Quest Diagnostics 2010 Annual Report Download - page 97

Download and view the complete annual report

Please find page 97 of the 2010 Quest Diagnostics annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

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 December 31, 2010. 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 December 31, 2010 in support of certain foreign
operations.
Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect at
December 31, 2010 are as follows:
Year ending December 31,
2011 . . . ................................................................................. $174,094
2012 . . . ................................................................................. 127,333
2013 . . . ................................................................................. 90,606
2014 . . . ................................................................................. 64,856
2015 . . . ................................................................................. 47,796
2016 and thereafter. ...................................................................... 140,673
Minimum lease payments. . ............................................................... 645,358
Noncancelable sub-lease income .......................................................... (4,708)
Net minimum lease payments............................................................. $640,650
Operating lease rental expense for 2010, 2009 and 2008 aggregated $196 million, $189 million and $190
million, respectively. Rent expense associated with operating leases that include scheduled rent increases and
tenant incentives, such as rent holidays, is recorded on a straight-line basis over the term of the lease.
The Company has certain noncancelable commitments to purchase products or services from various
suppliers, mainly for consulting and other service agreements, and standing orders to purchase reagents and other
laboratory supplies. At December 31, 2010, the approximate total future purchase commitments are $92 million,
of which $49 million are expected to be incurred in 2011, $33 million are expected to be incurred in 2012
through 2013 and the balance thereafter.
Contingent Lease Obligations
The Company remains subject to contingent obligations under certain real estate leases that were entered into
by certain predecessor companies of a subsidiary prior to the Company’s acquisition of the subsidiary. While
over the course of many years, the title to the properties and interest in the subject leases have been transferred
to third parties and the subject leases have been amended several times by such third parties, the lessors have not
formally released the subsidiary predecessor companies from their original obligations under the leases and
therefore remain contingently liable in the event of default. The remaining terms of the lease obligations and the
Company’s corresponding indemnifications range from 13 to 37 years. The lease payments under certain leases
are subject to market value adjustments and contingent rental payments and therefore, the total contingent
obligations under the leases cannot be precisely determined but are likely to total several hundred million dollars.
A claim against the Company would be made only upon the current lessee’s default and after a series of claims
and corresponding defaults by third parties that precede the Company in the order of liability. The Company also
has certain indemnification rights from other parties to recover losses in the event of default on the lease
obligations. The Company believes that the likelihood of its performance under these contingent obligations is
remote and no liability has been recorded for any potential payments under the contingent lease obligations.
Legal Matters
The Company is involved in various legal proceedings. Some of the proceedings against the Company
involve claims that are substantial in amount.
In 2006 and 2008, the Company and several of its subsidiaries received subpoenas from the California
Attorney General’s Office seeking documents relating to the Company’s billings to MediCal, 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
F-31
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)