Quest Diagnostics 2008 Annual Report Download - page 63

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Operating Income
Operating income for the year ended December 31, 2008 was $1.2 billion, or 16.9% of net revenues,
compared to $1.1 billion, or 16.3% of net revenues, in the prior year period. The increase in operating income,
as a percentage of net revenues, was primarily due to revenue growth and the actions we have taken to reduce
our cost structure, partially offset by the full year impact of the acquired operations of AmeriPath. In addition,
we estimate the impact of hurricanes in the third quarter of 2008 reduced the increase in operating income for
the year ended December 31, 2008 by approximately $8 million, compared to the prior year.
In addition, the operating income percentage for the year ended December 31, 2008, reflects the impact of a
fourth quarter charge of $16.2 million, principally associated with workforce reductions and the impact of the
various items which affected cost of services and selling, general and administrative expenses as a percentage of
net revenues.
Other (Income) Expense
Other expense, 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, 2008, other expense, net includes a third quarter charge of $8.9 million associated with the write-
down of an equity investment and losses of $9.9 million associated with investments held in a trust pursuant to
our supplemental deferred compensation plan. For the year ended December 31, 2007, other expense, net includes
a $4 million charge related to the write-down of an investment.
Income Tax Expense
The effective income tax rate for the year ended December 31, 2008 decreased 1.3 percentage points,
compared to the prior year period. This decrease was primarily due to the favorable resolution of certain tax
contingencies in 2008.
Discontinued Operations
During the third quarter of 2008, the Company and NID, a former test kit manufacturing subsidiary of the
Company, reached an agreement in principle with the United States Attorney’s Office to settle the previously
disclosed federal government investigation involving NID and the Company regarding NID test kits and tests
performed using those test kits.
The agreement in principle provides for a comprehensive settlement of federal claims. As part of the
agreement, NID, which was closed in 2006, is expected to enter a guilty plea to a single count of felony
misbranding. The terms of the settlement are subject to the final negotiation and execution of definitive
agreements, which is expected to include a corporate integrity agreement, and the approval by the United States
Department of Justice and the United States Department of Health and Human Services and satisfactory
resolution of related state claims. There can be no assurance, however, when or whether a settlement may be
finalized, or as to its terms. If a settlement is not finalized, the Company would defend itself and NID and could
incur significant costs in doing so.
As a result of the agreement in principle in 2008, the Company recorded charges of $75 million in
discontinued operations to increase its reserve for the settlement and related matters. As of December 31, 2008,
the total reserve was $316 million. The Company has recorded deferred tax benefits of $58 million on the
reserve, reflecting the Company’s current estimate of the portion of the reserve expected to be deductible for tax
purposes. The reserve reflects the Company’s current estimate of the expected probable loss with respect to these
matters, assuming the settlement is finalized. If a settlement is not finalized, the eventual losses related to these
matters could be materially different than the amount reserved and could be material to the Company’s results of
operations, cash flows and financial condition in the period that such matters are determined or paid.
Loss from discontinued operations, net of taxes, for the year ended December 31, 2008 was $51 million, or
$0.26 per diluted share, compared to $214 million, or $1.10 per diluted share in 2007. Results for the year ended
December 31, 2008 and 2007 reflect charges of $75 million and $241 million, respectively, to reserve for the
settlement and related matters in connection with various government claims, which is more fully described in
Note 14 and Note 15 to the Consolidated Financial Statements.
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