Quest Diagnostics 2008 Annual Report Download - page 57

the differentiated services we offer to our customers will enable us to grow organically, we believe there will
continue to be opportunities to grow beyond our current principal business of offering clinical testing 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. Given that physicians and hospitals are
primary sources for both point-of-care testing and laboratory performed tests, we believe providing both services
will strengthen our relationships with customers and accelerate our growth.
Additionally, diagnostic testing in international markets, particularly developing countries, is highly
fragmented and less mature. Continued expansion into point-of-care testing and international markets will
diversify our revenue base, and add businesses in markets which are growing faster and are more profitable than
our principal business of United States based clinical testing.
Acquisition of AmeriPath
On May 31, 2007, we completed the acquisition of AmeriPath, in an all-cash transaction valued at
approximately $2 billion, including approximately $780 million of assumed debt and related accrued interest.
AmeriPath is a leading provider of anatomic pathology, including dermatopathology, and esoteric testing which
generated annual revenues of approximately $800 million.
Through the acquisition, we acquired all of AmeriPath’s operations. AmeriPath, with its team of
approximately 400 board certified pathologists, operates 40 outpatient anatomic pathology testing locations and
provides inpatient anatomic pathology and medical director services for approximately 200 hospitals throughout
the United States. We financed the all-cash purchase price and related transaction costs, together with the
repayment of approximately $780 million of principal and related accrued interest representing substantially all of
AmeriPath’s debt, as well as the refinancing of the $450 million term loan used to finance the acquisition of
HemoCue, with $1.6 billion of borrowings under a five-year term loan facility, $780 million of borrowings under
a one-year bridge loan, and cash on-hand. In June 2007, we completed an $800 million senior notes offering. The
net proceeds of the senior notes offering were used to repay the $780 million bridge loan. The acquisition was
accounted for under the purchase method of accounting.
Acquisition of HemoCue
On January 31, 2007, we acquired HemoCue, a Sweden-based company specializing in point-of-care testing,
in an all-cash transaction valued at approximately $450 million, including $113 million of assumed debt of
HemoCue. The transaction was financed through an interim credit facility, which was refinanced during the
second quarter of 2007 in connection with the financing of the AmeriPath acquisition.
HemoCue is the leading international provider in point-of-care testing for hemoglobin, with a growing share
in professional glucose and microalbumin testing.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions and select accounting policies that affect
our reported financial results and the disclosure of contingent assets and liabilities.
While many operational aspects of our business are subject to complex federal, state and local regulations,
the accounting for most of our business is generally straightforward with net revenues primarily recognized upon
completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar
transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits.
Due to the nature of our business, several of our accounting policies involve significant estimates and judgments:
•revenues and accounts receivable associated with clinical testing;
•reserves for general and professional liability claims;
•reserves for other legal proceedings;
•accounting for and recoverability of goodwill; and
•accounting for stock-based compensation expense.
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