Quest Diagnostics 2003 Annual Report Download - page 86

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(dollars in thousands unless otherwise indicated)
commitment to an exit plan, as under previous accounting guidance. The provisions of SFAS 146 apply to
integration costs associated with actions that impact the employees and operations of Quest Diagnostics. Costs
associated with actions that impact the employees and operations of an acquired company, such as Unilab, are
accounted for as a cost of the acquisition and included in goodwill in accordance with Emerging Issues Task
Force No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination’’.
Integration of Unilab Corporation
During the fourth quarter of 2003, the Company finalized its plan related to the integration of Unilab into
Quest Diagnostics’ laboratory network. As part of the plan, following the sale of certain assets to LabCorp as
part of the Divestiture, the Company closed its previously owned clinical laboratory in the San Francisco Bay
area and completed the integration of remaining customers in the northern California area to Unilab’s
laboratories in San Jose and Sacramento. The Company currently operates two laboratories in the Los Angeles
metropolitan area. As part of the integration plan, the Company plans to open a new regional laboratory in the
Los Angeles metropolitan area into which it will integrate all of its business in the area.
During 2003, the Company recorded $9 million of costs associated with executing the Unilab integration
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 of 2003 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 $6.6 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.
Integration of American Medical Laboratories, Incorporated
During the third quarter of 2002, the Company finalized its plan related to the integration of AML into
Quest Diagnostics’ laboratory network. The plan focused principally on improving customer service by enabling
the Company to perform esoteric testing on the east and west coasts of the United States, and redirecting
certain physician testing volumes within its national network to provide more local testing. As part of the plan,
the Company’s Chantilly, Virginia laboratory, acquired as part of the AML acquisition, has become the primary
esoteric testing laboratory and hospital service center for the eastern United States, complementing the
Company’s Nichols Institute esoteric testing facility in San Juan Capistrano, California. Esoteric testing volumes
have been redirected within the Company’s national network to provide customers with improved turnaround
time and customer service. The Company has completed the transition of certain routine clinical laboratory
testing previously performed in the Chantilly, Virginia laboratory to other testing facilities within the Company’s
regional laboratory network. A reduction in staffing occurred as the Company executed the integration plan and
consolidated duplicate or overlapping functions and facilities. Employee groups affected as a result of this plan
included those involved in the collection and testing of specimens, as well as administrative and other support
functions.
In connection with the AML integration plan, the Company recorded $11 million of 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. Of the total costs indicated above, $9.5 million,
related to actions that impact the employees and operations of AML, was accounted for as a cost of the AML
acquisition and included in goodwill. Of the $9.5 million, $5.9 million related to employee severance benefits
for approximately 200 employees, with the remainder primarily related to contractual obligations associated with
leased facilities and equipment. In addition, $1.5 million of integration costs, related to actions that impact
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