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 Quarter ended June 30, 2005 Commission file number 001-12215
Quest Diagnostics Incorporated
1290 Wall Street West Lyndhurst, NJ 07071 (201) 393-5000
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 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of July 26, 2005 there were 202,988,456 outstanding shares of the registrant’s common stock, $.01 par value.
PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
Index to consolidated financial statements filed as part of this report:
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004
2
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004
4
Notes to Consolidated Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
23
Item 4.
Controls and Procedures
1
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (in thousands, except per share data) (unaudited)
Three Months EndedJune 30,
Six Months EndedJune 30,
2005
2004
Net revenues
$
1,377,529
1,297,674
2,697,014
2,553,416
Operating costs and expenses:
Cost of services
798,678
747,577
1,578,760
1,484,858
Selling, general and administrative
315,674
307,402
624,022
614,947
Amortization of intangible assets
933
2,058
1,864
4,122
Other operating expense, net
1,091
10,618
1,302
10,591
Total operating costs and expenses
1,116,376
1,067,655
2,205,948
2,114,518
Operating income
261,153
230,019
491,066
438,898
Other income (expense):
Interest expense, net
(12,640
)
(16,346
(25,423
(30,990
Minority share of income
(5,072
(5,019
(10,085
(9,473
Equity earnings in unconsolidated joint ventures
6,440
5,397
13,654
9,954
Other income (expense), net
(544
(1,223
211
(24
Total non-operating expenses, net
(11,816
(17,191
(21,643
(30,533
Income before taxes
249,337
212,828
469,423
408,365
Income tax expense
100,248
85,999
188,723
165,387
Net income
149,089
126,829
280,700
242,978
Earnings per common share:
Basic
0.74
0.62
1.39
1.18
Diluted
0.72
0.59
1.36
1.13
Weighted average common shares outstanding:
202,597
206,017
202,158
206,151
206,554
216,508
206,348
216,853
Dividends per common share
0.09
0.075
0.18
0.15
The accompanying notes are an integral part of these statements.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2005 AND DECEMBER 31, 2004 (in thousands, except per share data) (unaudited)
June 30, 2005
December 31, 2004
Assets
Current assets:
Cash and cash equivalents
204,107
73,302
Accounts receivable, net of allowance for doubtful accounts of $215,492 and $202,857 at June 30, 2005 and December 31, 2004, respectively
693,378
649,281
Inventories
76,264
75,327
Deferred income taxes
104,217
83,030
Prepaid expenses and other current assets
66,618
50,140
Total current assets
1,144,584
931,080
Property, plant and equipment, net
658,972
619,485
Goodwill, net
2,524,596
2,506,950
Intangible assets, net
10,546
11,462
24,276
29,374
Other assets
144,630
105,437
Total assets
4,507,604
4,203,788
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
710,081
668,987
Short-term borrowings and current portion of long-term debt
230,086
374,801
Total current liabilities
940,167
1,043,788
Long-term debt
624,150
724,021
Other liabilities
162,952
147,328
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01 per share; 300,000 shares authorized; 213,647 and 213,567 shares issued at June 30, 2005 and December 31, 2004, respectively
2,136
1,068
Additional paid-in capital
2,187,299
2,195,346
Retained earnings
1,062,957
818,734
Unearned compensation
(3,149
(11
Accumulated other comprehensive income
684
3,866
Treasury stock, at cost; 10,815 and 17,347 shares at June 30, 2005 and December 31, 2004, respectively
(469,592
(730,352
Total stockholders’ equity
2,780,335
2,288,651
Total liabilities and stockholders’ equity
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (in thousands) (unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
85,531
83,917
Provision for doubtful accounts
119,266
112,338
Deferred income tax provision (benefit)
(10,439
9,748
10,085
9,473
Stock compensation expense
790
965
Tax benefits associated with stock-based compensation plans
19,920
39,983
Other, net
(1,135
2,592
Changes in operating assets and liabilities:
Accounts receivable
(163,363
(180,861
14,688
(461
Integration, settlement and other special charges
(1,105
(16,341
Income taxes payable
30,248
4,920
Other assets and liabilities, net
(14,677
8,873
Net cash provided by operating activities
370,509
318,124
Cash flows from investing activities:
Capital expenditures
(123,870
(90,847
Business acquisition, net of cash acquired
(19,323
—
Increase in investments and other assets
(23,698
(2,876
Proceeds from disposition of assets
34
4,741
Net cash used in investing activities
(166,857
(88,982
Cash flows from financing activities:
Proceeds from borrowings
99,999
304,921
Repayments of debt
(100,465
(305,637
Purchases of treasury stock
(91,988
(271,103
Exercise of stock options
64,163
66,839
Dividends paid
(33,228
(30,943
Distributions to minority partners
(11,328
(8,314
Financing costs paid
(2,061
Net cash used in financing activities
(72,847
(246,298
Net change in cash and cash equivalents
130,805
(17,156
Cash and cash equivalents, beginning of period
154,958
Cash and cash equivalents, end of period
137,802
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, unless otherwise indicated) (unaudited)
1.
BASIS OF PRESENTATION
Background
Quest Diagnostics Incorporated and its subsidiaries (“Quest Diagnostics” or the “Company”) is the largest clinical laboratory testing business in the United States. As the nation’s leading provider of diagnostic testing and services for the healthcare industry, Quest Diagnostics offers a broad range of clinical laboratory testing services to patients, physicians, hospitals, healthcare insurers, employers, governmental institutions and other commercial clinical laboratories. Quest Diagnostics is the leading provider of esoteric testing, including gene-based testing, and testing for drugs of abuse. The Company is also a leading provider of anatomic pathology services and testing to support clinical trials of new pharmaceuticals worldwide. Through the Company’s national network of laboratories and patient service centers, and its esoteric testing laboratories and development facilities, Quest Diagnostics offers comprehensive and innovative diagnostic testing, information and services used by physicians and other healthcare professionals to make decisions to improve health.
