Quest Diagnostics Inc. Q3 2008 Earnings Conference Call Transcript

Oct.21.08 | About: Quest Diagnostics (DGX)

Quest Diagnostics, Inc. (NYSE:DGX)

Q3 FY08 EarningsCall

October 21, 2008, 8:30 AMET

Executives

Laure Park - VP, Communications and IR

Surya N. Mohapatra - Chairman, President and CEO

Robert A. Hagemann - Sr. VP and CFO

Analysts

Amanda Murphy - William Blair & Company

Adam Feinstein - Barclays Capital

Tom Gallucci - Merrill Lynch

Ralph Giacobbe - Credit Suisse

Robert M. Willoughby - Banc of America Securities

Kemp Dolliver - Cowen & Company

Ricky Goldwasser - UBS

Gary Taylor - Citigroup

Arthur I. Henderson - Jefferies & Co.

Bill Bonello - Wachovia Securities

Operator

Welcome tothe Quest Diagnostics Third Quarter 2008Conference Call. At the request of thecompany, this call is being recorded.The entire contents of the call, includingthe presentation and question-and-answer sessionthat will follow are the copyrighted propertyof Quest Diagnostics with all rights reserved.Any redistribution, retransmission, or rebroadcastof this call, in any form withoutthe expressed written consent of QuestDiagnostics is strictly prohibited.

Now, I'd like tointroduce Laure Park, Vice President of Communicationsand Investor Relations for Quest Diagnostics.Thank you, ma'am. You may proceed.

Laure Park - Vice President, Communications and Investor Relations

Thank you and goodmorning. I'm here this morning with SuryaMohapatra, our Chairman and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer.

Some of our commentaryand answers to questions may contain forward-lookingstatements. You are cautioned not to placeundue reliance on forward-looking statements,which speak only as of the datethat they are made and reflects management'scurrent estimates, projections, expectations orbeliefs and which involves risks and uncertainties,that could cause actual results and outcomesto be materially different.

Risks and uncertaintiesthat may affect the future results ofthe company include, but are not limitedto adverse results from pending or futuregovernment investigations, lawsuits, or privateactions; the competitive environment, changesin government regulation, changing relationshipwith customers, payers, suppliers and strategicpartners and other factors described inthe Quest Diagnostics 2007 Form 10-K,2008 quarterly reports on Form 10-Q, andcurrent reports on Form 8-K.

A copy of ourearnings press release is available, andthe text of our prepared remarks willbe available later today in the "quarterlyupdates section of our website at www.questdiagnostics.com.A downloadable spreadsheet with our resultsand supplement analysis are also availableon the website.

Now here is SuryaMohapatra.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Thank you Laurie. Wedelivered another strong quarter of growthand cost reductions. Our growth was basedon improvements across the board in esoteric,gene-based and routine testing. We alsomade progress with our cost reductionprogram. I'm pleased with our progress.

During the quarter,revenues grew 3.4% to $1.8 billion, adjustedearnings per share increased 12% and cashflow improved to $329 million. For thefull year 2008, we have raised guidancefor adjusted earnings per share to between$3.17 and $3.22.

Let me take amoment to give you our view withrespect to the diagnostics industry andin particular to our company, in lightof the current economic environment.

There is generalagreement that we are in a recessionand facing difficult economic conditions. Whilethe rate of our growth may temporarilyslow, diagnostic testing is a criticalhealthcare service and we expect continuedgrowth in revenues and earnings.

Remember that almostnothing happens in patient care withouta lab test. We provide important andessential information that influences more than70% of healthcare decisions. The demographicsof the growing and aging population arepositive for our industry and our company.We are seeing the number of testsordered for each patient increase.

The rapid advancesin science, medicine and Information Technologyare bringing new and innovative teststo market quickly to diagnose diseaseand monitor therapy at an earlier stage.This is accelerating adoption of manygene-based and esoteric tests and helpingmillions of patients.

Anatomic Pathology andmolecular diagnostics are critical to cancercare and increasing reliance on thesetests has reduced morbidity and mortality.

Healthcare reform ison the agendas of both the presidentialcandidates. Both candidates have indicated theneed to promote wellness and preventionrather than simply treating the sick.Employers, too, have recognized the importanceof helping their employees to become healthierand maintain their wellness. Laboratory testingis as critical for wellness as itis for treating illness.

As a result, webelieve that our growth rate will remainpositive and that we have an opportunityto grow our revenues and increase ourmarket share. Diagnostic testing is alarge and fragmented industry. We onlyhave 15 % of the market, leavingplenty of room for our growth.

Over the years, wehave invested in building unique productsand services. Some competitors may findit difficult to compete in a downeconomy. And, many hospitals may preferto partner with us to manage theirlabs to reduce their need for additionalcapital.

Diagnostic testing remainsan attractive segment of healthcare industry.And we are well positioned to takeadvantage of growth opportunities. I willgive you a brief progress report onour commitments and future growth initiativesafter you hear the analysis of ourthird quarter results from Bob. Bob?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

ThanksSurya. As you heard, our business isstrong and performing well. Its revenuesand earnings have continued to grow, andit has displayed outstanding cash flowcharacteristics.

Before I take youthrough the numbers, a quick update regardingNID. After lengthy discussions, we arepleased to report an agreement in principlewith the federal government in connectionwith its investigation. While there arestill details to be negotiated and definitiveagreements to be executed, the detailswhich we can share with you areincluded in footnote 6 to the earningsrelease.

As a result ofthis agreement, we have increased ourreserves related to NID by $73 million,through a charge recorded in discontinuedoperations, bringing the total reserves to$314 million. The timing of any paymentsagainst the reserve will be addressedas part of the definitive settlement agreements.We are pleased to have reached agreementon the most important elements of thismatter.

Now, let's turn tothe results for the third quarter. Revenueswere $1.8 billion, 3.4% above the prioryear, and about 4% above before theimpact of hurricanes which adversely impactedour revenues and volumes in the quarter.Revenues for our clinical testing business,which account for over 90% of ourtotal revenues, were 3% above the

prior year, and about3.5% above before the hurricanes' impact.

The AmeriPath acquisitionanniversaried in the second quarter, andis no longer impacting year-over-year revenuecomparability. Volume was almost 1% abovethe prior year, and about 1.3% abovethe prior year, before the weather impact.

Over the last threequarters we have consistently seen growthin our underlying volume of about 1%.This is despite a significant decline,almost 10%, in pre-employment drug testing,which accounts for about 7% of ourtotal volume. As we've explained previously,this tends to be very low pricedbusiness, and its impact to revenue andprofitability is generally less significant.

