Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2012 and 2011
(in millions, except per share and percentage data)
(unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2012

2011

2012

2011

Net revenues

$

1,906.8

$

1,903.2

$

3,843.3

$

3,724.8

Operating costs and expenses:

Cost of services

1,110.5

1,104.4

2,227.1

2,201.4

Selling, general and administrative

440.8

462.8

941.4

910.6

Amortization of intangible assets

20.2

18.6

40.4

28.5

Other operating expense, net

0.6

0.6

0.1

236.5

Total operating costs and expenses

1,572.1

1,586.4

3,209.0

3,377.0

Operating income

334.7

316.8

634.3

347.8

Other income (expense):

Interest expense, net

(41.9)

(46.6)

(84.3)

(84.5)

Equity earnings in unconsolidated joint ventures

7.4

7.9

15.0

15.6

Other (expense) income, net

(1.3)

(0.3)

3.5

1.9

Total non-operating expenses, net

(35.8)

(39.0)

(65.8)

(67.0)

Income from continuing operations before taxes

298.9

277.8

568.5

280.8

Income tax expense

112.4

105.8

213.8

155.0

Income from continuing operations

186.5

172.0

354.7

125.8

Income (loss) from discontinued operations, net of taxes

(0.1)

(0.5)

0.2

(0.9)

Net income

186.4

171.5

354.9

124.9

Less: Net income attributable to noncontrolling interests

8.7

8.4

18.1

15.6

Net income attributable to Quest Diagnostics

$

177.7

$

163.1

$

336.8

$

109.3

Amounts attributable to Quest Diagnostics' common stockholders:

Income from continuing operations

$

177.8

$

163.6

$

336.6

$

110.2

Income (loss) from discontinued operations, net of taxes

(0.1)

(0.5)

0.2

(0.9)

Net income

$

177.7

$

163.1

$

336.8

$

109.3

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:

Income from continuing operations

$

1.12

$

1.03

$

2.12

$

0.68

Income (loss) from discontinued operations

—

—

—

—

Net income

$

1.12

$

1.03

$

2.12

$

0.68

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:

Income from continuing operations

$

1.11

$

1.02

$

2.10

$

0.68

Income (loss) from discontinued operations

—

—

—

(0.01)

Net income

$

1.11

$

1.02

$

2.10

$

0.67

Weighted average common shares outstanding:

Basic

158.5

157.6

158.4

159.5

Diluted

159.8

159.4

159.7

161.3

Operating income as a percentage of net revenues

17.6

%

16.6

%

16.5

%

9.3

%

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
June 30, 2012 and December 31, 2011
(in millions, except per share data)

June 30, 2012

December 31, 
2011

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

173.7

$

164.9

Accounts receivable, net

941.5

906.5

Inventories

90.1

89.1

Deferred income taxes

163.5

153.3

Prepaid expenses and other current assets

108.4

87.4

Total current assets

1,477.2

1,401.2

Property, plant and equipment, net

788.6

799.8

Goodwill

5,822.6

5,795.8

Intangible assets, net

1,016.3

1,035.6

Other assets

288.1

281.0

Total assets

$

9,392.8

$

9,313.4

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable and accrued expenses

$

880.2

$

906.8

Short-term borrowings and current portion of long-term debt

444.5

654.4

Total current liabilities

1,324.7

1,561.2

Long-term debt

3,378.2

3,370.5

Other liabilities

668.8

666.7

Stockholders' equity:

Quest Diagnostics stockholders' equity:

Common stock, par value $0.01 per share; 600 shares authorized at both June 30, 2012 and December 31, 2011;
    215.1 shares and 214.6 shares issued at June 30, 2012 and December 31, 2011, respectively

2.2

2.1

Additional paid-in capital

2,357.6

2,347.5

Retained earnings

4,546.3

4,263.6

Accumulated other comprehensive loss

(8.4)

(8.0)

Treasury stock, at cost; 56.8 shares and 57.2 shares at June 30, 2012 and December 31, 2011, respectively

(2,902.5)

(2,912.3)

Total Quest Diagnostics stockholders' equity

3,995.2

3,692.9

Noncontrolling interests

25.9

22.1

Total stockholders' equity

4,021.1

3,715.0

Total liabilities and stockholders' equity

$

9,392.8

$

9,313.4

Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2012 and 2011
(in millions)
(unaudited)

Six Months Ended June 30,

2012

2011

Cash flows from operating activities:

Net income

$

354.9

$

124.9

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

144.0

136.1

Provision for doubtful accounts

147.2

146.0

Deferred income tax (benefit) provision

(11.3)

