Edgar Filing: QUEST DIAGNOSTICS INC

UNITED STATES

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 quarterly period ended June 30, 2011

Commission file number 001-12215

Quest Diagnostics Incorporated

Three Giralda Farms

Madison, NJ 07940

(973) 520-2700

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 such 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of July 21, 2011, there were outstanding 158,286,303 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, 2011 and 2010	2

	Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010	3

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	4

	Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

	See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”	44

Item 4.	Controls and Procedures

	Controls and Procedures	44

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)
(in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,

	2011			2010			2011			2010

Net revenues	$	1,903,201		$	1,874,727		$	3,724,778		$	3,680,230


Operating costs and expenses:
Cost of services		1,104,394			1,078,971			2,201,392			2,145,344
Selling, general and administrative		462,789			419,412			910,647			850,145
Amortization of intangible assets		18,592			9,270			28,441			18,629
Other operating expense, net		572			1,180			236,484			1,656

Total operating costs and expenses		1,586,347			1,508,833			3,376,964			3,015,774


Operating income		316,854			365,894			347,814			664,456

Other income (expense):
Interest expense, net		(46,581	)		(36,367	)		(84,510	)		(72,322	)
Equity earnings in unconsolidated joint ventures		7,869			7,385			15,568			15,349
Other (expense) income, net		(346	)		(7,119	)		1,862			(1,107	)

Total non-operating expenses, net		(39,058	)		(36,101	)		(67,080	)		(58,080	)


Income from continuing operations before taxes		277,796			329,793			280,734			606,376
Income tax expense		105,762			125,651			154,988			231,029

Income from continuing operations		172,034			204,142			125,746			375,347
Loss from discontinued operations, net of taxes		(507	)		(266	)		(881	)		(318	)

Net income		171,527			203,876			124,865			375,029
Less: Net income attributable to noncontrolling interests		8,384			9,261			15,583			17,966

Net income attributable to Quest Diagnostics	$	163,143		$	194,615		$	109,282		$	357,063


Amounts attributable to Quest Diagnostics’ stockholders:
Income from continuing operations	$	163,650		$	194,881		$	110,163		$	357,381
Loss from discontinued operations, net of taxes		(507	)		(266	)		(881	)		(318	)

Net income	$	163,143		$	194,615		$	109,282		$	357,063


Earnings per share attributable to Quest Diagnostics’ common stockholders - basic:
Income from continuing operations	$	1.03		$	1.08		$	0.68		$	1.98
Loss from discontinued operations		—			—			—			—


Net income	$	1.03		$	1.08		$	0.68		$	1.98


Earnings per share attributable to Quest Diagnostics’ common stockholders - diluted:
Income from continuing operations	$	1.02		$	1.07		$	0.68		$	1.96
Loss from discontinued operations		—			—			(0.01	)		—

Net income	$	1.02		$	1.07		$	0.67		$	1.96


Weighted average common shares outstanding:
Basic		157,607			178,920			159,548			179,570
Diluted		159,352			180,760			161,278			181,572

Dividends per common share	$	0.10		$	0.10		$	0.20		$	0.20

The accompanying notes are an integral part of these statements.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010
(in thousands, except per share data)


	June 30, 2011			December 31, 2010

	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	184,218		$	449,301
Accounts receivable, net of allowance for doubtful accounts of $244,156 and $228,917 at June 30, 2011 and December 31, 2010, respectively		929,372			845,299
Inventories		87,967			76,572
Deferred income taxes		166,739			142,470
Prepaid expenses and other current assets		109,659			91,775

Total current assets		1,477,955			1,605,417
Property, plant and equipment, net		820,593			834,376
Goodwill		5,816,969			5,101,938
Intangible assets, net		1,082,171			796,405
Other assets		233,503			189,494

Total assets	$	9,431,191		$	8,527,630


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	998,682		$	865,272
Short-term borrowings and current portion of long-term debt		994,675			348,996

Total current liabilities		1,993,357			1,214,268
Long-term debt		3,332,931			2,641,160
Other liabilities		654,307			618,077
Stockholders’ equity:
Quest Diagnostics stockholders’ equity:
Common stock, par value $0.01 per share; 600,000 shares authorized at both June 30, 2011 and December 31, 2010; 214,597 shares and 214,173 shares issued at June 30, 2011 and December 31, 2010, respectively		2,146			2,142
Additional paid-in capital		2,317,074			2,311,421
Retained earnings		3,945,037			3,867,420
Accumulated other comprehensive income		34,043			10,626
Treasury stock, at cost; 56,385 shares and 43,456 shares at June 30, 2011 and December 31, 2010, respectively		(2,869,150	)		(2,158,129	)

Total Quest Diagnostics stockholders’ equity		3,429,150			4,033,480
Noncontrolling interests		21,446			20,645

Total stockholders’ equity		3,450,596			4,054,125

Total liabilities and stockholders’ equity	$	9,431,191		$	8,527,630

The accompanying notes are an integral part of these statements.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)
(in thousands)


	Six Months Ended June 30,

	2011			2010

Cash flows from operating activities:
Net income	$	124,865		$	375,029
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		136,084			126,307
Provision for doubtful accounts		145,985			148,403
Deferred income tax provision (benefit)		8,890			(3,702	)
Stock-based compensation expense		35,192			28,575
Excess tax benefits from stock-based compensation arrangements		(4,786	)		(4	)
Provision for special charge		236,000			—
Other, net		6,430			11,266
Changes in operating assets and liabilities:
Accounts receivable		(194,057	)		(193,168	)
Accounts payable and accrued expenses		(74,546	)		(84,590	)
Settlement of special charge		(241,000	)		—
Income taxes payable		39,323			41,780
Other assets and liabilities, net		1,703			(1,512	)

Net cash provided by operating activities		220,083			448,384


Cash flows from investing activities:
Business acquisitions, net of cash acquired		(1,136,380	)		—
Sale of securities acquired in business acquisition		213,541			—
Capital expenditures		(78,624	)		(88,848	)
Increase in investments and other assets		(6,503	)		(3,196	)

Net cash used in investing activities		(1,007,966	)		(92,044	)


Cash flows from financing activities:
Proceeds from borrowings		2,433,329			—
Repayments of debt		(1,108,786	)		(1,487	)
Purchases of treasury stock		(835,001	)		(425,773	)
Exercise of stock options		97,216			40,174
Excess tax benefits from stock-based compensation arrangements		4,786			4
Dividends paid		(32,930	)		(36,430	)
Distributions to noncontrolling interests		(16,850	)		(16,830	)
Other financing activities		(18,964	)		(2,366	)

Net cash provided by (used in) financing activities		522,800			(442,708	)


Net change in cash and cash equivalents		(265,083	)		(86,368	)

Cash and cash equivalents, beginning of period		449,301			534,256


Cash and cash equivalents, end of period	$	184,218		$	447,888

The accompanying notes are an integral part of these statements.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(unaudited)
(in thousands)


				Quest Diagnostics Stockholders’ Equity

	Shares of Common Stock Outstand -ing			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Compre- hensive Income			Treasury Stock, at Cost			Compre- hensive Income			Non- controlling Interests			Total Stock- holders’ Equity

Balance, December 31, 2010		170,717		$	2,142		$	2,311,421		$	3,867,420		$	10,626		$	(2,158,129	)				$	20,645		$	4,054,125
Net income											109,282								$	109,282			15,583			124,865
Currency translation														26,474						26,474						26,474
Market valuation, net of tax benefit of $1,020														(1,596	)					(1,596	)					(1,596	)
Net deferred loss on cash flow hedges														(1,461	)					(1,461	)					(1,461	)

Comprehensive income																			$	132,699

Dividends declared											(31,665	)														(31,665	)
Distributions to noncontrolling interests																							(16,850	)		(16,850	)
Issuance of common stock under benefit plans		972			7			1,274									8,770									10,051
Stock-based compensation expense								33,418									1,774									35,192
Exercise of stock options		2,240						(16,220	)								113,436									97,216
Shares to cover employee payroll tax withholdings on stock issued under benefit plans		(339	)		(3	)		(19,283	)																	(19,286	)
Tax benefits associated with stock-based compensation plans								6,464																		6,464
Purchases of treasury stock		(15,378	)														(835,001	)								(835,001	)
Other																							2,068			2,068

Balance, June 30, 2011		158,212		$	2,146		$	2,317,074		$	3,945,037		$	34,043		$	(2,869,150	)				$	21,446		$	3,450,596


				Quest Diagnostics Stockholders’ Equity

	Shares of Common Stock Outstand -ing			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Compre- hensive Loss			Treasury Stock, at Cost			Compre- hensive Income			Non- controlling Interests			Total Stock- holders’ Equity

Balance, December 31, 2009		183,293		$	2,141		$	2,302,368		$	3,216,639		$	(20,961	)	$	(1,510,548	)				$	21,825		$	4,011,464
Net income											357,063								$	357,063			17,966			375,029
Currency translation														(33,186	)					(33,186	)					(33,186	)
Market valuation, net of tax expense of $3,552														5,555						5,555						5,555
Net deferred loss on cash flow hedges														362						362						362

Comprehensive income																			$	329,794

Dividends declared											(35,844	)														(35,844	)
Distributions to noncontrolling interests																							(16,830	)		(16,830	)
Issuance of common stock under benefit plans		869			2			(24,377	)								34,618									10,243
Stock-based compensation expense								26,768									1,807									28,575
Exercise of stock options		1,027						(11,081	)								51,255									40,174
Shares to cover employee payroll tax withholdings on stock issued under benefit plans		(271	)		(1	)		(5,489	)								(9,614	)								(15,104	)
Tax benefits associated with stock-based compensation plans								2,628																		2,628
Purchases of treasury stock		(7,741	)														(425,773	)								(425,773	)
Other																							(405	)		(405	)

Balance, June 30, 2010		177,177		$	2,142		$	2,290,817		$	3,537,858		$	(48,230	)	$	(1,858,255	)				$	22,556		$	3,946,888

The accompanying notes are an integral part of these statements.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands unless otherwise indicated)


1.	DESCRIPTION OF BUSINESS

Background

Quest Diagnostics Incorporated and its subsidiaries (“Quest Diagnostics” or the “Company”) is the world’s leading provider of diagnostic testing, information and services, providing insights that enable patients, physicians and others to make better healthcare decisions. Quest Diagnostics offers patients and physicians the broadest access to diagnostic laboratory services through the Company’s nationwide network of laboratories and patient service centers. The Company provides interpretive consultation through the largest medical and scientific staff in the industry, with approximately 900 M.D.s and Ph.D.s, primarily located in the United States. Quest Diagnostics is the leading provider of clinical testing, including gene-based and esoteric testing, anatomic pathology services and testing for drugs-of-abuse in the United States, and the leading provider of risk assessment services for the life insurance industry in North America. The Company is also a leading provider of testing for clinical trials. The Company’s diagnostics products business manufactures and markets diagnostic test kits and specialized point-of-care testing. Quest Diagnostics empowers healthcare organizations and clinicians with robust information technology solutions that can improve patient care and medical practice.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, results of operations, and cash flows 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 2010 Annual Report on Form 10-K.

The year-end balance sheet data was derived from the audited financial statements as of December 31, 2010, but does not include all the disclosures required by accounting principles generally accepted in the United States (“GAAP”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings Per Share

The Company’s unvested restricted common stock and unvested restricted stock units that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the earnings allocation in computing earnings per share using the two-class method. Basic earnings per common share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income, adjusted for earnings allocated to participating securities, by the weighted average number of 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 outstanding stock options and performance share units granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Non-Employee Director Long-Term Incentive Plan. Earnings allocable to participating securities include the portion of dividends declared as well as the portion of undistributed earnings during the period allocable to participating securities.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Adoption of New Accounting Standards

On January 1, 2011, the Company adopted revised guidance issued by the Financial Accounting Standards Board (“FASB”) related to the accounting for revenue in certain revenue arrangements that include software elements and in arrangements with multiple deliverables. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted a new accounting standard related to the disclosures about the Company’s use of fair value measurements relating to the tabular reconciliation of beginning and ending balances of the Level 3 (fair value determined based on significant unobservable inputs) classification and that provides greater disaggregation for each class of assets and liabilities that use fair value measurements. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted a new accounting standard related to the accounting for insurance claims and related insurance recoveries. This standard clarifies that a healthcare entity may not net insurance recoveries against related professional claim liabilities in its balance sheet and also requires that claim liabilities shall be determined without consideration of insurance recoveries. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted a new accounting standard pertaining to disclosures of charity care provided by healthcare entities. Under this new standard, the measurement basis for charity care disclosures is the cost of performing the services. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted a new accounting standard related to goodwill which (1) modifies step one of the goodwill impairment test by requiring entities with reporting units that have a zero or negative carrying value to assess whether it is more likely than not that a goodwill impairment exists and (2) does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step one of the goodwill impairment test. Under the requirements of this standard, if the entity concludes that it is more likely than not that an impairment of goodwill exists, the entity must perform step two of the goodwill impairment test. In determining whether it is more likely than not that an impairment of goodwill exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment exists. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards

