Quest Diagnostics 2003 Annual Report Download - page 59

We expect to incur up to $20 million of costs through 2005 to integrate Unilab and our existing California
operations. During 2003, we recorded $9 million of such costs associated with executing the plan. The majority
of these integration costs related to employee severance and contractual obligations associated with leased
facilities and equipment. Employee groups affected as a result of this plan include those involved in the
collection and testing of specimens, as well as administrative and other support functions. Of the $9 million in
costs, $7.9 million was recorded in the fourth quarter and related to actions that impact the employees and
operations of Unilab, was accounted for as a cost of the Unilab acquisition and included in goodwill. Of the
$7.9 million, $6.8 million related to employee severance benefits for approximately 150 employees, with the
remainder primarily related to contractual obligations. In addition, $1.1 million of integration costs, related to
actions that impact Quest Diagnostics’ employees and operations and comprised principally of employee
severance benefits for approximately 30 employees, were accounted for as a charge to earnings in the third
quarter of 2003 and included in “other operating (income) expense, net’’ within the consolidated statements of
operations. As of December 31, 2003, accruals related to the Unilab integration plan totaled approximately $7
million. While the majority of the accrued costs at December 31, 2003 are expected to be paid in 2004, there
are certain severance costs that have payment terms extending into 2005. The remaining estimated costs
associated with executing the Unilab integration plan relate to actions which are expected to take place through
2005. Such costs will be accounted for as a charge to earnings in the periods that the related actions are taken.
Upon completion of the Unilab integration, we expect to realize approximately $25 million to $30 million
of annual synergies and we expect to achieve this annual rate of synergies by the end of 2005.
American Medical Laboratories, Incorporated and Clinical Diagnostics Services, Incorporated
On April 1, 2002, we completed our acquisition of all of the outstanding voting stock of American
Medical Laboratories, Incorporated, or AML. In addition, during the fourth quarter of 2001, we acquired all of
the voting stock of Clinical Diagnostic Services, Inc.
See Notes 3 and 4 to the Consolidated Financial Statements for a full discussion of these transactions.
Six Sigma and Standardization Initiatives
We intend to become recognized as the quality leader in the healthcare services industry. We continue to
implement our Six Sigma and standardization initiatives throughout all aspects of our organization. Six Sigma is
a management approach that requires a thorough understanding of customer needs and requirements, root cause
analysis, process improvements and rigorous tracking and measuring of services. We have integrated our Six
Sigma initiative with our initiative to standardize operations and processes across all of our Company by
adopting identified Company best practices. We plan to continue these initiatives during the next several years
and expect that their successful implementation will result in measurable improvements in customer satisfaction
and operating results.
Results of Operations
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Net income for the year ended December 31, 2003 increased to $437 million from $322 million for the
prior year period. This increase in earnings was primarily attributable to revenue growth and improved
efficiencies generated from our Six Sigma and standardization initiatives.
Net Revenues
Net revenues for the year ended December 31, 2003 grew by 15.3% over the prior year level and include
the results of Unilab, which was acquired on February 28, 2003, for ten months. Net revenues for 2003 also
included twelve months of results for AML, which was acquired on April 1, 2002. Pro forma revenue growth,
assuming that the Unilab and AML acquisitions and the related Divestiture had been completed on January 1,
2002, was 4.3% for the year ended December 31, 2003.
For the year ended December 31, 2003, clinical testing volume, measured by the number of requisitions,
increased 11.3% compared to 2002. On a pro forma basis, assuming that the Unilab and AML acquisitions and
the Divestiture had been completed on January 1, 2002, testing volume declined 1.2%. The combined effect of
the severe winter storms and the New Jersey physicians’ strike during the first quarter of 2003 and Hurricane
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