Description
Quest Diagnostics Inc. President and CEO STEPHEN H RUSCKOWSKI bought 5,000 shares on 8-07-2012 at $ 59.34
BUSINESS OVERVIEW
OUR STRATEGY AND STRENGTHS
Our mission is to be the undisputed world leader in diagnostic testing, information and services. We are dedicated to improving the health of patients through unsurpassed diagnostic insights and innovation and we focus on patients, growth and people to help achieve our goals.
Growth Strategy. We offer high value diagnostic testing services and products attractive to patients, physicians, payers, employers and others. We believe that successful execution of our strategy will drive continued growth of our business. Additionally, we believe that, over the long term, we will be able to grow at a rate above the U.S. clinical laboratory industry growth rate, and to expand margins. The elements of our growth strategy are described below.
•Leverage our assets and capabilities. We are the world leader in the clinical testing business and the leading cancer diagnostic testing provider. We offer the broadest test menu, with more than 3,000 tests, and are the leading provider in the United States of gene-based and esoteric testing. We offer national access to testing services and have the most extensive clinical testing network in the United States, with testing facilities in major metropolitan areas. We operate a nationwide specimen collection network including approximately 2,000 of our own patient service centers and, in addition, approximately 3,000 phlebotomists in physician offices. We also operate many additional locations globally where thousands of contracted paramedical examiners coordinate the provision of paramedical examinations related to life insurance applications. We provide anatomic pathology services, including inpatient anatomic pathology and medical director services at hospitals, throughout the United States. We have a medical and scientific staff including hundreds of M.D.s and Ph.D.s, primarily located in the United States, many of whom are recognized leaders in their field and are available for consultation. We serve approximately half of the physicians and half of the hospitals in the United States. We have strong logistics capabilities, including courier vehicles and aircraft that collectively make tens of thousands of stops daily. We plan to continue to enhance our test menu and service capabilities. We believe that customers and payers prefer providers that offer a comprehensive and innovative range of tests and services and the most convenient access to those services and that, by offering such services, we will be able to profitably enhance our market position.
•Continue to lead in medical innovation. We are a leading innovator in the clinical testing market with unsurpassed medical and technical expertise. We collaborate with leading academic centers and maintain relationships with advisors and consultants that are leaders in key fields, such as cardiology, oncology, neurology and infectious disease. In connection with our research and development efforts, our medical and scientific experts publish in peer-reviewed journals research that demonstrates the clinical value and importance of diagnostic testing. In 2011, we published over fifty articles that support advancements and the latest thinking in laboratory testing and disease diagnosis. Over the past several years, we have expanded our business in more complex and faster-growing testing areas, including gene-based and esoteric testing and diagnostics products.
We see significant opportunity to use diagnostics for personalized medicine and, as a result of combining the resources we gained through our 2011 acquisition of Celera Corporation with our other assets, can offer an “end to end” array of services for companion diagnostics. We have expertise dealing with biomarkers in clinical trials, have biomarker discovery capabilities, and can make available laboratory developed tests, in vitro diagnostics (“IVD”) test kits and late-stage commercialization support for companion diagnostics for new therapies that will foster personalized patient treatment. For example, in 2012, the FDA granted our de novo classification petition for our STRATIFY JCV TM Antibody ELISA testing service. It is the first blood test to be FDA market authorized for the qualitative detection of antibodies to the polyomavirus JC virus for stratifying risk for progressive multifocal leukoencephalopathy, an infrequent but serious brain infection, in patients with multiple sclerosis receiving TYSABRI ® , a therapy for relapsing forms of multiple sclerosis. STRATIFY JCV TM , which was developed under an exclusive collaboration for the United States market with the co-manufacturer of TYSABRI ® , is to be performed only at Focus Diagnostics.
We continue to introduce new tests, technology and services, including many with a focus on personalized and targeted medicine. For example, in 2011, we introduced our AccuType ® IL28b, a test designed to aid in the prediction of patient response to the widely-used peginterferon alpha-based therapy for treating hepatitis C virus infection. In addition, as an industry leader with the largest and broadest U.S. network and presence outside the United States, we believe we are the distribution channel of choice for developers of new tests to introduce their products to the marketplace. Through our relationships with the academic medical community and pharmaceutical and biotechnology firms, we believe that we are a leader in bringing technical innovation to the market.
•Provide leading healthcare information technology solutions . We provide interoperable technologies that help healthcare organizations and physicians enter, share and access clinical information without costly IT implementation or significant workflow disruption, including through our Care360 ® suite of products and our ChartMaxx ® electronic document management system for hospitals. These solutions offer access to a large national healthcare provider network, including approximately 200,000 networked physicians and clinicians using Quest Diagnostics’ Care360 connectivity products. The Care360 products, including Care360 Labs and Meds, enable physicians electronically to order diagnostic tests and review test results from Quest Diagnostics and electronically to prescribe medications. Our Care360 EHR product, which is certified as a complete electronic health record by the Certification Commission for Health Information Technology, allows physicians to generate a complete record of a clinical patient encounter, automates and streamlines the clinician’s workflow, and allows for rapid deployment and implementation with minimal workflow disruption. We believe that these products enhance the value we provide to our customers and result in increased customer loyalty by providing more convenient ordering and reporting of clinical tests, greater convenience in electronically prescribing medication and better access to clinical information.
We are a leader in providing patients with tools to manage their healthcare and medical information. Our automated patient appointment scheduling enables patients to schedule appointments, including via mobile devices, at times that are convenient for them while reducing or eliminating their waiting time. We also offer TestMinder ® , which sends email reminders to patients who require frequent testing, and Gazelle ® , a secure mobile health platform that allows users to receive their Quest Diagnostics laboratory results, manage their personal health information, find a Quest Diagnostics location and schedule appointments directly from their smartphone.