On an annual basis, Quest Diagnostics processes approximately 140 million requisitions for testing through its extensive network of laboratories and patient service centers in virtually every major metropolitan area throughout the United States.
Basis of Presentation
The interim consolidated financial statements reflect all adjustments, which in the opinion of management are necessary for a fair statement of financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. The interim consolidated financial statements have been compiled without audit. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per common share is calculated by dividing net income, adjusted for the after-tax impact of the interest expense associated with the Company’s 1¾% contingent convertible debentures due 2021 (the “Debentures”), by the weighted average common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of the Debentures, and outstanding stock options and restricted common shares granted under the Company’s Employee Equity Participation Program.
On June 20, 2005, the Company effected a two-for-one stock split through the issuance of a stock dividend of one new share of common stock for each share of common stock held by stockholders of record on June 6, 2005. References to the number of common shares and per common share amounts in the accompanying consolidated balance sheets and consolidated statements of operations, including earnings per common share calculations and related disclosures, have been restated to give retroactive effect to the stock split for all periods presented.
In September 2004, the Emerging Issues Task Force reached a final consensus on Issue 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”, (“Issue 04-8”), effective December 31, 2004. Pursuant to Issue 04-8, the Company included the dilutive effect of its Debentures in its dilutive earnings per common share calculations using the if-converted method, regardless of whether or not the holders of these securities were permitted to exercise their conversion rights, and retroactively restated previously reported diluted earnings per common share. The Debentures were called for redemption by the Company in December 2004, and redeemed as of January 18, 2005. See Note 3 for a further discussion of the Debentures. References to previously reported diluted weighted average common shares outstanding and diluted earnings per common share amounts in the accompanying consolidated statements of operations and related disclosures, have been restated to give retroactive effect of the required change in accounting for all periods presented.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (in thousands, unless otherwise indicated) (unaudited)
The computation of basic and diluted earnings per common share (using the if-converted method) was as follows (in thousands, except per share data):
Net income available to common stockholders – basic
Add: Interest expense associated with the Debentures, net of related tax effects
831
82
1,662
Net income available to common stockholders – diluted
127,660
280,782
244,640
Weighted average common shares outstanding – basic
Effect of dilutive securities:
Stock options and restricted common stock
3,957
4,777
3,884
4,988
Debentures
5,714
306
Weighted average common shares outstanding – diluted
Basic earnings per common share
Diluted earnings per common share
Stock-Based Compensation
The Company has chosen to adopt the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure - an amendment of FASB Statement No. 123” (“SFAS 148”), and continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Under this approach, the cost of restricted stock awards is expensed over their vesting period, while the imputed cost of stock option grants and discounts offered under the Company’s Employee Stock Purchase Plan (“ESPP”) is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. Stock-based compensation expense recorded in accordance with APB 25, related to restricted stock awards, was $0.6 million and $0.5 million for the three months ended June 30, 2005 and 2004, respectively, and $0.8 million and $1.0 million for the six months ended June 30, 2005 and 2004, respectively.
The following table presents net income and basic and diluted earnings per common share, had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts granted for stock purchases under the Company’s ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share data):
6
Three Months Ended June 30,
Six Months Ended June 30,
Net income:
Net income, as reported
Add: Stock-based compensation under APB 25
600
417
Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects
(8,596
(10,796
(19,189
(21,760
Pro forma net income
141,093
116,450
262,301
222,183
Basic – as reported
Basic – pro forma
0.70
0.57
1.30
1.08
Diluted – as reported
Diluted – pro forma
0.68
0.54
1.27
1.03
The fair value of each stock option award granted prior to January 1, 2005 was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each stock option award granted subsequent to January 1, 2005 was estimated on the date of grant using a lattice-based option-valuation model. Management believes a lattice-based option-valuation model provides a more accurate measure of fair value. The expected volatility in connection with the Black-Scholes option-pricing model was based on the historical volatility of the Company’s stock, while the expected volatility under the lattice-based option-valuation model was based on the current and the historical implied volatilities from traded options of the Company’s stock. The weighted average assumptions used in valuing options granted in the periods presented are noted in the following table:
Dividend yield
0.7
%
Risk-free interest rate
4.0
3.7
3.1
Expected volatility
22.4
47.1
23.0
47.2
Expected holding period, in years
New Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123, revised 2004, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that companies recognize compensation cost relating to share-based payment transactions based on the fair value of the equity or liability instruments issued. SFAS 123R is effective for annual periods beginning after June 15, 2005. The Company expects to adopt SFAS 123R effective January 1, 2006 using the modified prospective approach. Under this approach, awards that are granted, modified or settled after January 1, 2006 will be measured and accounted for in accordance with SFAS 123R. Unvested awards that were granted prior to January 1, 2006 will continue to be accounted for in accordance with SFAS 123 except that compensation costs will be recognized in the Company’s results of operations. The Company has not completely finalized what changes will be made to its equity compensation plans in light of the accounting change, and therefore is not yet in a position to quantify its impact.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB No. 20 “Accounting Changes”, and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for the Company beginning January 1, 2006.
7
2.
GOODWILL AND INTANGIBLE ASSETS
Goodwill at June 30, 2005 and December 31, 2004 consisted of the following:
Goodwill
2,712,649
2,695,003
Less: accumulated amortization
(188,053
The changes in the gross carrying amount of goodwill for the six-month period ended June 30, 2005 and for the year ended December 31, 2004 are as follows:
Balance at beginning of period
2,706,928
Goodwill acquired during the period
17,646
Other
(11,925
Balance at end of period
During the six months ended June 30, 2005, the Company completed an acquisition of a small regional laboratory for $19 million in cash.
