Quest Diagnostics 2010 Annual Report Download - page 60

Income Tax Expense
2009 2008 Change
(dollars in millions)
Income tax expense . . ............................................................. $460.5 $368.8 $91.7
Effective income tax rate .......................................................... 37.5% 36.8% 0.7%
The increase in income tax expense for the year ended December 31, 2009 compared to the prior year was
primarily due to an increase in income from continuing operations before income taxes of $177.3 million and an
increase in the effective income tax rate. The effective income tax rate for the year ended December 31, 2009
increased compared to the prior year primarily due to the favorable resolution of certain tax contingencies
reflected in the effective income tax rate for 2008. Results for the year ended December 31, 2009 included $7.0
million of income tax benefits, primarily associated with certain discrete tax benefits. Results for the year ended
December 31, 2008 included $16.5 million of income tax benefits, primarily associated with the favorable
resolution of certain tax contingencies.
Discontinued Operations
Loss from discontinued operations, net of taxes, for the year ended December 31, 2009 was $1.2 million, or
$0.01 per diluted share, compared to $51 million, or $0.26 per diluted share, in 2008. During the third quarter of
2008, the Company and NID reached an agreement in principle to settle the previously disclosed federal
government investigation of NID, a test kit subsidiary voluntarily closed in 2006. As a result of the agreement in
principle, during 2008, the Company recorded charges of $75 million in discontinued operations to increase its
reserves for the settlement and related matters. On April 15, 2009, the Company entered into a final settlement
agreement with the federal government and paid $308 million, which had been previously reserved in connection
with the final settlement. See Note 16 to the 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 commodities prices are not material to our consolidated financial condition or results of
operations. See Note 11 to the Consolidated Financial Statements for additional discussion of our financial
instruments and hedging activities.
At December 31, 2010 and 2009, the fair value of our debt was estimated at approximately $3.1 billion and
$3.3 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 December 31, 2010 and 2009, the estimated
fair value exceeded the carrying value of the debt by $80 million and $151 million, respectively. A hypothetical
10% increase in interest rates (representing 45 basis points and 46 basis points at December 31, 2010 and 2009,
respectively) would potentially reduce the estimated fair value of our debt by approximately $89 million and $96
million at December 31, 2010 and 2009, respectively.
Borrowings under our senior unsecured revolving credit facility, our secured receivables credit facility and
our term loan due May 2012 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
rates on our senior unsecured revolving credit facility and term loan due May 2012 are subject to a pricing
schedule that can fluctuate based on changes in our credit ratings. As such, our borrowing cost under these credit
arrangements will be subject to both fluctuations in interest rates and changes in our credit ratings. As of
December 31, 2010, the borrowing rates under these credit facilities were: for our secured receivables credit
facility, 1.16%; for our senior unsecured credit facility, LIBOR plus 0.40%; and for our term loan due May 2012,
LIBOR plus 0.40%. At December 31, 2010, the weighted average LIBOR was 0.26%. At December 31, 2010,
there was $742 million outstanding under our term loan due May 2012 and no borrowings outstanding under our
$750 million senior unsecured revolving credit facility or our $525 million secured receivables credit facility.
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.
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