Quest Diagnostics 2007 Annual Report Download

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2007 Annual Report
Execution Value Leadership

Table of contents

  • Page 1
    Execution Value Leadership 2007 Annual Report

  • Page 2
    ... HIGHLIGHTS Year Ended December 31 in millions, except per share data 2007 Net Revenues Operating Income Net Income Net Earnings Per Diluted Share Information is for continuing operations. 2006 $ 6,269 1,128 626 3.14 $ 6,705 1,091 554 2.84 M9% 5-Year CAGR* M9% 5-Year CAGR* M9% 5-Year CAGR...

  • Page 3
    ... from the competition, drive profitable growth and create value for shareholders, employees and customers. With the industry's most extensive laboratory testing menu, we touch the lives of patients approximately 150 million times a year. Q U EST D I A G N O ST I C S 2007 A N N U A L R EPO RT Page...

  • Page 4
    TO OUR SHAREHOLDERS, EMPLOYEES AND CUSTOMERS: 2007 was a year of significant achievements for Quest Diagnostics. The year started with uncertainty regarding industry pricing and access to health plan contracts. During the course of the year, we took a series of decisive actions to reduce that ...

  • Page 5
    ...฀in฀2002. Our acquisition of AmeriPath made us the clear leader in cancer diagnostics. We have strengthened our integrated offering of clinical, anatomic pathology and esoteric testing for hospitals, specialists and primary care physicians. Q U EST D I A G N O ST I C S 2007 A N N U A L R EPO RT...

  • Page 6
    ...to lab testing; and •฀฀ For฀every฀doctor,฀hospital฀administrator,฀ life insurance executive, and pharmaceutical research head to think of Quest Diagnostics as the most trusted source when it comes to diagnostic testing, information and services. We stand at the beginning of a new era...

  • Page 7
    2007 Form 10-K

  • Page 8
    ... WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2007 Commission File Number 001-12215 Quest Diagnostics Incorporated 3 Giralda Farms Madison, New Jersey 07940 (973) 520-2700 Delaware (State...

  • Page 9
    ... Fees and Services ...Item 15. Exhibits, Financial Statement Schedules ...Selected Historical Financial Data of Our Company ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Management's Report on Internal Control Over Financial Reporting...Report of...

  • Page 10
    ... and services. We provide insights that enable patients, physicians and others to make decisions to improve health services. Quest Diagnostics was incorporated in Delaware in 1990; its predecessor companies date back to 1967. We conduct business through our headquarters in Madison, New Jersey, and...

  • Page 11
    ... in the United States and in select international markets. BUSINESS OPERATIONS Quest Diagnostics is the leading provider of diagnostic testing, information and services in the United States, providing insights that enable patients and physicians to make decisions to improve health services. We offer...

  • Page 12
    ... abbreviated menu of routine tests for customers that require rapid turnaround times. Patient service centers are facilities where specimens are collected, and are typically located in or near a building used by medical professionals. We operate 24 hours a day, 365 days a year. We perform and report...

  • Page 13
    ... strong relationships with our referring physician base. We significantly strengthened our anatomic pathology services offering through our May 2007 acquisition of AmeriPath Group Holdings, Inc., ("AmeriPath"). We provide a full-range of cancer diagnostic services to all specialties including...

  • Page 14
    ... reach critical mass with our proprietary Leumeta menu, we are planning collaborations with oncology centers on independent clinical studies to directly compare bone marrow cell-based tests with our Leumeta plasma-based tests. We have also added new fluorescence in situ hybridization, or FISH-based...

  • Page 15
    ... service centers because many life insurance applicants prefer this option to a home or workplace examination. We believe that we are the leading provider of clinical testing to employers for drugs-of-abuse. Our Drug Testing Index, which is an annual report of our aggregate drug testing results...

  • Page 16
    ... of physician offices. International. We have laboratory facilities in Mexico City, Mexico; San Juan, Puerto Rico; and Heston, England. These laboratories support our clinical trials business and clinical testing in their local markets. In addition, we have established operations in Gurgaon, India...

  • Page 17
    ..., including our Care360 Physician Portal, enable physicians to order diagnostic tests and review test results from Quest Diagnostics online. In addition, the Care360 Physician Portal enables physicians to electronically prescribe medication, view clinical and administrative information in a patient...

