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| DGX > SEC Filings for DGX > Form 10-Q on 27-Oct-2009 | All Recent SEC Filings |
27-Oct-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 and our diagnostic products business. Our business segment information is disclosed in Note 10 to the interim consolidated financial statements.
Three and Nine Months Ended September 30, 2009 Compared with Three and Nine Months Ended September 30, 2008
Income from continuing operations for the three months ended September 30, 2009 was $192 million, or $1.02 per diluted share, compared to $160 million, or $0.81 per diluted share, in 2008. The increase in income from continuing operations for the three month period was principally due to improved operating performance, reduced interest expense and an investment write-down in the prior year. Income from continuing operations for the nine months ended September 30, 2009 was $549 million, or $2.91 per diluted share, compared to $463 million, or $2.35 per diluted share, in 2008. The increase in income from continuing operations for the nine month period was principally driven by improved operating performance and lower interest expense.
Results for the nine months ended September 30, 2009 include a $15.5 million gain, or $0.05 per diluted share, associated with an insurance settlement for storm-related losses, partially offset by $7.6 million in charges, 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.
Results for the three and nine months ended September 30, 2008 include a third quarter charge of $8.9 million, or $0.03 per diluted share, associated with the write-down of an equity investment. In addition, we estimate the impact of hurricanes in the third quarter of 2008 adversely impacted operating income for the three and nine months ended September 30, 2008 by approximately $8 million or $0.02 per diluted share.
Net revenues for the three months ended September 30, 2009 grew by 3.9% over the prior year level to $1.9 billion. Net revenues for the nine months ended September 30, 2009 were $5.6 billion, 2.9% above the prior year level. We estimate that net revenue growth over the prior year for the three and nine months ended September 30, 2009 was aided by approximately 0.5% and 0.2%, respectively, associated with the impact of
For the third quarter of 2009, revenues for our clinical testing business, which accounts for over 90% of our net revenues, grew 4.3% above the prior year level. Declines in pre-employment drug testing, which is part of our clinical testing business, reduced consolidated revenues by about 0.8%. Clinical testing volume, measured by the number of requisitions, was unchanged from the prior year period. Pre-employment drug testing, which accounted for approximately 5% of our total clinical testing volume, declined 23% 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. Also, we estimate that the third quarter volume comparison to the prior year was aided by about 0.6%, associated with the impact of hurricanes in the third quarter of 2008. Revenue per requisition increased 4.3% for the three months ended September 30, 2009, with the increase continuing to be primarily driven by a positive test mix and a benefit of about a half of one percent from the Medicare laboratory fee increase which went into effect January 1, 2009.
For the nine months ended September 30, 2009, clinical testing revenues grew 3.5% above the prior year level. Declines in pre-employment drug testing reduced consolidated revenues by about 0.8%. Clinical testing volume, measured by the number of requisitions, decreased 0.8% for the nine months ended September 30, 2009. Pre-employment drug testing, which accounted for approximately 5% of our total clinical testing volume, declined 24% and reduced consolidated volume by 1.7%. Our decision to exit certain laboratory management agreements that did not meet our profitability thresholds also reduced volume by 0.5%. In addition, the nine months ended September 30, 2009 had fewer business days than the prior year which we estimate reduced volume by 0.5%. Lastly, we estimate that the volume comparison for 2009 was aided by about 0.2%, associated with the impact of hurricanes in the third quarter of 2008. Revenue per requisition increased 4.3% for the nine months ended September 30, 2009, with the increase primarily driven by a positive test mix and a benefit of about a half of one percent 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 nine months ended September 30, 2009. These businesses include our risk assessment services business, our clinical trials testing business, our healthcare information technology business and our diagnostic products business. These businesses contain most of our international operations and, in the aggregate, reported revenues for the three months ended September 30, 2009 were within 1% of the prior year level, despite the impact of foreign exchange rates which reduced the combined revenues of these businesses by approximately 4%. Reported revenues for these businesses for the nine months ended September 30, 2009 were 3% below the prior year period, 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%.
Total operating costs and expenses for the three months ended September 30, 2009 increased $39 million compared to the third quarter of 2008, and decreased as a percentage of net revenues to 81.6% compared to 82.6% in 2008. Total operating costs and expenses for the nine months ended September 30, 2009 increased $34 million from the prior year period and decreased as a percentage of net revenues to 81.7% compared to 83.4% 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 2009 have enabled us to realize modest cost increases 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 September 30, 2009, decreasing from 58.7% 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 as well as the impact of hurricanes which adversely impacted our operations during the third quarter of 2008. For the nine months ended September 30, 2009, cost of services, as a percentage of net revenues, was 58.0% of net revenues, decreasing from 59.0% of net revenues in the prior year period. The improvement over the prior year primarily reflects actions taken to reduce our cost structure and higher revenue per requisition.
For both the three months ended September 30, 2009 and 2008, bad debt expense was 4.4% of net revenues. For the nine months ended September 30, 2009, bad debt expense was 4.4% 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 slow economy.
Other operating expense (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 restructurings and other special charges. For the nine months ended September 30, 2009, other operating expense (income), net includes a $15.5 million second quarter gain related to an insurance settlement for storm-related losses.
Operating income for the three months ended September 30, 2009 was $348 million, or 18.4% of net revenues, compared to $317 million, or 17.4% of net revenues, in the prior year period. For the nine months ended September 30, 2009, operating income was $1.0 billion, or 18.3% of net revenues, compared to $905 million, or 16.6% 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. Operating income for the nine months ended September 30, 2009 also includes a $15.5 million gain related to an insurance settlement for storm-related losses, which contributed approximately 30 basis points to the improvement in operating income as a percentage of net revenues. In addition, we estimate that the impact of hurricanes in the third quarter of 2008 served to aid the three and nine month period-over-period comparisons by about 30 basis points and 10 basis points, respectively. The operating income percentage for the three and nine months ended September 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 nine months ended September 30, 2009 decreased $10 million and $27 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 2009, compared to the prior year periods.
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. For the nine months ended September 30, 2009, other income (expense), net includes a charge of $7.0 million associated with the write-down of an investment and $7.6 million in charges associated with the early extinguishment of debt. For the three and nine months ended September 30, 2008, other income (expense), net includes a third quarter charge of $8.9 million associated with the write-down of an equity investment.
The effective income tax rate for the three and nine months ended September 30, 2009 increased by 1% and 0.8%, respectively, compared to the prior year period, primarily due to the favorable resolution of certain tax contingencies in 2008.
Income from discontinued operations, net of taxes, for the three months ended September 30, 2009 was $0.5 million, or $0.00 per diluted share, compared to a loss of $49 million, or $0.25 per diluted share in 2008. Loss from discontinued operations, net of taxes, for the nine months ended September 30, 2009 was $1.0 million, or $0.01 per diluted share, compared to $51 million, or $0.26 per diluted share in the prior year. During the third quarter of 2008, the Company and NID reached an agreement in principle with the United States Attorney's Office to settle the previously disclosed federal government investigation of NID, a test kit subsidiary voluntarily closed in 2006. As a result of the agreement in principle, during the third quarter of 2008, the Company recorded a charge of $73 million in discontinued operations to increase its reserves for the settlement and related matters. On April 15, 2009, the Company entered into a final settlement agreement with the federal government and paid $308 million, which had been previously reserved in connection with the final settlement. See Note 9 to the interim consolidated financial statements for further details.
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