Quest Diagnostics 2000 Annual Report Download - page 60

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The following discussion and analysis regarding operating costs and expenses exclude the effect of testing
performed by third parties under our laboratory network management arrangements, which serve to increase cost of
services as a percentage of net revenues and reduce selling, general and administrative expenses as a percentage of net
revenues. Cost of services, which included the costs of obtaining, transporting and testing specimens, decreased during
1999 as a percentage of net revenues to 61.0% from 61.5% a year ago. This decrease was primarily attributable to an
increase in average revenue per requisition.
Selling, general and administrative expenses, which included the costs of the sales force, billing operations, bad
debt expense, general management and administrative support, decreased during 1999 as a percentage of net revenues to
30.4% from 30.6% in the prior year. During 1999 bad debt expense increased to 6.7% of net revenues from 6.1% of net
revenues in the prior year. The increase in bad debt expense was principally attributable to SBCL's collection experience,
which is less favorable than Quest Diagnostics' historical experience. A significant portion of the difference is due to
Quest Diagnostics' processes in the billing area, most notably the processes around the collection of diagnosis, patient and
insurance information necessary to effectively bill for services performed. While the sharing of internal best practices has
begun in the billing functions, management believes that additional opportunities exist in order to improve SBCL's
historical collection experience. The remaining overall decrease in selling, general and administrative expenses as a
percentage of net revenues was primarily attributable to the impact of the SBCL acquisition which enabled us to leverage
certain of our fixed costs across a larger revenue base. While selling, general and administrative expenses decreased as a
percentage of net revenues, we experienced an increase in expenses in 1999 as compared to 1998 due to the impact of the
SBCL acquisition and from additional investments in information technology and sales and marketing capabilities,
litigation expenses and employee compensation costs.
Interest, Net
Net interest expense in 1999 increased from the prior year by $28.0 million. Net interest expense for the year
ended December 31, 1999 included $1.9 million of interest income associated with a favorable state tax settlement. The
increase in net interest expense is primarily attributable to the amounts borrowed under the Credit Agreement in
conjunction with the SBCL acquisition and a decrease in interest income resulting from lower average cash balances in
1999 as compared to 1998.
Amortization of Intangible Assets
Amortization of intangible assets increased in 1999 from the prior year by $8.1 million, principally as a result of
the SBCL acquisition.
Provisions for Restructuring & Other Special Charges
During the third and fourth quarters of 1999, we recorded provisions for restructuring and other special charges
totaling $30.3 million and $43.1 million, respectively, principally incurred in connection with the acquisition and planned
integration of SBCL.
Of the total special charge recorded in the third quarter of 1999, $19.8 million represented stock-based employee
compensation of which $17.8 million related to special one-time grants of our common stock to certain individuals of the
combined company, and $2.0 million related to the accelerated vesting, due to the completion of the SBCL acquisition, of
restricted stock grants made in previous years. In addition, during the third quarter of 1999, we incurred $9.2 million of
professional and consulting fees related to integration planning activities. The remainder of the third quarter charge
related to costs incurred in conjunction with our planned offering of new senior subordinated notes, the proceeds of
which were expected to be used to repay our existing Notes. During the third quarter of 1999, we decided not to proceed
with the offering due to unsatisfactory market conditions.
Of the total special charge recorded in the fourth quarter of 1999, $36.4 million represented costs related to
planned integration activities affecting Quest Diagnostics' operations and employees. Of these costs, $23.4 million related
to employee severance costs, $9.7 million related primarily to lease obligations for facilities and equipment and $6.7
million was associated with the write-off of assets that we plan to dispose of in conjunction with the integration of SBCL.
Offsetting these charges was the reversal of $3.4 million of reserves associated with our consolidation plan announced in
the fourth quarter of 1997. Upon finalizing the initial integration plans for SBCL in the fourth quarter of 1999, we
determined that $3.4 million of the remaining reserves associated with the December 1997 consolidation plan was no
longer necessary due to changes in the plan as a result of the SBCL integration. In addition to the net charge of $36.4
million, we recorded $3.5 million of special recognition awards granted in the fourth quarter of 1999 to certain
employees involved in the transaction and integration planning processes of the SBCL acquisition. The remainder of the