Quest Diagnostics 2000 Annual Report Download - page 54

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34
Integration of SBCL and Quest Diagnostics Businesses
We expect to continue to realize significant benefits from combining our existing laboratory network with that
of SBCL. As part of an integration plan finalized in the fourth quarter of 1999, we are in the process of reducing
redundant facilities and infrastructure, including laboratory consolidations in geographic markets served by more than
one of our laboratories, and redirecting testing volume within our national network to provide more local testing and
improve customer service. We are not exiting any geographic markets as a result of the plan. Employee groups to be
impacted as a result of these actions include those involved in the collection and testing of specimens, as well as
administrative and other support functions. During the fourth quarter of 1999, we recorded the estimated costs associated
with executing the integration plan. The majority of these integration costs related to employee severance, contractual
obligations associated with leased facilities and equipment, and the write-off of fixed assets which management believes
will have no future economic benefit upon combining the operations. Integration costs related to planned activities
affecting SBCL’s operations and employees were recorded as a cost of the acquisition. Integration costs associated with
the planned integration of SBCL affecting Quest Diagnostics’ operations and employees were recorded as a charge to
earnings in the fourth quarter of 1999. These costs are more fully described under “Provisions for Restructuring and
Other Special Charges”. A full discussion and analysis of the reserves related to the SBCL integration is contained in
Note 4 to the Consolidated Financial Statements.
Through the end of December 2000, we had completed the transition of approximately 85% of our business
affected by integration throughout our national laboratory network, including laboratory consolidations in a number of
geographic markets. Integration activities, related to laboratory consolidations in major markets and the redirection of
testing volumes to provide more local testing and improve customer service, are underway in other markets. Management
expects to substantially complete the planned integration of the Company’s principal laboratories early in the second
quarter of 2001 in all major markets. Other activities, including the standardization of information systems, will continue
beyond 2001.
Management expects that this integration will result in approximately $150 million of annual synergies to be
achieved over the next several years. For the year ended December 31, 2000, the Company estimates it achieved
approximately $50 million of such synergies. For the full year 2001, management expects that the Company will realize
approximately $50 - $70 million of additional synergies driven by cost reductions.
Management anticipates that additional charges may be recorded in 2001 associated with further consolidating
the operations of SBCL beyond 2000. Management cannot estimate the amount of these charges at this time, but expects
to fund these charges with cash from operations.
During and after the integration process, we are committed to providing the highest levels of customer service.
Through a corporate project office, we track and monitor key service and quality metrics. In the event that these key
service and quality metrics fail to remain at acceptable levels, we will adjust the pace of the integration activities so that
underlying causes are identified and resolved in order to ensure that the highest levels of customer service are maintained.
While no significant service disruptions have occurred to date, the process of combining operations could cause an
interruption of, or a deterioration in, services which could result in a customer’s decision to stop using Quest Diagnostics
for clinical laboratory testing. We believe that the successful implementation of the SBCL integration plan and our value
proposition based on expanded patient access, our broad testing capabilities and most importantly, the quality of the
services we provide, will significantly mitigate customer attrition.