In May 2011, the FASB issued an amendment to the accounting standards related to fair value measurements and disclosure requirements that result in a consistent definition of fair value and common requirements for the measurement and disclosure of fair value between GAAP and International Financial Reporting Standards. This standard provides certain amendments to the existing guidance on the use and application of fair value measurements and maintains a definition of fair value that is based on the notion of exit price. This standard will become effective for the Company on January 1, 2012 and is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued an amendment to the accounting standards related to the presentation of comprehensive income. This standard revises the manner in which entities present comprehensive income in their financial statements and removes the option to present items of other comprehensive income in the statement of changes in equity. This standard requires an entity to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements of net income and other comprehensive income. This standard will become effective retrospectively for the Company on January 1, 2012.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


3.	EARNINGS PER SHARE

The computation of basic and diluted earnings per common share was as follows (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,

	2011			2010			2011			2010

Amounts attributable to Quest Diagnostics’ stockholders:
Income from continuing operations	$	163,650		$	194,881		$	110,163		$	357,381
Loss from discontinued operations, net of taxes		(507	)		(266	)		(881	)		(318	)

Net income attributable to Quest Diagnostics’ common stockholders	$	163,143		$	194,615		$	109,282		$	357,063


Income from continuing operations	$	163,650		$	194,881		$	110,163		$	357,381
Less: Earnings allocated to participating securities		877			928			967			1,588

Earnings available to Quest Diagnostics’ common stockholders – basic and diluted	$	162,773		$	193,953		$	109,196		$	355,793


Weighted average common shares outstanding – basic		157,607			178,920			159,548			179,570

Effect of dilutive securities:
Stock options and performance share units		1,745			1,840			1,730			2,002

Weighted average common shares outstanding – diluted		159,352			180,760			161,278			181,572


Earnings per share attributable to Quest Diagnostics’ common stockholders – basic:
Income from continuing operations	$	1.03		$	1.08		$	0.68		$	1.98
Loss from discontinued operations		—			—			—			—

Net income	$	1.03		$	1.08		$	0.68		$	1.98


Earnings per share attributable to Quest Diagnostics’ common stockholders – diluted:
Income from continuing operations	$	1.02		$	1.07		$	0.68		$	1.96
Loss from discontinued operations		—			—			(0.01	)		—

Net income	$	1.02		$	1.07		$	0.67		$	1.96

Stock options and performance share units of 2.3 million shares and 2.2 million shares for the three and six months ended June 30, 2011, respectively, were not included due to their antidilutive effect.

Stock options and performance share units of 3.1 million shares and 2.9 million shares for the three and six months ended June 30, 2010, respectively, were not included due to their antidilutive effect.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


4.	BUSINESS ACQUISITIONS

Acquisition of Athena Diagnostics

On April 4, 2011, the Company completed its acquisition of Athena Diagnostics (“Athena”) from Thermo Fisher Scientific, Inc., in an all-cash transaction valued at $740 million. Athena is the leading provider of advanced diagnostic tests related to neurological conditions, and generated revenues of approximately $110 million in 2010.

Through the acquisition, the Company acquired all of Athena’s operations. The Company financed the all-cash purchase price of $740 million and related transaction costs with a portion of the net proceeds from the Company’s 2011 Senior Notes Offering. For the three and six months ended June 30, 2011, transaction costs of $7.1 million and $8.2 million, respectively, were recorded in selling, general and administrative expenses. See Note 8 for further discussion of the 2011 Senior Notes Offering.

The acquisition of Athena was accounted for under the acquisition method of accounting. As such, the cost to acquire Athena was allocated to the respective assets acquired and liabilities assumed based on their estimated fair values as of the closing date. A preliminary allocation of the cost to acquire Athena has been made to certain assets and liabilities of Athena based on preliminary estimates. The Company is continuing to assess the estimated fair values of certain assets acquired and liabilities assumed. The consolidated financial statements include the results of operations of Athena subsequent to the closing of the acquisition which are not material to the Company’s consolidated results of operations.

The following table summarizes the Company’s preliminary purchase price allocation of the cost to acquire Athena:


	Preliminary Fair Values as of April 4, 2011


Cash and cash equivalents	$	—
Accounts receivable		17,853
Other current assets		13,427
Property, plant and equipment		3,038
Intangible assets		220,040
Goodwill		563,974
Other assets		135

Total assets acquired		818,467

Current liabilities		8,511
Non-current deferred income taxes		69,956

Total liabilities assumed		78,467


Net assets acquired	$	740,000

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

The acquired amortizable intangible assets are being amortized over their estimated useful lives as follows:


	Preliminary Fair Values		Weighted Average Useful Life


Technology	$	92,580	16 years
Non-compete agreement		37,000	4 years
Tradename		34,520	10 years
Customer relationships		21,420	20 years
Informatics database		34,520	10 years

	$	220,040

Of the amount allocated to goodwill and intangible assets, approximately $42 million is expected to be deductible for tax purposes. All of the goodwill acquired in connection with the Athena acquisition has been allocated to the Company’s clinical testing business. As of the acquisition date, the fair value of accounts receivable approximated its book value, all of which is expected to be collected.

Acquisition of Celera Corporation

On March 17, 2011, the Company entered into a definitive merger agreement with Celera Corporation (“Celera”) under which the Company agreed to acquire Celera in a transaction valued at approximately $341 million, net of $326 million in acquired cash and short-term marketable securities. Additionally, the Company expects to utilize Celera’s available tax credits, net operating loss carryforwards and capitalized tax research and development expenditures to reduce its future tax payments by approximately $110 million. Celera is a healthcare business delivering personalized disease management through a combination of products and services incorporating proprietary discoveries. Celera generated revenues of $128 million in 2010.

Under the terms of the definitive merger agreement, the Company, through a wholly-owned subsidiary, commenced a cash tender offer to purchase all of the outstanding shares of common stock of Celera for $8 per share in cash. On May 4, 2011, the Company announced that as a result of the tender offer, the Company had a controlling ownership interest in Celera. On May 17, 2011, the Company completed the acquisition by means of a short-form merger, in which the remaining shares of Celera common stock that had not been tendered into the tender offer were converted into the right to receive $8 per share in cash. The Company has accounted for the acquisition of Celera as a single transaction, effective May 4, 2011.

Through the acquisition, the Company acquired all of Celera’s operations. The Company financed the all-cash purchase price of $667 million and related transaction costs with borrowings under its existing credit facilities and cash on hand. Of the total cash purchase price of $667 million, $508 million was paid through June 30, 2011. Accounts payable and accrued expenses at June 30, 2011 included a liability of $159 million representing the remaining merger consideration related to shares of Celera which had not been surrendered as of June 30, 2011. The Company expects to fund the payment of the remaining merger consideration with cash on hand and its existing credit facilities.

For the three and six months ended June 30, 2011, transaction costs of $7.2 million and $8.4 million, respectively, were recorded in selling, general and administrative expenses. Additionally, for the three and six months ended June 30, 2011, financing related costs of $0.8 million and $3.1 million, respectively, were recorded in interest expense, net.

The acquisition of Celera was accounted for under the acquisition method of accounting. As such, the cost to acquire Celera was allocated to the respective assets acquired and liabilities assumed based on their estimated fair values as of the date the Company acquired its controlling ownership interest in Celera. A preliminary allocation of the cost to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

acquire Celera has been made to certain assets and liabilities of Celera based on preliminary estimates. The Company is continuing to assess the estimated fair values of certain assets acquired and liabilities assumed. The consolidated financial statements include the results of operations of Celera subsequent to the Company acquiring its controlling ownership interest which are not material to the Company’s consolidated results of operations.

The following table summarizes the Company’s preliminary purchase price allocation of the cost to acquire Celera:


	Preliminary Fair Values as of May 4, 2011


Cash and cash equivalents	$	112,312
Short-term marketable securities		213,418
Accounts receivable		16,810
Other current assets		25,809
Property, plant and equipment		11,091
Intangible assets		85,830
Goodwill		134,283
Non-current deferred income taxes		102,838
Other assets		34,586

Total assets acquired		736,977

Current liabilities		59,008
Long-term liabilities		10,717

Total liabilities assumed		69,725


Net assets acquired	$	667,252

The acquired amortizable intangible assets are being amortized over their estimated useful lives as follows:


	Preliminary Fair Values		Weighted Average Useful Life


Outlicensed technology	$	46,450		6 years
Technology		21,730		8 years
Customer relationships		6,750		9 years
Tradename		5,400		5 years

	$	80,330

In addition to the amortizable intangible assets noted above, $5.5 million was allocated to in-process research and development, which is currently not subject to amortization.

Of the amount allocated to goodwill and intangible assets, approximately $28 million is expected to be deductible for tax purposes. Of the total goodwill acquired in connection with the Celera acquisition, approximately $103 million has been allocated to the Company’s clinical testing business, with the remainder allocated to the Company’s diagnostics products business. As of the acquisition date, the fair value of accounts receivable approximated its book value, all of which is expected to be collected.

Goodwill represents the excess of the fair value of the acquiree over the recognized bases of the net identifiable assets acquired and includes the future economic benefits from other assets that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the Athena and Celera acquisitions includes: the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

expected synergies resulting from combining the operations of the acquired businesses with those of the Company; and the value associated with an assembled workforce that has a historical track record of identifying opportunities, developing services and products, and commercializing them.

Pro Forma Combined Financial Information

Supplemental pro forma combined financial information has not been presented as the combined impact of the Athena and Celera acquisitions is not material to the Company’s consolidated financial statements.


5.	FAIR VALUE MEASUREMENTS

The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis:


			Basis of Fair Value Measurements

			Quoted Prices in Active Markets for Identical Assets / Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs

June 30, 2011			Level 1		Level 2		Level 3

Assets:
Trading securities	$	47,830	$	47,830	$	—	$	—
Interest rate swaps		18,939		—		18,939		—
Cash surrender value of life insurance policies		21,968		—		21,968		—
Available-for-sale equity securities		2,451		—		—		2,451
Foreign currency forward contracts		1,094		—		1,094		—

Total	$	92,282	$	47,830	$	42,001	$	2,451


Liabilities:
Deferred compensation liabilities	$	73,124	$	—	$	73,124	$	—
Foreign currency forward contracts		110		—		110		—

Total	$	73,234	$	—	$	73,234	$	—

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


			Basis of Fair Value Measurements

			Quoted Prices in Active Markets for Identical Assets / Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs

December 31, 2010			Level 1		Level 2		Level 3

Assets:
Trading securities	$	38,740	$	38,740	$	—	$	—
Cash surrender value of life insurance policies		20,314		—		20,314		—
Interest rate swaps		10,483		—		10,483		—
Available-for-sale equity securities		5,066		—		—		5,066
Foreign currency forward contracts		4,527		—		4,527		—

Total	$	79,130	$	38,740	$	35,324	$	5,066


Liabilities:
Deferred compensation liabilities	$	61,964	$	—	$	61,964	$	—
Foreign currency forward contracts		464		—		464		—

Total	$	62,428	$	—	$	62,428	$	—

The Company offers certain employees the opportunity to participate in supplemental deferred compensation plans. A participant’s deferrals, together with Company matching credits, are invested in a variety of participant-directed stock and bond mutual funds that are classified as trading securities. Changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held exclusive of any transaction costs. A corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the trading securities.

The Company offers certain employees the opportunity to participate in a non-qualified deferred compensation program. A participant’s deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program’s liability. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the hypothetical investments.

The fair value measurements of foreign currency forward contracts are obtained from a third-party pricing service and are based on market prices in actual transactions and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value measurements of the Company’s interest rate swaps are model-derived valuations as of a given date in which all significant inputs are observable in active markets including certain financial information and certain assumptions regarding past, present and future market conditions. The Company does not believe that the changes in the fair values of its foreign currency forward contracts and interest rate swaps will materially differ from the amounts that could be realized upon settlement or maturity or that the changes in fair value will have a material effect on its results of operations, liquidity and capital resources.

Investments in available-for-sale equity securities consist of the revaluation of an existing investment in unregistered common shares of a publicly-held company. This investment is classified within Level 3 because the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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unregistered securities contain restrictions on their sale, and therefore, the fair value measurement reflects a discount for the effect of the restriction.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value based on the short maturities of these instruments. At June 30, 2011 and December 31, 2010, the fair value of the Company’s debt was estimated at $4.6 billion and $3.1 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, 2011 and December 31, 2010, the estimated fair value exceeded the carrying value of the debt by $228 million and $80 million, respectively.


6.	TAXES ON INCOME

Income tax expense for the six months ended June 30, 2011 and 2010 was $155 million and $231 million, respectively. The increase in the effective income tax rate for the six months ended June 30, 2011 is primarily due to a charge recorded in the first quarter of 2011 associated with a settlement of certain legal claims (see Note 12), a portion for which a tax benefit has not been recorded.


7.	GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill for the six months ended June 30, 2011 and for the year ended December 31, 2010 are as follows:


	June 30, 2011		December 31, 2010

Balance at beginning of period	$	5,101,938	$	5,083,944
Goodwill acquired during the year		698,257		—
Other purchase accounting adjustments		—		246
Increase related to foreign currency translation		16,774		17,748

Balance at end of period	$	5,816,969	$	5,101,938

Approximately 90% of the Company’s goodwill as of June 30, 2011 and December 31, 2010 was associated with its clinical testing business.

For the six months ended June 30, 2011, goodwill acquired was associated with the Athena and Celera acquisitions (see Note 4 for further details).