Our employer business,which is predominantly pre-employment drug testing,and our risk assessment business, whichserves life insurers, are our two businessesmost subject to a slowing economy. Yet,the profits for both businesses are abovethe prior year level due to aggressiveactions we have taken to manage theircosts. These businesses, combined, account forless than 10% of our total revenues.

Revenue per requisitionincreased 2.3%, with the increase continuingto be primarily driven by a positivemix, and is in line with what wesaw in the first two quarters. Aswe've previously indicated, all of ourlargest health plan contracts have nowbeen renegotiated for multi-year periods, andwe believe there is much more stabilityin pricing than last year.

The impact to variousrevenue measures for a number of theitems I've just discussed is includedin a table within footnote 5 inthe earnings release. Operating income asa percentage of revenues was 17.4% forthe third quarter, and reflects continuedimprovement, despite the hurricanes' impact ofapproximately 1.5%, principally due to revenuegrowth and the progress we are makingwith our cost reduction program announcedlast year. That program, which we expectto reduce our cost structure by $500million is on track, and we expectto have delivered over $300 million inannualized savings as we exit this year,with the balance in 2009.

Last quarter, I outlinedthe major elements for our program whichinclude using Lean Six Sigma to increaseproductivity in our labs. Driving moreof our purchasing through master contractsto take advantage of our scale. Betteraligning our service capacity with patientand sample flows. Optimizing logistics routesusing more fuel-efficient and using morefuel efficient vehicles. And deploying enhancedconnectivity to our customers and patientservice centers, to reduce costs in specimendata entry and billing, and lower ourbad debt.

We are making goodprogress across all of these areas, particularlyin billing and collections, where we continueto see excellent performance in bad debt,days sales outstanding and the cost ofour billing operation.

Bad debt expenseas a percentage of revenues was 4.4%,four-tenths of a percent lower than lastyear and unchanged from the second quarter.DSOs were reduced to 45 days, downfrom 46 days at the end of Q2and 48 days at last year-end.

With our disciplinedapproach, we expect to see continued strongperformance in our billing and collectionmetrics, despite a slowing economy. Includedin other income expense is a non-cashcharge associated with the write-down ofan equity investment made several yearsago. While the accounting rules requiredus to write-down this investment, we haveretained much of the value we initiallyexpected, through certain rights to theintellectual property associated with varioustests being developing.

Diluted earnings pershare from continuing operations were $0.86before the investment write-down and theimpact of hurricanes in the quarter, whichtogether, reduced earnings per share by$0.05. This compares to $0.77 in theprior year, a 12% increase.

Last quarter we indicatedthat, combined, our investments in systemsand our start-up in India, would reducefull-year EPS by about $0.17. We incurred$0.05 of the impact in quarter three,bringing the year-to-date total to about$0.12, and now expect to incur about$0.16 per share for the full year.

Our lab in India became operational earlier this year. Weare still in the early days oframping up our selling efforts and othersupport functions, but seeing real progress.While this market is expected to bea significant contributor to our internationaloperations, we are not expecting it tocontribute material revenues this year.

Our estimate forstart-up losses this year remains about$0.04 per share. We have incurred roughly$0.01 in each of the first threequarters.

Our systems investments,expected to total $0.12 per share forthe full year, associated with developingand deploying standard systems across AmeriPathand our clinical labs, are on track.Year-to-date, we incurred roughly $0.09 cents,$0.04 in quarter three of the $0.12per share we expect to spend thisyear on systems enhancements.

The cash flow producedby our business continued to be outstanding.Cash from operations increased to $329million for the quarter, compared to $291million last year. During the quarter,we reduced debt by $131 million, bringingour total debt reduction since the AmeriPathacquisition to $830 million.

Capital expenditures were$45 million in the quarter. In addition,cash and cash equivalents more than doubled,to $287 million.

As you can seefrom our results, we have been veryprudent in the way we've deployed ourcapital and maintained our liquidity duringwhat has been an extremely challengingtime for financial markets worldwide.

Our strong cash flow;our accumulated cash balances; and ourunused credit lines, with strong bankingpartners, which total in excess of $1billion, position us very well for theseturbulent times. Until the credit marketsdemonstrate stability, we will continue tobe prudent and conservative in how wedeploy our capital.

Turning to 2008 guidancefrom continuing operations. We expect revenuegrowth to exceed 8% for the fullyear. This is slightly below our previousestimate of approximately 9%. The changeis principally due to the impact ofhurricanes in the third quarter, a delayin obtaining approval for one of ourpoint-of-care products, and not seeing theacceleration in volume we had anticipatedin our clinical testing business.

While we have notseen the acceleration in testing volumewe had expected, we continue to expectvolumes in the fourth quarter to growat rates similar to what we haveseen year-to-date. We continue to expectoperating income as a percentage of revenuesto approach 17%. We continue to expectcash from operations to approximate $900million.

And we now expectcapital expenditures of between $200 millionand $220 million.

And lastly, we haveincreased our estimate for adjusted dilutedearnings per share and now expect between$3.17 and $3.22, excluding the third quarterimpact of hurricanes and the investmentwrite-down, and any potential special charges.

These are challengingeconomic times, and no company will betotally immune. However, we are well positionedto not only weather them, but tofurther strengthen our competitive position.We have already made the investments whichprovide us with truly unparalleled assetsand capabilities, making it harder forothers to catch up during a periodwhen, for many, access to capital willbe constrained.

Our program to reducecosts and drive efficiencies has beenunderway for some time, and already hasexcellent momentum. And our strong financialcondition and cash flow characteristics willprovide us with the ability to operateour business and take advantage of growthopportunities more freely than others. Becauseof these strengths, we are confident inour prospects for both the near termand the long-term.

Now I'll turn itback to Surya.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Thanks,Bob. Over the past several years wehave taken a series of bold anddecisive actions to drive profitable growth,expand margins, diversify our business anddifferentiate ourselves from our competitors.Let me comment on our progress.

Our approach to profitablegrowth is to leverage our sales, serviceand science. Our revenue growth is drivenby increased demand for all test categories,including gene-based, esoteric and routine tests.Gene-based and esoteric testing revenues grewby almost 10% during the quarter. Testingvolume for Vitamin D, testosterone, Chlamydia,gonorrhea, and HPV testing all grew indouble digits.

We also saw stronggrowth in certain segments of routinetesting during the quarter.

The ImmunoCAP allergyblood testing continued to grow at strongdouble-digit rates from a larger existingbase, with food allergy volume up 35%during the quarter, and non-food testingup more than 20%.

