Quest Diagnostics 2007 Annual Report Download - page 63

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Company would defend itself and NID and could incur significant costs in doing so. See Note 15 to the
Consolidated Financial Statements for a further description of these matters.
Loss from discontinued operations, net of tax, for the year ended December 31, 2007 was $214 million, or
$1.10 per diluted share, compared to $39 million, or $0.20 per diluted share in 2006. Results for the year ended
December 31, 2007 reflect a charge of $241 million to establish a reserve as described above. Results for the
year ended December 31, 2006 reflect pre-tax charges of $32 million, primarily related to the wind down of
NID’s operations.
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 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 more than 90% of our 2006 net revenues, grew
approximately 10% for the year. The acquisition of LabOne contributed approximately 4% to the growth in
clinical 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
was 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.
Our businesses other than clinical 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 represented
approximately 5% of our net revenues in 2006 with a growth rate of approximately 1% to 2% per year. The
growth in risk assessment services was sluggish during 2006, and was 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
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