8.9

Stock-based compensation expense

34.2

35.2

Excess tax benefits from stock-based compensation arrangements

(3.9)

(4.8)

Provision for special charge

—

236.0

Other, net

0.3

6.4

Changes in operating assets and liabilities:

Accounts receivable

(181.9)

(194.1)

Accounts payable and accrued expenses

(87.7)

(74.5)

Settlement of special charge

—

(241.0)

Income taxes payable

28.6

39.3

Other assets and liabilities, net

(12.3)

1.7

Net cash provided by operating activities

412.1

220.1

Cash flows from investing activities:

Business acquisitions, net of cash acquired

(50.6)

(1,136.4)

Sale of securities acquired in business acquisition

—

213.5

Capital expenditures

(77.4)

(78.6)

Increase in investments and other assets

(2.6)

(6.5)

Net cash used in investing activities

(130.6)

(1,008.0)

Cash flows from financing activities:

Proceeds from borrowings

685.0

2,433.3

Repayments of debt

(899.6)

(1,108.8)

Purchases of treasury stock

(100.0)

(835.0)

Exercise of stock options

90.6

97.2

Excess tax benefits from stock-based compensation arrangements

3.9

4.8

Dividends paid

(54.0)

(32.9)

Distributions to noncontrolling interests

(15.8)

(16.8)

Other financing activities, net

17.2

(19.0)

Net cash (used in) provided by financing activities

(272.7)

522.8

Net change in cash and cash equivalents

8.8

(265.1)

Cash and cash equivalents, beginning of period

164.9

449.3

Cash and cash equivalents, end of period

$

173.7

$

184.2

Cash paid during the period for:

Interest

$

82.0

$

72.6

Income taxes

$

202.8

$

107.7

Notes to Financial Tables

1) The computation of basic and diluted earnings per common share is as follows:

Three Months Ended

June 30,

Six Months Ended

 June 30,

2012

2011

2012

2011

(in millions, except per share data)

Amounts attributable to Quest Diagnostics' common stockholders:

Income from continuing operations

$

177.8

$

163.6

$

336.6

$

110.2

Income (loss) from discontinued operations, net of taxes

(0.1)

(0.5)

0.2

(0.9)

Net income available to common stockholders

$

177.7

$

163.1

$

336.8

$

109.3

Income from continuing operations

$

177.8

$

163.6

$

336.6

$

110.2

Less: Earnings allocated to participating securities

0.7

0.9

1.3

1.0

Earnings available to Quest Diagnostics' common stockholders - basic and diluted

$

177.1

$

162.7

$

335.3

$

109.2

Weighted average common shares outstanding - basic

158.5

157.6

158.4

159.5

Effect of dilutive securities:

Stock options and performance share units

1.3

1.8

1.3

1.8

Weighted average common shares outstanding - diluted

159.8

159.4

159.7

161.3

Earnings per share attributable to Quest Diagnostics' common stockholders - basic:

Income from continuing operations

$

1.12

$

1.03

$

2.12

$

0.68

Income (loss) from discontinued operations

—

—

—

—

Net income

$

1.12

$

1.03

$

2.12

$

0.68

Earnings per share attributable to Quest Diagnostics' common stockholders - diluted:

Income from continuing operations

$

1.11

$

1.02

$

2.10

$

0.68

Income (loss) from discontinued operations

—

—

—

(0.01)

Net income

$

1.11

$

1.02

$

2.10

$

0.67

2) Adjusted amounts for operating income, operating income as a percentage of net revenues, income from continuing operations, and diluted earnings per common share represent the Company's results before the impact of the Medi-Cal charge, restructuring and integration charges, transaction costs related to the acquisitions of Athena Diagnostics and Celera Corporation, CEO succession costs, and the estimated impact of severe weather. Adjusted measures are presented because management believes those measures are useful adjuncts to reported results under accounting principles generally accepted in the United States when comparing results of operations from period to period. Adjusted measures should not be considered as an alternative to the corresponding measures determined under accounting principles generally accepted in the United States. The following tables reconcile reported results to adjusted results:

Three Months Ended June 30, 2012

(dollars in millions, except per share data)

Restructuring and Integration Charges

CEO Succession Costs

As Reported

(a)

(b)

As Adjusted

Operating income

$

334.7

$

12.6

$

3.0

$

350.3

Operating income as a % of net revenues

17.6

%

0.7

%

0.1

%

18.4

%

Income from continuing operations (c)

177.8

7.7

1.8

187.3

Diluted earnings per common share

1.11

0.05

0.01

1.17

(a) Includes $12.6 million of pre-tax costs primarily associated with professional fees and workforce reductions incurred in connection with further restructuring and integrating our business.