  • Page 18
    ... providing health insurance coverage to patients, such as a health insurance plan, self-insured employer benefit fund, or the traditional Medicare or Medicaid program, (2) the patient or (3) the physician or other party (such as a hospital, another laboratory or an employer) who referred the testing...

  • Page 19
    ... physicians and patients multiple choices for clinical testing. Health insurance plans that use these networks realize cost reductions by reducing testing performed by non-contracted providers and from simplified payment administration for clinical testing services. Hospitals and Other Laboratories...

  • Page 20
    ...provide wellness screenings to employers and their employees. GENERAL Sales and Marketing. Our sales force is organized to focus on customer groups and service types. The majority of representatives focus on marketing clinical laboratory testing, anatomic pathology and related services to physicians...

  • Page 21
    ...certifications are international standards for quality management systems. We have extensive internal proficiency testing, quality control and audits for our clinical laboratory operations. Quality control samples are processed in parallel with the analysis of patient specimens. The results of tests...

  • Page 22
    ...provider, including: • service capability and quality; • accuracy, timeliness and consistency in reporting test results; • pricing; • patient insurance coverage; • number and type of tests performed by the provider; • number, convenience and geographic coverage of patient service centers...

  • Page 23
    ... third-party payers, like Medicare and Medicaid. Billing for clinical testing services is very complicated, so we have compliance policies and procedures that increase our billing costs. Patients, insurance companies, Medicare, Medicaid, physicians, hospitals and employer groups all have different...

  • Page 24
    ... has been rapid growth of health insurance plans offering Medicare Advantage programs and of beneficiary enrollment in these plans. In recent years, in an effort to control costs, states also have increasingly mandated that Medicaid beneficiaries enroll in private managed care arrangements. If these...

  • Page 25
    ... services provided are accurate, reliable and timely. The cost of compliance with CLIA makes it cost prohibitive for many physicians to operate clinical laboratories in their offices. However, manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point...

  • Page 26
    ...the cost of the donated software and services and compliance with other conditions. Drug Testing. The Substance Abuse and Mental Health Services Administration ("SAMHSA") regulates drug testing for public sector employees and employees of certain federally regulated businesses. All laboratories that...

  • Page 27
    ..., most clinical laboratory specimens and some laboratory supplies are considered hazardous materials subject to regulation by the Department of Transportation, the Public Health Service, the United States Postal Service and the International Air Transport Association. Corporate Practice of...

  • Page 28
    ... Company policies. Further, we conduct in-depth reviews of procedures and facilities to assure regulatory compliance throughout our operations. We conduct annual training of our employees on these compliance policies and procedures. AVAILABLE INFORMATION We file annual, quarterly and current reports...

  • Page 29
    ..., Governance Committee and Quality, Safety and Compliance Committee • Certificate of Incorporation • Bylaws You can request a copy of these documents, including exhibits, at no cost, by contacting Investor Relations, 3 Giralda Farms, Madison, New Jersey 07940 (973-520-2700). The information on...

  • Page 30
    ...by government payers to reduce utilization and pricing for clinical testing services. From time to time, Congress has legislated reductions in, or frozen updates to, the Medicare Clinical Laboratory Fee Schedule. In addition, CMS has adopted policies limiting or excluding coverage for clinical tests...

  • Page 31
    ... associated with providing testing services to their members through capitated payment arrangements. In addition, some healthcare insurance plans have been willing to limit the PPO or POS laboratory network to only a single national laboratory to obtain improved fee-for-service pricing. There are...

  • Page 32
    ... including those relating to: • billing and reimbursement of clinical tests; • certification of clinical laboratories; • the anti-self-referral and anti-kickback laws and regulations; • the laws and regulations administered by the U.S. Food and Drug Administration; • the corporate practice...

  • Page 33
    ..., insurance companies, Medicare, Medicaid, physicians, hospitals and employer groups. Changes in laws and regulations could increase the complexity and cost of our billing process. Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies and...

  • Page 34
    ... in their homes or by physicians in their offices. Although the CLIA compliance costs make it cost prohibitive for many physicians to operate clinical laboratories in their offices, manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-care test...

