Quest Diagnostics 2006 Annual Report Download - page 78

completed the wind-down of NID and classified the operations of NID as discontinued operations for all periods
presented. Our business segment information is disclosed in Note 16 to the Consolidated Financial Statements.
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Continuing Operations
Income from continuing operations for the year ended December 31, 2006 increased to $626 million, or
$3.14 per diluted share, compared to $573 million, or $2.79 per diluted share in 2005. The increase in income
from continuing operations was principally associated with improved performance in our clinical testing business,
driven by organic revenue growth and increases in operating efficiencies resulting from our Six Sigma,
standardization and consolidation efforts. Results for the year ended December 31, 2006 include pre-tax charges
of $27 million, or $0.08 per diluted share, associated with integration activities related to LabOne and our
operations in California, and $10 million pre-tax, or $0.03 per diluted share, related to net investment losses.
Also, results for the year ended December 31, 2006, included pre-tax expenses of $55 million, or $0.17 per
share, associated with stock-based compensation recorded in accordance with SFAS 123R.
Net Revenues
Net revenues for the year ended December 31, 2006 grew by 15% over the prior year level to $6.3 billion.
The acquisition of LabOne, contributed 8% to revenue growth. Approximately 55% of LabOne’s net revenues are
generated from risk assessment services provided to life insurance companies, with the remainder classified as
clinical laboratory testing. The acquisition of Focus Diagnostics, which was completed on July 3, 2006,
contributed approximately half a percent to revenue growth.
Our clinical testing business, which accounted for over 92% of our 2006 net revenues, grew approximately
10% for the year. The acquisition of LabOne contributed approximately 4% to the growth in clinical laboratory
testing net revenues, principally reflected in volume. The increase in clinical testing revenues was driven by
improvements in both testing volumes, measured by the number of requisitions, and increases in average revenue
per requisition.
For the year ended December 31, 2006, clinical testing volume increased 5% compared to the prior year
period, principally driven by the acquisition of LabOne.
For the year ended December 31, 2006, average revenue per requisition improved 5%. This improvement is
primarily attributable to a continuing shift to a more esoteric test mix, and increases in the number of tests
ordered per requisition. Gene-based and esoteric testing net revenues were over $1 billion for 2006, and grew
greater than 10% compared to the prior year. LabOne’s clinical testing business carries a lower revenue per
requisition than our average, principally due to a higher concentration of lower priced drugs-of-abuse testing; and
modestly reduced our average revenue per requisition. Management continues to expect that average revenue per
requisition will typically grow approximately 2% per year, with some fluctuations from year to year.
Our businesses other than clinical laboratory testing accounted for approximately 8% of net revenues in
2006. These businesses include our risk assessment services business, our clinical trials testing business, our
healthcare information technology business (MedPlus), and our diagnostics products business whose combined
growth rates did not significantly affect our consolidated growth rate. The risk assessment services business
currently represents approximately 5% of our net revenues and has been growing approximately 1% to 2% per
year. The growth in risk assessment services has slowed, and is being adversely impacted by an overall decline
in the life insurance market, resulting in a decline in the number of life insurance applicants being tested,
partially offset by growth in paramedical exams and various risk assessment activities outsourced by life
insurance companies.
Operating Costs and Expenses
Total operating costs and expenses for the year ended December 31, 2006 increased $691 million from the
prior year period primarily due to the LabOne acquisition and, to a lesser degree, organic growth in our clinical
testing business. The increased costs were primarily in the areas of employee compensation and benefits and
testing supplies. Employee compensation and benefits included $55 million of stock-based compensation recorded
in accordance with SFAS 123R. While our cost structure has been favorably impacted by efficiencies generated
from our Six Sigma, standardization and consolidation initiatives, we continue to make investments in sales,
service, science and information technology to further differentiate our Company. These investments include:
•increased focus in high-growth specialty testing areas, and improved sales training and sales tools;
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