Quest Diagnostics 2007 Annual Report Download - page 65

Other Income (Expense)
Interest expense, net for the year ended December 31, 2006 increased $34 million over the prior year. The
increase in interest expense, net was primarily due to additional interest expense associated with our $900 million
senior notes offering in October 2005 used to fund the LabOne acquisition, as described more fully in Note 10 to
the Consolidated Financial Statements.
Other expense, net represents miscellaneous income and expense items related to non-operating activities
such as gains and losses associated with investments and other non-operating assets. For the year ended
December 31, 2006, other expense, net includes $26 million of charges related to the write-downs of investments
offset by a gain of $16 million on the sale of an investment.
For the year ended December 31, 2005, other expense, net includes a $7.1 million charge associated with
the write-down of an investment.
Discontinued Operations
Our discontinued operations are comprised of NID, a test kit manufacturing subsidiary. During the fourth
quarter of 2005, NID instituted its second voluntary product hold within a six-month period, due to quality
issues, which adversely impacted the operating performance of NID. As a result, we evaluated a number of
strategic options for NID, and on April 19, 2006, we decided to cease operations at NID. During the third quarter
of 2006, we completed the wind down of NID’s operations. Results of NID are reported as discontinued
operations for all periods presented.
Loss from discontinued operations, net of tax, for the year ended December 31, 2006 increased to $39
million, or $0.20 per diluted share, compared to $27 million, or $0.13 per diluted share in 2005. Results for the
year ended December 31, 2006 reflect pre-tax charges of $32 million, primarily related to the wind down of
NID’s operations. These charges included: inventory write-offs of $7 million; asset impairment charges of $6
million; employee severance costs of $6 million; contract termination costs of $6 million; facility closure costs of
$2 million; and costs to support activities to wind-down the business, 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 the use of derivative financial instruments. We do not
hold or issue derivative financial instruments for trading purposes. We believe that our foreign exchange exposure
is not material to our consolidated financial condition or results of operations. See Note 11 to the Consolidated
Financial Statements for additional discussion of our financial instruments and hedging activities.
At December 31, 2007 and 2006, the fair value of our debt was estimated at approximately $3.6 billion and
$1.6 billion, respectively, using quoted market prices and yields for the same or similar types of borrowings,
taking into account the underlying terms of the debt instruments. At December 31, 2007 and 2006, the estimated
fair value exceeded the carrying value of the debt by approximately $59.1 million and $0.4 million, respectively.
A hypothetical 10% increase in interest rates on our total debt portfolio (representing approximately 61 and 59
basis points at December 31, 2007 and 2006, respectively) would potentially reduce the estimated fair value of
our debt by approximately $78 million and $33 million at December 31, 2007 and 2006, respectively.
Borrowings under our senior unsecured revolving credit facility, our secured receivables credit facility, our
term loan due December 2008, and our term loan due May 2012 are subject to variable interest rates. Interest on
our secured receivables credit facility is based on rates that are intended to approximate commercial paper rates
for highly-rated issuers. Interest rates on our senior unsecured revolving credit facility, term loan due December
2008 and term loan due May 2012 are subject to a pricing schedule that can fluctuate based on changes in our
credit ratings. As such, our borrowing cost under these credit arrangements will be subject to both fluctuations in
interest rates and changes in our credit ratings. As of December 31, 2007, the borrowing rates under these credit
facilities were: for our senior unsecured credit facility, LIBOR plus 0.40%; for our term loan due December
2008, LIBOR plus 0.55%; and for our term loan due May 2012, LIBOR plus 0.50%. At December 31, 2007, the
LIBOR rate was 4.60%. At December 31, 2007, there was $1.4 billion outstanding under our term loan due May
2012, $60 million outstanding under our term loan due December 2008; $100 million outstanding under our
secured receivables credit facility and no borrowings outstanding under our $750 million senior unsecured
revolving credit facility.
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