For the year ended December 31, 2010, other purchase accounting adjustments were primarily related to a milestone payment on an acquisition from 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Intangible assets at June 30, 2011 and December 31, 2010 consisted of the following:


	Weighted Average Amortization Period	June 30, 2011							December 31, 2010

Amortizing intangible assets:		Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

Customer-related intangibles	19 years	$	633,733	$	(177,693	)	$	456,040	$	603,203	$	(161,345	)	$	441,858
Non-compete agreements	4 years		91,897		(55,387	)		36,510		54,886		(52,134	)		2,752
Technology	14 years		168,575		(22,005	)		146,570		51,830		(16,796	)		35,034
Other	8 years		146,331		(14,237	)		132,094		24,065		(9,380	)		14,685

Total	16 years		1,040,536		(269,322	)		771,214		733,984		(239,655	)		494,329

Intangible assets not subject to amortization:
In-process research and development			5,500		—			5,500		—		—			—
Tradenames			305,457		—			305,457		302,076		—			302,076


Total intangible assets		$	1,351,493	$	(269,322	)	$	1,082,171	$	1,036,060	$	(239,655	)	$	796,405

The increase in intangible assets for the six months ended June 30, 2011 was primarily due to intangible assets acquired as part of the Athena and Celera acquisitions (see Note 4 for further details).

Amortization expense related to intangible assets was $18.6 million and $9.3 million for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, amortization expense related to intangible assets was $28.4 million and $18.6 million, respectively.

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2011 is as follows:


Fiscal Year Ending December 31,

Remainder of 2011	$	38,451
2012		77,424
2013		75,530
2014		73,789
2015		63,328
2016		56,629
Thereafter		386,063

Total	$	771,214


8.	DEBT

Short-term borrowings and current portion of long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:


	June 30, 2011		December 31, 2010


Borrowings under Secured Receivables Credit Facility	$	85,000	$	—
Current portion of long-term debt		909,675		348,996

Total short-term borrowings and current portion of long-term debt	$	994,675	$	348,996

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Long-term debt at June 30, 2011 and December 31, 2010 consisted of the following:


	June 30, 2011		December 31, 2010


Senior Notes due July 2011	$	159,266	$	159,234
Term Loan due May 2012		742,000		742,000
Floating Rate Senior Notes due March 2014		200,000		—
Senior Notes due November 2015		499,307		499,227
Senior Notes due April 2016		303,153		—
Senior Notes due July 2017		374,521		374,480
Senior Notes due January 2020		509,179		503,770
Senior Notes due April 2021		549,106		—
Senior Notes due July 2037		420,918		420,840
Senior Notes due January 2040		438,114		243,422
Other		47,042		47,183

Total long-term debt		4,242,606		2,990,156
Less: current portion of long-term debt		909,675		348,996

Total long-term debt, net of current portion	$	3,332,931	$	2,641,160

2011 Senior Notes Offering

On March 24, 2011, the Company completed a $1.25 billion senior notes offering (the “2011 Senior Notes”). The 2011 Senior Notes were sold in four tranches: (a) $200 million aggregate principal amount of three-month LIBOR plus 0.85% floating rate senior notes due March 24, 2014 (the “Floating Rate Senior Notes due 2014”), issued at par, (b) $300 million aggregate principal amount of 3.20% senior notes due April 1, 2016 (the “Senior Notes due 2016”), issued at a discount of $0.3 million, (c) $550 million aggregate principal amount of 4.70% senior notes due April 1, 2021 (the “Senior Notes due 2021”), issued at a discount of $0.9 million and (d) $200 million aggregate principal amount of 5.75% senior notes due January 30, 2040 (the “Senior Notes due 2040”), issued at a discount of $5.5 million. The Senior Notes due 2040 are a reopening of the $250 million aggregate principal amount of 5.75% Senior Notes due 2040 issued on November 17, 2009. After considering the discounts, the effective interest rates on the Senior Notes due 2016, the Senior Notes due 2021 and the Senior Notes due 2040 are 3.22%, 4.72% and 5.95%, respectively. The Floating Rate Senior Notes due 2014 require quarterly interest payments, which commenced on June 24, 2011. The three-month LIBOR was 0.25% at June 30, 2011. The Senior Notes due 2016 and the Senior Notes due 2021 require semi-annual interest payments, which commence on October 1, 2011. The Senior Notes due 2040 require semi-annual interest payments, which commence on July 30, 2011. The 2011 Senior Notes are unsecured obligations of the Company and rank equally with the Company’s other unsecured obligations. The 2011 Senior Notes do not have a sinking fund requirement and are guaranteed by certain of the Company’s domestic, wholly-owned subsidiaries (the “Subsidiary Guarantors”).

The Company incurred $10.4 million of costs associated with the 2011 Senior Notes, which is being amortized over the term of the related debt.

The Company used $750 million of the net proceeds from the 2011 Senior Notes to fund the purchase price and related transaction costs associated with its acquisition of Athena, which closed on April 4, 2011 (See Note 4), and $485 million of the net proceeds, together with $90 million of cash on hand, to repay outstanding indebtedness under the Company’s senior unsecured revolving credit facility and its secured receivables credit facility.

As further discussed in Note 9, the Company has hedged its interest rate exposure on a portion of the Senior Notes due 2016 and on a portion of the Senior Notes due 2020 which have been designated as fair value hedges. The carrying value of the Senior Notes due 2016 has been increased by the fair value of the related hedge of $3.4 million in the consolidated balance sheet as of June 30, 2011. At June 30, 2011 and December 31, 2010, the carrying value of the Senior Notes due 2020 has been increased by the fair value of the related hedge of $15.5 million and $10.5 million, respectively.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

As of June 30, 2011, long-term debt matures as follows:


Fiscal Year Ending December 31,

Remainder of 2011	$	345,432
2012		568,175
2013		7,766
2014		207,365
2015		504,814
2016		300,779
Thereafter		2,313,980

Total maturities of debt		4,248,311
Unamortized discount		(24,644	)
Fair value basis adjustment attributable to hedged debt		18,939

Total debt		4,242,606
Current portion of long-term debt		(909,675	)

Total long-term debt, net of current portion	$	3,332,931

A full description of the terms of the Company’s indebtedness and related service requirements is contained in Note 10 to the Consolidated Financial Statements in the Company’s 2010 Annual Report on Form 10-K.


9.	FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to manage its exposure to market risks for changes in interest rates and foreign currencies. This strategy includes the use of interest rate swap agreements, forward starting interest rate swap agreements, treasury lock agreements and foreign currency forward contracts to manage its exposure to movements in interest and currency rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for speculative or trading purposes. The Company does not enter into derivative financial instruments that contain credit-risk-related contingent features or requirements to post collateral.

A summary of the fair values of derivative instruments in the consolidated balance sheets is stated in the table below:


	June 30, 2011			December 31, 2010

	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value

Derivatives Designated as Hedging Instruments
Asset Derivatives:
Interest rate swaps	Other assets	$	18,939	Other assets	$	10,483


Derivatives Not Designated as Hedging Instruments
Asset Derivatives:
Foreign currency forward contracts	Other current assets	$	1,094	Other current assets	$	4,527


Liability Derivatives:
Foreign currency forward contracts	Other current liabilities	$	110	Other current liabilities	$	464


Total Net Derivatives Asset		$	19,923		$	14,546

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Interest Rate Risk

The Company is exposed to interest rate risk on its cash and cash equivalents and its debt obligations. Interest income earned on cash and cash equivalents may fluctuate as interest rates change; however, due to their relatively short maturities, the Company does not hedge these assets or their investment cash flows and the impact of interest rate risk is not material. The Company’s debt obligations consist of fixed-rate and variable-rate debt instruments. The Company’s primary objective is to achieve the lowest overall cost of funding while managing the variability in cash outflows within an acceptable range. In order to achieve this objective, the Company has entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements between the counterparties are recognized as an adjustment to interest expense.

The Company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. On the date the derivative is entered into, the Company designates the type of derivative as a fair value hedge or cash flow hedge, and accounts for the derivative in accordance with its designation as prescribed by the standards on accounting for derivative instruments and hedging activities. At inception and at least quarterly thereafter, the Company formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flows of the hedged item. All components of each derivative financial instrument’s gain or loss are included in the assessment of hedge effectiveness.

The Company accounts for its derivatives as either an asset or liability measured at its fair value. The fair value is based upon quoted market prices obtained from third-party financial institutions and includes an adjustment for the credit risk of the obligor’s non-performance. For a derivative instrument that has been formally designated as a fair value hedge, fair value gains or losses on the derivative instrument are reported in earnings, together with offsetting fair value gains or losses on the hedged item that are attributable to the risk being hedged. For derivatives that have been formally designated as a cash flow hedge, the effective portion of changes in the fair value of the derivatives is recorded in accumulated other comprehensive income and the ineffective portion is recorded in earnings. Upon maturity or early termination of an effective interest rate swap designated as a cash flow hedge, unrealized gains or losses are deferred in stockholders’ equity, as a component of accumulated other comprehensive income, and are amortized as an adjustment to interest expense over the period during which the hedged forecasted transaction affects earnings. If it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting and any deferred gains or losses related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income, unless it is probable that the forecasted transaction will not occur. If it is probable that the forecasted transaction will not occur by the originally specified time period, the Company discontinues hedge accounting, and any deferred gains or losses reported in accumulated other comprehensive income are classified into earnings immediately.

Interest Rate Derivatives – Cash Flow Hedges

In March 2011, the Company entered into interest rate lock agreements with several financial institutions for a total notional amount of $400 million (the “Treasury Lock Agreements”). The Treasury Lock Agreements, which had an original maturity date of April 5, 2011, were entered into to hedge part of the Company’s interest rate exposure associated with the variability in future cash flows attributable to changes in the 10-year and 30-year U.S. treasury rates related to the planned issuance of debt securities. In connection with the Company’s senior notes offering in March 2011 (see Note 8), the Company paid $3.1 million to settle the Treasury Lock Agreements which have been accounted for as cash flow hedges. These losses are deferred in stockholders’ equity, as a component of accumulated other comprehensive income, and are amortized as an adjustment to interest expense over the term of the Senior Notes due 2021 and Senior Notes due 2040.

In previous years, the Company entered into various forward starting interest rate swap agreements and treasury-lock agreements that were accounted for as cash flow hedges (see Note 11 to the Consolidated Financial Statements in the Company’s 2010 Annual Report on Form 10-K for further details). The effective portions of the changes in fair value of these derivatives represent deferred gains or losses that are recorded in accumulated other comprehensive income. These deferred gains or losses are reclassified from accumulated other comprehensive income to the statement of operations in the same period or periods during which the hedged transaction affects earnings, which is when the Company recognizes interest expense on the hedged cash flows. The total loss, net of tax benefit, recognized in accumulated other

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

comprehensive income on the cash flow hedges as of June 30, 2011 and December 31, 2010 was $8.1 million and $6.6 million, respectively. The loss recognized on the Company’s cash flow hedges for the three and six months ended June 30, 2011 and 2010, as a result of ineffectiveness, was not material. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive income into earnings within the next 12 months is $1.3 million.

Interest Rate Derivatives – Fair Value Hedges

In March 2011, the Company entered into various fixed-to-variable interest rate swap agreements (the “2011 Fixed-to-Variable Interest Rate Swap Agreements”) which have an aggregate notional amount of $200 million and a variable interest rate based on six-month LIBOR plus 0.54%.

In November 2009, the Company entered into various fixed-to-variable interest rate swap agreements (the “2009 Fixed-to-Variable Interest Rate Swap Agreements”) which have an aggregate notional amount of $350 million and a variable interest rate based on one-month LIBOR plus 1.33%.

These derivative financial instruments are accounted for as fair value hedges of a portion of the Senior Notes due 2016 and a portion of the Senior Notes due 2020 and effectively convert that portion of the debt into variable interest rate debt. The Company recognizes the changes in the fair value of both the fixed-to-variable interest rate swap agreements and the related underlying debt obligations in other (expense) income, net as equal and offsetting gains and losses. The fair value of the 2011 Fixed-to-Variable Interest Rate Swap Agreements was an asset of $3.4 million at June 30, 2011. At June 30, 2011 and December 31, 2010, the fair value of the 2009 Fixed-to-Variable Interest Rate Swap Agreements was an asset of $15.5 million and $10.5 million, respectively. Since inception, the fair value hedges have been effective; therefore, there is no impact on earnings for the three and six months ended June 30, 2011 and 2010 as a result of hedge ineffectiveness.

Foreign Currency Risk

The Company is exposed to market risk for changes in foreign exchange rates primarily under certain intercompany receivables and payables. Foreign exchange forward contracts are used to mitigate the exposure of the eventual net cash inflows or outflows resulting from these intercompany transactions. The objective is to hedge a portion of the forecasted foreign currency risk over a rolling 12-month time horizon to mitigate the eventual impacts of changes in foreign exchange rates on the cash flows of the intercompany transactions. As of June 30, 2011, the gross notional amount of foreign currency forward contracts in U.S. dollars was $55.4 million and principally consists of contracts in Swedish krona and British pounds. The Company does not designate these derivative instruments as hedges under current accounting standards unless the benefits of doing so are material. The Company’s foreign exchange exposure is not material to the Company’s consolidated financial condition or results of operations. The Company does not hedge its net investment in non-U.S. subsidiaries because it views those investments as long-term in nature.


