Quest Diagnostics 2006 Annual Report Download - page 82

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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 $1.0 billion, or 18.5% of net
revenues, from $881 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 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 (expense) income, 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 (expense) income, net included a $7.1 million charge associated with the write-down
of an investment.
Discontinued Operations
Our discontinued operations are comprised of NID a test kit manufacturing subsidiary. During the fourth
quarter of 2005, NID instituted its second voluntary product hold within a six-month period, due to quality
issues, which adversely impacted its operating performance. Prior to these product holds NID accounted for about
1% of consolidated net revenues. Earnings before taxes for NID decreased by approximately $50 million or $0.16
per diluted share as compared to 2004. The second product hold caused us to reevaluate the financial outlook for
NID, and as a result of this analysis we recorded certain pretax charges as described below. 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, caused
us to further evaluate a number of strategic options for NID. On April 19, 2006, we decided to discontinue
NID’s operations. During the third quarter of 2006, we completed the wind-down of NID’s operations. Results of
NID are reported as discontinued operations for all periods presented.
Loss from discontinued operations, net of tax, for the year ended December 31, 2005 was $27 million, or
$0.13 per diluted share, compared to a gain of $7 million, or $0.03 per diluted share in 2004. Results for the
year ended December 31, 2005 reflect pre-tax charges of $16 million recorded during the fourth quarter of 2005.
These charges included the write-off of all of the goodwill associated with NID of $7.5 million, and other write-
offs totaling $8.5 million, principally related to products and equipment inventory. In addition, during the second
quarter of 2005, in connection with its first product hold, NID recorded a charge of approximately $3 million,
principally related to products and equipment inventory.
The government continues to investigate and review NID. Any costs resulting from this review will be
included in discontinued operations. 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. See Note 14 to the
Consolidated Financial Statements for a further description of these matters.
Quantitative and Qualitative Disclosures About Market Risk
We address our exposure to market risks, principally the market risk of changes in interest rates, through a
controlled program of risk management that may include the use of derivative financial instruments. We do not
hold or issue derivative financial instruments for speculative purposes. We do not believe that our foreign
exchange exposure is material to our consolidated financial condition or results of operations. See Note 2 to the
Consolidated Financial Statements for additional discussion of our financial instruments and hedging activities.
See Note 10 to the Consolidated Financial Statements for information regarding our treasury lock agreements.
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