For the year ended December 31, 2004, the reduction in goodwill was primarily related to an increase in pre-acquisition tax net operating losses and credit carryforwards associated with businesses acquired.
Intangible assets at June 30, 2005 and December 31, 2004 consisted of the following:
Weighted Average Amortization Period
Cost
Accumulated Amortization
Net
Non-compete agreements
5 years
45,692
(43,301
2,391
44,942
(42,348
2,594
Customer lists
15 years
42,423
(37,729
4,694
42,225
(37,197
5,028
6 years
6,850
(3,389
3,461
(3,010
3,840
Total
10 years
94,965
(84,419
94,017
(82,555
Amortization expense related to intangible assets was $933 and $2,058 for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, amortization expense related to intangible assets was $1,864 and $4,122, respectively.
The estimated amortization expense related to intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2005 is as follows:
8
Fiscal Year Ending December 31,
Remainder of 2005
1,718
2006
2,712
2007
1,321
2008
1,127
2009
1,028
2010
784
Thereafter
1,856
3.
DEBT
Short-term borrowings and current portion of long-term debt at June 30, 2005 and December 31, 2004 consisted of the following:
Borrowings under $300 million Secured Receivables Credit Facility
229,920
129,921
Debentures called for redemption in December 2004
244,660
Current portion of long-term debt
166
220
Total short-term borrowings and current portion of long-term debt
Long-term debt at June 30, 2005 and December 31, 2004 consisted of the following:
Term loan due December 2008
75,000
Borrowings under $500 million Credit Facility
100,000
6¾% senior notes due July 2006
274,687
274,531
7½% senior notes due July 2011
274,337
274,281
292
429
624,316
724,241
Less: current portion
Total long-term debt
In December 2004, the Company called for redemption all of its outstanding Debentures. Under the terms of the Debentures, the holders of the Debentures had an option to submit their Debentures for redemption at par plus accrued and unpaid interest or convert their Debentures into shares of the Company’s common stock at a conversion price of $43.75 per share. Through December 31, 2004, $3.2 million of principal of the Debentures were converted into less than 0.1 million shares of the Company’s common stock. The outstanding principal of the Debentures at December 31, 2004 was classified as a current liability within short-term borrowings and current portion of long-term debt on the Company’s consolidated balance sheet. As of January 18, 2005, the redemption was completed and $0.4 million of principal was redeemed for cash and $249.6 million of principal was converted into approximately 5.7 million shares of the Company’s common stock.
On January 31, 2005, the Company repaid $100 million of principal outstanding under its $500 million senior unsecured revolving credit facility (the “Credit Facility”) with $100 million of borrowings under its $300 million receivables securitization facility (the “Secured Receivables Credit Facility”).
9
4.
COMMITMENTS AND CONTINGENCIES
The Company has standby letters of credit issued under its $75 million letter of credit lines to ensure its performance or payment to third parties, which amounted to $72 million at June 30, 2005. The letters of credit, which are renewed annually, primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.
The Company has entered into several settlement agreements with various government and private payers during recent years relating to industry-wide billing and marketing practices that had been substantially discontinued by the mid-1990s. The Company is aware of certain pending lawsuits related to billing practices filed under the qui tam provisions of the civil False Claims Act and other federal and state statutes. Some of the proceedings against the Company involve claims that are substantial in amount.
During the second quarter of 2005, the Company received a subpoena from the United States Attorney’s office for the District of New Jersey. The subpoena seeks the production of business and financial records regarding capitation and risk sharing arrangements with government and private payers for the years 1993 through 1999.
During the fourth quarter of 2004, the Company and its test kit manufacturing subsidiary, NID, each received a subpoena from the United States Attorney’s office for the Eastern District of New York. The subpoenas seek the production of various business records, including documents related to parathyroid hormone testing and parathyroid hormone test kits manufactured by NID. NID is currently undergoing an inspection by the U.S. Food and Drug Administration (“FDA”). As a result of such inspection, it is likely that the FDA will give notice to NID that it is not in compliance with applicable regulatory requirements. Noncompliance with FDA regulatory requirements or failure to take adequate and timely corrective action on the part of NID, could lead to regulatory or enforcement action by the FDA against NID, including, but not limited to, a warning letter, injunction, suspension of production and/or distribution, seizure or recall of products, fines or penalties, denial of premarket clearance, recommendation against award of government contracts, and criminal prosecution. NID is fully cooperating with the FDA.
In addition, the Company is involved in various legal proceedings arising in the ordinary course of business. Some of the proceedings against the Company involve claims that are substantial in amount.
Although management believes that reserves for the matters discussed above are adequate, it is possible that the final resolution of these matters could be material to the Company’s results of operations or cash flows in the period in which such matters are settled. The Company does not believe that these issues will have a material adverse effect on its overall financial condition. However, the Company understands that there may be pending qui tam claims brought by former employees or other “whistle blowers”, or other pending claims as to which the Company has not been provided with a copy of the complaint and accordingly cannot determine the extent of any potential liability.
As a general matter, providers of clinical laboratory testing services may be subject to lawsuits alleging negligence or other similar legal claims. These suits could involve claims for substantial damages. Any professional liability litigation could also have an adverse impact on the Company’s client base and reputation. The Company maintains various liability insurance coverage for claims that could result from providing or failing to provide clinical laboratory testing services, including inaccurate testing results and other exposures. The Company’s insurance coverage limits its maximum exposure on individual claims; however, the Company is essentially self-insured for a significant portion of these claims. The basis for claims reserves considers actuarially determined losses based upon the Company’s historical and projected loss experience. Management believes that present insurance coverage and reserves are sufficient to cover currently estimated exposures. management cannot predict the outcome of any claims made against the Company, management does not anticipate that the ultimate outcome of any such proceedings or claims will have a material adverse effect on the Company’s financial
10
position but may be material to the Company’s results of operations or cash flows in the period in which such claims are resolved.