•Continuously drive Six Sigma quality and deliver a positive patient experience. We strive to provide the highest quality in all that we do. We use Six Sigma and Lean processes to continuously reduce defects, enhance quality and further increase the efficiency of our operations. Six Sigma is a management approach that utilizes a thorough understanding of customer needs and requirements, root cause analysis, process improvements and rigorous tracking and measuring to enhance quality. Lean is a management approach that seeks to streamline processes and eliminate waste. We also use Six Sigma and Lean principles to help standardize operations and processes across our Company and identify and adopt best practices. We believe our use of Six Sigma and Lean results in superior service to our customers and drives customer loyalty. The patient is at the center of everything we do. Patients have a choice when it comes to selecting a healthcare provider and we strive to give patients reason to put their trust in us. We have made significant investments in training our employees to provide a positive patient experience. We believe that this will drive patient and physician loyalty.
•Expand our diagnostic scope. Technology advances are enabling testing to move closer to the patient and point-of-care, or near-patient, tests are becoming increasingly available and reliable. This enables more timely and effective decisions, with the opportunity to improve patient care and reduce medical costs. We have businesses, including HemoCue, Celera and Focus Diagnostics, which offer diagnostics products, including point-of-care testing. We intend to expand our product menus and develop novel technology platforms and systems to meet the needs of our clients. We are well positioned to offer choice and integrated solutions to physicians, hospitals, clinics and retail customers for the testing methods that are most appropriate for each patient and practice.
Shareholder Focus.
We are focused on increasing shareholder returns and returns on invested capital (“ROIC”) through a framework that encompasses improving operating performance and disciplined capital deployment. To improve our operating performance, we are taking steps to accelerate organic revenue growth and to reduce our operating costs. We have launched a program to reduce our operating costs by $500 million by the end of 2014.
Our disciplined capital deployment framework includes dividends, share repurchases and investment in our business and is intended to improve ROIC. The framework is grounded in maintaining an investment grade credit rating. In 2012, the Company expects to use the majority of its free cash flow to reduce its outstanding debt and achieve a debt/EBITDA ratio in the range of 2 – 2¼ times. Upon achieving our targeted leverage ratio, we expect to return to investors through a combination of dividends and share repurchases a majority of our free cash flow. Consistent with that expectation, we increased our quarterly common stock dividend by 70%, from $0.10 per share to $0.17 per share, in January 2012. We expect that the dividend will grow over time commensurate with earnings and cash flows.
We will continue to invest in our business in a disciplined manner which should require significantly less capital than in recent years. As a result of our 2011 acquisitions of Athena Diagnostics and Celera, we believe that we have established a solid foundation of strategic assets and capabilities, and that it is unlikely that we will complete any large strategic acquisitions in the near term. Our near-term investments are likely to focus on smaller fold-in acquisitions; investments in science and innovation in the form of licensing, collaborations and internal development; and investments in technology that will improve quality and efficiency in our laboratories and in other parts of our business. We anticipate that selective acquisitions will enable us to add capabilities and further strengthen our access and distribution.
Healthcare Information Technology. We provide interoperable technologies that help healthcare organizations and physicians enter, share and access clinical information without costly IT implementation or significant workflow disruption, including through our Care360 ® suite of products and our ChartMaxx ® electronic document management system for hospitals. These solutions offer access to a large national healthcare provider network, including approximately 200,000 networked physicians and clinicians using Quest Diagnostics’ Care360 connectivity products. We believe that these products enhance the value we provide to our customers and result in increased customer loyalty by providing more convenient ordering and reporting of clinical tests, greater convenience in electronically prescribing medication and providing better access to clinical information. We believe that our healthcare information technology capabilities differentiate us from the competition.
The Care360 products, including our Care360 Labs and Meds, enable physicians electronically to order diagnostic tests and review test results from Quest Diagnostics and electronically to prescribe medication. At the end of 2011, prescriptions were written through Care360 ePrescribing at an annualized rate of 32 million medications. Our Care360 EHR product, which is certified as a complete electronic health record by the Certification Commission for Health Information Technology, allows physicians to generate a complete record of a clinical patient encounter, automates and streamlines the clinician’s workflow, and allows for rapid deployment and implementation with minimal workflow disruption. The solution allows doctors to electronically create, manage and distribute patient encounter notes, including vital signs and progress notes. It captures lab and radiology results, provides clinical decision support tools and allows doctors to send secure messages and clinical information to other practitioners and secure, Web-based laboratory results to their patients’ personal health records. Physicians also take advantage of our new Care360 Mobile application that lets them review results and order medications using their smartphones or mobile devices. Care360 was named the top stand-alone e-Prescribing system of 2011 by Black Book Rankings.
In 2011, for the eighth time in the past ten years, ChartMaxx was awarded the Best in KLAS award for the document management and imaging category. It is being used by over 400,000 clinical and administrative users in hospitals and other clinical locations. Our Care360 Data Exchange is the delivery mechanism for clinical transactions, including bi-directional transmission of orders and results involving the acute care and ambulatory settings.
We are a leader in providing patients with advanced tools to manage their health. Using our Care360 connectivity products, physicians can securely provide diagnostic and other data to a patient’s account. We offer Gazelle ® , a secure mobile health platform that allows users to receive their Quest Diagnostics laboratory results, manage their personal health information, find a Quest Diagnostics location and schedule appointments directly from their smartphone.
Clinical Trials Testing. We believe that we are the second largest provider of central laboratory testing performed in connection with clinical research trials on new drugs, vaccines and certain medical devices. Clinical research trials are required by the FDA and non-U.S. international regulatory authorities to assess the safety and efficacy of new drugs, vaccines and some medical devices. We see opportunities to develop pharmacogenetic and pharmacogenomic tests to help speed drug approval processes for our clinical trials customers and, capitalizing on the trend to personalized medicine, to better focus patient therapy based on a patient’s genetic markers. We have biomarker capabilities that advance our efforts to develop these tests. In 2011, we acquired Celera, enhancing our ability to provide biomarker discovery and develop IVD test kits. As a result, we now offer an “end to end” array of services for companion diagnostics.
