Quest Diagnostics 2011 Annual Report Download - page 105

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Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect at
December 31, 2011 are as follows:
Year ending December 31,
2012 . . . ................................................................................. $174,496
2013 . . . ................................................................................. 131,661
2014 . . . ................................................................................. 96,932
2015 . . . ................................................................................. 70,203
2016 . . . ................................................................................. 48,648
2017 and thereafter. ...................................................................... 116,567
Minimum lease payments. . ............................................................... 638,507
Noncancelable sub-lease income .......................................................... (3,430)
Net minimum lease payments............................................................. $635,077
Operating lease rental expense for 2011, 2010 and 2009 totaled $219 million, $196 million and $189
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, 2011, the approximate total future purchase commitments are $70 million,
of which $31 million are expected to be incurred in 2012, $32 million are expected to be incurred in 2013
through 2014 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 12 to 36 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.
Settlement of California Lawsuit
On May 9, 2011, the Company announced an agreement in principle to settle, and on May 19, 2011, the
Company finalized a settlement of, a qui tam case filed by a competitor under the California False Claims Act in
California state court (the “California Lawsuit”) related to the Company’s practices billing Medi-Cal, the
California Medicaid program. 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 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 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
F-33
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)