5.
STOCKHOLDERS’ EQUITY
Changes in stockholders’ equity for the six months ended June 30, 2005 were as follows:
Shares of Common Stock Outstanding
Common Stock
Additional Paid-In Capital
Retained Earnings
Unearned Compensation
Accumulated Other Compre- hensive Income
Treasury Stock, at Cost
Compre- hensive Income
Balance, December 31, 2004
196,220
Other comprehensive loss
(3,182
Comprehensive income
277,518
Adjustment for 2-for-1 stock split
(1,068
Dividends declared
(36,477
Issuance of common stock under benefit plans
288
3,237
(3,928
8,808
2,508
(42,641
106,804
Shares to cover employee payroll tax withholdings on stock issued under benefit plans
(5
Conversion of contingent convertible debentures
5,632
12,510
237,136
Amortization of unearned compensation
(1,816
Balance, June 30, 2005
202,832
For the three months ended June 30, 2005, the Company repurchased approximately 0.6 million shares of its common stock at an average price of $53.03 per share for $30 million. For the six months ended June 30, 2005, the Company repurchased approximately 1.8 million shares of its common stock at an average price of $50.64 per share for $92 million. For the three and six months ended June 30, 2005, the Company reissued approximately 1.2 million and 2.7 million shares, respectively, for employee benefit plans. For the six months ended June 30, 2005, the Company has reissued approximately 5.6 million shares in connection with the conversion of its Debentures. Through June 30, 2005, the Company has repurchased approximately 26.5 million shares of its common stock at an average price of $40.98 for $1.1 billion. At June 30, 2005, $420 million of the share repurchase authorization remained available.
During each of the first and second quarters of 2005, the Company’s Board of Directors declared a quarterly cash dividend of $0.09 per common share payable on April 20, 2005 to shareholders of record on April 6, 2005 and July 22, 2005 to shareholders of record on July 8, 2005, respectively. The quarterly dividends were paid on April 20, 2005 and July 22, 2005 and totaled approximately $18.2 million each quarter.
11
Changes in stockholders’ equity for the six months ended June 30, 2004 were as follows:
Shares ofCommonStockOutstanding
CommonStock
AdditionalPaid-InCapital
RetainedEarnings
UnearnedCompensation
AccumulatedOtherCompre-hensiveIncome
TreasuryStock, at Cost
Compre-hensiveIncome
Balance, December 31, 2003
205,627
2,267,014
380,559
(2,346
5,947
(257,548
(4,938
238,040
(30,829
188
1,777
962
4,310
4,163
(70,757
137,596
(152
(1
(6,265
(6,397
Balance, June 30, 2004
203,429
2,231,752
592,708
(419
1,009
(386,745
For the three months ended June 30, 2004, the Company purchased 5.3 million shares of its common stock at an average price of $42.67 per share for $226 million and reissued 2.0 million shares in connection with employee benefit plans. For the six months ended June 30, 2004, the Company purchased 6.4 million shares of its common stock at an average price of $42.38 per share for $271 million and reissued 4.2 million shares in connection with employee benefit plans.
6.
SUPPLEMENTAL CASH FLOW & OTHER DATA
Depreciation expense
42,071
40,789
83,667
79,795
Interest expense
(13,359
(16,768
(26,376
(31,818
Interest income
719
422
953
828
Interest paid
2,974
4,012
24,975
25,915
Income taxes paid
142,581
108,820
148,977
112,391
Non-cash financing activities:
Conversion of Debentures
244,338
12
7.
SUMMARIZED FINANCIAL INFORMATION
The Company’s 6¾% senior notes due 2006, 7½% senior notes due 2011 and the Debentures are guaranteed by the Company’s wholly owned subsidiaries that operate clinical laboratories in the United States (the “Subsidiary Guarantors”). With the exception of Quest Diagnostics Receivables Incorporated (see paragraph below), the non-guarantor subsidiaries are primarily foreign subsidiaries and less than wholly owned subsidiaries. In January 2005, the Company completed its redemption of all of its outstanding Debentures (see Note 3 for further details).
In conjunction with the Company’s Secured Receivables Credit Facility, the Company maintains a wholly owned non-guarantor subsidiary, Quest Diagnostics Receivables Incorporated (“QDRI”). Through March 31, 2004, the Company and the Subsidiary Guarantors, with the exception of American Medical Laboratories, Incorporated (“AML”) and Unilab Corporation (“Unilab”), transferred all private domestic receivables (principally excluding receivables due from Medicare, Medicaid and other federal programs, and receivables due from customers of its joint ventures) to QDRI. Effective with the second quarter of 2004, the Company and Subsidiary Guarantors, including AML and Unilab, transfer all private domestic receivables to QDRI. QDRI utilizes the transferred receivables to collateralize the Company’s Secured Receivables Credit Facility. The Company and the Subsidiary Guarantors provide collection services to QDRI. QDRI uses cash collections principally to purchase new receivables from the Company and the Subsidiary Guarantors.
The following condensed consolidating financial data illustrates the composition of the combined guarantors. Investments in subsidiaries are accounted for by the parent using the equity method for purposes of the supplemental consolidating presentation. Earnings (losses) of subsidiaries are therefore reflected in the parent’s investment accounts and earnings. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.