We have clinical trials testing centers in the United States, the United Kingdom and India, and we provide clinical trials testing in Argentina, Brazil, China and Singapore through affiliated laboratories. We serve most of the major pharmaceutical companies.
Life Insurer Services. We are the largest provider of risk assessment services to the life insurance industry in North America. We also provide risk assessment services for insurance companies doing business in many countries outside the United States.
Our risk assessment services comprise underwriting support services to the life insurance industry, including laboratory testing, electronic data collection, specimen collection and paramedical examinations, medical record retrieval, case management, motor vehicle reports, telephone inspections, prescription histories and credit checks. The laboratory tests that we perform and data we gather are designed to assist insurance companies to objectively evaluate the mortality risks of policy applicants. The majority of the testing is performed on specimens of life insurance applicants, but also includes specimens of applicants for other types of insurance. Factors such as the number of applications for underwritten life insurance policies can affect the utilization of clinical testing and other services we provide to our insurance customers. Most of our specimen collections and paramedical examinations are performed by our network of approximately 5,000 contracted paramedical examiners at the applicant’s home or workplace. We also offer paramedical examinations through approximately 500 of our patient service centers, and operate approximately 80 locations other than patient service centers in the United States and Canada where we provide paramedical examinations, bringing to approximately 580 the total number of sites where we can provide these examinations. We also contract with third parties at over an additional 200 locations globally to coordinate providing these exams.
We seek to grow our risk assessment services revenues by increasing our market share and by offering new and innovative laboratory tests, data collection and analytics and other services. For example, in 2011, we were the first in the industry to offer on-line lab results to life insurance applicants. We charge our life insurance customers on a fee-for-service basis, typically under multi-year agreements.
Employer Services. We believe that we are a leading provider of testing to employers for the detection of employee use of drugs of abuse. Our Quest Diagnostics Drug Testing Index TM , which is an annual report of our aggregate drug testing results, is used by employers, the federal government and the media to help identify and quantify drug abuse among the nation’s workforce.
We provide a full range of solutions for drugs of abuse, including urine, hair, blood and oral fluid tests. We regularly look for opportunities to enhance our test offerings. In 2011, we introduced Oral-Eze ® , our own innovative oral fluid collection system that simplifies the collection of oral samples for routine drug testing. The Oral-Eze ® Oral Fluid Collector provides all the advantages of previous collection systems, with the added benefit of our indicator window technology.
As healthcare costs have increased, so has the value of preventive care. Employers grappling with rising healthcare costs increasingly use wellness screening as a key tool to reduce their healthcare costs and the healthcare risks of their employees. We provide wellness testing and analytic services to employers to enable them and their employees to take an active role in improving their health and empower employers with aggregated health information. Our Blueprint for Wellness ® program offers employers actionable data to power their health improvement and cost containment programs. We are leveraging our patient service centers and paramedical examiner network to deliver wellness screening nationwide. We also are exploring offering Blueprint for Wellness ® through additional channels.
Diagnostic Products, Including Point-of-care, or Near-patient, Testing. Technology advances are enabling testing to move closer to the patient and are becoming increasingly available, accurate and cost effective. Over time, some testing that is now done in clinical laboratories will cease to be performed in clinical laboratories and will be performed closer to the patient. We believe that our point-of-care testing strategy will strengthen our relationship with our customers by enabling us to offer more solutions that improve the effectiveness of our customers and the care of their patients by enabling faster diagnosis and treatment. We are well positioned to offer options and integrated solutions to physicians, hospitals and clinics for the testing methods that are most appropriate for each patient and practice.
We develop and manufacture products that enable healthcare professionals to make healthcare diagnoses, including products for point-of-care, or near-patient, testing for the professional market. We have several companies, including Focus Diagnostics, HemoCue and Celera, that enhance our offerings and better enable us to serve these markets.
Focus Diagnostics ® is a leading provider of infectious disease testing that has established a reputation for being first to introduce new tests to the market, including diagnostic tests for Lyme disease, West Nile Virus, SARS and, most recently, H1N1. Focus Diagnostics develops, manufactures and markets diagnostic products, such as HerpeSelect ® ELISA tests that detect patient antibodies to specific types of herpes simplex virus, which can be performed on a variety of instrument platforms. Focus Diagnostics sells its diagnostic products to large academic medical centers, hospitals and commercial laboratories globally. Focus Diagnostics has an agreement with 3M Corporation for global human diagnostic rights to a compact integrated bench-top instrument for use with real time polymerase chain reaction (“PCR”) assays. These tests are sold under the Simplexa ® brand name. In 2011, Focus Diagnostics received the CE mark to offer several new Simplexa tests in Europe, including tests for Cytomegalovirus, Epstein Barr virus, BK virus and clostridium difficile . Focus Diagnostics now offers one of the most comprehensive molecular transplant-testing menus in Europe. Focus Diagnostics also registered the Simplexa Dengue molecular test with the National Agency of Sanitary Vigilance, an office of Brazil’s federal government, for use in public and private health testing in Brazil. In 2011, Focus Diagnostics received FDA 510(k) clearance for its Simplexa test offering for Flu A/B/RSV. In 2011, the Simplexa/3M technology won a gold Medical Design Excellence Award in the IVD category and an Edison award for new science and medical diagnostics product. We intend to develop and pursue FDA clearance and CE marking for additional Simplexa TM tests.
HemoCue ® innovates, manufactures and distributes point-of-care testing products globally. HemoCue is the leading global provider in point-of-care testing for hemoglobin, with a growing market share for glucose, microalbumin and white blood cell testing. HemoCue offers its White Blood Cell Differential System in Europe, and plans in 2012 to seek 510(k) clearance and waived status under the Clinical Laboratory Improvement Amendments (“CLIA”) for this product which, if granted, would permit physicians to use these products in a much larger segment of physician offices. The HemoCue handheld systems are used in physician’s offices, blood banks, hospitals, diabetes clinics and public health clinics. Approximately sixty percent of HemoCue products are sold outside the United States.