Celiac disease testingincreased more than 25%. And InSure colorectalcancer screening volume was up over 15%.Leveraging our science with strong innovationand quality remains at the core ofhow we drive growth. We are keenlyfocused on expanding our leadership positionin cancer diagnostics.

We recently introducedthe new HE-4 blood test for ovariancancer recurrence. This is the only testin the last 20 years to receiveFDA clearance for monitoring ovarian cancer,and we are the only national referencelab to offer it.

Ovarian cancer isthe fifth most common cause of cancer-relateddeath among women in the U.S., with more than 15,000 deaths and nearly22,000 new cases diagnosed per year.

This is just themost recent example in a long historyof new innovative tests and technologybrought to market by Quest Diagnostics.

The centerpiece ofour business is diagnostic testing. Wehave unparallel assets and capabilities. Inorder to leverage these assets for growthand increase our operational efficiency, wehave been focusing on various customersegments who need our products and services,such as Patients, Physicians, Health Plans,Hospitals, Employers, Life Insurers and PharmaCompanies.

We are expandingour diagnostic scope and we are expandingour geographic reach.

Over the longer term,we expect additional growth to come fromsome of our newer businesses, such aspoint-of-care testing and international.

We are seeing stronggrowth in near-patient, or point-of-care testing,growing at greater than 10% year-to-date.Increased demand for CLIA-waived testing helpeddrive the growth. We have had strongersales in the U.S. in 2008. Ourlargest point-of-care customer, the AmericanRed Cross, has accelerated its use ofour hemoglobin testing.

We are making progressin India. Our market presence is growingand we are adding new customers. Wehave also expanded our lab and fieldpresence, and strengthened our management teamin Delhi. In addition, I'm pleased thatwe won our first tender in thestate of Maharashtra to screen hemoglobinlevels for all blood bank donors usingour HemoCue device.

As you have heardme say before, as we enter thedecade of diagnostics, healthcare is movingfrom a focus solely on curative careto a recognition of the value ofdetection, prevention and personalized care.

We are encouragedby a growing trend that recognizes theimportance of promoting wellness and prevention;that empowers patients to take controlof their health; and that encourages employersto create healthy workplaces. This trendtoward wellness bodes well for Quest Diagnostics.

We are empoweringpatients, and collaborating with payers, governmentsand employers to make people healthier.Consider our collaborations to drive awarenessof the value of early detection forcolorectal cancer. To-date, payers includingAetna, CIGNA and Independence Blue Cross,and the state of Tennessee have givenhundreds of thousands of our convenientInSure test to their members, employeesand residents.

We are helping employerscreate healthier workplaces and helping employeesto take ownership of their health byparticipating in our Blueprint for Wellnessprogram. This provides individuals with acomprehensive health risk report including laboratorytest results. Large employers such asDomino's Pizza, the Houston Independent School Districts and Jeld-Wen, are enthusiasticusers of this exciting wellness service.

Through our collaborationwith Google Health, we are empoweringpatients to manage their personal healthinformation and get a better understandingof their health status using lab testing.As the only laboratory partner of GoogleHealth, we make it easy and convenientfor people to manage their lab resultsand other health information in theirpersonal health record.

Now we are furtherenabling Google Health users to buy alimited menu of tests for

themselves to monitortheir health and wellness. We are alsohelping to reduce medical errors and improvepatient safety by helping physician customersuse our Care360 physician portal to ordertests and prescribe drugs electronically.

As we have enhancedthe portal, its utilization has grown.For example, the number of eprescriptionsthrough Care360 more than doubled in Septemberto nearly 300,000 compared to a yearearlier.

Our operating marginshave grown through top-line growth andcost savings. We have embraced Six Sigmaand Lean principles as a way todrive improvements in the quality andefficiency of our service. This has becomepart of our corporate culture which putspatients first and is based on theneed for continuous improvement in allthat we do.

We are on trackto meet our commitment to reduce ourcost structure by $500 million by theend of next year. We continue toexpect that over time we will achieveoperating margins of 20%.

In summary, we arethe leader in an attractive industry thatprovides an important and essential healthcareservice. While diagnostic testing is notimmune to economic challenges, the challengesare far outweighed by the opportunities.

We continue to differentiateourselves from our competitors through oursuperior patientcentric service, Six Sigma quality,innovative new tests and advanced technology.

We are bifocal, doingwhat is right for the business inthe short-term and planning for the long-term.

Our company remainsstrong operationally and financially. This enablesus to execute our strategy without distractionthrough the current political and economicenvironment and to take advantage of opportunitiesthat may arise in the future.

Thank you. We willnow take your questions. Operator?

Question And Answer

Operator

Thank you.[Operator Instructions]. Our first question comesfrom Amanda Murphy. Your line is open,and please state your company.

Amanda Murphy - William Blair & Company

Hi, good morning. Its AmandaMurphy from William Blair. Just a coupleof questions. You mentioned that volumeor say, revenue growth on the esotericside is running at the 10% levels.Can you break that down in anywaybetween pricing and volume growth, andsort of how that stranded through theyear?

Laure Park - Vice President, Communications and Investor Relations

Amanda, wereally are focused on revenue growth.And, the revenue growth is up about10%. We're seeing strong growth as weindicated in Vitamin D testing, whichis driven off increased demand acrossthe industry, as you hear for thattest, as well as improved demand alsoon HPV, chlamydia and gonorrhea.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Amanda, you should expect thatthe majority of that growth in theesoteric testing is more volume driven,given the fact it has been a newertesting.

Amanda Murphy - William Blair & Company

Okay,thanks. That's helpful. And then, on thepoint-of-care side, can you just talkabout what perhaps has surprised you both,on the positive side and on thenegative side, as you bring those teststo market? And also, have you beenable to apply any big clearances fromNIB, I know, as you commercialize point-of-caretesting?

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Well,let me comment on you about thepoint-of-care. Remember only 18 month agowe acquired HemoCue, which is a verywell-established point-of-care near present testingcompany. And when you look at thepoint-of-care platform of near present testingwe have Enterix, HemoCue and Focus diagnostics.What we are doing actually is takingtesting to the patient's bed side andas we increase our coverage and useour distribution channel, we find thatsome of the main customer like AmericanRed Cross, they are accelerating the adoptionof some of the platform. So weare pleased with the adoption of ourproducts. The only work we have todo is to continue convincing the doctorsand the FDA and the regulators thatthere is more to gain using point-of-carein the clear way of laboratory inthe doctor's office.