13
Condensed Consolidating Statement of Operations Three Months Ended June 30, 2005
Parent
SubsidiaryGuarantors
Non-GuarantorSubsidiaries
Eliminations
Consolidated
224,352
1,086,547
132,474
(65,844
122,143
630,079
46,456
24,495
227,745
68,702
(5,268
457
467
Royalty (income) expense
(89,446
89,446
Other operating expense (income), net
1,088
(2
58,737
947,735
115,172
165,615
138,812
17,302
(60,576
Non-operating expenses, net
(15,519
(56,084
(789
60,576
150,096
82,728
16,513
60,324
33,091
6,833
Income before equity earnings
89,772
49,637
9,680
Equity earnings from subsidiaries
59,317
(59,317
Condensed Consolidating Statement of Operations Three Months Ended June 30, 2004
209,548
1,021,661
133,259
(66,794
115,462
586,962
45,153
27,528
220,894
63,927
(4,947
503
1,546
(82,968
82,968
10,622
(7
71,147
892,373
109,082
138,401
129,288
24,177
(61,847
(20,832
(57,301
(905
61,847
117,569
71,987
23,272
47,280
28,795
9,924
70,289
43,192
13,348
56,540
(56,540
14
Condensed Consolidating Statement of Operations Six Months Ended June 30, 2005
431,646
2,133,730
260,093
(128,455
241,625
1,244,626
92,509
46,297
453,199
134,803
(10,277
910
936
(175,231
175,231
214
114,689
1,873,992
227,544
316,957
259,738
32,549
(118,178
(29,063
(110,661
(97
118,178
287,894
149,077
32,452
115,474
59,630
13,619
172,420
89,447
18,833
108,280
(108,280
Condensed Consolidating Statement of Operations Six Months Ended June 30, 2004
409,773
2,013,982
254,917
(125,256
236,282
1,160,797
87,779
55,444
446,519
122,262
(9,278
1,026
3,078
(163,967
163,967
9,886
22
683
138,671
1,774,383
210,742
271,102
239,599
44,175
(115,978
(35,528
(109,020
(1,963
115,978
235,574
130,579
42,212
96,985
52,232
16,170
138,589
78,347
26,042
104,389
(104,389
15
Condensed Consolidating Balance Sheet June 30, 2005
Subsidiary Guarantors
Non- Guarantor Subsidiaries
193,873
3,421
6,813
Accounts receivable, net
29,730
84,994
578,654
Other current assets
31,154
121,808
94,137
247,099
254,757
210,223
679,604
212,255
416,444
30,273
Goodwill and intangible assets, net
157,113
2,332,435
45,594
2,535,142
Intercompany receivable (payable)
376,416
(66,998
(309,418
Investment in subsidiaries
2,195,899
(2,195,899
87,635
43,090
38,181
168,906
3,284,075
2,935,194
484,234
384,411
293,957
31,713
294,123
261,633
70,528
551,664
1,958
48,801
89,936
24,215
Stockholders’ equity
1,999,471
196,428
Condensed Consolidating Balance Sheet December 31, 2004
56,424
6,058
10,820
22,365
75,359
551,557
12,032
109,100
87,365
208,497
90,821
190,517
649,742
213,416
379,952
26,117
158,021
2,315,015
45,376
2,518,412
493,578
(124,047
(369,531
2,109,612
(2,109,612
49,031
49,100
36,680
134,811
3,114,479
2,810,537
388,384
368,363
268,420
32,204
244,713
167
613,076
268,587
162,125
170,293
551,771
1,957
42,459
80,155
24,714
1,910,024
199,588
16
Condensed Consolidating Statement of Cash Flows Six Months Ended June 30, 2005
Non-Guarantor Subsidiaries
26,426
53,946
5,159
2,690
19,788
96,788
(89,198
(1,883
2,022
19,221
Changes in operating assets and liabilities
21,573
(48,657
(107,125
(134,209
242,191
112,641
15,677
Net cash provided by (used in) investing activities
56,692
(101,450
(10,647
(111,452
(161,434
(13,828
(9,037
111,452
137,449
(2,637
(4,007
Condensed Consolidating Statement of Cash Flows Six Months Ended June 30, 2004
28,519
50,474
4,924
2,409
25,143
84,786
(29,288
(17,501
5,161
62,761
(4,162
24,705
(204,413
(183,870
Net cash provided by (used in) operating activities
240,456
161,168
(83,500
107,719
(52,066
(3,957
(140,678
Net cash (used in) provided by financing activities
(366,761
(108,224
88,009
140,678
(18,586
878
552
141,588
1,991
11,379
123,002
2,869
11,931
17
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for it is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar transactions, and about one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our 2004 Annual Report on Form 10-K.
Results of Operations
Three and Six Months Ended June 30, 2005 Compared with Three and Six Months Ended June 30, 2004
Net income for the three months ended June 30, 2005 increased to $149 million from $127 million for the prior year period. For the six months ended June 30, 2005, net income increased to $281 million from $243 million for the prior year period. The increases in earnings were primarily attributable to revenue growth, partially offset by investments in our operations. In addition, during the second quarter of 2004, $13.2 million in pre-tax charges were recorded which served to reduce our reported net income for both the three and six months ended June 30, 2004 by $7.9 million. Of the $13.2 million of charges incurred in the second quarter of 2004, $10.3 million related to the acceleration of certain pension obligations in connection with the succession of the Company’s prior CEO, and the remaining $2.9 million represented the write-off of deferred financing costs associated with the refinancing of our bank debt and credit facility.
Net Revenues
Net revenues for the three and six months ended June 30, 2005 grew by 6.2% and 5.6%, respectively, over the prior year levels. The increases in net revenues were driven by improvements in testing volumes, measured by the number of requisitions, and increases in average revenue per requisition in our clinical laboratory testing business. Revenues from our other businesses, which represent approximately 4% of our consolidated net revenues, approximated those of the prior year for both the quarter and the year-to-date period.