(b) Principally represents accrued severance and accelerated vesting of equity awards in connection with the succession of our prior CEO.

(c) For both the restructuring and integration charges, and CEO succession costs, income tax benefits were calculated using a combined federal and state rate of 38.7%.

Six Months Ended June 30, 2012

(dollars in millions, except per share data)

Restructuring and Integration Charges

CEO Succession Costs

As Reported

(d)

(e)

As Adjusted

Operating income

$

634.3

$

25.7

$

10.1

$

670.1

Operating income as a % of net revenues

16.5

%

0.7

%

0.2

%

17.4

%

Income from continuing operations (f)

336.6

15.8

6.1

358.5

Diluted earnings per common share

2.10

0.10

0.04

2.24

(d) Includes $25.7 million of pre-tax costs primarily associated with professional fees and workforce reductions incurred in connection with further restructuring and integrating our business.

(e) Principally represents accrued severance and accelerated vesting of equity awards in connection with the succession of our prior CEO.

(f) For both the restructuring and integration charges, and CEO succession costs, income tax benefits were calculated using a combined federal and state rate of 38.7%.

Three Months Ended June 30, 2011

(dollars in millions, except per share data)

Restructuring & Integration Charges

Transaction Costs

As Reported

(g)

(h)

As Adjusted

Operating income

$

316.8

$

6.1

$

14.3

$

337.2

Operating income as a % of net revenues

16.6

%

0.3

%

0.8

%

17.7

%

Income from continuing operations (i)

163.6

3.7

11.3

178.6

Diluted earnings per common share

1.02

0.03

0.07

1.12

(g) Includes $6.1 million of pre-tax restructuring and integration costs, principally associated with workforce reductions.

(h) Includes $15.1 million of pre-tax transaction costs associated with the acquisitions of Athena Diagnostics and Celera Corporation. Of these costs, $14.3 million, primarily related to professional fees, was recorded in selling, general, and administrative expenses and $0.8 million of financing related costs were recorded in interest expense, net.

(i) For the impact of restructuring and integration charges, income tax benefits were calculated using a combined federal and state rate of 39%. Income tax benefit of $3.8 million associated with transaction costs was calculated by applying a combined federal and state rate of 39% to those costs for which a tax benefit has been recorded.

Six Months Ended June 30, 2011

(dollars in millions, except per share data)

Medi-Cal Settlement

Restructuring & Integration Charges

Transaction Costs

Severe Weather

As Reported

(j)

(k)

(l)

(m)

As Adjusted

Operating income

$

347.8

$

236.0

$

19.4

$

16.6

$

18.5

$

638.3

Operating income as a % of net revenues

9.3

%

6.3

%

0.5

%

0.5

%

0.4

%

17.0

%

Income from continuing operations (n)

110.2

194.7

11.8

15.0

11.3

343.0

Diluted earnings per common share

0.68

1.20

0.07

0.10

0.07

2.12

(j) Represents the first quarter 2011 pre-tax charge of $236 million associated with the Medi-Cal settlement.

(k) Includes $19.4 million of pre-tax restructuring and integration charges, principally associated with workforce reductions.

(l) Includes $19.7 million of pre-tax transaction costs, associated with the acquisitions of Athena Diagnostics and Celera Corporation. Of these costs, $16.6 million, primarily related to professional fees, was recorded in selling, general, and administrative expenses and $3.1 million of financing related costs were recorded in interest expense, net.

(m) Represents an estimate of the impact of severe weather in the first quarter of 2011.

(n) Income tax benefit of $41.3 million associated with the Medi-Cal charge was calculated by applying a combined federal and the applicable state tax rate of 36% to the portion of the settlement for which a tax benefit has been recorded. Income tax benefit of $4.7 million associated with transaction costs was calculated by applying a combined federal and state rate of 39% to those costs for which a tax benefit has been recorded. For the estimated impact of severe weather and the impact of restructuring and integration charges, income tax benefits were calculated using a combined federal and state rate of 39%.