  • Page 35
    ... the results of our operations and adversely impact our reputation. The provision of clinical testing services, including anatomic pathology services, and related services, and the design, manufacture and marketing of diagnostic products involve certain inherent risks. The services that we provide...

  • Page 36
    ... things, disputes as to intellectual property, professional liability and employee-related matters, as well as inquiries from governmental agencies and Medicare or Medicaid carriers regarding billing issues. Some of the proceedings against us involve claims that are substantial in amount and could...

  • Page 37
    ... business. We do not have insurance or are substantially self-insured for a significant portion of any liability with respect to such claims. The ultimate outcome of the various proceedings or claims could have a material adverse effect on our financial condition, results of operations or cash flows...

  • Page 38
    ... to bill the Medicare and Medicaid programs or other adverse regulatory actions by federal, state and local agencies. (i) Changes in federal, state or local laws or regulations, including changes that result in new or increased federal or state regulation of commercial clinical laboratories or tests...

  • Page 39
    ... to promptly or properly bill for our services or to obtain appropriate payments for services that we do bill. (u) Changes in interest rates and changes in our credit ratings from Standard & Poor's and Moody's Investor Services causing an unfavorable impact on our cost of and access to capital...

  • Page 40
    ... centers, and a clinical trials testing laboratory at locations throughout the United States. In addition, we maintain offices, manufacturing facilities and clinical laboratories in locations outside the United States, including in Sweden, Puerto Rico, Mexico, the United Kingdom, India and...

  • Page 41
    ... reviews, investigations and proceedings has increased in recent years with regard to many firms in the healthcare services industry, including our Company. We maintain various liability insurance coverages for claims that could result from providing or failing to provide clinical testing services...

  • Page 42
    ... relating to billings to MediCal, the California Medicaid program. The subpoenas seek documents from various time frames ranging from three to ten years. The Company and Specialty are cooperating with the California Attorney General's Office. We understand that there may be pending qui tam claims...

  • Page 43
    ..., the high and low sales price per share as reported on the New York Stock Exchange Consolidated Tape and dividend information. Common Stock Market Price High Low Dividends Declared 2006 First Quarter ...Second Quarter ...Third Quarter ...Fourth Quarter ...2007 First Quarter ...Second Quarter...

  • Page 44
    ... Dec07 QUEST DIAGNOSTICS INCORPORATED S&P 500 INDEX S&P 500 HEALTH CARE EQUIPMENT & SERVICES Closing DGX Price(1) Total Shareholder Return S&P 500 S&P 500 H.C. Performance Graph Values S&P 500 S&P 500 H.C. Date DGX DGX 12/31/2003 ...12/31/2004 ...12/31/2005 ...12/31/2006 ...12/31/2007 ... $36...

  • Page 45
    ... controls and procedures were effective as of the end of the period covered by this annual report. Management's Report on Internal Control Over Financial Reporting See page 61. Changes in Internal Control On May 31, 2007, the Company completed the acquisition of AmeriPath. AmeriPath disclosed...

  • Page 46
    ... stock is listed for trading on the New York Stock Exchange, in 2007 our Chief Executive Officer was required to make, and he made, an annual certification to the New York Stock Exchange stating that he was not aware of any violation by Quest Diagnostics of the corporate governance listing standards...

  • Page 47
    ... of certain beneficial owners and management appearing in our Proxy Statement under the captions "Information about our Corporate Governance - Stock Ownership of Directors and Executive Officers" and "Additional Information Regarding Executive Compensation - Equity Compensation Plan Information" is...

  • Page 48
    ... Schedules (a) Documents filed as part of this Report. 1. Index to financial statements and supplementary data filed as part of this Report. Item Page Financial Statements Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations...

  • Page 49
    ...duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2008. QUEST DIAGNOSTICS INCORPORATED (Registrant) By /s/ Surya N. Mohapatra, Ph.D. Surya N. Mohapatra, Ph.D. Chairman of the Board, President and Chief Executive Officer Each individual...

  • Page 50
    ... data is only a summary and should be read together with the audited consolidated financial statements and related notes of our Company and management's discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report on Form 10-K. 2007(a) Year Ended...

  • Page 51
    ... results for 2007 include the results of operations of HemoCue and AmeriPath subsequent to the closing of the applicable acquisition. See Note 3 to the Consolidated Financial Statements. (b) On July 3, 2006, we completed the acquisition of Focus Technologies Holding Company, ("Focus Diagnostics...

