losses, which contributed approximately 80 basis points and 40 basis points, respectively, to the improvement in operating income as a percentage of net revenues. The operating income percentage for the three and six months ended June 30, 2009 also reflects the impact of the various items which served to reduce cost of services and selling, general and administrative expenses as a percentage of net revenues.
Interest expense, net for the three and six months ended June 30, 2009 decreased $9 million and $17 million, respectively, compared to the prior year periods. These decreases were primarily due to lower interest rates on our variable-interest rate debt, as well as lower average outstanding debt balances in the first half of 2009, compared to the prior year periods.
Other (expense) income, net represents miscellaneous income and expense items related to non-operating activities such as gains and losses associated with investments and other non-operating assets. For the three and six months ended June 30, 2009, other (expense) income, net includes a charge of $7.0 million associated with the write-down of an investment and a $6.3 million charge associated with the early extinguishment of debt.
The effective income tax rate for the three and six months ended June 30, 2009 was above the prior year periods by 1.2% and 0.7%, respectively. These increases were primarily due to the favorable resolution of certain tax contingencies in the second quarter of 2008.
Income from discontinued operations, net of taxes, for the three months ended June 30, 2009 was $0.1 million, or $0.00 per diluted share, compared to a loss of $0.9 million, or $0.01 per diluted share in 2008. Loss from discontinued operations, net of taxes, for the six months ended June 30, 2009 was $1.6 million, or $0.01 per diluted share, compared to $2.0 million, or $0.01 per diluted share in the prior year. 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 8 and Note 9 to the interim consolidated financial statements for further details.
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