Amanda Murphy - William Blair & Company

Haveyou seen any increase in a regulatoryscrutiny in terms of tax you're offeringto Google for example.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

No,we have not seen any regulatory scrutinynor do we expect any scrutiny becauseremember the patient is seeking Googleto put their health records and thedoctors have to agree to that andthe patient has to give us a consent.

Amanda Murphy - William Blair & Company

Okay.Thank you very much.

Operator

We havea question from Adam Feinstein. Your lineis open. Please state your company.

Adam Feinstein - Barclays Capital

Yes, Barclays Capital. Good morningeveryone. Just, I guess a few questions.Why don't we start with the volumes.So just wanted to just get somemore thoughts in terms of... and clearlythe big question one is trying tofigure out is the economy impacting volumes.Volume grows, with respect to hurricanesis slightly lower than what it wasaveraging in the first half of theyear. So as you think about thedifference there, just curious in termsof how you think about the economylaying on that or was some of thatjust a fact you analyzed the EDNA[ph] contract win. And so just curiousin terms of your thoughts around what'sgoing on with the volumes.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

HiAdam, this is Bob. To-date, listen wehave seen significant impact outside ofour employer and risk assessments businessesand as you know both of those businessesare feeling the effects. We are addressingthat through working the cost structuresand in fact the profitability for bothof those businesses is better than itwas a year ago.

Now, with that said,the rest of our business why Ithink it's much more insulated than othertypes of businesses is not totally immuneto an economic slowdown. And the impactto the degree, there is much ofone, will be difficult to measure butwill likely be reflected as a temporaryslowing of our growth rate. And aswe've said or longer short in volume.We still fully expect to see positiverevenue in earnings growth as we lookahead. In fact, in Q3 volume growthwas inline with what we saw year-to-dateand in Q4 we're expecting volumes ofabout 1% or so which is generallyinline with what we've seen year-to-date.

There could be someimpact that we're seeing at this point.As you know, we did reduce slightlyour expectations for revenue growth butit wasn't really all just clinical testing.Certainly, the hurricanes impacted that somewhat.We had had some product delays inour point-of-care business, most noticeably theWBC test which we're hoping to haveintroduced by now. And we're not seeingthe acceleration in volume that we hadexpected in the clinical testing business.

I think that couldbe a combination of a couple ofthings. It could be... some of itcould be the economy, although that'sdifficult to measure and then, we areseeing a slightly slower ramp up ingrowth from selling more anatomic pathologyinto primary care physicians. It's takinga little longer to get that established.But otherwise nothing significant at thispoint.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Yes,I just wanted to make a comment,Adam. The way I look at the economy...healthcare segment is an attractive segmentand diagnostic testing in healthcare remainsvery attractive. And as you know, it'snot an elastic business. If the economywas growing faster, it doesn't mean thatit will go and do more blood test.At the same time, I don't thinkpeople are going to delay there atsome sort of healthcare services. So,we have seen in past the diagnostictesting to some extent is less affectedby the changes in the economy. Andwhen I look at this industry with$45 billion revenue per year, and whenI look at the demographics, I reallyfeel excited about the opportunity, thediagnostic testing has compared to allother industries.

So we are actuallypretty excited about the future. And weare operationally strong. We are financiallystrong. And we're looking forward to takeadvantage of the situation.

Adam Feinstein - Barclays Capital

Okay.And just I have follow-up question here,I appreciate all the detail there. Justmaybe comment on the bad debt expense.Also, you guys have done a goodjob in terms of managing the baddebt expense. So just curious to getyour thoughts there in terms of what'sgoing on. And do you think thecurrent levels are sustainable, excuse me.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Well,certainly bad debt and DSOs are theother places where the economic impactcould show up. But as you've seen,both of those have improved over theprior year, and ends throughout this yearfor us. And while there could besome impact to these metrics, I don'texpect it to be significant because, asyou know, unlike hospitals, the vast majorityof our patientsthat we serve are really insuredpatients. And on top of that, Ithink we have a very solid billingand collections process and we are alsoworking to do more collections of paymentsat the point of service as wellwhich we think will help.

Adam Feinstein - Barclays Capital

And then just a final questionon the bad debt and I'll get backin the queue. But just, if we stripout the AmeriPath's bad debt, I know it is not includedin the same store but just curiousin terms of just have you madeprogress. That was one of the areasyou were targeting. So just curious interms of whether the trend has gonebetter there also.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

If you stripout the impact of AmeriPath, we arepretty comparable to where we were ayear ago.

Adam Feinstein - Barclays Capital

Okay. Great. Thank you.

Operator

Our next question isfrom Tom Gallucci, Your lineis open. Please state your company.

Tom Gallucci - Merrill Lynch

Merrill Lynch.Thank you. Maybe just a follow upshere. Bob, just on that last answerthat you had. So you're statingthat sort of core Quest was tosort of stable year-over-year which shouldimply that AmeriPath did get a littlebetter so you're making some progresson bad debt on that side.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Correct.We continue to make progress there.

Tom Gallucci - Merrill Lynch

Okay. But then on the revenueside, it sounds like that part ofor maybe you haven't had as muchprogress as you expect it when youtalk about selling AP through to theprimary care docs that would be someof the revenue related type synergiesat AmeriPath. Is that right?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Itis. Yes, its an opportunity that wefeel is still as big as it everwas. We just got off to a slowerstart there than we were anticipating.

Tom Gallucci - Merrill Lynch

Is there any particular reasonwhy that happened or it is a harderthing than you thought it was goingto be or any more color that youcan offer?

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

No,it's just a way integrating both thecompanies than we are taking it regionby region. So we are doing somepiloting in some places. So, Tom, itstaking a little longer than what youhad expected but I think we onlydo it the right way.

Tom Gallucci - Merrill Lynch

Okay. Bob, on a topic ofthat that maybe could you just remindus how you do accrue bad debt,just for the sake of making surethat to the extent there appears changein the patient mix; that would beaccurate slightly this quarter as opposedto if it delays you don't get thatbill in six to 12 months from now.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

WellI'll try not to take you througha detailed accounting. But essentially theway it works is, we have a veryrigorous policy that looks at a receivablesby payer type and as they age outrequires additional reserves. Where at onepoint you have to fully reserve thatreceivable if it ages out beyond acertain level. So I'm very confident inthe process that we use to establishour reserves so that we are notgoing to have any surprises there.

Tom Gallucci - Merrill Lynch

All right. So what you aredescribing there, right up front thoughif it's a one payer versus anotherpayer you take a different level ofapproval. Is that what were you --

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Absolutely.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Absolutely.

