Quest Diagnostics 2005 Annual Report Download - page 69

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year ended December 31, 2005, decreasing from 23.9% in the prior year period. These improvements were
primarily due to revenue growth, which has allowed us to leverage our expense base, as well as continued
benefits from our Six Sigma and standardization initiatives. The financial results of NID served to reduce the
improvement for the year by approximately 0.3%. For the year ended December 31, 2005, bad debt expense
was 4.2% of net revenues, compared to 4.4% in the prior year period. This decrease primarily relates to the
improved collection of diagnosis, patient and insurance information necessary to more effectively bill for
services performed. We believe that our Six Sigma and standardization initiatives and the increased use of
electronic ordering by our customers will provide additional opportunities to further improve our overall
collection experience and cost structure.
Other operating expense (income), net represents miscellaneous income and expense items related to
operating activities, including gains and losses associated with the disposal of operating assets. For the year
ended December 31, 2005, other operating expense (income), net includes a $6.2 million charge primarily
related to forgiveness of amounts owed by patients and physicians, and related property damage as a result of
hurricanes in the Gulf Coast, and the write-off of $7.5 million of goodwill associated with NID. For the year
ended December 31, 2004, other operating expense (income), net includes a $10.3 million charge associated
with the acceleration of certain pension obligations in connection with the succession of the Company’s prior
CEO.
Operating Income
Operating income for the year ended December 31, 2005 improved to $968 million, or 17.6% of net
revenues, from $891 million, or 17.4% of net revenues, in the prior year period. The increases in operating
income for the year ended December 31, 2005 were principally driven by revenue growth and continued
benefits from our Six Sigma and standardization initiatives. Operating income as a percentage of revenues
compared to the prior year was reduced by approximately 1% due to the performance at NID, and by 0.2%
due to LabOne’s lower margins.
Other Income (Expense)
Interest expense, net for the year ended December 31, 2005 approximated the prior year level. The
redemption of our contingent convertible debentures in January 2005 and increased interest income principally
served to reduce net interest expense in 2005, which was offset by the interest expense related to the financing
of the LabOne acquisition. Interest expense, net for the year ended December 31, 2004 included a $2.9 million
charge representing the write-off of deferred financing costs associated with the second quarter 2004 refinancing
of our bank debt and credit facility.
Other, 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,
2005, other, net includes a $7.1 million charge associated with the write-down of an investment.
NID
NID is the Company’s test kit manufacturing subsidiary, which prior to two product holds initiated during
2005, accounted for about 1% of consolidated net revenues. During the fourth quarter of 2005, NID instituted
its second product hold due to quality issues. The hold remains in effect for substantially all of NID’s products
while NID works to address the issues and return product to market. The latest product hold has caused us to
reevaluate the financial outlook for NID. As a result of this analysis we recorded a pre-tax charge of $16
million ($0.06 per diluted share) in the fourth quarter to write off certain of NID’s assets. The charge includes
the write-off of all of the goodwill associated with NID of $7.5 million, which is included in other operating
expense (income), net, and other write-offs totaling $8.5 million, principally related to products and equipment
inventory, which are included in cost of services. In addition, during the second quarter, in connection with its
first product hold, NID recorded a charge of approximately $3 million, principally related to products and
equipment inventory. These charges, coupled with the operating losses at NID stemming from the product holds,
together with the costs to rectify NID’s quality issues and comply with an ongoing government investigation
and regulatory review of NID, have reduced pre-tax earnings compared to the prior year by approximately $50
million or $0.16 per diluted share.
While NID is continuing to work to address its quality issues and return products to market, we are also
evaluating all of our strategic options for NID, including but not limited to repositioning NID as a smaller more
narrowly focused business, selling some or all of the assets of NID, or exiting the business. Although we
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