10.	STOCKHOLDERS’ EQUITY

Components of Comprehensive Income

The market valuation adjustment for the six months ended June 30, 2011 and 2010 represents unrealized holding (losses) gains on available-for-sale securities, net of taxes. The net deferred loss on cash flow hedges for the six months ended June 30, 2011 and 2010 represents deferred losses on the Company’s interest rate related derivative financial instruments designated as cash flow hedges, net of amounts reclassified to interest expense (see Note 9). Foreign currency translation adjustments are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries.

Comprehensive Income

For the three months ended June 30, 2011 and 2010, comprehensive income was $165 million and $169 million, respectively.

Dividend Program

During each of the quarters of 2011 and 2010, the Company’s Board of Directors has declared a quarterly cash dividend of $0.10 per common share.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Share Repurchase Plan

In January 2011, the Company’s Board of Directors authorized the Company to repurchase an additional $750 million of the Company’s common stock, increasing the total available authorization at that time to $1 billion. The share repurchase authorization has no set expiration or termination date.

For the six months ended June 30, 2011, the Company repurchased 15.4 million shares of its common stock from SB Holdings Capital Inc., a wholly-owned subsidiary of GlaxoSmithKline plc., at an average price of $54.30 per share for a total of $835 million. For the three and six months ended June 30, 2011, the Company reissued 1.1 million shares and 2.4 million shares, respectively, for employee benefit plans. At June 30, 2011, $165 million remained available under the Company’s share repurchase authorizations.

For the three months ended June 30, 2010, the Company repurchased 3.3 million shares of its common stock at an average price of $53.36 per share for a total of $175 million. For the six months ended June 30, 2010, the Company repurchased 7.7 million shares of its common stock at an average price of $55.00 per share for $426 million, including 4.5 million shares purchased in the first quarter at an average price per share of $56.21 for $251 million under an accelerated share repurchase transaction (“ASR”) with a bank.

Under the ASR, in January 2010, the Company repurchased 4.5 million shares of the Company’s outstanding common stock for an initial purchase price of $56.05 per share. The purchase price of these shares was subject to an adjustment based on the volume weighted average price of the Company’s common stock during a period following execution of the agreement. The total cost of the initial purchase was $250 million. The purchase price adjustment was settled in the first quarter of 2010 and resulted in an additional cash payment of $0.7 million, for a final purchase price of $251 million, or $56.21 per share.

For the three and six months ended June 30, 2010, the Company reissued 0.6 million shares and 1.6 million shares, respectively, for employee benefit plans.


11.	SUPPLEMENTAL CASH FLOW & OTHER DATA


	Three Months Ended June 30,						Six Months Ended June 30,

	2011			2010			2011			2010



Depreciation expense	$	54,127		$	53,704		$	107,643		$	107,678

Interest expense		(47,231	)		(36,640	)		(85,510	)		(73,170	)
Interest income		650			273			1,000			848

Interest expense, net		(46,581	)		(36,367	)		(84,510	)		(72,322	)

Interest paid		17,539			21,103			72,583			56,415
Income taxes paid		97,119			190,289			107,721			197,118

Assets acquired under capital leases		1,876			—			2,697			—

Businesses acquired:
Fair value of assets acquired		1,555,444			—			1,555,444			—
Fair value of liabilities assumed		148,192			—			148,192			—

Fair value of net assets acquired		1,407,252			—			1,407,252			—
Less: Merger consideration payable		158,560			—			158,560			—

Cash paid for business acquisitions		1,248,692			—			1,248,692			—
Less: Cash acquired		112,312			—			112,312			—

Business acquisitions, net of cash acquired	$	1,136,380		$	—		$	1,136,380		$	—

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


12.	COMMITMENTS AND CONTINGENCIES

The Company has a line of credit with a financial institution totaling $85 million for the issuance of letters of credit (the “Letter of Credit Line”). The Letter of Credit Line, which is renewed annually, matures on November 19, 2011 and is guaranteed by the Subsidiary Guarantors.

In support of its risk management program, to ensure the Company’s performance or payment to third parties, $63 million in letters of credit were outstanding at June 30, 2011. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments. In addition, $6 million of bank guarantees were outstanding at June 30, 2011 in support of certain foreign operations.

Contingent Lease Obligations

The Company is subject to contingent obligations under certain leases and other instruments incurred in connection with real estate activities and other operations associated with LabOne, Inc., which the Company acquired in 2005, and certain of its predecessor companies. No liability has been recorded for any of these potential contingent obligations. See Note 15 to the Consolidated Financial Statements contained in the Company’s 2010 Annual Report on Form 10-K for further details.

Legal Matters

The Company is involved in various legal proceedings. Some of the proceedings against the Company involve claims that are substantial in amount.

California Lawsuit

In 2006 and 2008, the Company and several of its subsidiaries received subpoenas from the California Attorney General’s Office (the “Attorney General”) seeking documents relating to the Company’s billings to Medi-Cal, the California Medicaid program. The Company cooperated with the government’s requests. Subsequently, the State of California intervened as plaintiff in a civil lawsuit, California ex rel. Hunter Laboratories, LLC v. Quest Diagnostics Incorporated., et al. (the “California Lawsuit”), filed in California Superior Court against a number of clinical laboratories, including the Company and several of its subsidiaries. The complaint was originally filed by a competitor laboratory in California under the whistleblower provisions of the California False Claims Act. The complaint was unsealed on March 20, 2009.

The plaintiffs alleged, among other things, that the Company overcharged Medi-Cal for testing services and violated the California False Claims Act. Specifically, the plaintiffs alleged, among other things, that the Company violated certain regulations that govern billing to Medi-Cal (“Comparable Charge” regulations). A liability finding could have lead to an injunction, fines or penalties, and exclusion from Medi-Cal, as well as claims by third parties.

In the third quarter of 2010, the California Department of Health Care Services (the “Department”) conducted an audit of the Company’s billing to Medi-Cal. The Department contended that the Company’s billings were not consistent with applicable California regulations, as then interpreted by the Department. While the Company believes it was in compliance in all material respects with California requirements applicable to billing for clinical laboratory testing, the Company entered into an interim agreement under which it agreed to temporarily suspend billing Medi-Cal for a period of up to six months through March 1, 2011, during which it continued to provide services. The agreement was subsequently extended. The Company continued to recognize revenue from Medi-Cal for services provided in accordance with its interpretation of California regulations related to billing for clinical laboratory testing.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

The Company engaged in discussions in an attempt to resolve the matters described above. Agreement with both the Attorney General and the Department was required to settle this matter. During the fourth quarter of 2010, the Company reached an understanding, which was highly conditioned, to settle these matters pursuant to which the Company would pay $241 million. Conditions included, but were not limited to, reaching an agreement regarding the manner in which the Company’s future billings would be treated by the Department. In subsequent discussions during the fourth quarter of 2010, the Attorney General and the Department rejected the Company’s proposals that would have addressed these outstanding issues. As a result, as of the issuance of the Company’s financial statements for 2010, settlement discussions had reached an impasse. Based on these facts and circumstances, the Company concluded that a liability was not probable as of December 31, 2010.

In the first quarter of 2011, settlement discussions resumed. On May 9, 2011, the Company announced an agreement in principle to resolve these matters. On May 19, 2011, the Company finalized a settlement and release with the Attorney General, the Department and the qui tam relator. While denying liability, in order to avoid the uncertainty, expense and risks of litigation, the Company agreed to resolve these matters for $241 million. The Company agreed to the settlement to resolve the Comparable Charge allegations; the Company received a full release of these and all other allegations in the complaint. The Company also agreed to certain reporting obligations regarding its pricing for a limited time period and, at the option of the Company in lieu of such obligations for a transitional period, to provide Medi-Cal with a discount (the “Transitional Discount”) until the end of July 2012. The Transitional Discount, to the extent provided, is not expected to have a material impact on the Company’s consolidated revenues or results of operations.

As provided for in the settlement agreement, the Company resumed billing for unbilled services and expects to be reimbursed for all services provided prior to the effective date of the settlement agreement. Such reimbursement is expected to be consistent with the related amounts accrued.

As a result of the agreement in principle, the Company recorded a pre-tax charge to earnings in the first quarter of 2011 of $236 million, which represented the cost to resolve the matters noted above and related claims, less amounts previously reserved for related matters. The Company funded the $241 million payment in the second quarter of 2011 with cash on hand and borrowings under its existing credit facilities.

Other Legal Matters

In 2005, the Company received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General, seeking business records including records regarding the Company’s relationship with health maintenance organizations, independent physician associations, group purchasing organizations, and preferred provider organizations relating back to 1995. The Company has cooperated with the investigation. Subsequently, in November 2009, the U.S. District Court for the Southern District of New York partially unsealed a civil complaint, U.S. ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated, filed against the Company under the whistleblower provisions of the federal False Claims Act. The complaint alleges, among other things, violations of the federal Anti-Kickback Statute and the federal False Claims Act in connection with the Company’s pricing of laboratory services. The complaint seeks damages for alleged false claims associated with laboratory tests reimbursed by government payors, treble damages and civil penalties. In March 2011, the district court granted the Company’s motion to dismiss the relators’ complaint and disqualified the relators and their counsel from pursuing an action based on the facts alleged in the complaint; the relators filed a notice of appeal. The government was given additional time to decide whether to join the case. In July 2011, the government filed a notice declining to intervene in the action and the Court entered a final judgment in the Company’s favor. The relators’ appeal is pending.

In April 2010, a putative class action was filed against the Company and NID in the U.S. District Court for the Eastern District of New York on behalf of entities that allegedly purchased or paid for certain of NID’s test kits. The complaint alleges that certain of NID’s test kits were defective and that defendants, among other things, violated RICO and state consumer protection laws. The complaint alleges an unspecified amount of damages.

In August 2010, a shareholder derivative action was filed in the Superior Court of New Jersey, Morris County, on behalf of the Company against the directors and certain present officers of the Company. The complaint alleges that the defendants breached their fiduciary duties in connection with, among other things, alleged overcharges by the Company to Medi-Cal for testing services, and seeks unspecified compensatory damages and equitable relief. The action was dismissed without prejudice. On July 21, 2011, the action was re-filed.

In November 2010, a putative class action was filed against the Company and certain present and former officers of the Company in the Superior Court of New Jersey, Essex County, on behalf of the Company’s sales people nationwide who were over forty years old and who either resigned or were terminated after being placed on a performance improvement plan. The complaint alleges that the defendants’ conduct violates the New Jersey Law Against Discrimination, and seeks, among other things, unspecified damages. The defendants removed the complaint to the United States District Court for the District of New Jersey.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

In June 2011, a shareholder derivative action was filed in the Superior Court of New Jersey, on behalf of the Company against the current directors and a former director of the Company. The complaint alleges that the defendants breached their fiduciary duties, wasted corporate assets and were unjustly enriched in connection with, among other things, alleged overcharges by the Company to Medi-Cal for testing services, and seeks unspecified compensatory damages and equitable relief.

In addition, the Company and certain of its subsidiaries have received subpoenas from state agencies in five states and from the Office of the Inspector General of the U.S. Department of Health and Human Services which seek documents relating to the Company’s billing practices. The Company is cooperating with the requests.

The federal or state governments may bring claims based on new theories as to the Company’s practices which management believes to be in compliance with law. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers. The Company is aware of certain pending individual or class action lawsuits, and has received several subpoenas, related to billing practices filed under the qui tam provisions of the Civil False Claims Act and/or other federal and state statutes, regulations or other laws. The Company understands that there may be other pending qui tam claims brought by former employees or other “whistle blowers” as to which the Company cannot determine the extent of any potential liability.

These matters are in different stages. Some of these matters are in their early stages. Matters may involve responding to and cooperating with various government investigations and related subpoenas. As of June 30, 2011, the Company does not believe that any losses related to these matters are probable. While the Company believes that a reasonable possibility exists that losses may have been incurred, based on the nature and status of the matters, potential losses, if any, cannot be estimated.

Reserves for Legal Matters

Management has established reserves in accordance with generally accepted accounting principles for the matters discussed above. Such reserves totaled approximately $2 million and $10 million as of June 30, 2011 and December 31, 2010, respectively. Management cannot predict the outcome of such matters. Although management does not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company’s financial condition, given the high degree of judgment involved in establishing accruals for loss estimates related to these types of matters, the outcome of such matters may be material to the Company’s results of operations or cash flows in the period in which the impact of such matters is determined or paid.

Reserves for General and Professional Liability Claims

As a general matter, providers of clinical 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 coverages for, among other things, claims that could result from providing, or failing to provide, clinical 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. Reserves for such matters, including those associated with both asserted and incurred but not reported claims, are established by considering actuarially determined losses based upon the Company’s historical and projected loss experience. Such reserves totaled approximately $137 million and $130 million as of June 30, 2011 and December 31, 2010, respectively. Management believes that established reserves and present insurance coverage are sufficient to cover currently estimated exposures. Management cannot predict the outcome of any claims made against the Company. Although 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 condition, given the high degree of judgment involved in establishing accruals for loss estimates related to these types of matters, the outcome may be material to the Company’s results of operations or cash flows in the period in which the impact of such claims is determined or paid.


13.	DISCONTINUED OPERATIONS

Summarized financial information for the discontinued operations of NID, a test kit manufacturing subsidiary which was closed in 2006, is set forth below:

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


	Three Months Ended June 30,						Six Months Ended June 30,

	2011			2010			2011			2010


Net revenues	$	—		$	—		$	—		$	—

Income (loss) from discontinued operations before income taxes		(190	)		280			(282	)		295
Income tax expense		(317	)		(546	)		(599	)		(613	)

Loss from discontinued operations, net of taxes	$	(507	)	$	(266	)	$	(881	)	$	(318	)

The remaining balance sheet information related to NID was not material at June 30, 2011 and December 31, 2010.