Celera offers a number of market leading high complexity molecular diagnostic products in segments such as HIV-1 drug resistance testing, reproductive genetics, transplantation and cardiovascular genetics. Celera products, which are distributed by a third party worldwide, span the various levels of regulatory registrations and are sold to a broad spectrum of customers who require high quality and regulatory approved products. We also manufacture and offer the InSure ® fecal immunochemical test (FIT TM ) for screening for colorectal cancer.
International. We have laboratory facilities in Gurgaon, India; Heston, England; Mexico City, Mexico; and San Juan, Puerto Rico. These laboratories support clinical testing in their local markets, and also may support our clinical trials business. We have an office in Ireland that supports our activities in that country, and also have sales representatives dedicated to offering our diagnostic test products in countries outside the United States. We see opportunities to bring our experience and expertise in diagnostic testing and point-of-care products to international markets, particularly developing countries where the testing markets are highly fragmented and less mature, including by leveraging existing facilities to serve new markets.
CEO BACKGROUND
Jenne K. Britell, Ph.D., 69, joined Brock Capital Group LLC in March 2010 as a Senior Managing Director, advising companies and investors regarding strategy, acquisitions and asset deployment, including in connection with financial services. From 2001 to 2009, she was the Chairman and Chief Executive Officer of Structured Ventures, Inc., which advised domestic and foreign companies on financial services products and strategy. From 1996 to 2000, she was a senior officer of GE Capital, serving as President of GE Capital Global Commercial & Mortgage Banking and Executive Vice President of GE Capital Global Consumer Finance from 1999 to 2000 and serving as President and Chief Executive Officer of GE Capital Central and Eastern Europe from 1998 to mid-1999. Dr. Britell is the non-executive chair of United Rentals, Inc. and a director of Crown Holdings, Inc. She is a member of the Council on Foreign Relations, a trustee of the Fox Chase Cancer Center and a director of the U.S. Russia Foundation for Entrepreneurship and the Rule of Law and the U.S. Russia Investment Fund. Dr. Britell served as a director of Lincoln National Corporation from 2001 to 2006, of West Pharmaceuticals Corporation from 2005 until 2008 and of Aames Investment Corporation from 2001 until 2006. She has been a director of Quest Diagnostics since August 2005. She has extensive executive and advisory experience, including in corporate finance, capital markets, international business and strategic planning, with multinational corporations operating in complex, regulated industries.
Gail R. Wilensky, Ph.D., 68, is a Senior Fellow at Project HOPE, an international non-profit health foundation, which she joined in 1993. From 2008 through 2009, Dr. Wilensky served as President of the Defense Health Board, an advisory board in the Department of Defense. From 1997 to 2001, she was the chair of the Medicare Payment Advisory Commission. From 1995 to 1997, she chaired the Physician Payment Review Commission. In 1992 and 1993, Dr. Wilensky served as a deputy assistant to the President of the United States for policy development relating to health and welfare issues. From 1990 to 1992, she was the administrator of the Health Care Financing Administration where she directed the Medicare and Medicaid programs. Dr. Wilensky is a director of UnitedHealthcare Corporation. She served as a director of Manor Care Inc. from 1998 until 2007, Gentiva Health Services, Inc. from 2000 until 2009, Cephalon Inc. from 2002 to 2011 and SRA International, Inc. from 2006 to 2011. Dr. Wilensky also served as a Commissioner of the World Health Organization’s Commission on the Social Determinants of Health and as the Non-Department Co-Chair of the Defense Department’s Task Force on the Future of Military Health Care. She has been a director of Quest Diagnostics since January 1997. Dr. Wilensky has extensive experience, including in strategic planning, as a senior advisor to the U.S. government and private enterprises regarding healthcare issues and the operation of the U.S. healthcare system.
John B. Ziegler, 66, retired in January 2006 as the President, Worldwide Consumer Healthcare, of GlaxoSmithKline plc. He joined a predecessor company of GlaxoSmithKline in 1991, and held positions of increasing responsibility during his tenure. He has been a director of Quest Diagnostics since May 2000. He has extensive executive experience, including in sales, marketing, strategic planning and international operations, with multinational corporations operating in the healthcare industry.
John C. Baldwin, M.D., 63, is Senior Advisor for Health Affairs to the Texas Tech University System and a tenured professor. He oversees health research, education, and accreditation issues for the university. From 2007 to 2009, he served as President of Texas Tech University Health Sciences Center. From 2005 to 2007, he was President and Chief Executive Officer of CBR Institute for Biomedical Research. From 1998 to 2005, Dr. Baldwin was the Associate Provost for Health Affairs at Dartmouth College and Professor of Surgery at Dartmouth Medical School. From 1994 to 1998, Dr. Baldwin was the head of the surgical programs at Baylor College of Medicine and its affiliated hospitals. Dr. Baldwin was also the Governor of the American College of Surgeons from 1991 through 1997 and the President of the International Society of Cardiothoracic Surgeons in 1999. Dr. Baldwin has served as the Vice-Chair of the Board of Overseers of Harvard University. Dr. Baldwin served as a director of Massey Energy Company from 2004 until 2006. He has been a director of Quest Diagnostics since May 2004. Dr. Baldwin has extensive executive experience, including in strategic planning, with major organizations, and extensive experience with healthcare issues and the operation of the U.S. healthcare system, including as a practicing physician.
