Quest Diagnostics 2008 Annual Report Download - page 64

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Continuing Operations
Income from continuing operations for the year ended December 31, 2007 was $554 million, or $2.84 per
diluted share, compared to $626 million, or $3.14 per diluted share in 2006. The decrease in income from
continuing operations was principally due to the impact of the change in contract status with UNH. However, we
successfully mitigated the ongoing impact during the third quarter of 2007 as a result of actions taken to reduce
costs, and higher reimbursement for the testing we continue to perform for UNH members. During the second
half of the year our profits, before considering the acquisition of AmeriPath, exceeded those of the prior year,
when we were a contracted provider to UNH. The acquisition of AmeriPath, which was completed in May 2007,
also served to reduce income from continuing operations compared to the prior year. We expect the acquisition
of AmeriPath to improve our revenue growth and earnings once the anticipated growth opportunities and cost
synergies associated with the acquisition are realized. Results for the year ended December 31, 2007 include first
quarter pre-tax charges of $10.7 million, or $0.03 per diluted share, associated with workforce reductions in
response to reduced volume levels and $4.0 million, or $0.01 per diluted share, related to in-process research and
development expense associated with the HemoCue acquisition.
Net Revenues
Net revenues for the year ended December 31, 2007 grew by 7.0% over the prior year level to $6.7 billion.
The acquisition of AmeriPath contributed approximately 8% to revenue growth. Our acquisitions of Focus
Diagnostics, Enterix and HemoCue contributed approximately 1.7% to revenue growth. We estimate the impact of
our change in status with UNH reduced revenue growth by approximately 5%.
Our clinical testing business, which accounted for over 90% of our 2007 net revenues, grew approximately
5.6% for the year, with AmeriPath contributing 8.3% growth and the change in status with UNH reducing
revenues by approximately 5%. Volume, measured by the number of requisitions, declined 4.1% for the year
ended December 31, 2007, primarily due to our change in status with UNH, which reduced volume by an
estimated 7%, partially offset by the impact of the AmeriPath acquisition, which increased volume by about 3%.
Revenue per requisition increased 10.2% for the year ended December 31, 2007 and was impacted by the results
of AmeriPath, which contributed 5.1% to the improvement, and a 2% increase due to higher reimbursement on
the retained business with UNH, which was reimbursed at a higher rate as a non-contracted provider, with the
balance of the increase primarily driven by a positive test mix.
Our businesses other than clinical testing accounted for approximately 9% of net revenues in 2007. These
businesses include our risk assessment services business, our clinical trials testing business, our healthcare
information technology business, MedPlus, and our diagnostics products business. The revenues for these
businesses as a group grew 23% for the year ended December 31, 2007 as compared to the prior year period,
with the increase primarily driven by our acquisitions of HemoCue, Focus Diagnostics and Enterix.
Operating Costs and Expenses
Total operating costs and expenses for the year ended December 31, 2007 increased $473 million from the
prior year period. Costs associated with the acquired operations of AmeriPath, Focus Diagnostics, Enterix and
HemoCue increased costs by approximately $552 million for the year ended December 31, 2007. This increase
was offset in part by actions taken to improve our operating efficiency and reduce the size of our workforce.
Results for the year ended December 31, 2007 include first quarter charges of $10.7 million associated with
workforce reductions ($3.9 million included in costs of services and $6.8 million in selling, general and
administrative) and $4.0 million of in-process research and development costs associated with the acquisition of
HemoCue, which was recorded in other operating (income) expense, net.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 59.2% of net
revenues for the year ended December 31, 2007, compared to 59.0% of net revenues in 2006. The increase in
cost of services as a percentage of revenues was primarily due to lower volumes in our clinical testing business
and costs associated with workforce reductions. Partially offsetting these increases were improvements related to
the increase in average revenue per requisition and actions taken to reduce costs.
Selling, general and administrative expenses, which include the costs of the sales force, billing operations,
bad debt expense and general management and administrative support, were 24.1% of net revenues during the
year ended December 31, 2007, compared to 22.5% in the prior year period. This increase was primarily due to
lower volume levels in our clinical testing business; costs associated with workforce reductions; costs associated
52