Quest Diagnostics 2006 Annual Report Download - page 72

Our current expectation is that no longer being a contracted provider to UNH and becoming a non-
contracted provider to Horizon Blue Cross Blue Shield of New Jersey (which accounted for approximately 1% of
our net revenues in 2006), will reduce our revenue growth in 2007 by between 7% and 10%, most of that
resulting from the direct loss of previously contracted work, and some of it associated with the loss of other
work from physicians who choose to consolidate their testing with a single laboratory. Given that we expect a
decrease in volume levels in 2007 due to these contract changes, we plan to adjust our cost structure to match
the new volume levels. However, due to the fact that a large portion of our costs, approximately 40% or more,
are fixed, we do not expect our cost reduction actions will fully mitigate the profit impact of the anticipated
volume decline during 2007. Our plans also include examining our structural, or fixed costs, to determine what
reductions can be made. The extent to which we will need to reduce structural costs, which in part will be driven
by how quickly we replace lost business, will determine how long it will take to complete all of our cost actions.
As we do so, top priorities will be maintaining the differentiated level of service we provide to our patients and
physicians, and remaining positioned to capitalize on growth opportunities.
Acquisitions
The clinical laboratory industry in the United States remains fragmented. We expect to continue to
selectively evaluate potential acquisitions of domestic clinical laboratories that can be integrated into our existing
laboratories, thereby increasing access for patients and enabling us to reduce costs and improve efficiencies.
While over the long term we believe positive industry factors in the United States diagnostic testing industry and
the differentiated services we offer to our customers will enable us to grow organically, we see a number of
opportunities to grow beyond our current principal business of operating diagnostic testing laboratories in the
United States. Technology is enabling testing to be performed closer to the patient, whether in the physician’s
office or at the hospital bedside, in the form of point-of-care testing, also referred to as near patient testing. We
are actively exploring opportunities in this area and intend to capitalize on this trend to augment our laboratory
testing business. Given that physicians and hospitals are primary sources for both near patient testing and
laboratory performed tests, we believe providing both services will strengthen our relationships with customers
and accelerate our growth.
Additionally, we see opportunities to bring our experience and expertise in diagnostic testing to international
markets, particularly developing countries where the testing markets are highly fragmented and less mature. In
addition, expansion into near patient testing and international markets will diversify our revenue base, and add
businesses which are growing faster and are more profitable than our principal business of United States based
clinical laboratory testing.
Acquisition and Integration of LabOne, Inc.
On November 1, 2005, we completed the acquisition of LabOne, Inc., or LabOne,in an all-cash transaction
with a combined value of approximately $947 million, including approximately $138 million of assumed debt of
LabOne. See Note 3 to the Consolidated Financial Statements for a full discussion of the LabOne acquisition.
Through the acquisition, Quest Diagnostics acquired all of LabOne’s operations, including its health
screening and risk assessment services to life insurance companies, as well as its clinical diagnostic testing
services to healthcare providers and drugs-of-abuse testing to employers. LabOne had 3,100 employees and
principal laboratories in Lenexa, Kansas, as well as in Cincinnati, Ohio. We financed the acquisition and related
transaction costs together with the repayment of substantially all of LabOne’s debt outstanding with proceeds
from a $900 million private placement of senior notes, as described in Note 10 to the Consolidated Financial
Statements, and from cash on hand.
During the first quarter of 2006, we finalized our plan related to the integration of LabOne and recorded
$23 million of costs, primarily comprised of employee severance benefits. Employee groups affected as a result
of this plan included those involved in the testing of specimens, as well as administrative and other support
functions. Of the total costs indicated above, $21 million related to actions that impact Quest Diagnostics’
employees and its operations and are comprised principally of employee severance benefits for approximately
600 employees. These costs were accounted for as a charge to earnings and included in “other operating expense,
net” within the consolidated statements of operations.
In addition, $2.6 million of integration costs, related to actions that impact the employees and operations of
LabOne, were accounted for as a cost of the LabOne acquisition and included in goodwill. Of the $2.6 million,
$1.2 million related to asset write-offs with the remainder primarily associated with employee severance benefits
for approximately 95 employees.
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