14.	BUSINESS SEGMENT INFORMATION

Clinical testing is an essential element in the delivery of healthcare services. Physicians use clinical tests to assist in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions. Clinical testing is generally categorized as clinical laboratory testing and anatomic pathology services. Clinical laboratory testing is performed on whole blood, serum, plasma and other body fluids, such as urine, and specimens such as microbiology samples. Anatomic pathology services are principally for the detection of cancer and are performed on tissues, such as biopsies, and other samples, such as human cells. Customers of the clinical testing business include patients, physicians, hospitals, employers, governmental institutions and other commercial clinical laboratories. The clinical testing business accounted for greater than 90% of net revenues from continuing operations in 2011 and 2010.

All other operating segments include the Company’s non-clinical testing businesses and consist of its risk assessment services, clinical trials testing, healthcare information technology and diagnostics products businesses. The Company’s risk assessment business provides underwriting support services to the life insurance industry including teleunderwriting, specimen collection and paramedical examinations, laboratory testing, medical record retrieval, case management, motor vehicle reports, telephone inspections, prescription histories and credit checks. The Company’s clinical trials testing business provides clinical testing performed in connection with clinical research trials on new drugs, vaccines and certain medical devices. The Company’s healthcare information technology business is a developer and integrator of clinical connectivity and data management solutions for healthcare organizations, physicians and clinicians than can help improve patient care and medical practice. The Company’s diagnostics products business manufactures and markets products that enable healthcare professionals to make healthcare diagnoses, including products for point-of-care testing for the professional market. During the second quarter of 2011, the Company acquired Athena and Celera (see Note 4 for further details). Athena is included in the Company’s clinical laboratory testing business. The majority of Celera’s operations are included in the Company’s clinical laboratory testing business, with the remainder in other operating segments.

On April 19, 2006, the Company decided to discontinue NID’s operations and results of operations for NID have been classified as discontinued operations for all periods presented (see Note 13).

At June 30, 2011, substantially all of the Company’s services are provided within the United States, and substantially all of the Company’s assets are located within the United States.

The following table is a summary of segment information for the three and six months ended June 30, 2011 and 2010. Segment asset information is not presented since it is not used by the chief operating decision maker at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income for the segment. General management and administrative corporate expenses, including amortization of intangible assets and the charge to earnings in the first quarter of 2011 of $236 million related to the settlement of the California Lawsuit (see Note 12), are included in general corporate expenses below. The accounting policies of the segments are the same as those of the Company as set forth in Note 2 to the Consolidated Financial Statements contained in the Company’s 2010 Annual Report on Form 10-K and Note 2 to the interim consolidated financial statements.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)


	Three Months Ended June 30,						Six Months Ended June 30,

	2011			2010			2011			2010

Net revenues:
Clinical laboratory testing business	$	1,726,948		$	1,715,112		$	3,389,113		$	3,372,179
All other operating segments		176,253			159,615			335,665			308,051

Total net revenues	$	1,903,201		$	1,874,727		$	3,724,778		$	3,680,230


Operating earnings (loss):
Clinical laboratory testing business	$	373,748		$	390,216		$	684,032		$	731,101
All other operating segments		14,766			16,944			22,625			18,506
General corporate expenses		(71,660	)		(41,266	)		(358,843	)		(85,151	)

Total operating income		316,854			365,894			347,814			664,456
Non-operating expenses, net		(39,058	)		(36,101	)		(67,080	)		(58,080	)

Income from continuing operations before taxes		277,796			329,793			280,734			606,376
Income tax expense		105,762			125,651			154,988			231,029

Income from continuing operations		172,034			204,142			125,746			375,347
Loss from discontinued operations, net of taxes		(507	)		(266	)		(881	)		(318	)

Net income		171,527			203,876			124,865			375,029
Less: Net income attributable to noncontrolling interests		8,384			9,261			15,583			17,966

Net income attributable to Quest Diagnostics	$	163,143		$	194,615		$	109,282		$	357,063


15.	SUBSEQUENT EVENT

On July 14, 2011, the Company adopted a restructuring plan that it expects to complete within the third quarter of 2011. The Company anticipates incurring a charge of approximately $20 million before tax (approximately $12 million after tax) in the third quarter of 2011, principally associated with workforce reduction costs, consisting primarily of severance and related benefits. The Company expects that the full amount of the charge will result in future cash expenditures.


16.	SUMMARIZED FINANCIAL INFORMATION

The Company’s Senior Notes due 2011, Floating Rate Senior Notes due 2014, Senior Notes due 2015, Senior Notes due 2016, Senior Notes due 2017, Senior Notes due 2020, Senior Notes due 2021, Senior Notes due 2037 and Senior Notes due 2040 are fully and unconditionally guaranteed, jointly and severally, by the Subsidiary Guarantors. With the exception of Quest Diagnostics Receivables Incorporated (“QDRI”) (see paragraph below), the non-guarantor subsidiaries are primarily foreign subsidiaries and less than wholly-owned subsidiaries.

In conjunction with the Company’s secured receivables credit facility, the Company maintains a wholly-owned non-guarantor subsidiary, QDRI. The Company and certain of its Subsidiary Guarantors transfer certain domestic receivables to QDRI. QDRI utilizes the transferred receivables to collateralize borrowings under 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

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

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.

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2011


	Parent			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated


Net revenues	$	203,321		$	1,577,305		$	189,592		$	(67,017	)	$	1,903,201

Operating costs and expenses:
Cost of services		121,342			909,681			73,371			—			1,104,394
Selling, general and administrative		35,526			342,577			92,150			(7,464	)		462,789
Amortization of intangible assets		543			16,048			2,001			—			18,592
Royalty (income) expense		(104,418	)		104,418			—			—			—
Other operating expense (income), net		28			585			(41	)		—			572

Total operating costs and expenses		53,021			1,373,309			167,481			(7,464	)		1,586,347

Operating income		150,300			203,996			22,111			(59,553	)		316,854
Non-operating (expense) income, net		(45,706	)		(53,301	)		396			59,553			(39,058	)

Income from continuing operations before taxes		104,594			150,695			22,507			—			277,796
Income tax expense		40,382			59,578			5,802			—			105,762

Income from continuing operations		64,212			91,117			16,705			—			172,034
Loss from discontinued operations, net of taxes		—			(507	)		—			—			(507	)
Equity earnings from subsidiaries		98,931			—			—			(98,931	)		—

Net income		163,143			90,610			16,705			(98,931	)		171,527
Less: Net income attributable to noncontrolling interests		—			—			8,384			—			8,384

Net income attributable to Quest Diagnostics	$	163,143		$	90,610		$	8,321		$	(98,931	)	$	163,143

Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2010


	Parent			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Consolidated


Net revenues	$	218,419		$	1,540,722		$	181,373	$	(65,787	)	$	1,874,727

Operating costs and expenses:
Cost of services		129,236			886,783			62,952		—			1,078,971
Selling, general and administrative		21,273			312,465			93,236		(7,562	)		419,412
Amortization of intangible assets		18			7,601			1,651		—			9,270
Royalty (income) expense		(105,316	)		105,316			—		—			—
Other operating (income) expense, net		(1,346	)		233			2,293		—			1,180

Total operating costs and expenses		43,865			1,312,398			160,132		(7,562	)		1,508,833

Operating income		174,554			228,324			21,241		(58,225	)		365,894
Non-operating (expense) income, net		(39,974	)		(54,940	)		588		58,225			(36,101	)

Income from continuing operations before taxes		134,580			173,384			21,829		—			329,793
Income tax expense		52,577			67,331			5,743		—			125,651

Income from continuing operations		82,003			106,053			16,086		—			204,142
Loss from discontinued operations, net of taxes		—			(266	)		—		—			(266	)
Equity earnings from subsidiaries		112,612			—			—		(112,612	)		—

Net income		194,615			105,787			16,086		(112,612	)		203,876
Less: Net income attributable to noncontrolling interests		—			—			9,261		—			9,261

Net income attributable to Quest Diagnostics	$	194,615		$	105,787		$	6,825	$	(112,612	)	$	194,615

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2011


	Parent			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated


Net revenues	$	401,810		$	3,080,649		$	380,879		$	(138,560	)	$	3,724,778

Operating costs and expenses:
Cost of services		244,933			1,817,071			139,388			—			2,201,392
Selling, general and administrative		73,962			654,306			197,203			(14,824	)		910,647
Amortization of intangible assets		706			24,197			3,538			—			28,441
Royalty (income) expense		(206,774	)		206,774			—			—			—
Other operating expense (income), net		236,306			371			(193	)		—			236,484

Total operating costs and expenses		349,133			2,702,719			339,936			(14,824	)		3,376,964

Operating income		52,677			377,930			40,943			(123,736	)		347,814
Non-operating (expense) income, net		(84,126	)		(110,455	)		3,765			123,736			(67,080	)

Income (loss) from continuing operations before taxes		(31,449	)		267,475			44,708			—			280,734
Income tax expense		36,768			105,743			12,477			—			154,988

Income (loss) from continuing operations		(68,217	)		161,732			32,231			—			125,746
Loss from discontinued operations, net of taxes		—			(881	)		—			—			(881	)
Equity earnings from subsidiaries		177,499			—			—			(177,499	)		—

Net income		109,282			160,851			32,231			(177,499	)		124,865
Less: Net income attributable to noncontrolling interests		—			—			15,583			—			15,583

Net income attributable to Quest Diagnostics	$	109,282		$	160,851		$	16,648		$	(177,499	)	$	109,282

Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2010


	Parent			Subsidiary Guarantors			Non- Guarantor Subsidiaries		Eliminations			Consolidated


Net revenues	$	429,640		$	3,023,312		$	373,709	$	(146,431	)	$	3,680,230

Operating costs and expenses:
Cost of services		251,823			1,766,570			126,951		—			2,145,344
Selling, general and administrative		44,351			626,583			194,104		(14,893	)		850,145
Amortization of intangible assets		35			15,232			3,362		—			18,629
Royalty (income) expense		(206,808	)		206,808			—		—			—
Other operating (income) expense, net		(321	)		466			1,511		—			1,656

Total operating costs and expenses		89,080			2,615,659			325,928		(14,893	)		3,015,774

Operating income		340,560			407,653			47,781		(131,538	)		664,456
Non-operating (expense) income, net		(70,533	)		(121,385	)		2,300		131,538			(58,080	)

Income from continuing operations before taxes		270,027			286,268			50,081		—			606,376
Income tax expense		104,062			113,078			13,889		—			231,029

Income from continuing operations		165,965			173,190			36,192		—			375,347
Loss from discontinued operations, net of taxes		—			(318	)		—		—			(318	)
Equity earnings from subsidiaries		191,098			—			—		(191,098	)		—

Net income		357,063			172,872			36,192		(191,098	)		375,029
Less: Net income attributable to noncontrolling interests		—			—			17,966		—			17,966

Net income attributable to Quest Diagnostics	$	357,063		$	172,872		$	18,226	$	(191,098	)	$	357,063

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Condensed Consolidating Balance Sheet
June 30, 2011


	Parent			Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Consolidated

Assets
Current assets:
Cash and cash equivalents	$	138,157		$	2,484	$	43,577		$	—		$	184,218
Accounts receivable, net		22,222			163,482		743,668			—			929,372
Other current assets		75,339			186,666		102,360			—			364,365

Total current assets		235,718			352,632		889,605			—			1,477,955
Property, plant and equipment, net		169,607			609,465		41,521			—			820,593
Goodwill and intangible assets, net		155,529			6,260,302		483,309			—			6,899,140
Intercompany (payable) receivable		(461,060	)		739,576		(278,516	)		—			—
Investment in subsidiaries		7,788,982			—		—			(7,788,982	)		—
Other assets		274,555			43,974		50,321			(135,347	)		233,503

Total assets	$	8,163,331		$	8,005,949	$	1,186,240		$	(7,924,329	)	$	9,431,191


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	786,734		$	161,246	$	50,702		$	—		$	998,682
Short-term borrowings and current portion of long-term debt		763,683			144,699		86,293			—			994,675

Total current liabilities		1,550,417			305,945		136,995			—			1,993,357
Long-term debt		2,989,123			18,378		325,430			—			3,332,931
Other liabilities		194,641			541,596		53,417			(135,347	)		654,307
Stockholders’ equity:
Quest Diagnostics stockholders’ equity		3,429,150			7,140,030		648,952			(7,788,982	)		3,429,150
Noncontrolling interests		—			—		21,446			—			21,446

Total stockholders’ equity		3,429,150			7,140,030		670,398			(7,788,982	)		3,450,596

Total liabilities and stockholders’ equity	$	8,163,331		$	8,005,949	$	1,186,240		$	(7,924,329	)	$	9,431,191

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Condensed Consolidating Balance Sheet
December 31, 2010


	Parent		Subsidiary Guarantors		Non- Guarantor Subsidiaries			Eliminations			Consolidated

Assets
Current assets:
Cash and cash equivalents	$	392,525	$	928	$	55,848		$	—		$	449,301
Accounts receivable, net		15,913		135,417		693,969			—			845,299
Other current assets		55,723		165,099		96,183			(6,188	)		310,817