Surya N. Mohapatra, Ph.D., 62, is Chairman of the Board, President and Chief Executive Officer of Quest Diagnostics. Prior to joining the Company in February 1999 as Senior Vice President and Chief Operating Officer, he was Senior Vice President of Picker International, a worldwide leader in advanced medical imaging technologies, where he served in various executive positions during his 18-year tenure. Dr. Mohapatra was appointed President and Chief Operating Officer of the Company in June 1999, Chief Executive Officer in May 2004, and Chairman of the Board in December 2004. Dr. Mohapatra also is a director of Xylem Inc., a Trustee of The Rockefeller University and a member of the Corporate Advisory Board of Johns Hopkins Carey Business School. Dr. Mohapatra served as a director of ITT Corporation from 2008 to October 2011 and Vasogen, Inc. from 2002 to 2006. He has been a director of Quest Diagnostics since October 2002. Dr. Mohapatra has experience at Quest Diagnostics, including as President and Chief Executive Officer, that provides him unique insights into the Company’s operations, challenges and opportunities, and he has extensive executive experience in international operations and medical diagnostics.
Gary M. Pfeiffer, 62, retired in 2006 as the Senior Vice President and Chief Financial Officer of E.I. du Pont de Nemours and Company. He joined DuPont in 1974, where he held positions of increasing responsibility in finance and international operations, as well as in various DuPont divisions. Mr. Pfeiffer served as Secretary of Finance for the state of Delaware from January through June 2009. Mr. Pfeiffer is a director of InterNAP Network Services Corporation and the non-executive chair of the board of Talbots, Inc. He is the non-executive Chair of the Board of Directors of Christiana Care Health System, a regional hospital system located in Delaware, and serves on the advisory board of Greentech Capital Advisors, LLC. Mr. Pfeiffer has been a director of Quest Diagnostics since December 2004. He has extensive executive experience, including in corporate finance, accounting, international operations, and strategic planning, with a multinational corporation operating in complex industries.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Our Company
Quest Diagnostics is the world's leading provider of diagnostic testing, information and services, providing insights that enable patients and physicians to make better healthcare decisions. Our clinical testing business currently represents our one reportable business segment and accounted for greater than 90% of our net revenues from continuing operations in both 2012 and 2011. 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 13 to the interim consolidated financial statements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. There have been no significant changes to our critical accounting policies from those disclosed in our 2011 Annual Report on Form 10-K.
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.
We are engaged in a multi-year program designed to deliver $500 million in run rate cost savings versus 2011 by the time we exit 2014. We anticipate that this program, which we now call Invigorate, will deliver approximately 20% of our $500 million goal as we exit 2012, with the remainder in 2013 and 2014. This effort is intended to address continued reimbursement pressures and labor and benefit cost increases, free up additional resources to invest in science, innovation and other growth initiatives, and enable us to improve operating profitability and quality. We anticipate roughly one-third of the savings from client support/billing, procurement and supply chain; one-third from laboratory operations and specimen acquisition; and one-third from selling, general and administrative expenses, including information technology. Common themes across many of the opportunities include standardizing systems and processes and data bases, increased use of automation and technology, and centralizing and selective outsourcing of certain activities.
We have developed high-level estimates of the pre-tax charges expected to be incurred in connection with the course of action totaling $100 million to $175 million through 2014 consisting of: $40 million to $80 million of employee separation costs; $30 million to $45 million of facility-related costs; $10 million to $20 million of asset impairment charges; and $20 million to $30 million of systems conversion and integration costs. Of the total estimated pre-tax charges expected to be incurred, we estimate that $90 million to $155 million are anticipated to result in cash expenditures. The actual charges incurred in connection with the multi-year course of action could be materially different from these estimates. As detailed plans to implement the multi-year course of action are approved and executed, it will result in charges to earnings.
In connection with our Invigorate program, we launched a voluntary retirement program to certain eligible employees that qualified for the program. Of the total estimated pre-tax charges for employee separation costs noted above, we expect to incur approximately $50 million in connection with the voluntary retirement program over the next several quarters. We estimate that the voluntary retirement program will contribute approximately $40 million of annualized savings once fully implemented, which we expect in the first quarter of 2013.
Net Revenues
Net revenues for the three months ended June 30, 2012 were 0.2% above the prior year level with the Celera and S.E.D. acquisitions contributing 0.8% 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, 2012 compared to the prior year period. The acquisitions of Celera and S.E.D. contributed about half a percent to clinical testing revenue growth in the quarter. Clinical testing volume, measured by the number of requisitions, increased 0.7% for the second quarter of 2012 , compared to the prior year period. This increase was primarily driven by the acquisitions of Celera and S.E.D., and the continued growth of pre-employment drug testing, which increased about 5% in the quarter.
Revenue per requisition for the three months ended June 30, 2012 was essentially unchanged from the prior year level. Revenue per requisition benefited from an increase in the number of tests ordered per requisition, and was offset by reimbursement changes, and business and payor mix changes including an increase in lower priced drugs-of-abuse testing, and a decrease in higher priced anatomic pathology testing.
Net revenues for the six months ended June 30, 2012 were 3.2% above the prior year level with the Athena, Celera and S.E.D. acquisitions contributing approximately 2% to consolidated revenue growth.
Clinical testing revenue increased 3.5% for the six months ended June 30, 2012 compared to the prior year period. The acquisitions of Athena, Celera and S.E.D. contributed about 1.7% to clinical testing revenue growth during the period. Clinical testing volume, measured by the number of requisitions, increased 2.0% compared to the prior year period. We estimate that the impact of weather favorably affected the year-over-year volume comparisons by about 1%, and acquisitions contributed about 0.5%. After considering the favorable impact of weather and acquisitions, underlying volume growth was about 0.5%. Pre-employment drug testing volume grew about 5% during the six months ended June 30, 2012 .
Revenue per requisition for the six months ended June 30, 2012 was 1.4% above the prior year period. Revenue per requisition continued to benefit from an increased mix in gene-based and esoteric testing, particularly from the impact of the acquired operations of Athena and Celera. Partially offsetting this benefit were reimbursement changes, and business and payor mix changes including an increase in lower priced drugs-of-abuse testing, and a decrease in higher priced anatomic pathology testing.