Tom Gallucci - Merrill Lynch

Okay. And then my last questionis just on CapEx. You lowered yourexpectations there last quarter, now theyare lower again. So, it's a prettysignificant difference from where you werein the beginning of the year. What'sthe biggest driver there?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Yes.I would tell you that it's reallyjust prudent capital management. We haveasked all of our managers to reallytake a hard look at capital spendingto see if they can cut back ordelay some projects. Some of those actuallyare in the IT area. India, as youknow, is ramping up a little slowerthan we had thought and we hadsome capital in there although still lessthan 10% of our total. And we'vefrankly differed some facility expansions. Butwith that, keep in mind, we've historicallyinvested in our operating and our technologyinfrastructure and it gives us the abilityto moderate our spending if we wantto, but without adversely impacting ourbusiness or its prospects. So, I feelvery comfortable that we can tighten ourbelts right now. Some of this maybejust deferred until next year. But alot of times you find out thatwhen you go without something, maybe yourealize that you could have done withoutit completely. So, I'm hoping if that'sthe case as well.

Tom Gallucci - Merrill Lynch

Thank you.

Operator

Our nextquestion comes from Ralph Giacobbe. Yourline is open. Please state your companyname.

Ralph Giacobbe - Credit Suisse

Thanks. Credit Suisse. Can you maybe estimatethe impact of the extra day inthe quarter and sort of how youthink about that in terms of theguidance that you put out in the4Q, or for 2008, and implied 4Q.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Thatwas fully built into the guidance thatwe had out there.

Ralph Giacobbe - Credit Suisse

Okay.Any estimate for the quarter?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Whatthe impact was?

Ralph Giacobbe - Credit Suisse

Yes.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Around1%, or so.

Ralph Giacobbe - Credit Suisse

Okay.And then, with the NID settlement, maybeany updated thoughts for usage of cash.And specifically, maybe thoughts on acquisitionsjust given the current market conditions?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Well,first I would tell you that we'vebeen pretty conservative in the way we'vedeployed capital over the last quarteror so. And as I think about it,our first objective with respect to capitalis to make sure we preserve it.And that's why you saw us buildup the cash balance this last quarter.

Once the credit marketshave demonstrated that they've returned tosome sense of normalcy, and they canstay there, you'll see us deploy capitalsimilar to what we've done historically.Our credit stats have continued to improveover the course of the last yearsas we've paid down debt. And whiledebt reduction is going to continue tobe in area where we will deploycash, we'll also be able to givemore consideration though to acquisitions andshare repurchases.

Between the two ofthose, I generally see acquisitions asa priority over share repurchases. Theybetter position the company for sustainablegrowth in shareholder returns. And I'dexpect valuations may become a littlemore attractive as well. And as youknow like we've done historically, whenacquisitions aren't available at the rightprice, we'll deploy the excess cash intoshare repurchases.

And there generally,while we won't be in the marketevery quarter repurchasing shares, over thecourse of the year we typically wouldpurchase at a minimum, the amount necessaryto offset the delusion associated withour equity plans.

Ralph Giacobbe - Credit Suisse

Okay.And then just my last one. Canyou maybe talk a little bit moreabout India. I know you had mentionedsome progress there. I know, there wassome management turnover in that area.Can you talk about some of theprogress? What you're seeing? Where you'reat? I know you've talked about itbeing also a little bit slow, interms of some of the CapEx projects.But just a little bit more detailon that, and what's going on there.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Sure.India remains the most attractive marketas far as international is concerned.And it is also the most importantfocus for us, because in the longerterm, in three or five years, weexpect enormous growth from a country,which has 300 million middle class.

We have built astate-of-the-art laboratory, not only the bestin India, probably best in the AsiaPacific, in that Pacific region. And weare going through hiring people, trainingpeople, improving our operational and medicalneed. We have to make some changesin management. We wanted to strengthenour management now that we accomplishphase of growth, rather than just operationalefficiency there. And we are gaining customers,and if you think about the Indiabusiness, it's not only... the laboratoryis not only going to do testingfor hospitals and physicians, but alsoit is designed to do testing forpharma companies for clinical trials andthe life insurers.

So, I'm very pleasedwith where we are. I would havelike to really move much faster asfar as the customer acquisition. But goingforward with the new management, we justleveraged our marketing campaign. We juststarted actually last month. So, I'm veryexcited about the opportunities that wehave in the future. But it is littlebit slow than what I thought.

Ralph Giacobbe - Credit Suisse

Okay.Thank you.

Operator

Our nextquestion comes from Don Brock [ph]. Yourline is open. Please state your company.

Unidentified Analyst

Sure, JPMorgan.The first thing I just wanted toask really quickly was on the EPSraise, I mean I feel like we'vekind of talked around it, I meanspecifically, have you built in an increasein debt repayment or share repurchasefor the fourth quarter that's going todrive the upside to the number?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Theanswer to that is no. And franklyeven if we aggressively repurchase sharesin the fourth quarter or pay downdebt in the fourth quarter, it doesn'thave that much of an impact inthe quarter than do you it.

Unidentified Analyst

Excellent. Thankyou. The second thing was, Surya, inyour opening remarks, you talked aboutthe possibility from a competitive andfrom an opportunity perspective, of somebusiness moving to some of the largerindependent labs from the hospital outreachprograms. Could you just give a littlebit more color around that?

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Sure.As you heard from Bob, that wehave been investing in our company andover the last four years, we've beenpreparing ourselves how to improve thequality, how to provide the products andservices that is required, not only forphysician and managed care organization butalso for hospitals and the pharma companiesand what I was referring to thatthis is a situation now when lotsof people have difficulty to access capital.And I have a number of discussionwith many hospitals who would like tohave somebody manage their laboratories withhigh quality tests and then they don'thave to spend the extra capital toobtain their laboratories. So we see thatgoing forward, we will work with hospitalsto manage their labs and also toupdate their labs. As far as theoutreach business is concerned, I thinkas always I say that there willbe 10 or 12 outreach businesses butonce you go above a certain regionand above certain dollars, you have todo the same way as everybody else.You have to managed care contracts, youhave to logistics, you have to havebilling. So I don't think there isa lot of changes, increase in outreach.In fact what we have seen overthe last 18 months there are anumber of outreach laboratories there forsale. So, again we are not immuneto economic challenges, but our businesshas plenty of room to grow andwith the operationally strong company aswe are and financially strong, we areready to take advantage of some ofthe opportunity that may come in frontof us.

Unidentified Analyst

Now doesthat mean that you would be moreinclined at this point to manage orwork with the hospitals versus acquiringsome of those programs that might beon the block right now?