Total current assets		464,161		301,444		846,000			(6,188	)		1,605,417
Property, plant and equipment, net		179,624		616,114		38,638			—			834,376
Goodwill and intangible assets, net		155,596		5,279,371		463,376			—			5,898,343
Intercompany receivable (payable)		84,107		231,268		(315,375	)		—			—
Investment in subsidiaries		6,195,557		—		—			(6,195,557	)		—
Other assets		227,822		10,090		48,319			(96,737	)		189,494

Total assets	$	7,306,867	$	6,438,287	$	1,080,958		$	(6,298,482	)	$	8,527,630


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	623,610	$	190,334	$	57,516		$	(6,188	)	$	865,272
Current portion of long-term debt		203,659		144,004		1,333			—			348,996

Total current liabilities		827,269		334,338		58,849			(6,188	)		1,214,268
Long-term debt		2,295,709		19,342		326,109			—			2,641,160
Other liabilities		150,409		512,681		51,724			(96,737	)		618,077
Stockholders’ equity:
Quest Diagnostics stockholders’ equity		4,033,480		5,571,926		623,631			(6,195,557	)		4,033,480
Noncontrolling interests		—		—		20,645			—			20,645

Total stockholders’ equity		4,033,480		5,571,926		644,276			(6,195,557	)		4,054,125

Total liabilities and stockholders’ equity	$	7,306,867	$	6,438,287	$	1,080,958		$	(6,298,482	)	$	8,527,630

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)

Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2011


	Parent			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated


Cash flows from operating activities:
Net income	$	109,282		$	160,851		$	32,231		$	(177,499	)	$	124,865
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		22,889			104,703			8,492			—			136,084
Provision for doubtful accounts		2,376			27,950			115,659			—			145,985
Provision for special charge		236,000			—			—			—			236,000
Other, net		(195,421	)		67,472			(3,824	)		177,499			45,726
Changes in operating assets and liabilities		(151,255	)		(161,149	)		(156,173	)		—			(468,577	)

Net cash provided by (used in) operating activities		23,871			199,827			(3,615	)		—			220,083
Net cash used in investing activities		(1,059,870	)		(169,185	)		(5,315	)		226,404			(1,007,966	)
Net cash provided by (used in) financing activities		781,631			(29,086	)		(3,341	)		(226,404	)		522,800

Net change in cash and cash equivalents		(254,368	)		1,556			(12,271	)		—			(265,083	)
Cash and cash equivalents, beginning of period		392,525			928			55,848			—			449,301

Cash and cash equivalents, end of period	$	138,157		$	2,484		$	43,577		$	—		$	184,218

Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2010


	Parent			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated


Cash flows from operating activities:
Net income	$	357,063		$	172,872		$	36,192		$	(191,098	)	$	375,029
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,331			93,907			8,069			—			126,307
Provision for doubtful accounts		3,006			24,669			120,728			—			148,403
Other, net		(131,368	)		(6,194	)		(17,401	)		191,098			36,135
Changes in operating assets and liabilities		82,079			(196,396	)		(123,173	)		—			(237,490	)

Net cash provided by operating activities		335,111			88,858			24,415			—			448,384
Net cash provided by (used in) investing activities		11,063			(68,458	)		(2,763	)		(31,886	)		(92,044	)
Net cash used in financing activities		(424,511	)		(26,208	)		(23,875	)		31,886			(442,708	)

Net change in cash and cash equivalents		(78,337	)		(5,808	)		(2,223	)		—			(86,368	)
Cash and cash equivalents, beginning of period		464,958			17,457			51,841			—			534,256

Cash and cash equivalents, end of period	$	386,621		$	11,649		$	49,618		$	—		$	447,888

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions and select accounting policies that affect our reported financial results and the disclosure of contingent assets and liabilities. 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 most of 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 our total 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, 2010.

Initiatives to Improve Operating Efficiency

The diagnostic testing industry is labor intensive. Employee compensation and benefits constitute approximately one-half of our total costs and expenses. Cost of services consists principally of costs for obtaining, transporting and testing specimens. Selling, general and administrative expenses consist principally of the costs associated with our sales and marketing efforts, billing operations, bad debt expense and general management and administrative support. In addition, performing diagnostic testing involves significant fixed costs for facilities and other infrastructure required to obtain, transport and test specimens. Therefore, relatively small changes in volume can have a significant impact on profitability in the short-term.

A large portion of our costs are fixed, making it more challenging to fully mitigate the profit impact of reduced volume in the short term. In response to reduced volume levels, as a result of a temporary slowdown in healthcare utilization, we have implemented a number of actions in July 2011 to align our costs with reduced volume levels. These cost actions, which are broad in nature and affect most parts of our business, will result in a charge to earnings in the third quarter of 2011 estimated at approximately $20 million, comprised principally of employee separation costs.

In addition, in July 2011 we announced a multi-year program designed to reduce our cost structure by $500 million over the next three years. This effort is intended to address continued reimbursement pressures and labor and benefit cost increases, free up additional resources to invest in science and innovation, and enable us to improve operating profitability. As detailed plans to implement these opportunities are approved and executed, it likely will result in charges to earnings associated with the implementation. These charges may be material to the results of operations and cash flows in the periods recorded or paid.

Acquisitions

Acquisition of Athena Diagnostics

On February 24, 2011, we signed a definitive agreement to acquire Athena Diagnostics (“Athena”) from Thermo Fisher Scientific, Inc., in an all-cash transaction valued at approximately $740 million. Athena is the leading provider of advanced diagnostic tests related to neurological conditions, and generated revenues of approximately $110 million in 2010. We completed the acquisition of Athena on April 4, 2011 (see Note 4 to the interim consolidated financial statements for further details).

Acquisition of Celera Corporation

On March 17, 2011, we entered into a definitive merger agreement with Celera Corporation (“Celera”) under which we agreed to acquire Celera for $8 per share, in a transaction valued at approximately $341 million, net of $326 million in acquired cash and short-term marketable securities. Additionally, we expect to utilize Celera’s available tax credits, net operating loss carryforwards and capitalized tax research and development expenditures to reduce our future tax payments by approximately $110 million. Celera is a healthcare business delivering personalized disease management through a combination of products and services incorporating proprietary discoveries. Celera generated revenues of $128 million in 2010. We completed the acquisition of Celera on May 17, 2011.

Of the total purchase price of $667 million to acquire Celera, $508 million was paid through June 30, 2011. Accounts payable and accrued expenses at June 30, 2011 included a liability of $159 million representing the remaining merger consideration related to shares of Celera which had not been surrendered as of June 30, 2011. We expect to fund the payment of the remaining merger consideration with cash on hand and existing credit facilities. See Note 4 to the interim consolidated financial statements for further details.

Results of Operations

Our clinical testing business currently represents our one reportable business segment. In both 2011 and 2010, our clinical testing business accounted for greater than 90% of net revenues. Our other operating segments consist of our risk assessment services, clinical trials testing, healthcare information technology and diagnostic products businesses. Our business segment information is disclosed in Note 14 to the interim consolidated financial statements.

Settlement Related to the California Lawsuit

As a result of settlement discussions which resumed in the first quarter of 2011, on May 9, 2011, we announced an agreement in principle to resolve a previously disclosed civil lawsuit brought by a California competitor in which the State of California intervened (the “California Lawsuit”). In the lawsuit, the plaintiffs alleged, among other things, that we overcharged Medi-Cal for testing services and violated the California False Claims Act. Specifically, the plaintiffs alleged, among other things, that we violated certain regulations that govern billing to Medi-Cal (“Comparable Charge” regulations). While denying liability, in order to avoid the uncertainty, expense and risks of litigation, we agreed to resolve these matters for $241 million. On May 19, 2011, we finalized a settlement agreement and release with the California Department of Health Care Services, the California Attorney General’s Office and the qui tam relator. We agreed to the settlement to resolve claims pertaining to the Comparable Charge allegations; we received a full release of these and all other allegations in the complaint. We also agreed to certain reporting obligations regarding our pricing for a limited time period and, at our option in lieu of such obligations for a transitional period, to provide Medi-Cal with a discount (the “Transitional Discount”) until the end of July 2012. The Transitional Discount, to the extent provided, is not expected to have a material impact on our consolidated revenues or results of operations.

As provided for in the settlement agreement, we have resumed billing for unbilled services and expect to be reimbursed for all services provided prior to the effective date of the final settlement agreement. Such reimbursement is expected to be consistent with the related amounts accrued.

As a result of the agreement in principle, we recorded a pre-tax charge to earnings in the first quarter of 2011 of $236 million (the “Medi-Cal charge”), or $1.20 per diluted share, which represented the cost to resolve the matters noted above and related claims, less amounts previously reserved for related matters.

We funded the $241 million payment in the second quarter of 2011 with cash on hand and borrowings under our existing credit facilities. See Note 12 to the interim consolidated financial statements for further details.

Three and Six Months Ended June 30, 2011 Compared with Three and Six Months Ended June 30, 2010

Continuing Operations


	Three Months Ended June 30,				% Change Increase (decrease)			Six Months Ended June 30,				% Change Increase (decrease)

	2011		2010					2011		2010

	(dollars in millions, except per share data)

Net revenues	$	1,903.2	$	1,874.7		1.5	%	$	3,724.8	$	3,680.2		1.2	%
Income from continuing operations		163.6		194.9		(16.1	)%		110.2		357.4		(69.2	)%
Earnings per diluted share	$	1.02	$	1.07		(4.7	)%	$	0.68	$	1.96		(65.3	)%

Results for the three months ended June 30, 2011 included pre-tax charges of $21.2 million, or $0.10 per diluted share, associated with the acquisitions of Athena and Celera. Of these costs, $20.4 million, primarily related to professional fees and integration charges, were recorded in selling, general and administrative expenses and $0.8 million of financing related costs were included in interest expense, net.

Results for the six months ended June 30, 2011 were affected by a number of items which impacted earnings per diluted share by $1.44. During the first quarter of 2011, we recorded the Medi-Cal charge of $236 million, or $1.20 per diluted share, in “other operating expense, net.” In addition, results for the six months ended June 30, 2011 included pre-tax charges of $25.8 million, or $0.12 per diluted share, associated with the acquisitions of Athena and Celera. Of these costs $22.7 million, primarily related to professional fees and integration charges, were recorded in selling, general and administrative expenses and $3.1 million of financing related costs were included in interest expense, net. Results for the six months ended June 30, 2011 also included $13.3 million of pre-tax charges, or $0.05 per diluted share, principally associated with workforce reductions. Of these costs, $9.0 million and $4.3 million were included in cost of services and selling, general and administrative expenses, respectively. In addition, we estimate that the impact of severe weather during the first quarter of 2011 adversely affected operating income for the six months ended June 30, 2011 by $18.5 million, or $0.07 per diluted share.

Results for the six months ended June 30, 2010 were affected by a number of items which impacted earnings per diluted share by $0.11. During the first quarter of 2010, we recorded pre-tax charges of $17.3 million, or $0.06 per diluted share, principally associated with workforce reductions. Of these costs, $4.5 million and $12.8 million were included in cost of services and selling, general and administrative expenses, respectively. In addition, we estimate that the impact of severe weather during the first quarter of 2010 adversely affected operating income for the six months ended June 30, 2010 by $14.1 million, or $0.05 per diluted share.

Net Revenues

Net revenues for the three months ended June 30, 2011 were 1.5% above the prior year level with the Athena and Celera acquisitions contributing 2.5% revenue growth in the quarter.

Clinical testing revenue, which accounted for over 90% of our consolidated revenues, increased by 0.7% for the three months ended June 30, 2011 over the prior year period. The acquisitions of Athena and Celera contributed about 2.2% to the clinical testing revenue growth in the quarter. Clinical testing volume, measured by the number of requisitions, decreased by 0.9% for the second quarter of 2011 compared to the prior year period due to continued market softness, as measured by physician office visits in the second quarter of 2011. The clinical testing volume contributed by the Athena and Celera acquisitions had a modest positive impact in the quarter. Pre-employment drug testing volume, which has continued to rebound, grew about 6% in the quarter.

Revenue per requisition for the three months ended June 30, 2011 was 1.6% above the prior year period, with the improvement driven by an increase in esoteric testing mix from the acquired operations of Athena and Celera. While revenue per requisition is benefiting from an increased mix in gene-based and esoteric testing, it continues to be pressured by business and payer mix changes, the 1.75% Medicare fee schedule decrease, which went into effect January 1, 2011,

and pricing changes in connection with several large contract extensions executed in the first half of last year. The business and payer mix changes, which continue to pressure revenue per requisition, include the further rebound in our lower-priced drugs-of-abuse testing, and continued weakness in our higher priced anatomic pathology testing services.

Net revenues for the six months ended June 30, 2011 were 1.2% above the prior year level with the Athena and Celera acquisitions contributing 1.3% to consolidated revenue growth.

Clinical testing revenue, which accounted for over 90% of our consolidated revenues, grew 0.5%. The acquisitions of Athena and Celera contributed about 1.1% to the clinical testing revenue growth for the six months ended June 30, 2011. Clinical testing volume, measured by the number of requisitions, increased by 0.5% compared to the prior year period. Pre-employment drug testing volume, which has continued to rebound, grew about 8% during the six months ended June 30, 2011.