For the three and six months ended June 30, 2005, clinical testing volume increased 5.3% and 4.0%, respectively, compared to the prior year periods.
Average revenue per requisition improved 1.2% and 1.7% for the three and six months ended June 30, 2005, respectively, compared to the prior year periods. These improvements are primarily attributable to a continuing shift in test mix to higher value testing, including gene-based and esoteric testing, and increases in the number of tests ordered per requisition, partially offset by payer mix changes which served to reduce average revenue per requisition. Management continues to expect that average revenue per requisition will typically grow approximately 2% in a given year, with some fluctuations on a quarter-to-quarter basis.
Operating Costs and Expenses
Total operating costs and expenses for the three and six months ended June 30, 2005 increased $49 million and $91 million, respectively, from the prior year periods primarily due to increases in our clinical testing volume. The increased costs were primarily in the areas of employee compensation and benefits, and testing supplies. While our cost structure has been favorably impacted by efficiencies generated from our Six Sigma and standardization initiatives, we continue to make investments in sales, service, science, and information technology to further differentiate our Company.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 58.0% of net revenues for the three months ended June 30, 2005, increasing from 57.6% of net revenues in the prior year period. For the six months ended June 30, 2005, cost of services, as a percentage of net revenues, increased to 58.5% from 58.2% in
the prior year period. These increases were primarily the result of increases related to testing supplies, initial installation costs associated with deploying our Internet-based orders and results systems in physicians’ offices, and an increase in the number of phlebotomists in our patient service centers to support an increasing percentage of our volume generated from these sites, partially offset by the increase in average revenue per requisition and efficiency gains resulting from our Six Sigma and standardization initiatives. At June 30, 2005, 44% of our orders and 69% of our test results were being transmitted via the Internet, both substantially greater than a year ago. The increased use of our Internet-based systems is improving the initial collection of billing information which is reducing the cost of billing and bad debt expense, both of which are components of selling, general and administrative expenses, and reducing the cost associated with specimen processing, which is included in cost of services.
Selling, general and administrative expenses, which include the costs of the sales force, billing operations, bad debt expense and general management and administrative support, was 22.9% of net revenues during the three months ended June 30, 2005, decreasing from 23.7% in the prior year period. For the six months ended June 30, 2005, selling, general and administrative expenses, as a percentage of net revenues, decreased to 23.1% from 24.1% in the prior year period. These improvements were primarily due to revenue growth, which has allowed us to leverage our expense base, as well as efficiencies from our Six Sigma and standardization initiatives. For the three and six months ended June 30, 2005, bad debt expense was 4.3% and 4.4% of net revenues, respectively, consistent with the prior year levels. We believe that our Six Sigma and standardization initiatives and the increased use of electronic ordering by our customers will provide additional opportunities to further improve our overall collection experience and cost structure.
Other operating expense, net represents miscellaneous income and expense items related to operating activities including gains and losses associated with the disposal of operating assets. For the three and six months ended June 30, 2004, other operating expense, net includes a $10.3 million charge associated with the acceleration of certain pension obligations in connection with the succession of the Company’s prior CEO.
Operating Income
Operating income for the three months ended June 30, 2005 improved to $261 million, or 19.0% of net revenues, from $230 million, or 17.7% of net revenues, in the prior year period. For the six months ended June 30, 2005, operating income improved to $491 million, or 18.2% of net revenues, from $439 million or 17.2% of net revenues, in the prior year period. Reflected in operating income and impacting cost of sales for both the three and six months ended June 30, 2005 is a charge of approximately $3 million, principally associated with a write-down of inventory and equipment, stemming from a voluntary product hold instituted at our test kit manufacturing subsidiary, NID. The increases in operating income for the three and six months ended June 30, 2005 were principally driven by revenue growth. Also contributing to the increases is a $10.3 million charge in the second quarter of 2004 related to the acceleration of certain pension obligations associated with the succession of the Company’s prior CEO, which reduced operating income, as a percentage of net revenues, by 0.8% and 0.4%, respectively, for the three and six months ended June 30, 2004. Partially offsetting these improvements were increased costs of services as a percentage of net revenues as a result of investments in our operations.
Other Income (Expense)
Interest expense, net for the three and six months ended June 30, 2005 decreased from the prior year periods primarily due to the redemption of our contingent convertible debentures in January 2005, as well as the 2004 refinancing of certain of our debt. Interest expense, net for both the three and six months ended June 30, 2004, included a $2.9 million charge representing the write-off of deferred financing costs associated with our 2004 refinancing. See Note 10 to the Consolidated Financial Statements contained in our 2004 Annual Report on Form 10-K for a further discussion of the redemption and the debt refinancing.
Other 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.
19
Impact of Contingent Convertible Debentures on Earnings per Common Share
Due to a required change in accounting effective December 31, 2004, we included the dilutive effect of our 1¾% contingent convertible debentures, or the Debentures, in our dilutive earnings per common share calculations using the if-converted method, regardless of whether or not the holders of these securities were permitted to exercise their conversion rights, and retroactively restated previously reported diluted earnings per common share. References to previously reported diluted weighted average common shares outstanding, including diluted earnings per common share calculations and related disclosures, have been restated to give effect to the required change in accounting for all periods presented. This change reduced previously reported diluted earnings per common share by approximately 2% for the three and six months ended June 30, 2004. The Debentures were redeemed, principally through a conversion into common shares, as of January 18, 2005. See Note 10 to the Consolidated Financial Statements contained in our 2004 Annual Report on Form 10-K and Note 3 to the interim consolidated financial statements for a further discussion of the Debentures.