  • Page 52
    ... from year to year. Reimbursement for Services Payments for clinical testing services are made by physicians, hospitals, employers, healthcare insurers, patients and the government. Physicians, hospitals and employers are typically billed on a fee-for-service basis based on negotiated fee schedules...

  • Page 53
    ... testing with healthcare insurers and government payers at the federal and state level. Our Company Quest Diagnostics, as the largest clinical testing company with a leading position in most of its domestic geographic markets and service offerings, is well positioned to benefit from the long...

  • Page 54
    ...life insurance industry, and testing for drugs-ofabuse. We are also a leading provider of testing for clinical trials. The Company's diagnostics products business, which includes the operations of HemoCue, Enterix and certain of Focus Diagnostics' operations, manufactures and markets diagnostic test...

  • Page 55
    ... by better aligning our service capacity with patient and sample flows. We are driving more of our purchasing through master contracts to take better advantage of our scale. We are expanding the use of customer connectivity which reduces costs in specimen data entry and billing, and helps lower our...

  • Page 56
    ... of our plan for the integration of AmeriPath and recorded the related costs of the integration. These costs were not material to our results of operations or cash flows. Acquisition of HemoCue On January 31, 2007, we acquired HemoCue, a Sweden-based company specializing in point-of-care testing, in...

  • Page 57
    ...due from government payers under the Medicare and Medicaid programs represent approximately 14% of our net accounts receivable. Collection of such receivables is normally a function of providing the complete and correct billing information within the various filing deadlines. Collection typically 48

  • Page 58
    ... liability insurance coverages for claims that could result from providing or failing to provide clinical testing services including inaccurate testing results and other exposures. Our insurance coverage limits our maximum exposure on individual claims; however, we are essentially self-insured for...

  • Page 59
    ... cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan was disclosed, based on the vesting provisions of the individual grants, but not charged to expense. The process of estimating the fair value of stock-based compensation awards and recognizing stock...

  • Page 60
    ... can all cause stock-based compensation expense to vary from period to period. Results of Operations Our clinical testing business currently represents our one reportable business segment. The clinical testing business for each of the three years in the period ended December 31, 2007 accounted for...

  • Page 61
    ...sales force, billing operations, bad debt expense and general management and administrative support, were 24.1% of net revenues during the year ended December 31, 2007, compared to 22.5% in the prior year period. This increase was primarily due to lower volume levels in our clinical testing business...

  • Page 62
    ... due to lower volume levels in our clinical testing business, the various items which served to increase cost of services and selling, general and administrative expenses as a percentage of revenues, and the impact of the acquired operations of AmeriPath and HemoCue. These decreases were offset...

  • Page 63
    ... year period primarily due to the LabOne acquisition and, to a lesser degree, organic growth in our clinical testing business. The increased costs were primarily in the areas of employee compensation and benefits and testing supplies. Employee compensation and benefits included $55 million of stock...

  • Page 64
    ... in California. Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 59% of net revenues for the year ended December 31, 2006, consistent with the prior year. Selling, general and administrative expenses, which include the costs of the sales force, billing...

  • Page 65
    ..., comprised primarily of employee costs and professional fees, of $5 million. 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 may include...

  • Page 66
    ... year. Days sales outstanding, a measure of billing and collection efficiency, were 48 days at December 31, 2007 unchanged from December 31, 2006, despite a two day increase due to the impact of AmeriPath. We expect AmeriPath's impact on our days sales outstanding to decrease over time. Net cash...

  • Page 67
    ... its highest level, we have reduced our total debt by $417 million. Net cash provided by financing activities for the year ended December 31, 2007, also included $95 million in proceeds from the exercise of stock options, including related tax benefits, offset by purchases of treasury stock totaling...

  • Page 68
    ...under our existing credit facilities. We believe that cash from operations and our borrowing capacity under our credit facilities will provide sufficient financial flexibility to meet seasonal working capital requirements and to fund capital expenditures, debt service requirements, cash dividends on...

  • Page 69
    ... position. In addition, we plan to leverage our knowledge and expertise in diagnostic testing to further expand into international markets and point-of-care testing. Our strong cash generation, balance sheet and credit profile position us well to take advantage of these growth opportunities...