Revenue per requisition for the six months ended June 30, 2011 approximated the prior year level. Revenue per requisition continues to benefit from an increased mix in gene-based and esoteric testing, particularly from the impact of the acquired operations of Athena and Celera. Offsetting this benefit was business and payor mix changes including: an increase in lower priced drugs-of-abuse testing and a decrease in higher priced anatomic pathology testing; price changes in connection with several large contract extensions executed in the first half of last year; and the 1.75% Medicare fee schedule decrease, which went into effect January 1, 2011.

Our businesses other than clinical laboratory testing accounted for approximately 9% of our net revenues for the three and six months ended June 30, 2011 and 2010. These businesses include our risk assessment services, clinical trials testing, healthcare information technology, and diagnostic products businesses. For the three and six months ended June 30, 2011, revenue in our non-clinical testing businesses, which contain most of our international operations, grew by approximately 10% and 9%, respectively, and benefited from the impact of the Celera acquisition and foreign currency exchange rates.

Operating Costs and Expenses


	Three Months Ended June 30,

	2011					2010					Change Increase (decrease)


	$		% Net Revenue			$		% Net Revenue			$			% Net Revenue

	(dollars in millions)

Cost of services	$	1,104.4		58.0	%	$	1,078.9		57.6	%	$	25.5			0.4	%
Selling, general and administrative expenses (SG&A)		462.8		24.3	%		419.4		22.4	%		43.4			1.9	%
Amortization of intangible assets		18.6		1.0	%		9.3		0.5	%		9.3			0.5	%
Other operating expense, net		0.6		0.1	%		1.2		—	%		(0.6	)		0.1	%

Total operating costs and expenses	$	1,586.4		83.4	%	$	1,508.8		80.5	%	$	77.6			2.9	%


Bad debt expense (included in SG&A)	$	68.6		3.6	%	$	72.1		3.8	%	$	(3.5	)		(0.2	)%


	Six Months Ended June 30,

	2011					2010					Change Increase (decrease)


	$		% Net Revenue			$		% Net Revenue			$			% Net Revenue

	(dollars in millions)

Cost of services	$	2,201.4		59.1	%	$	2,145.3		58.3	%	$	56.1			0.8	%
Selling, general and administrative expenses (SG&A)		910.6		24.4	%		850.1		23.1	%		60.5			1.3	%
Amortization of intangible assets		28.5		0.8	%		18.6		0.5	%		9.9			0.3	%
Other operating expense, net		236.5		6.4	%		1.7		—	%		234.8			6.4	%

Total operating costs and expenses	$	3,377.0		90.7	%	$	3,015.7		81.9	%	$	361.3			8.8	%


Bad debt expense (included in SG&A)	$	146.0		3.9	%	$	148.4		4.0	%	$	(2.4	)		(0.1	)%

Total Operating Costs and Expenses

For the second quarter of 2011, the impacts of the higher costs associated with employee compensation and benefits, investments we have made in our sales force and service capabilities, the addition of the Athena and Celera operations, as well as costs related to the Athena and Celera transactions, served to increase total operating expenses as a percent of net revenues compared to the prior year period. Partially offsetting these increases was a year-over-year reduction in costs associated with actions we have taken to adjust our cost structure, primarily associated with workforce reductions. Results for the second quarter of 2011 included pre-tax charges of $20.4 million, primarily related to professional fees and integration charges associated with the acquisitions of Athena and Celera, which served to increase operating expenses as a percent of net revenues by 1.1%.

For the six months ended June 30, 2011, the impacts of the Medi-Cal charge, severe weather, higher costs associated with employee compensation and benefits, and investments we have made in our sales force and service capabilities, as well the impact of the Athena and Celera acquisitions, served to increase total operating expenses as a percent of net revenues compared to the prior year period. Partially offsetting these increases was a year-over-year reduction in costs associated with actions we have taken to adjust our cost structure, primarily associated with workforce reductions. Results for the six months ended June 30, 2011 included the Medi-Cal charge of $236 million recorded in connection with the California Lawsuit. In addition, results for the six months ended June 30, 2011 and 2010 included pre-tax charges, principally associated with workforce reductions, of $13.3 million ($9.0 million in cost of services and $4.3 million in selling, general and administrative expenses) and $17.3 million ($4.5 million in cost of services and $12.8 million in selling, general and administrative expenses), respectively. Selling, general and administrative expenses for the six months ended June 30, 2011 also included $22.7 million of pre-tax charges, primarily related to professional fees and integration charges associated with the acquisitions of Athena and Celera.

Also, year-over-year comparisons for both the three and six months ended June 30, 2011 were unfavorably impacted by approximately $4 million associated with gains on investments in our supplemental deferred compensation plans. Under our supplemental deferred compensation plans, employee compensation deferrals, together with Company matching contributions, are invested in a variety of investments held in trusts. Gains and losses associated with the investments are recorded in earnings within “other (expense) income, net.” A corresponding and offsetting adjustment is also recorded to the deferred compensation obligation to reflect investment gains and losses earned by the employee. Such adjustments to the deferred compensation obligation are recorded in earnings principally within “selling, general and administrative expenses” and offset the amount of investment gains and losses recorded in “other (expense) income, net.” Results for the three and six months ended June 30, 2011 included an increase in operating costs of $0.2 million and $2.3 million, respectively, representing increases in the deferred compensation obligation to reflect investment gains earned by employees participating in our deferred compensation plans. Results for the three and six months ended June 30, 2010 included a reduction in operating costs of $3.9 million and $1.4 million, respectively, representing decreases in

the deferred compensation obligation to reflect investment losses incurred by employees participating in our deferred compensation plans.

Cost of Services

The increase in cost of services as a percentage of net revenues for the three months ended June 30, 2011 compared to the prior year period primarily reflects higher costs associated with employee compensation and benefits, and investments we have made in service capabilities, partially offset by an increase in revenue per requisition, attributable to the acquired operations of Athena and Celera.

The increase in cost of services as a percentage of revenues for the six months ended June 30, 2011 compared to the prior year period reflects the impact of severe weather in the first quarter, a $4.5 million increase in pre-tax charges associated with workforce reductions and higher costs associated with employee compensation and benefits, and investments we have made in service capabilities. These increases have been partially offset by the acquired operations of Athena and Celera, which served to reduce the percentage.

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses as a percentage of net revenues for the three months ended June 30, 2011 compared to the prior year period primarily reflects pre-tax charges of $20.4 million, primarily related to professional fees and integration charges, associated with the acquisitions of Athena and Celera, higher costs associated with employee compensation and benefits, investments we have made in our sales force and the impact of the Celera operations.

The increase in selling, general and administrative expenses as a percentage of net revenues for the six months ended June 30, 2011 compared to the prior year period primarily reflects the impact of severe weather, higher costs associated with employee compensation and benefits and investments we have made in our sales force. In addition, selling, general and administrative expenses for the six months ended June 30, 2011 included pre-tax charges of $22.7 million, primarily related to professional fees and integration charges associated with the acquisitions of Athena and Celera. These increases were partially offset by an $8.5 million decrease in pre-tax charges associated with workforce reductions.

For the three months and six months ended June 30, 2011, bad debt expense as a percentage of net revenues improved compared to the prior year periods, primarily reflecting continued strong performance in our billing operations and collection metrics.

Amortization of Intangible Assets

The increase in amortization of intangible assets for the three and six months ended June 30, 2011 compared to the prior year periods reflects the impact of amortization of intangible assets acquired as part of the Athena and Celera acquisitions.

Other Operating Expense, net

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 the Medi-Cal charge of $236 million recorded in connection with the California Lawsuit.

Operating Income


	Three Months Ended June 30,						Change Increase (decrease)			Six Months Ended June 30,						Change Increase (decrease)

	2011			2010						2011			2010

	(dollars in millions)

Operating income	$	316.9		$	365.9		$	(49.0	)	$	347.8		$	664.5		$	(316.7	)
Operating income % of net revenues		16.6	%		19.5	%		(2.9	)%		9.3	%		18.1	%		(8.8	)%

Interest Expense, net


	Three Months Ended June 30,				Change Increase (decrease)		Six Months Ended June 30,				Change Increase (decrease)

	2011		2010				2011		2010

	(dollars in millions)
Interest expense, net	$	46.6	$	36.4	$	10.2	$	84.5	$	72.3	$	12.2

Interest expense, net for the three and six months ended June 30, 2011 increased from the prior year period primarily due to incremental debt of approximately $1.3 billion, used to partially fund $835 million of share repurchases and approximately $1 billion paid for acquisitions. In addition, for the three and six months ended June 30, 2011, interest expense, net included $0.8 million and $3.1 million, respectively, of financing commitment fees related to the acquisition of Celera which were expensed. See Note 8 to the interim financial statements for further details regarding our senior notes offering.

Other (Expense) Income, net

Other (expense) income, net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments and other non-operating assets. For the three and six months ended June 30, 2011 and 2010, other (expense) income, net consisted of the following:


	Three Months Ended June 30,						Change Increase (decrease)			Six Months Ended June 30,						Change Increase (decrease)

	2011			2010						2011			2010

	(dollars in millions)
Investment gains (losses) associated with our supplemental deferred compensation plans	$	0.2		$	(3.9	)	$	4.1		$	2.3		$	(1.4	)	$	3.7
(Loss) gain on an investment		—			(3.3	)		3.3			(0.2	)		0.7			(0.9	)
Other (expense) income items, net		(0.5	)		0.1			(0.6	)		(0.2	)		(0.4	)		0.2

Total other (expense) income, net	$	(0.3	)	$	(7.1	)	$	6.8		$	1.9		$	(1.1	)	$	3.0

Income Tax Expense


	Three Months Ended June 30,						Change Increase (decrease)		Six Months Ended June 30,						Change Increase (decrease)

	2011			2010					2011			2010


Effective income tax rate		38.1	%		38.1	%		—		55.2	%		38.1	%		17.1	%

The increase in the effective income tax rate for the six months ended June 30, 2011 is primarily due to the Medi-Cal charge recorded in the first quarter of 2011 associated with the California Lawsuit (see Note 12 to the interim consolidated financial statements), a portion for which a tax benefit has not been recorded.

Discontinued Operations

Loss from discontinued operations, net of taxes, for the three months ended June 30, 2011 and 2010 was $0.5 million and $0.3 million, respectively, with no impact on diluted earnings per share. Loss from discontinued operations for the six months ended June 30, 2011 was $0.9 million, or $0.01 per diluted share. For the six months ended June 30, 2010, loss from discontinued operations was $0.3 million with no impact on diluted earnings per share. See Note 13 to the interim consolidated financial statements for further details.

Quantitative and Qualitative Disclosures About Market Risk

We address our exposure to market risks, principally the market risk of changes in interest rates, through a controlled program of risk management that includes the use of derivative financial instruments. We do not hold or issue derivative financial instruments for trading purposes. We believe that our exposures to foreign exchange impacts and changes in commodity prices are not material to our consolidated financial condition or results of operations. See Note 9 to the interim consolidated financial statements for additional discussion of our financial instruments and hedging activities.

At June 30, 2011 and December 31, 2010, the fair value of our debt was estimated at approximately $4.6 billion and $3.1 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, 2011 and December 31, 2010, the estimated fair value exceeded the carrying value of the debt by $228 million and $80 million, respectively. A hypothetical 10% increase in interest rates (representing 41 basis points and 45 basis points at June 30, 2011 and December 31, 2010, respectively) would potentially reduce the estimated fair value of our debt by approximately $119 million and $89 million at June 30, 2011 and December 31, 2010, respectively.

Borrowings under our floating rate senior notes due 2014, our term loan due May 2012, our senior unsecured revolving credit facility and our secured receivables credit facility are subject to variable interest rates. Interest on our secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly-rated issuers. Interest on our term loan due May 2012 and our senior unsecured revolving credit facility 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. At June 30, 2011, the borrowing rates under these debt instruments were: for our floating rate senior notes due 2014, LIBOR plus 0.85%; for our term loan due May 2012, LIBOR plus 0.40%; for our senior unsecured revolving credit facility, LIBOR plus 0.40%; and for our secured receivables credit facility, 1.10%. At June 30, 2011, the weighted average LIBOR was 0.2%. As of June 30, 2011, $200 million, $742 million, and $85 million were outstanding under our floating rate senior notes due 2014, our term loan due May 2012, and our $525 million secured receivables credit facility, respectively. There were no borrowings outstanding under our $750 million senior unsecured revolving credit facility as of June 30, 2011.

We seek to mitigate the variability in cash outflows that result from changes in interest rates by maintaining a balanced mix of fixed-rate and variable-rate debt obligations. In order to achieve this objective, we have entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net settlements are recognized as an adjustment to interest expense.

In March 2011, we entered into various fixed-to-variable interest rate swap agreements which have a notional amount totaling $200 million and a variable interest rate based on six-month LIBOR plus 0.54%. These derivative financial instruments are accounted for as fair value hedges of a portion of our senior notes due 2016. In addition, in previous years we entered into various fixed-to-variable interest rate swap agreements with a notional amount of $350 million and a variable interest rate based on one-month LIBOR plus 1.33% that were accounted for as fair value hedges of a portion of our senior notes due 2020. Based on our net exposure to interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing 3 basis points) would impact annual interest expense by approximately $0.4 million, assuming no changes to the debt outstanding at June 30, 2011.

