Quest Diagnostics 2005 Annual Report Download - page 70

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expect that the negative impact of NID on the Company’s financial performance will be for a finite period, we
cannot estimate at this time how long a period it will be, even after we decide which strategic option we will
select. We currently expect to finalize our plans for NID before the end of the second quarter of 2006, at
which time we expect to be in a position to estimate the financial impact, including potential restructuring and
other charges, resulting from our decision.
The ongoing government investigation and regulatory review of NID continue. While we do not believe that
these matters will have a material adverse impact on our overall financial condition, their final resolution could
be material to our results of operations or cash flows in the period in which the impact of such matters is
determined or paid. Please refer to Note 14 to the Consolidated Financial Statements, “Commitments and
Contingencies’’ for a further description of these matters.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Net income for the year ended December 31, 2004 increased to $499 million, or $2.35 per diluted share,
from $437 million, or $2.02 per diluted share, for the prior year period. This increase in earnings was primarily
attributable to revenue growth and efficiencies generated from our Six Sigma and standardization initiatives,
partially offset by investments in our operations. For the year ended December 31, 2004, the increase in
earnings was partially offset by the impact of $13.2 million in pre-tax charges recorded in the second quarter of
2004. Included in the second quarter charges was $10.3 million related to the acceleration of certain pension
obligations in connection with the succession of our prior CEO with the remaining $2.9 million representing the
write-off of deferred financing costs associated with a refinancing. These charges served to reduce reported net
income for the year ended December 31, 2004 by $7.9 million and reduced basic and diluted earnings per
common share by $0.08.
Net Revenues
Net revenues for the year ended December 31, 2004 grew by 8.2% over the prior year level. Including
twelve months of Unilab Corporation’s, or Unilab’s, results in 2004 (which was acquired on February 28, 2003),
versus ten months of Unilab’s results in the prior year, contributed 1.5% to consolidated revenue growth. The
increase in net revenues was primarily driven by improvements in testing volumes and increases in average
revenue per requisition. Pro forma revenue growth was 6.7% for the year ended December 31, 2004, assuming
that the Unilab acquisition and the related sale of certain assets in northern California, or the Divestiture, had
been completed on January 1, 2003. See Note 3 to the Consolidated Financial Statements for a full discussion
of the Unilab acquisition and the Divestiture.
For the year ended December 31, 2004, clinical testing volume, measured by the number of requisitions,
increased 5.0% compared to the prior year period. On a pro forma basis, assuming that the Unilab acquisition
and the Divestiture had been completed on January 1, 2003, testing volume increased 3.2% for the year ended
December 31, 2004.
Average revenue per requisition improved 2.6% for the year ended December 31, 2004 compared to the
prior year period. This improvement is primarily attributable to a continuing shift in test mix to higher value
testing, including gene-based testing, and increases in the number of tests ordered per requisition. These factors
are expected to continue as the primary drivers of increases in revenue per requisition, although to a lesser
extent than the past several years. Gene-based testing net revenues approximated $600 million for 2004, and
grew over 10% compared to the prior year. The inclusion of Unilab’s results subsequent to February 28, 2003
served to reduce average revenue per requisition by 0.4% for the year ended December 31, 2004, reflecting
Unilab’s lower revenue per requisition.
Drugs-of-abuse testing, which is among our lowest priced services and accounts for approximately 6% of
our volume and 3% of our consolidated net revenues, grew for the first year after several years of decline.
However, growth in this business remained below that for our consolidated business.
Our businesses other than clinical laboratory testing, which represent approximately 4% of our consolidated
net revenues, grew approximately 20% during the year ended December 31, 2004 compared to the prior year
period, and contributed about one-half of a percent to reported net revenue growth.
Operating Costs and Expenses
Total operating costs and expenses for the year ended December 31, 2004 increased $294 million from the
prior year period primarily due to increases in our clinical testing volume. The increased costs were primarily
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