Our businesses other than clinical laboratory testing accounted for approximately 9% of our net revenues for the three and six months ended June 30, 2012 and 2011 . These businesses contain most of our international operations and include our risk assessment services, clinical trials testing, healthcare information technology and diagnostic products businesses. For the three months ended June 30, 2012 , combined revenues in these businesses decreased by approximately 5%, compared to the prior year period. For the six months ended June 30, 2012 , combined revenues in these businesses approximated the prior year level. Increased revenues associated with our diagnostics products operations acquired as part of the Celera acquisition offset an approximate 5% reduction in revenues among our other non-clinical testing businesses.
Results for the six months ended June 30, 2012 included costs of $25.7 million, primarily associated with professional fees and workforce reductions incurred in connection with further restructuring and integrating our business ($8.6 million in cost of services and $17.1 million in selling, general and administrative expenses). In addition, $10.1 million of pre-tax charges, associated with separation costs and accelerated vesting of certain equity awards in connection with the succession of our prior CEO, were recorded in selling, general and administrative expenses in 2012.
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 included $19.4 million of restructuring and integration charges, principally associated with workforce reductions ($9.0 million in cost of services and $10.4 million in selling, general and administrative expenses). Results for the six months ended June 30, 2011 also included pre-tax transaction costs of $16.6 million associated with the acquisitions of Athena and Celera, primarily related to professional fees, which were recorded in selling, general and administrative expenses.
Cost of Services
The increase in cost of services as a percentage of net revenues for the three months ended June 30, 2012 , compared to the prior year period, is principally associated with costs associated with workforce reductions. Higher costs associated with employee compensation and benefits were essentially offset by the impact of actions we have taken to reduce our cost structure.
The decrease in cost of services as a percentage of net revenues for the six months ended June 30, 2012 , compared to the prior year period, primarily reflects the impact of actions we have taken to reduce our cost structure, and the impact of the acquired operations of Athena and Celera which serve to reduce the percentage. In addition, severe weather in 2011, which served to reduce revenues and increase costs as a percentage of revenues, contributed to higher cost of services as a percentage of revenues in 2011 compared to the current year period.
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses as a percentage of net revenues for the three months ended June 30, 2012 , compared to the prior year period, primarily reflects the transaction costs associated with the Athena and Celera acquisitions that were incurred during the second quarter of 2011, and actions we have taken to reduce our cost structure. This improvement was partially offset by costs incurred in connection with the succession of our prior CEO and a $1.9 million increase in pre-tax charges associated with restructuring and integration costs.
The increase in selling, general and administrative expenses as a percentage of net revenues for the six months ended June 30, 2012 , compared to the prior year period, primarily reflects the impact of the acquired operations of Athena and Celera, costs incurred in connection with the succession of our prior CEO, and a $6.7 million increase in pre-tax charges associated with restructuring and integration costs. These increases were partially offset by actions we have taken to reduce our cost structure, and the favorable impact on the year over year comparisons due to the severe weather in 2011, and the transaction costs associated with the Athena and Celera acquisitions that were incurred during the 2011.
Amortization of Intangible Assets
The increase in amortization of intangible assets for the three and six months ended June 30, 2012 , compared to the prior year period, primarily reflects the impact of amortization of intangible assets acquired as part of the Athena, Celera and S.E.D. acquisitions.
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 speculative 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 8 to the interim consolidated financial statements for additional discussion of our financial instruments and hedging activities.
At June 30, 2012 and December 31, 2011 , the fair value of our debt was estimated at approximately $4.3 billion and $4.4 billion , respectively, using quoted active 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, 2012 and December 31, 2011 , the estimated fair value exceeded the carrying value of the debt by $500 million and $387 million , respectively. A hypothetical 10% increase in interest rates (representing 44 basis points and 41 basis points at June 30, 2012 and December 31, 2011 , respectively) would potentially reduce the estimated fair value of our debt by approximately $102 million and $112 million at June 30, 2012 and December 31, 2011 , respectively.
Borrowings under our floating rate senior notes due 2014, 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 senior unsecured revolving credit facility is subject to a pricing schedule that can fluctuate based on changes in our credit ratings. As such, our borrowing cost under this credit arrangement will be subject to both fluctuations in interest rates and changes in our credit ratings. At June 30, 2012 , the borrowing rates under these debt instruments were: for our floating rate senior notes due 2014, LIBOR plus 0.85%; for our senior unsecured revolving credit facility, LIBOR plus 1.125%; and for our secured receivables credit facility, 0.96%. At June 30, 2012 , the weighted average LIBOR was 0.5%. As of June 30, 2012 , $200 million was outstanding under our floating rate senior notes due 2014 and $435 million was outstanding under our $525 million secured receivables credit facility. There were no borrowings outstanding under our $750 million senior unsecured revolving credit facility as of June 30, 2012 .
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 4 basis points) would impact annual interest expense by approximately $0.5 million , assuming no changes to the debt outstanding at June 30, 2012 .
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 $65.2 million at June 30, 2012 . A hypothetical 10% change in interest rates (representing 10 basis points) would potentially change the fair value of the asset by approximately $4.0 million . In July 2012, we monetized the asset associated with these interest rate swap agreements by terminating the agreements, and entered into new fixed-to-variable interest rate swap agreements. As a result of this termination, we received proceeds of $71.8 million, which will be amortized as a reduction of interest expense over the remaining term of the hedged debt instruments.
The new agreements entered into in July 2012 include: fixed-to-variable interest rate swap agreements with a notional amount of $200 million and a variable interest rate based on six-month LIBOR plus 2.33% that are accounted for as fair value hedges of a portion of our senior notes due 2016; and 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 3.56% that are accounted for as fair value hedges of a portion of our senior notes due 2020.
For further details regarding our outstanding debt, see Note 11 to the Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011 . For details regarding our financial instruments, see Note 8 to the interim consolidated financial statements.
Risk Associated with Investment Portfolio
Our investment portfolio includes equity investments comprised primarily of 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 value of our equity investments was $12.6 million at June 30, 2012 .