We address our exposure to market risks, principally the market risk of changes in interest rates, through a controlled program of risk management that may include the use of derivative financial instruments. We do not hold or issue derivative financial instruments for trading purposes. We do not believe that our foreign exchange exposure is material to our financial position or results of operations. See Note 2 to the Consolidated Financial Statements contained in our 2004 Annual Report on Form 10-K for additional discussion of our financial instruments and hedging activities.
At June 30, 2005 and December 31, 2004, the fair value of our debt was estimated at approximately $0.9 billion and $1.2 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 June 30, 2005 and December 31, 2004, the estimated fair value exceeded the carrying value of the debt by approximately $51 million and $84 million, respectively. An assumed 10% increase in interest rates (representing approximately 60 and 45 basis points at June 30, 2005 and December 31, 2004, respectively) would reduce the estimated fair value of our debt by approximately $8 million and $17 million at June 30, 2005 and December 31, 2004, respectively.
Borrowings under our senior unsecured revolving credit facility, our secured receivables credit facility and our term loan due December 2008 are subject to variable interest rates. Interest on the secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly rated issuers. Interest rates on our senior unsecured revolving credit facility and term loan due December 2008 are subject to a pricing schedule that can fluctuate based on changes in our credit ratings. As such, our borrowing cost under these credit arrangements will be subject to both fluctuations in interest rates and changes in our credit ratings. As of June 30, 2005, our borrowing rates for our LIBOR-based loans ranged from LIBOR plus 0.55% to LIBOR plus 0.625%. At June 30, 2005, there was $230 million of borrowings outstanding under our $300 million secured receivables credit facility, $75 million outstanding under our term loan due December 2008 and no borrowings outstanding under our $500 million senior unsecured revolving credit facility. Based on our net exposure to interest rate changes, an assumed 10% change in interest rates on our variable rate indebtedness (representing approximately 33 basis points) would impact annual net interest expense by approximately $1.0 million, assuming no changes to the debt outstanding at June 30, 2005. See Note 3 to the interim consolidated financial statements for details regarding our debt outstanding.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2005 totaled $204 million, compared to $73 million at December 31, 2004. Cash flows from operating activities in 2005 were $371 million, which were used to fund investing and financing activities, which required cash of $167 million and $73 million, respectively. Cash and cash equivalents at June 30, 2004 totaled $138 million, compared to $155 million at December 31, 2003. Cash flows from operating activities in 2004 provided cash of $318 million, which were used to fund investing and financing activities of $89 million and $246 million, respectively.
Cash Flows From Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2005 was $371 million compared to $318 million in the prior year period. This increase was primarily due to improved operating performance, a smaller increase in net accounts receivable compared to the prior year, and the timing and net amount of various payments for taxes and other
20
liabilities. Days sales outstanding, a measure of billing and collection efficiency, was 45 days at June 30, 2005, compared to 47 days at December 31, 2004.
Cash Flows From Investing Activities
Net cash used in investing activities for the six months ended June 30, 2005 was $167 million, consisting primarily of capital expenditures of $124 million, equity investments of $24 million in companies which develop diagnostic tests, and an acquisition of a small regional laboratory for $19 million.
Net cash used in investing activities for the six months ended June 30, 2004 was $89 million, consisting primarily of capital expenditures.
Contributing the majority of the increase in capital expenditures is the construction of a new laboratory facility in California, into which we plan to consolidate certain of our operations in the Los Angeles area.
Cash Flows From Financing Activities
Net cash used in financing activities for the six months ended June 30, 2005 was $73 million, consisting primarily of purchases of treasury stock totaling $92 million and dividend payments of $33 million, partially offset by $64 million received from the exercise of stock options. In addition, we repaid the remaining $100 million of principal outstanding under our senior unsecured revolving credit facility with $100 million of borrowings under our secured receivables credit facility, which carries a slightly lower borrowing cost. The $92 million in treasury stock purchases represents 1.8 million shares of our common stock purchased at an average price of $50.64 per share.
Net cash used in financing activities for the six months ended June 30, 2004 was $246 million, consisting primarily of purchases of treasury stock totaling $271 million and $31 million in dividend payments, partially offset by $67 million received from the exercise of stock options. In addition, we repaid the remaining $305 million of principal outstanding under our term loan due June 2007 with $100 million of borrowings under our senior unsecured revolving credit facility, $130 million of borrowings under our secured receivables credit facility and $75 million of borrowings under our term loan due December 2008. The $271 million in treasury stock purchases represents 6.4 million shares of our common stock purchased at an average price of $42.38 per share, including 2.4 million shares purchased from GlaxoSmithKline in the second quarter of 2004.
Stock Split
On June 20, 2005, the Company effected a two-for-one stock split through the issuance of a stock dividend of one new share of common stock for each share of common stock held by stockholders of record on June 6, 2005. References to previously reported number of common shares and per common share amounts including earnings per common share calculations and related disclosures, have been restated to give retroactive effect to the stock split for all periods presented.
Dividend Policy
On January 27, 2005, our Board of Directors increased the quarterly cash dividend per common share to $0.09, payable to shareholders of record on April 6, 2005 and paid on April 20, 2005. A cash dividend of $0.09 per common share was also declared on May 10, 2005, payable to shareholders of record on July 8, 2005 and paid on July 22, 2005. We have paid a dividend each quarter since January 2004. We expect to fund future dividend payments with cash flows from operations, and do not expect the dividend to have a material impact on our ability to finance future growth.
Share Repurchase Plan
For the three months ended June 30, 2005, we repurchased 560 thousand shares of our common stock at an average price of $53.03 per share for $30 million. For the six months ended June 30, 2005, we repurchased 1.8 million shares of our common stock at an average price of $50.64 for $92 million under our share repurchase program. Through June 30, 2005, we have repurchased approximately 26 million shares of our common stock at an average price of $40.98 for $1.1 billion under our share repurchase program. At June 30, 2005, our remaining authorizations for share repurchases totaled $420 million.