  • Page 70
    ... the year ended December 31, 2007. PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, audited the Company's internal control over financial reporting as of December 31, 2007 and issued their audit report...

  • Page 71
    ... of Quest Diagnostics Incorporated and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of...

  • Page 72
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2007 AND 2006 (in thousands, except per share data) 2007 2006 Assets Current assets: Cash and cash...(loss) ...Treasury stock, at cost; 19,705 and 19,806 shares at December 31, 2007 and 2006, respectively ...Total...

  • Page 73
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (in thousands, except per share data) 2007 2006 2005 Net revenues ...Operating costs and expenses: Cost of services ...Selling, general and administrative ......

  • Page 74
    ... options ...Excess tax benefits from stock-based compensation arrangements ...Dividends paid...Distributions to minority partners ...Financing costs paid ...Net cash provided by (used in) financing activities ...Net change in cash and cash equivalents ...Cash and cash equivalents, beginning of year...

  • Page 75
    ...Exercise of stock options ...Shares to cover employee payroll tax withholdings on stock issued under benefit plans...Tax benefits associated with stock-based compensation plans ...Purchases of treasury stock ...Balance, December 31, 2006 ...Net income ...Currency translation ...Market valuation, net...

  • Page 76
    ... OF BUSINESS Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or the "Company") is the largest provider of diagnostic testing, information and services in the United States, providing insights that enable physicians and other healthcare professionals to make decisions...

  • Page 77
    ... by Medicare and Medicaid programs. Under capitated arrangements with healthcare insurers, the Company recognizes revenue based on a predetermined monthly reimbursement rate for each member of an insurer's health plan regardless of the number or cost of services provided by the Company. Taxes...

  • Page 78
    ... of a change in the estimated number of performance share units expected to be earned is recognized as compensation cost in earnings in the period of the revision. The Company recognizes stock-based compensation expense related to the Company's Amended Employee Stock Purchase Plan ("ESPP") based...

  • Page 79
    ... payers, is limited. While the Company has receivables due from federal and state governmental agencies, the Company does not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent...

  • Page 80
    ... assets, principally representing the cost of customer relationships, customer lists and non-competition agreements acquired, are capitalized and amortized on the straight-line method over their expected useful life, which generally ranges from five to twenty years. Intangible assets with indefinite...

  • Page 81
    ... (i) publicly available information regarding comparable publiclytraded companies in the clinical testing industry, (ii) the financial projections and future prospects of the Company's business, including its growth opportunities and likely operational improvements, and (iii) comparable sales prices...

  • Page 82
    ... derivative financial instruments to manage its market risks. This includes the use of interest rate swap agreements to manage its exposure to movements in interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative...

  • Page 83
    ... remeasurements recorded in the results of operations. SFAS 141(R) also requires that costs for business restructuring and exit activities related to the acquired company will be included in the post-combination financial results of operations and also provides new guidance for the recognition...

  • Page 84
    ...a new $450 million term loan and cash on-hand. On May 31, 2007, the Company refinanced this term loan (see Note 10). In January 2008, the Company received a payment of approximately $24 million from an escrow fund established at the time of the acquisition, which reduces the aggregate purchase price...

  • Page 85
    ... pathologists, operates 40 outpatient anatomic pathology laboratories and provides inpatient anatomic pathology and medical director services for approximately 200 hospitals throughout the United States. The Company financed the all-cash purchase price and related transaction costs, together...

  • Page 86
    ...and markets diagnostic products. It offers its reference testing services and diagnostic products to large academic medical centers, hospitals and commercial laboratories. The Company financed the aggregate purchase price of $205 million, which included $0.5 million of related transaction costs, and...

  • Page 87
    ... Note 10) and cash on-hand. Through the acquisition of LabOne, the Company acquired all of LabOne's operations, including its health screening and risk assessment services for life insurance companies, its clinical diagnostic testing services, and its drugs-of-abuse testing for employers. Pro Forma...

  • Page 88
    ...forma results for the year ended December 31, 2005 exclude $14.3 million of transaction related costs, which were incurred and expensed by LabOne in conjunction with its acquisition by Quest Diagnostics. 4. INTEGRATION OF ACQUIRED BUSINESSES Integration of AmeriPath During the fourth quarter of 2007...