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, 2012 totaled $174 million , compared to $165 million at December 31, 2011 . Cash and cash equivalents consist of cash and highly liquid short-term investments. For the six months ended June 30, 2012 , cash flows from operating activities of $412 million were used to fund investing and financing activities of $131 million and $273 million , respectively. Cash and cash equivalents at June 30, 2011 totaled $184 million compared to $449 million at December 31, 2010 . 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 Flows from Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2012 was $412 million compared to $220 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 (see Note 5 to the interim consolidated financial statements), or $194 million net of an associated reduction in second quarter estimated tax payments. Days sales outstanding, a measure of billing and collection efficiency, was 44 days at June 30, 2012 , compared to 45 days at December 31, 2011 and 44 days at June 30, 2011 .
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2012 was $131 million , and consisted principally of $50.5 million related to the S.E.D. acquisition and capital expenditures of $77 million .
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, was 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 senior 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 .
Cash Flows from Financing Activities
Net cash used in financing activities for the six months ended June 30, 2012 was $273 million , consisting primarily of net decreases in debt of $215 million, purchases of treasury stock of $100 million , dividend payments of $54 million and distributions to noncontrolling interests of $16 million . These decreases were partially offset by proceeds from the exercise of stock options and related tax benefits totaling $95 million. The net decrease in debt consists of $685 million of borrowings and $900 million of repayments.
For the six months ended June 30, 2012 , net borrowings of $350 million under our secured receivables credit facility, together with $210 million of cash on hand, were used to fund repayments of $560 million under our term loan due May 2012. The net borrowings under our secured receivables credit facility consist of $685 million of borrowings and $335 million of repayments.
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.
In February 2011, borrowings of $500 million under our secured receivables credit facility and $75 million under our senior unsecured revolving 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 senior 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 on April 4, 2011. The 2011 Senior Notes are further described in Note 11 to the Consolidated Financial Statements in our 2011 Annual Report on Form 10-K.
During the second quarter of 2011, $585 million and $30 million of borrowings under our secured receivables credit facility and our senior unsecured revolving credit facility, respectively, together with cash on hand, were used to fund the acquisition of Celera in May 2011. 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 senior unsecured revolving credit facility, respectively.
Dividends
During each of the first three quarters of 2011 , our Board of Directors declared a quarterly cash dividend of $0.10 per common share and in October 2011, declared an increase in the quarterly cash dividend from $0.10 per common share to $0.17 per common share. During each of the quarters in 2012, our Board of Directors declared a quarterly cash dividend of $0.17 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.
CONF CALL
Kathleen Valentine
Thank you, and good morning. I am here with Steve Rusckowski, our President and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer. During this call, we may make forward-looking statements. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in Quest Diagnostics' 2011 Annual Report on Form 10-K, 2012 quarterly reports on Form 10-Q and current reports on Form 8-K.
A copy of our earnings press release is available, and the text of our prepared remarks will be available later today in the Investor Relations Quarterly Update section of our website at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on the website.
Now here is Steve Rusckowski.
Stephen H. Rusckowski
Thanks, Kathleen, and thanks, everyone, for joining us today. Over the last 2 months, I've had an opportunity to meet with many of you. And for those of you that I have not had an opportunity to meet, I'd like to spend just a minute explaining why I joined Quest Diagnostics. First of all, this is a company that has an impact on healthcare. We touch about 150 million patients each year, and I believe there's an opportunity to touch more lives.
Second, this is the high-quality company in many ways. Healthcare professionals particularly have high regard for Quest Diagnostics. And then finally and most importantly, I believe there is a significant opportunity to drive shareholder value. So over the past 2 months, I've met with many of our stakeholders. I've met with employees, customers and investors. I visited many of our operations, and I'm rounding out my perspective on Quest Diagnostics, where the company is today, and how it can grow stronger. I really appreciate the feedback I've received. Now I'd like to share the results for the second quarter.
In our Q1 call, we cautioned that despite our positive volume performance, the underlying market conditions remain sluggish, and that it was premature to conclude that the market was recovering. Our caution was warranted. In the second quarter, our volume growth slowed. Sluggish market conditions continue to affect our business, and we saw softness across many of our businesses. We also could have executed better in the quarter. For example, we did not see the benefits we expected from actions we have taken to drive revenue growth in areas like women's health and the benefit from the narrowing of certain health plan networks. As a result, we intensified our actions to manage our costs, allowing us to deliver bottom line growth and margin expansion of the quarter and maintaining our earnings outlook for the year.
Specifically, despite essentially flat revenues, we increased adjusted earnings per share by $0.05 or 4.5%. We expanded adjusted margins by 70 basis points to 18.4%, and we generated $251 million of operating cash flow. Clearly, it is imperative that we continue to be vigilant in improving productivity, reducing costs and improving quality. We are executing a plan in this regard, and we now call it Invigorate. It is expected to deliver $500 million in run rate cost savings versus 2011 as we exit 2014. And I will share with you that we are firmly on track. Well, this is a top priority for me. From my first week on the job, I've been personally involved in Invigorate. I've shared with the organization that I'm personally chairing this effort. I've met with the teams focused on the biggest priority, the areas like lab operations, procurement, general administration, IT, to name a few. We will continue to meet on a regular operating rhythm. Each of these teams are required to manage their projects with structured, disciplined and rigorous program management approaches, and I am assuring that proper resources are properly deployed to these efforts. Finally, I am challenging the teams to additional -- to look for additional opportunities and to accelerate the pace at which we implement the program.
An opportunity we've already acted on was to accelerate the launch of a voluntary retirement program offered to certain qualified employees. We expect this program to deliver $40 million in annualized cost savings, a portion of which will be realized this year, with the full amount realized as we exit the first quarter of 2013. Now as we look at the market, we continue to see weakness in the near term. We believe that this industry will grow 4% to 5% in a normal economy, and that Quest Diagnostics should be able to grow at or above the market growth rate. One thing that we believe will enable growth is the Affordable Care Act, which we expect will have a positive net impact on the company in the industry's growth rate beginning in 2014. The act will increase covered lives, which will drive diagnostic testing volume. But at the same time, many of the newly insured will be covered by insurance products with lower price points and, therefore, the full impact on our business is still unfolding.