21
Contractual Obligations and Commitments
A description of the terms of our indebtedness, related debt service requirements and our future payments under certain of our contractual obligations is contained in Note 10 to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K. A discussion and analysis regarding our minimum rental commitments under noncancelable operating leases and noncancelable commitments to purchase products or services at December 31, 2004 is contained in Note 14 to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K. See Note 4 to the interim consolidated financial statements for information regarding the status of our remaining contractual obligations and commitments as of June 30, 2005. See Note 3 to the interim consolidated financial statements for information regarding the components of our outstanding indebtedness.
Our credit agreements relating to our senior unsecured revolving credit facility and our term loan due December 2008 contain various covenants and conditions, including the maintenance of certain financial ratios, that could impact our ability to, among other things, incur additional indebtedness. We do not expect these covenants to adversely impact our ability to execute our growth strategy or conduct normal business operations.
Unconsolidated Joint Ventures
We have investments in unconsolidated joint ventures in Phoenix, Arizona; Indianapolis, Indiana; and Dayton, Ohio, which are accounted for under the equity method of accounting. We believe that our transactions with our joint ventures are conducted at arm’s length, reflecting current market conditions and pricing. Total net revenues of our unconsolidated joint ventures, on a combined basis, are less than 6% of our consolidated net revenues. Total assets associated with our unconsolidated joint ventures are less than 3% of our consolidated total assets. We have no material unconditional obligations or guarantees to, or in support of, our unconsolidated joint ventures and their operations.
Requirements and Capital Resources
We estimate that we will invest approximately $210 million to $230 million during 2005 for capital expenditures to support and expand our existing operations, principally related to investments in information technology, equipment, and facility upgrades.
We believe that cash from operations and our borrowing capacity under our credit facilities will provide sufficient financial flexibility to meet seasonal working capital requirements and to fund capital expenditures, debt service requirements, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future. Our investment grade credit ratings have had a favorable impact on our cost of and access to capital, and we believe that our strong financial performance should provide us with access to additional financing, if necessary, to fund growth opportunities that cannot be funded from existing sources.
Impact of New Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123, revised 2004, “Share-Based Payment” and in May 2005, issued SFAS No. 154, “Accounting Changes and Error Corrections”. The impact of these accounting standards are discussed in Note 1 to the interim consolidated financial statements.
Forward-Looking Statements
Some statements and disclosures in this document are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may”, “believe”, “will”, “expect”, “project”, “estimate”, “anticipate”, “plan” or “continue”. These forward-looking statements are based on our current plans and expectations and are subject to a number of risks and uncertainties that could significantly cause our plans and expectations, including actual results, to differ materially from the forward-looking statements. The Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation.
We would like to take advantage of the “safe harbor” provisions of the Litigation Reform Act in connection with the forward-looking statements included in this document. The risks and other factors that could cause our actual financial results to differ materially from those projected, forecasted or estimated by us in forward-looking statements may include, but are not limited to, unanticipated expenditures, changing relationships with customers, payers, suppliers and strategic partners, competitive environment, changes in government regulations, conditions of the economy and other factors described in our 2004 Annual Report on Form 10-K and subsequent filings.
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
(a)
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective.
(b)
During the second quarter of 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Legal Proceedings
See Note 4 to the interim consolidated financial statements for information regarding the status of legal proceedings involving the Company.
Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of Shares Purchased
(b) Average Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands)
April 1, 2005 – April 30, 2005
$ —
$ 449,886
May 1, 2005 –May 31, 2005
176,600
$ 53.04
$ 440,519
June 1, 2005– June 30, 2005
383,200
$ 53.03
$ 420,198
559,800
In 2003, our Board of Directors authorized a share repurchase program, which permitted us to purchase up to $600 million of our common stock. In July 2004, our Board of Directors authorized us to purchase up to an additional $300 million of our common stock. Under a separate authorization from our Board of Directors, in December 2004 we repurchased 5.4 million shares of our common stock for approximately $254 million from GlaxoSmithKline plc. In January 2005, our Board of Directors expanded the share repurchase authorization by an additional $350 million.
Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 10, 2005. The matters voted on by the stockholders and the results of the vote were as follows:
The following individuals were elected as directors of the Company for terms expiring at the 2008 annual meeting of stockholders. The results of the vote were as follows:
Votes Received
Votes Withheld
William F. Buehler
86,074,042
7,181,044
Rosanne Haggerty
91,524,314
1,730,772
Gary M. Pfeiffer
91,492,574
1,762,512
Dr. Daniel C. Stanzione
86,082,161
7,172,925
The following individuals continue as directors:
Dr. John C. Baldwin James F. Flaherty III William R. Grant Dr. Surya N. Mohapatra Dr. Gail R. Wilensky John B. Ziegler
24
The ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the fiscal year ending December 31, 2005, was approved. The results of the vote were as follows:
Votes For
Votes Against
Abstentions
90,915,494
1,779,462
560,130
(c)
The proposal to approve the Amended and Restated Employee Long-Term Incentive Plan was approved. The results of the vote were as follows:
63,929,628
20,639,904
740,163
(d)
The proposal to approve the Amended and Restated Director Long-Term Incentive Plan was approved. The results of the vote were as follows:
63,573,856
20,922,244
782,097
Item 6.
Exhibits
Exhibits:
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
July 28, 2005
By
/s/ Surya N. Mohapatra
Surya N. Mohapatra, Ph.D.
Chairman, President and
Chief Executive Officer
/s/ Robert A. Hagemann
Robert A. Hagemann
Senior Vice President and
Chief Financial Officer
26