3) The following table summarizes the impact to the year over year comparisons for the Medi-Cal charge, restructuring and integration charges, transaction costs, CEO succession costs, and the estimated impact of severe weather on certain reported results for the three and six months ended June 30, 2012 and 2011 (in millions, except per share data):

Three months ended June 30, 2012 and 2011

Restructuring and Integration

Charges

CEO Succession Costs

2012

2011

Better (Worse)

2012

2011

Better (Worse)

Cost of services

$

4.6

$

—

$

(4.6)

$

—

$

—

$

—

Selling, general and administrative

8.0

6.1

(1.9)

3.0

—

(3.0)

Operating income

12.6

6.1

(6.5)

3.0

—

(3.0)

Net income

7.7

3.7

(4.0)

1.8

—

(1.8)

Diluted earnings per common share

0.05

0.03

(0.02)

0.01

—

(0.01)

Transaction Costs

2012

2011

Better (Worse)

Cost of services

$

—

$

—

$

—

Selling, general and administrative

—

14.3

14.3

Operating income

—

14.3

14.3

Net income

—

11.3

11.3

Diluted earnings per common share

—

0.07

0.07

Six months ended June 30, 2012 and 2011

Restructuring and Integration

Charges

CEO Succession Costs

2012

2011

Better (Worse)

2012

2011

Better (Worse)

Cost of services

$

8.6

$

9.0

$

0.4

$

—

$

—

$

—

Selling, general and administrative

17.1

10.4

(6.7)

10.1

—

(10.1)

Operating income

25.7

19.4

(6.3)

10.1

—

(10.1)

Net income

15.8

11.8

(4.0)

6.1

—

(6.1)

Diluted earnings per common share

0.10

0.07

(0.03)

0.04

—

(0.04)

Medi-Cal Settlement

Transaction Costs

2012

2011

Better (Worse)

2012

2011

Better (Worse)

Cost of services

$

—

$

—

$

—

$

—

$

—

$

—

Selling, general and administrative

—

—

—

—

16.6

16.6

Operating income

—

236.0

236.0

—

16.6

16.6

Net income

—

194.7

194.7

—

15.0

15.0

Diluted earnings per common share

—

1.20

1.20

—

0.10

0.10

Severe Weather

2012

2011

Better (Worse)

Cost of services

*

*

*

Selling, general and administrative

*

*

*

Operating income

—

18.5

18.5

Net income

—

11.3

11.3

Diluted earnings per common share

—

0.07

0.07

* The estimated impact on operating costs of severe weather predominantly affects cost of services; with a lesser impact on selling, general and administrative expenses.

4) Other operating expense, net includes special charges, and miscellaneous income and expense items related to operating activities. For the six months ended June 30, 2011, other operating expense, net included a pre-tax charge of $236 million associated with the Medi-Cal settlement.

5) 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 six months ended June 30, 2012 and 2011, other (expense) income, net includes gains of $3.5 million and $2.3 million, respectively, associated with investments held in trusts pursuant to our supplemental deferred compensation plans.

6) In January 2012, our Board of Directors authorized $1.0 billion of additional share repurchases, bringing the total available under share repurchase authorizations at that time to $1.1 billion. For the three months ended June 30, 2012, the Company repurchased 882 thousand shares of its common stock at an average price of $56.70 per share for $50 million. For the six months ended June 30, 2012, the Company repurchased 1.7 million shares of its common stock at an average price of $57.83 per share for $100 million. For the three and six months ended June 30, 2012, the Company reissued 0.7 million shares and 2.2 million shares, respectively, for employee benefit plans. As of June 30, 2012, the Company had $965 million remaining under share repurchase authorizations.

7) The outlook for adjusted diluted earnings per common share and adjusted operating income as a percentage of net revenues represent management's estimates for the full year 2012 before the impact of the restructuring and integration charges and CEO succession costs. These measures are presented because management believes they are useful adjuncts to the corresponding amounts determined under accounting principles generally accepted in the United States since they are meaningful to evaluate the Company's ongoing operating performance and are on a basis consistent with previous estimates of diluted earnings per common share and operating income as a percentage of net revenues. Adjusted diluted earnings per common share and adjusted operating income as a percentage of net revenues are not measures of financial performance under accounting principles generally accepted in the United States and should not be considered as an alternative to the corresponding amounts determined under accounting principles generally accepted in the United States.

The following table reconciles our 2012 outlook, on an adjusted basis, to the corresponding amounts determined under accounting principles generally accepted in the United States. The outlook, on an adjusted basis, excludes the impact of the restructuring and integration charges and CEO succession costs.

Outlook for 2012 Before Special Items

Restructuring and Integration Charges

CEO Succession Costs

As Reported

(a)

(b)

As Adjusted

Diluted earnings per common share

$4.31-$4.46

$0.10

$0.04

$4.45 - $4.60

Operating income as a % of net revenues

~ 17.6%

0.3%

0.1%

~ 18%

(a) Represents pre-tax costs of $25.7 million primarily associated with professional fees and workforce reductions incurred in connection with further restructuring and integrating our business.

(b) Represents pre-tax costs of $10.1 million related to the succession of our prior CEO.