In parallel with Invigorate, we have work to do to restore growth and be in a stronger position when the market recovers. Over the past 2 months, we have been conducting a thorough review of our businesses and our operations. This effort includes an evaluation of our selling and marketing efforts, how we prioritize our innovation investments, and our ability to leverage our unique assets to bring diagnostic solutions to the market. We do have some good examples of what we need to replicate to grow this business. Specifically, our expanding prescription drug monitoring business, our introduction of neurological tests at Athena, and our launch of new companion diagnostics like STRATIFY JCV test are a few good growth examples. So I look forward to sharing with you later this year the growth plans that results from this process.
Now I'd like to turn it over to Bob for more detailed analysis of the numbers. Bob?
Robert A. Hagemann
Thanks, Steve. Starting with revenues. Q2 revenues of $1.9 billion reflect growth of 20 basis points over the prior year. In the second quarter, comps were more challenging than in the first quarter. Specifically, we anniversaried the acquisitions of Athena and Celera, and did not experience the favorable weather impact we saw in the first quarter. These 2 factors combined contributed just over 5% growth in Q1. Excluding the impact of acquisitions, Q2 revenues were down about 0.5% from the prior year. This compares to about 1% underlying growth in Q1.
As Steve noted, market softness continued to impact our business. We didn't execute as we had planned and, as a result, our volume growth slowed. Our clinical testing revenues, which account for over 90% of total revenues, were about 1% for the quarter, all attributable to volume. Revenue per requisition was essentially unchanged from the prior year, with reimbursement pressure offset by favorable test mix and an increased number of tests per requisition. Recall that year-over-year growth in revenue per requisition we reported in Q1 was principally due to the increased esoteric mix contributed by Athena and Celera, and we have anniversaried that benefit this quarter.
Drugs of Abuse Testing volumes have continued to rebound and grew about 5% in the quarter, in line with the growth of the last 2 quarters. Q2 revenues in our nonclinical testing businesses, which include risk assessment, clinical trials testing, products and healthcare IT, were about 5% below the prior year. As you've heard, despite what was an essentially flat top line, we expanded margins -- earnings and margins in the quarter as a result of disciplined expense management and beginning to realize the benefits of our Invigorate program. Adjusted EPS of $1.17 was $0.05 above the prior year, and adjusted operating income at 18.4% was 70 basis points above the prior year. The restructuring, integration and CEO transition costs totaling about $16 million reduced reported operating income by 80 basis points and reported EPS by $0.06.
Last year's second quarter included $20 million of acquisition-related transaction and integration costs, which reduced reported operating income by a full percentage point and reported EPS by $0.10. Our Invigorate program continues on-track to deliver roughly $100 million in run rate savings as we exit this year. This represents about 20% of our $500 million goal, with the remainder expected in 2013 and 2014. As you heard from Steve, we're continuing to evaluate opportunities, which could potentially increase our goal for this program.
As we previously shared, common themes across most areas include standardizing systems, processes and databases, increased use of automation and technology and centralizing the selective outsourcing. As we noted last quarter, over the next few years, this will require some increased level of capital spending to standardize systems and upgrade IT infrastructure. In addition, as we disclosed in last quarter's 10-Q, our high-level estimates of charges we expect to incur over the next several years in connection with this program are between $100 million and $175 million, consisting primarily of employee separation costs, facility-related closure costs, asset impairments and systems conversion and integration costs.
As Steve mentioned, in connection with the Invigorate initiative, we have offered a voluntary retirement program to certain qualifying employees. We estimate this program will contribute approximately $40 million of annualized savings once fully implemented, which we expect by the first quarter of next year. The program will allow us to reduce the size of our workforce, reduce our average wage bill and update the skills of the workforce. In connection with the program, we expect to record charges estimated at about $50 million over the course of the next several quarters as employees leave the workforce. An area which is already benefiting from Invigorate is billing and collections. We have consistently produce industry-leading metrics in this area, but still have room to improve. Bad debt expense, as a percentage of revenues, was 3.5% in the quarter and reflects improvement from both Q1 and in the prior year. DSOs were 44 days, unchanged from last quarter.
Cash from operations was $251 million in the quarter compared to $60 million in the prior year. Note last year's cash flow was reduced by the net impact of the Medi-Cal settlement payment. Capital expenditures were $47 million in the quarter compared to $40 million a year ago. During the quarter, we repurchased 882,000 common shares at an average price of $56.70 for a total of $50 million. We also repaid $112 million of outstanding debt in connection with our stated objective to delever by $500 million to $700 million this year.
Turning to guidance. Based on our performance in the first half and our latest view of the market, we now expect results from continuing operations before special items as follows: revenue to grow between 1% and 2%; operating income to approximate 18% of revenues; cash from operations to approximate $1.2 billion; capital expenditures to approximate $200 million; and lastly, diluted earnings per share to be between $4.45 and $4.60. Now I'll turn it back to Steve.
Stephen H. Rusckowski
Thanks, Bob. So in closing, we delivered earnings growth and margin expansion in the quarter despite flat top line growth. We are accelerating our efforts to improve productivity, reduce costs, improve quality and restore top line growth. I want to reaffirm our commitment to increasing shareholder returns and improving our ROIC. This includes our intention to return the majority of our free cash flow to investors upon achieving our targeted leverage ratio.
In the near term, we do not expect to complete any large acquisitions. However, we will continue to consider value-creating, fold-in acquisitions. We are being thoughtful and disciplined in developing our plan to restore top line growth and improve shareholder returns, and are performing a thorough review of our businesses and operations as part of this process. I'll share with you that I believe we're moving with the appropriate speed and intend to share our plan with you in the fall. Now we'd be happy to take your questions. Operator?
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Fund Letters