  • Page 89
    ...) A reconciliation of the federal statutory rate to the Company's effective tax rate for 2007, 2006 and 2005 was as follows: 2007 2006 2005 Tax provision at statutory rate ...State and local income taxes, net of federal benefit ...Impact of foreign operations ...Non-deductible expenses, primarily...

  • Page 90
    ...: United States - federal ...United States - various states ...2002-2006 2000-2006 In conjunction with its acquisition of SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), which operated the clinical testing business of SmithKline Beecham plc ("SmithKline Beecham"), the Company entered into...

  • Page 91
    ... related to the acquisitions of AmeriPath and HemoCue, and the impact on goodwill as a result of the adoption of FIN 48. (See Notes 3 and 5 for further discussions). Approximately 90% of the Company's goodwill as of December 31, 2007 was included in its clinical testing business. For the year ended...

  • Page 92
    ... $582,558 For the year ended December 31, 2007, the increase in intangible assets not subject to amortization was due to tradenames resulting from the acquisitions of AmeriPath, $226 million, and HemoCue, $53.8 million (see Note 3). For the year ended December 31, 2006, the increase in intangible...

  • Page 93
    ...plus an applicable margin that will vary over a range from 40 basis points to 125 basis points based on changes in the Company's public debt ratings. At the option of the Company, it may elect to enter into LIBOR-based interest rate contracts for periods up to six months. Interest on any outstanding...

  • Page 94
    ... rate or federal funds rate. As of December 31, 2007, the Company's borrowing rate for LIBOR-based loans was LIBOR plus 0.50%. The Company incurred $7 million of costs associated with the Term Loan due 2012, which is being amortized over the term of the related debt. AmeriPath Debt In connection...

  • Page 95
    ..., to pay the cash purchase price and transaction costs of the LabOne acquisition and to repay $127 million of LabOne's debt. The Senior Notes due 2010 and 2015 were issued at a discount of $0.8 million and $1.6 million, respectively. After considering the discounts, the effective interest rates on...

  • Page 96
    ... rates. The Debentures due June 2034 require semi-annual interest payments in June and December. As of December 31, 2007, long-term debt maturing in each of the years subsequent to December 31, 2008 is as follows: Year ending December 31, 2009...2010...2011...2012...2013...Thereafter...Total long...

  • Page 97
    ... of these instruments. At December 31, 2007, the fair value of the interest rate swap agreements was not material. At December 31, 2007 and 2006, the fair value of the Company's debt was estimated at $3.6 billion and $1.6 billion, respectively, using quoted market prices and yields for the same or...

  • Page 98
    ...plc. For the year ended December 31, 2007, the Company repurchased 2.8 million shares of its common stock at an average price of $52.14 per share for $146 million, and reissued 2.9 million shares in connection with employee benefit plans. For the year ended December 31, 2006, the Company repurchased...

  • Page 99
    ... provides for the grant to eligible employees of either non-qualified or incentive stock options, or both, to purchase shares of Quest Diagnostics common stock at a price of no less than the fair market value on the date of grant. The stock options are subject to forfeiture if employment terminates...

  • Page 100
    ... changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised in 2007, 2006 and 2005 was $52 million, $106 million and $98 million, respectively. As of December 31, 2007, there was $29 million of unrecognized stock-based compensation cost related...

  • Page 101
    ...year ended December 31, 2007 and 2006, respectively. Income tax benefits related to stock-based compensation for 2005 were not material. Employee Stock Purchase Plan Under the Company's Employee Stock Purchase Plan ("ESPP"), which was approved by the Company's shareholders at the 2006 Annual Meeting...

  • Page 102
    ... acquisition agreements, SmithKline Beecham has agreed to indemnify Quest Diagnostics, on an after tax basis, against certain matters primarily related to taxes and billing and professional liability claims. At December 31, 2007 and 2006, liabilities included $27 million due to SmithKline Beecham...

  • Page 103
    ... settlement agreements with various government and private payers relating to industry-wide billing and marketing practices that had been substantially discontinued. The federal or state governments may bring additional claims based on new theories as to the Company's practices which management...