The fair value of the fixed-to-variable interest rate swap agreements related to our senior notes due 2016 and our senior notes due 2020 was an asset of $18.9 million at June 30, 2011. A hypothetical 10% change in interest rates (representing 25 basis points) would potentially change the fair value of the asset by $10 million.

For further details regarding our outstanding debt, see Note 10 to the consolidated financial statements included in our 2010 Annual Report on Form 10-K for the year ended December 31, 2010 and Note 8 to the interim consolidated financial statements. For details regarding our financial instruments, see Note 9 to the interim consolidated financial statements.

Risk Associated with Investment Portfolio

Our investment portfolio includes equity investments in publicly held companies that are classified as available-for-sale securities and other strategic equity holdings in privately held companies. These securities are exposed to price fluctuations and are generally concentrated in the life sciences industry. The carrying values of our available-for-sale equity securities and privately held securities were $15.1 million at June 30, 2011.

We regularly evaluate the fair value measurements of our equity investments to determine if losses in value are other than temporary and if an impairment loss has been incurred. The evaluation considers whether the security has the ability to recover and, if so, the estimated recovery period. Other factors that are considered in this evaluation include the amount of the other-than-temporary decline and its duration, the issuer’s financial condition and short-term prospects, and whether the market decline was caused by overall economic conditions or conditions specific to the individual security.

We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings in privately held companies cannot be easily quantified, as our ability to realize returns on investments depends on, among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity events such as initial public offerings, mergers or private sales.

Liquidity and Capital Resources

Cash and Cash Equivalents

Cash and cash equivalents at June 30, 2011 totaled $184 million, compared to $449 million at December 31, 2010. Cash and cash equivalents consist of cash and highly liquid short-term investments. For the six months ended June 30, 2011, cash flows from operating activities of $220 million, together with cash on hand and cash flows from financing activities of $523 million, were used to fund investing activities of $1.0 billion. Cash and cash equivalents at June 30, 2010 totaled $448 million, compared to $534 million at December 31, 2009. For the six months ended June 30, 2010, cash flows from operating activities of $448 million, together with cash on hand, were used to fund investing and financing activities of $92 million and $443 million, respectively.

Cash Flows from Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2011 was $220 million compared to $448 million in the prior year period. For the six months ended June 30, 2011, cash flows from operating activities included the second quarter payment to Medi-Cal, the California Medicaid program, of $241 million in connection with the settlement of the California Lawsuit (see Note 12 to the interim consolidated financial statements), or $194 million net of an associated reduction in second quarter estimated tax payments. In addition, 2011 cash flows from operating activities were reduced by $25 million of payments related to transaction and integration costs associated with the acquisitions of Athena and Celera, or $18 million net of an associated reduction in estimated tax payments. After giving consideration to the net settlement and transaction and integration payments, underlying cash flows from operating activities for the six months ended June 30, 2011 decreased by $16.7 million in comparison to the prior year. This decrease was primarily driven by operating performance and an increase in interest payments, partially offset by a reduction in estimated tax payments. Days sales outstanding, a measure of billing and collection efficiency, were 44 days at both June 30, 2011 and December 31, 2010, compared to 42 days at June 30, 2010.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2011 was $1.0 billion, consisting principally of $740 million related to the acquisition of Athena and $396 million net of cash acquired related to the acquisition of Celera, or $183 million net of cash and $213 million of short-term marketable securities acquired. A liability of $159 million, representing merger consideration related to shares of Celera which had not been surrendered, is included in accounts payable and accrued expenses at June 30, 2011. Proceeds from the sale of the short-term marketable securities, acquired as part of the Celera acquisition, were used to repay borrowings outstanding under our secured receivables credit facility and our unsecured revolving credit facility in the second quarter of 2011. In addition, cash flows from investing activities for the six months ended June 30, 2011 included capital expenditures of $79 million. Net cash used in investing activities for the six months ended June 30, 2010 was $92 million, and consisted principally of capital expenditures.

Cash Flows from Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2011 was $523 million, consisting primarily of net increases in debt of $1.3 billion, and proceeds from the exercise of stock options and related tax benefits totaling $102 million, partially offset by purchases of treasury stock of $835 million, dividend payments of $33 million, distributions to noncontrolling interests of $17 million and $10 million of payments primarily related to debt issuance costs incurred in connection with our senior notes offering in the first quarter of 2011. The net increase in debt consists of $2.4 billion of borrowings and $1.1 billion of repayments.

In February 2011, borrowings of $500 million under our secured receivables credit facility and $75 million under our senior unsecured credit facility, together with $260 million of cash on hand, were used to fund purchases of treasury stock totaling $835 million. In addition, we completed a $1.25 billion senior notes offering in March 2011 (the “2011 Senior Notes”). We used $485 million of the $1.24 billion in net proceeds from the 2011 Senior Notes offering, together with $90 million of cash on hand, to fund the repayment of $500 million outstanding under our secured receivables credit facility, and the repayment of $75 million outstanding under our unsecured revolving credit facility. The remaining portion of the net proceeds from the 2011 Senior Notes offering were used to fund our acquisition of Athena in April 2011 (see Note 4 and Note 8 to the interim financial statements for further details).

During the second quarter of 2011, $585 million and $30 million of borrowings under our secured receivables credit facility and our unsecured revolving credit facility, respectively, together with cash on hand, were used to fund the acquisition of Celera in May 2011 (see Note 4 to the interim financial statements for further details). During the second quarter of 2011, proceeds from the sale of short-term marketable securities acquired as part of the Celera acquisition totaling $214 million, together with cash on hand, were used to fund $500 million and $30 million of debt repayments under our secured receivables credit facility and our unsecured revolving credit facility, respectively.

Net cash used in financing activities for the six months ended June 30, 2010 was $443 million, consisting primarily of purchases of treasury stock totaling $426 million, dividend payments of $36 million and distributions to noncontrolling interests of $17 million, partially offset by $40 million in proceeds from the exercise of stock options, including related tax benefits.

Dividends

During each of the quarters of 2011 and 2010, our Board of Directors declared a quarterly cash dividend of $0.10 per common share. 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 Repurchases

In January 2011, our Board of Directors authorized $750 million of additional share repurchases of our common stock, increasing our total available authorization at that time to $1 billion. The share repurchase authorization has no set expiration or termination date.

For the six months ended June 30, 2011, we repurchased 15.4 million shares of our common stock from SB Holdings Capital Inc., a wholly-owned subsidiary of GlaxoSmithKline plc., at an average price of $54.30 per share for a total of $835 million. At June 30, 2011, $165 million remained available under the share repurchase authorizations.

For the three months ended June 30, 2010, we repurchased 3.3 million shares of our common stock at an average price of $53.36 per share for $175 million. For the six months ended June 30, 2010, we repurchased 7.7 million shares of our common stock at an average price of $55.00 per share for $426 million, including 4.5 million shares purchased in the first quarter at an average price of $56.21 per share for $251 million under an accelerated share repurchase transaction with a bank.

Contractual Obligations and Commitments

The following table summarizes certain of our contractual obligations as of June 30, 2011:


	Payments due by period

	(in thousands)
Contractual Obligations	Total		Remainder of 2011		1-3 years		3-5 years		After 5 years


Outstanding debt	$	4,286,269	$	426,269	$	560,000	$	700,000	$	2,600,000
Capital lease obligations		47,042		4,164		15,941		12,179		14,758
Interest payments on outstanding debt		2,235,864		85,825		308,932		302,872		1,538,235
Operating leases		639,741		96,620		256,605		134,453		152,063
Purchase obligations		71,890		24,997		36,693		9,444		756
Merger consideration obligation		158,560		158,560		—		—		—

Total contractual obligations	$	7,439,366	$	796,435	$	1,178,171	$	1,158,948	$	4,305,812

Interest payments on our long-term debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of June 30, 2011 applied to the June 30, 2011 balances, which are assumed to remain outstanding through their maturity dates.

A full description of the terms of our indebtedness and 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 2010 Annual Report on Form 10-K, as updated in Note 8 to the interim consolidated financial statements. A full discussion and analysis regarding our minimum rental commitments under noncancelable operating leases and noncancelable commitments to purchase product or services at December 31, 2010 is contained in Note 15 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K. See Note 4 to the interim consolidated financial statements for a discussion with respect to merger consideration related to shares of Celera which had not been surrendered as of June 30, 2011.

As of June 30, 2011, our total liabilities associated with unrecognized tax benefits were approximately $213 million, which were excluded from the table above. We believe it is reasonably possible that these liabilities may decrease by up to $26 million within the next twelve months, primarily as a result of the expiration of statutes of limitations, settlements and/or the conclusion of tax examinations on certain tax positions. For the remainder, we cannot make reasonably reliable estimates of the timing of the future payments of these liabilities. See Note 5 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K for information regarding our contingent tax liability reserves.

Our credit agreements and our term loan due May 2012 contain various covenants and conditions, including the maintenance of certain financial ratios, that could impact our ability to, among other things, incur additional indebtedness. As of June 30, 2011, we were in compliance with the various financial covenants included in our credit agreements and 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 equal less than 6% of our consolidated net revenues. Total assets associated with our unconsolidated joint ventures are less than 2% 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 $200 million during 2011 for capital expenditures, including assets under capitalized leases, to support and expand our existing operations, principally related to investments in information technology, equipment and facility upgrades. We expect to fund the repayment of the current portion of our long-term debt using cash on hand and existing credit facilities.

Accounts payable and accrued expenses at June 30, 2011 included a liability of $159 million representing merger consideration related to shares of Celera which had not been surrendered as of June 30, 2011. We expect to fund the payment of the remaining merger consideration with cash on hand and existing credit facilities.

As of June 30, 2011, $1.2 billion of borrowing capacity was available under our existing credit facilities, consisting of $440 million available under our secured receivables credit facility and $750 million available under our senior unsecured revolving credit facility.

We believe the banks participating in our various credit facilities are predominantly highly-rated banks, and that the borrowing capacity under the credit facilities described above is currently available to us. Should one or several banks no longer participate in either of our credit facilities, we would not expect it to impact our ability to fund operations. We expect that we will be able to replace our existing secured receivables credit facility and our senior unsecured revolving credit facility with alternative arrangements prior to their expiration.

We believe that cash and cash equivalents on hand and cash from operations, together with our borrowing capacity under our credit facilities, will provide sufficient financial flexibility to meet seasonal working capital requirements, capital expenditures, debt service requirements and other obligations, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future. We believe that our credit profile 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 May 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting standards related to fair value measurements. In June 2011, the FASB issued an amendment to the accounting standards related to the presentation of comprehensive income. The impact of these accounting standards is discussed in Note 2 to the interim 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. Risks and uncertainties that may affect our future results include, but are not limited to, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors discussed in “Business,” “Risk Factors,” “Cautionary Factors That May Affect Future Results,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk” in our 2010 Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” in our 2011 Quarterly Reports on Form 10-Q and other items throughout the 2010 Form 10-K and our 2011 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness 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). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

During the second quarter of 2011, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 12 to the interim consolidated financial statements for information regarding the status of legal proceedings involving the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the second quarter of 2011.


ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands)

April 1, 2011 – April 30, 2011
Share Repurchase Program (A)		—	$	—		—	$	165,049
Employee Transactions (B)		1,258	$	56.67		N/A		N/A
May 1, 2011 – May 31, 2011
Share Repurchase Program (A)		—	$	—		—	$	165,049
Employee Transactions (B)		3,532	$	57.23		N/A		N/A
June 1, 2011 – June 30, 2011
Share Repurchase Program (A)		—	$	—		—	$	165,049
Employee Transactions (B)		—	$	—		N/A		N/A
Total
Share Repurchase Program (A)		—	$	—		—	$	165,049
Employee Transactions (B)		4,790	$	57.08		N/A		N/A


	(A)	In January 2011, our Board of Directors authorized the Company to repurchase an additional $750 million of the Company’s common stock, increasing the total available authorization at that time to $1 billion. Since the share repurchase program’s inception in May 2003, our Board of Directors has authorized $4.5 billion of share repurchases of our common stock through June 30, 2011. The share repurchase authorization has no set expiration or termination date.

	(B)	Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of stock options (granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Non-Employee Director Long-Term Incentive Plan, collectively the “Stock Compensation Plans”) who exercised options; (2) restricted common shares withheld (under the terms of grants under the Stock Compensation Plans) to offset tax withholding obligations that occur upon vesting and release of the restricted common shares; and (3) shares withheld (under the terms of grants under the Stock Compensation Plans) to offset tax withholding obligations that occur upon the delivery of common shares underlying restricted stock units and performance share units.

Item 6. Exhibits

Exhibits:


	31.1	Rule 13a-14(a) Certification of Chief Executive Officer

	31.2	Rule 13a-14(a) Certification of Chief Financial Officer

	32.1	Section 1350 Certification of Chief Executive Officer

	32.2	Section 1350 Certification of Chief Financial Officer

	101.INS	dgx-20110630.xml

	101.SCH	dgx-20110630.xsd

	101.CAL	dgx-20110630_cal.xml

	101.DEF	dgx-20110630_def.xml

	101.LAB	dgx-20110630_lab.xml

	101.PRE	dgx-20110630_pre.xml

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 27, 2011
Quest Diagnostics Incorporated


By	/s/ Surya N. Mohapatra

	Surya N. Mohapatra, Ph.D. Chairman of the Board, President and Chief Executive Officer

By	/s/ Robert A. Hagemann

	Robert A. Hagemann Senior Vice President and Chief Financial Officer