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Atthe moment we do work with thehospitals. We manage some laboratories andin past we have bought some ofthe hospital business and again we toldyou last year that for 12 monthswe will be not going to acquireanything until we integrate AmeriPath andnow you heard from Bob that asthe credit market comes back to normalcywe will utilize our cash appropriatelyto acquire right assets at right value.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

AndDon, when we talked about acquiring hospitalbusiness, typically we are talking abouttheir outreach programs. When we talkabout managing business for hospitals, weare really talking about their labs inthe hospital typically serving the inpatientand the outpatient areas.

Unidentified Analyst

Right. Gotyou.

Laure Park - Vice President, Communications and Investor Relations

And eachhospital has a variety of needs andit will be met [ph] accordingly.

Unidentified Analyst

Perfect. Thanksguys.

Operator

Our nextquestion comes from Robert Willoughby. Yourline is open. Please state your company.

Robert M. Willoughby - Banc of America Securities

Hi, Banc of America. Three questions. The guidance you provided, therewas some language thing, and it includespotential special charges. Are you expectingsomething in the fourth quarter of sizeor magnitude?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Nothingspecific at this point, Bob. Again wealways... that's the qualifier that we alwaysput out there every time when weput guidance out.

Robert M. Willoughby - Banc of America Securities

Okay.And you did reference clinical testingresults a bit lower than where youthought they would be. Was there arationale for that, any reason?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

AsI said earlier, it could be, someof it, a slowing economy, although thatits really difficult to measure. But again,when I think about the change inrevenue guidance, we went from approximately9% to over 8%. So, it's a modestadjustment there and while we slightlyadjust with the top-line, we actuallybrought the bottom-line up.

Robert M. Willoughby - Banc of America Securities

Okay.But that is your pharma testing business,Bob?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

I'msorry?

Robert M. Willoughby - Banc of America Securities

Isthat the pharma... the clinical trial testingbusiness?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

No,no, no. This was clinical testing, notclinical trials testing.

Robert M. Willoughby - Banc of America Securities

I'msorry, then I misunderstood that. Andjust lastly, is there any ramifications,I guess there is a felony chargehere. Is there any ramification whatsoeveron your government business, or are theseexclusive?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Idon't expect that at all. The criminalplea was a single count of felonymisbranding by a subsidiary NID, whichhas been closed now since 2006. Therewere no criminal charges against QuestDiagnostics.

Robert M. Willoughby - Banc of America Securities

Okay.Great.

Laure Park - Vice President, Communications and Investor Relations

Your questionand based on the agreement and principal,we don't expect any impact as relatedto our participation in federal programs.

Robert M. Willoughby - Banc of America Securities

That'sgreat. Thank you.

Operator

We havea question from Kemp Dolliver. Your lineis open. Please state your company.

Kemp Dolliver - Cowen & Company

Hi. Cowen & Company. Question... firstquestion relates to AmeriPath, and spreadsheetthat came out. It showed AmeriPath actuallybeing a small drag on consolidated revenuesthis quarter. Is that hurricane related,or some other factor?

Laure Park - Vice President, Communications and Investor Relations

Kemp, Ithink you're looking at the year-to-dateimpact for AmeriPath. I mean, AmeriPath isfully anniversaried this quarter. And thereis no separate breakout of the AmeriPath impact to our revenues.

Kemp Dolliver - Cowen & Company

Actually,I'm looking at Q3, and it's inthere. We can take this offline. Butit's definitely...

Laure Park - Vice President, Communications and Investor Relations

I'll verify.

Kemp Dolliver - Cowen & Company

Okay.Thanks. The other question is it relatesto your moderation of revenue growth.Is Health Alliance a factor in that?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Certainly,it is. Yes. That's a management agreementthat we had; that's been discontinued.And there will be... there are actuallyseveral lab management agreements that weterminated over the course of the lastyear or so.

Kemp Dolliver - Cowen & Company

Okay.And any particular strategy behind that?Was it just individual situation throughtheir sapping [ph] business.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Yes,every one of those is unique. So,if you've seen one, you've seen one,basically. That's what I could tell youabout the...

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Thereare very individual situation. You knowwhat happened with Health Alliance. Itsnothing to do with us but everythingto do within Cincinnati.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Butas Surya pointed out though, this Ithink will be a bigger opportunity forus as we look forward because hospitalswill be capital constrained.

Kemp Dolliver - Cowen & Company

All right.Okay, good. And just my last questionBob, you're running any higher cash balancethan normal. Is that a reflection ofto do with the credit markets atthis point?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Yes,that's temporary. As I said our firstpriority right now in this market hasbeen to preserve capital but certainlyonce things free up you'll see uscarry a smaller cash balance.

Kemp Dolliver - Cowen & Company

Great.Thanks a lot.

Operator

There isa question from Ricky Goldwasser.Your line is open. Please state yourcompany name.

Ricky Goldwasser - UBS

Good morning.Just to clarify with some follow-up questions.Bob you mentioned that fourth quartervolumes are going to be at about1% and if we back into yourtop-line guidance, I get about 1.5% revenuegrowth. So and my question here, arewe comparing the first quarter, the 1%volume increase, is this apples-to-apples withthe 0.7% reported for the third quarteror is this adjusted for deteriorationin drugs-of-abuse and hoarse [ph], etcetera.And then secondly, what are you kindof like thinking about in terms ofprice because again, if we're thinking1.5% top-line growth, 1% volume growth,is this implied that the pricing metricis going to come down.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Yes,Ricky I think your squeeze is probablynot giving enough credit to the fourthquarter. We are expecting more than 1.5%revenue growth and the growth in volumethat we're expecting in Q4 is reallyapples-to-apples with the volumes that we'vebeen reporting here obviously before theAmeriPath acquisition.

Ricky Goldwasser - UBS

Okay. I mean for therevenue growth, I'm just kind of likethinking you are saying about 8% andyou did 6.5% I think year-to-date?

Laure Park - Vice President, Communications and Investor Relations

It wouldbe greater than 8%. So, I'm guessingthat's probably a piece of what's drivingaround in, Ricky.

Ricky Goldwasser - UBS

Okay. And as far asthe pricing goes?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Idon't see any reason for pricing tobe any different in Q4 than itwas for the rest of the year orfor the year, earlier part of theyear?

Ricky Goldwasser - UBS

Okay. And then one housekeepingon the test rate, test rate inthe third quarter is a little bithigher than what we estimated. Shouldwe assume test rates will go downin the first quarter or should weassume similar levels to what in thethird quarter?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Well,first I don't typically provide guidanceon the tax rate but I wouldn'texpect it to be significantly different,the underlying tax rate to be significantlydifferent in Q4 compared to Q3.

Ricky Goldwasser - UBS

Okay. Thank you.

Operator

We havea question from Gary Taylor. Your lineis open. Please state your company name.

Gary Taylor - Citigroup

Hi.Good morning. Citigroup. I had a questionabout the fourth quarter time doing thearithmetic correct. I believe implied 4Qearnings is 76 to 81. Is that right?

Laure Park - Vice President, Communications and Investor Relations

Yes.

Gary Taylor - Citigroup

That seemsto imply... well, that would be down6% to 12% sequentially. I think yourtypical 4Q seasonality is down more like5% to 6%. So, is there somethingelse being baked in, in terms ofconservatism or concern on the low end?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Iwouldn't say there is anything else beingbaked in. I think if you go backover the years our business has changeda little bit as we've done variousacquisitions and let's call it the seasonalityfrom quarter-to-quarter quarter-to-quarter that yousaw in the past isn't necessarily indicativeof what you're going to see goingforward.

Gary Taylor - Citigroup

Okay. That'swhat primarily growth away from the routinebusinesses, if the change in the business?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Someof it. Sure.

Gary Taylor - Citigroup

Okay. Canyou give us the balance sheet allowanceagainst the growth data.

Laure Park - Vice President, Communications and Investor Relations

Gary, the 10-Q will be filed on Thursday,which will have that number on itas well.

Gary Taylor - Citigroup

Okay. Andthen finally, can you talk about selfpay revenue in the quarter. I knowthat was up about 50 basis pointslast year. What does that look likein the third quarter or year-to-date?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Okay.Generally, it's up between 5% and 6%of our total revenues. It hasn't changeddramatically. We haven't seen a big changethere. So... and that's mostly the uninsuredthat we classify as patient direct embeddedin our third party is the portionassociated with deductibles and co-pays, whichis about equal to that amount. So,in total there is probably 10% to12% that we collect from patients ofour revenues. And that hasn't changeddramatically.

Gary Taylor - Citigroup

No spikinggrowth in uninsured volume, given thejob environment that's held pretty stable.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

No.There hasn't really been any spiking growth.Nor has there been any increase inour receivables balances or aging associatedwith patient pay either.

Gary Taylor - Citigroup

Okay. Thankyou.

Operator

Our nextquestion comes from Art Henderson. Yourline is open. Please state your companyname.

Arthur I. Henderson - Jefferies & Co.

Hi, thanks. With Jefferies. Bob, I'msorry. I got cut off for part ofthe call, but DSOs, how low canyou foresee getting those numbers?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Pushingthat. Our goal is to continue drivingthem down where we can. A lot ofit has to do with making sure youget the right billing information upfront.But additionally I think as we domore and more electronic and activitywith our physicians and then we domore and more electronic payments withour large payers, I think that canhelp drive that down over time. Butat this point I'd rather stay awayfrom trying to give you some specificguidance around DSOs.

Gary Taylor - Citigroup

Is itsafe to say though, that a lotof low hanging fruit has now gone.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Absolutely.I mean if you look at our DSOsover the last five to six yearsor so, they've come down pretty dramatically.

Gary Taylor - Citigroup

Yes.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Anda lot of that had to do withnot only getting the low hanging fruitbut also going after some of thereally hard stuff too. And I think,our billing operation is very efficient.It's very focused on getting the informationupfront that you need in order tobill properly because really, as I havetold people all along here, billing isall about getting the right informationupfront. If you don't get it upfront,and you try to get it later, youare really going to have a challengein collecting things.

Gary Taylor - Citigroup

Okay. That'sfair. One, actually two more questions,one for you, Bob. With the economyslowing down obviously, is there an opportunityto reduce compensation expense to someextent is there more people out thereat some of the lower levels wherethere might be some opportunity?

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

No.I think that first of all, we havebeen improving our operational efficiency andwe've been trying a number of wayswhere we can give flexible work force.But we are not going to changeour strategy. We have been doing thesething for last three or four yearsand the company has become much moreefficient. We are going to drive ourgrowth strategy and the cost improvementstrategy without any changes at the moment.But we'll be prudent as far ascapital expenses and operational expenses. ButI'm not seeing any major reduction.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Andour goal all along with our costreduction program has actually been totake work out, so that we needfewer people to do the work andnot necessarily try to pay them less.

Gary Taylor - Citigroup

Yes, understood.Okay. One last question. Surya, you mentionedwellness a few times in your preparedremarks. Is there a bigger opportunitythere that you are seeing either inthe way of an acquisition or somethingthat we should start to think about?

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Wellfirst of all, I think its the sametesting whether it is for illness orfor wellness and if you look atour company over the last four years,we have tried to bring more customersso that we can utilize our fixedcost infrastructure. The laboratories are usedin the night and we are utilizingthat infrastructure whether it is forhospital or managed care physician, employer,pharma, insurer. So now the biggest trendpeople have realized to reduce healthcare cost to take care of peoplebefore they become sick and that's whatI was referring that both the presidentialcandidates are thinking about prevention andfitness.

So we think thisis a great opportunity and we havebuilt up a small business what wecall blue print for wellness. We areworking with employers and governments howto create awareness about health reassessmentand the associate test. So going forward,you will see us focusing on thatarea and I really believe that's agreat opportunity. So if there is againopportunity for us to buy a coupleof companies to strengthen our platform,we will do that. But I considerwellness testing is as important as illnesstesting.

Gary Taylor - Citigroup

Great. Thanksvery much. Very nice quarter.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Thankyou.

Operator

We havea question from William Bonello. Yourline is open. Please state your companyname.

Bill Bonello - Wachovia Securities

Sure. Bill Bonello with Wachovia. Thanks.Just a question on trying to understandsort of the impact of the costsavings and what potentially might beoffsetting that. I mean, if I thinkof the magnitude of dollars that youguys are talking about having saved exitingthe year and how that compares lastyear, it would seem like we shouldhave seen a greater amount of marginexpansion than what we have seen ona year-over-year basis. And so, I knowa little bit of that is impactedby some of the cost initiatives. Although,those seem to have been pretty minimalin 2008. I'm just curious, if youcan speak to what else is impactingthe cost structure, and why we can'tsimply lay on $100 million or $150million of savings on top of revenue,and see that kind of margin expansion.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Well,it would be nice if it was thateasy. But, as you recall, at thebeginning of the year, some of theprice concessions that we made last year,when we renegotiated managed care contractskicked in. And certainly that's one ofthe things that put downward pressureon the margins this year, which arebeing offset by some of the costreduction programs. And then, in additionto that, we've got what I'll callnormal inflationary increases for salaries, wages,benefits etcetera.

Bill Bonello - Wachovia Securities

Would yousay that cost saving initiatives causedinflation is outpacing revenue growth?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Temporarilyin '07, it was outpacing the pricingthat we saw as a result of theconcessions that we made in '07.

Bill Bonello - Wachovia Securities

Okay. Andthat's probably carried through due thetime in 2008?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Correct.But now again, what I'd remind youis pricing is much more stable thanit was a year ago because all ofthose contracts were negotiated for multipleyear periods.

Bill Bonello - Wachovia Securities

And whendo we completely annualize the impactof any price cuts that you've taken?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

It'llbe sometime next year.

Bill Bonello - Wachovia Securities

Okay. Beginningprobably more front-end loaded or --

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Morein the first half of the year.

Bill Bonello - Wachovia Securities

Okay. So,when we think of the incremental dollarsslowing through on cost savings in '09,should we think of a more dramaticmargin impact or are there other considerationsin '09 that would offset some ofthat impact?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Whydon't we get in to more of thosedetails when we provide '09 guidance?

Bill Bonello - Wachovia Securities

That'sfair. Thank you very much.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Onlyfew months left. Thank you.

Bill Bonello - Wachovia Securities

Ba-bye.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Ba-bye.

Operator

We havea question from Shelly Norm [ph]. Yourline is open. Please state your company.

Unidentified Analyst

Thanks GoldmanSachs. Its Shelly in for Matt Borsch.I have a couple of questions onthe balance sheet and I apologize Idropped off the call for a coupleof minutes as well. Just let meknow if you have already addressed this.Just wondering, with the NID probableon settlement exceeding the balance sheetcash and that you've currently got, I'mwondering if you could update us onyour availability under the revolver.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Sure.As I said in our prepared remarks,we have in excess of $1 billionavailable under our revolver. And withrespect to NID, and the funding there,the timing of the payment or paymentsstill needs to be finalized. I wouldn'tautomatically assume that its going tobe in a lumpsum. Those details reallyneed to be worked out at this point.But I certainly expect that some combinationof our cash flow, the cash on handand our available credit facilities willbe used to fund those payments whendue.

Unidentified Analyst

So, if wecould just go into a little bitmore detail. The revolver itself I believeis $750 million and then you've gotan accounts receivable securitization worth about$400 million.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Correct.

Unidentified Analyst

No. Notto get too deep in the weeds, butI'm just wondering, I think that securitizationis going to expiring at the endof '08? So the way we sort of--

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Actuallyits only $125 million of that expiresat the end of '08. And we arein the process of trying to replacethat at this point.

Unidentified Analyst

Okay. Sowe can definitely think about $750 millionthat's available on that revolver thoughthere is no letters of credit. Okay,okay. So, going back to, there hasbeen a couple of comments that waitinguntil credit markets return to normalcy,we may take a look at doing somemore M&A. I'm just wondering, isn'tthis the opportunity to be out onas a buyer, maybe not right nowthis quarter, but if the credit marketsdon't return to normal and you haveadequate access to capital and there couldbe some very attractive multiples outthere. Just wondering if you could talkabout might that be a strategic changein direction for you, especially if weassume going into next year, the economycontinues to be slow, maybe these volumescontinue to be somewhat slower than expected,you supplement the top-line by going outand buying other companies.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Sure.There is no reason that we wouldn't.But until we see that there issome liquidity return to the marketplace,I think it makes sense for us tobe very prudent in how we deploycash. But certainly as you pointed outand as I said earlier, I thinkthat valuations should even be more attractiveas we look ahead.

Unidentified Analyst

But youare not implying that you would needto go to access the credit marketfor an additional facility.

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

No,I'm not implying that.

Unidentified Analyst

Okay, great.And then just housekeeping if I could.Can you tell me when LIBOR resetsfor your floating rate does?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

It'sactually resetting later this month.

Unidentified Analyst

And that'sfor fourth quarter interest expense?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

I'msorry?

Unidentified Analyst

I'm wonderingon the fourth quarter interest expense,when we think about LIBOR resetting forthe quarter?

Robert A. Hagemann - Senior Vice President and Chief Financial Officer

Ijust said it's going to reset laterthis month.

Laure Park - Vice President, Communications and Investor Relations

The quarterwill be a mix of two rates.

Unidentified Analyst

Got it.Okay, great. Thanks. And I just wantto... I guess I'll leave it there.

Operator

Our finalquestion comes from Daren Larik [ph].Your line is open. Please state yourcompany.

Unidentified Analyst

Thanks. Thanksfor taking my questions. It's Daren Larik[ph] with Deutsche Bank. I guess, justa question here with regard to howyou're working with managed care, as theylook to steer high volumes away fromhigher cost settings, mainly the hospitalsettings. Do you see any momentum withthat strategy? And just want to getyour thoughts as to whether you thinkthere could be an offset somewhat, ifthe economy has an impact on seculargross rates of your volumes and testing.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

Tobe successful in steering leakage, wehave to work together. And we havequite a number of managed care organizationsthat are very active in doing thesethings, for example Aetna and CIGNA, weare working with them. And we haveto have the information. We have towork hand in hand. And I thinkthat's an opportunity for us.

But going back tothe hospitals it's not only steering someof the tests that's going to thehospital. I'm talking about doing highquality innovative tests for hospitals, whichwe are very well positioned to do,either by managing their laboratories orproviding them tests because we have thevolume and the expertise, and we canhave a weaker turnaround than they have.And I think with the current situation,and with our strength in hospital business,I look forward to deeper market share,more market share, and gaining more presencein the hospital market.

Unidentified Analyst

Great. Thanks.

Surya N. Mohapatra - Chairman, President and Chief Executive Officer

That'sall.

Operator

Thank youfor participating in the Quest Diagnosticsthird quarter conference call. A transcriptof prepared remarks on this call willbe posted later today at Quest Diagnosticswebsite at www.questdiagnostics.com. A replayof the call would be available from10:30 AM on October 21st, through midnighton November 18, 2008 to investors inthe U.S. by dialing 866-431-7950. Investorsoutside the U.S. may dial 203-369-0981.No passcode is required for either number.

In addition, registeredanalysts and investors may access an onlinereplay of the call at www.streetevents.com.The call will also be available tothe media and individual investors atQuest Diagnostics' web site. The onlinereplay will be available 24 hours aday beginning at noon. Thank you. Youmay disconnect at this time. .

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