  • Page 104
    ... insurance coverage for claims that could result from providing or failing to provide clinical testing services, including inaccurate testing results and other exposures. The Company's insurance coverage limits its maximum exposure on individual claims; however, the Company is essentially self...

  • Page 105
    ... human cells. Customers of the clinical testing business include patients, physicians, hospitals, employers, governmental institutions and other commercial clinical laboratories. The clinical testing business accounted for greater than 90% of net revenues from continuing operations in 2007, 2006 and...

  • Page 106
    ... operations are included in the Company's clinical testing business, with the remainder in other operating segments. AmeriPath's operations are included in the Company's clinical testing business. At December 31, 2007, substantially all of the Company's services are provided within the United States...

  • Page 107
    ... for 2007 reflect a charge of $241 million to establish a reserve in connection with various government claims (see Note 15). Results for 2006 reflect losses from NID's operations, due to its voluntary product hold instituted late in the second quarter of 2005 in connection with a quality review of...

  • Page 108
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands unless otherwise indicated) Condensed Consolidating Balance Sheet December 31, 2007 Parent Subsidiary Guarantors NonGuarantor Subsidiaries Eliminations Consolidated Assets ...

  • Page 109
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands unless otherwise indicated) Condensed Consolidating Statement of Operations For the Year Ended December 31, 2007 NonGuarantor Subsidiaries Parent Subsidiary Guarantors ...

  • Page 110
    ... liabilities ...Net cash provided by (used in) operating activities...Net cash used in investing activities ...Net cash provided by financing activities . Net change in cash and cash equivalents. . Cash and cash equivalents, beginning of year ...Cash and cash equivalents, end of year ... $ 339,939...

  • Page 111
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (dollars in thousands unless otherwise indicated) Condensed Consolidating Statement of Cash Flows For the Year Ended December 31, 2006 Parent Subsidiary Guarantors NonGuarantor Subsidiaries ...

  • Page 112
    ... not be a national contracted provider of laboratory services to UNH beginning January 1, 2007 (see Note 17). (c) On January 31, 2007, the Company completed the acquisition of HemoCue. On May 31, 2007, the Company completed the acquisition of AmeriPath. The quarterly operating results include the...

  • Page 113
    ... government's investigation in connection with NID (see Note 15). (g) In the first quarter of 2006, the Company recorded $21 million in charges as a result of finalizing its plan of integration of LabOne, $4.1 million in charges related to consolidating operations in California into a new facility...

  • Page 114
    QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES SCHEDULE II-VALUATION ACCOUNTS AND RESERVES (in thousands) Balance at 1-1-07 Provision for Doubtful Accounts Net Deductions and Other (a) Balance at 12-31-07 Year ended December 31, 2007 Doubtful accounts and allowances ... $205,086 Balance at 1-1-06...

  • Page 115
    ...For the fiscal year ended December 31, 2007 Commission File No. 001-12215 QUEST DIAGNOSTICS INCORPORATED Exhibit Number Description 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 Restated Certificate of Incorporation (filed as an Exhibit to the Company's current report on...

  • Page 116
    ...of February 9, 2007 to Third Amended and Restated Credit and Security Agreement dated as of April 20, 2004, among Quest Diagnostics Receivables Inc., as Borrower, the Company, as Servicer, each of the lenders party thereto and Wachovia Bank, National Association, as Administrative Agent (filed as an...

  • Page 117
    ...File Number 001-12215) Amended and Restated Quest Diagnostics Incorporated Employee Long-Term Incentive Plan (filed as an Exhibit to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference) Form of Non-Qualified Stock Option Agreement...

  • Page 118
    ... Quest Diagnostics Incorporated Executive Officer Severance Plan (filed as an Exhibit to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2007) and incorporated herein by reference) AmeriPath Group Holdings, Inc. 2006 Stock Option and Restricted Stock Purchase Plan...

  • Page 119
    ... of Quest Diagnostics you own, wish to report a change of address or lost stock certificates or dividend checks, or would like to enroll in the company's automatic dividend reinvestment or direct deposit program, please contact National City Bank directly: National City Bank Shareholder Services...

  • Page 120
    .... Our Business Quest Diagnostics is the leading provider of diagnostic testing, information and services that patients and doctors need to make better healthcare decisions. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient...