Quest Diagnostics 2009 Annual Report Download - page 62

AmeriPath contributing 2.9% to the improvement. The balance of the increase was primarily driven by a positive
mix, partially offset by price reductions on various health plan contracts.
Our businesses other than clinical testing accounted for approximately 9% of our net revenues in 2008.
These businesses include our risk assessment services business, our clinical trials testing business, our healthcare
information technology business and our diagnostic products business. The revenues for these businesses as a
group grew about 6% for the year ended December 31, 2008 with the increase primarily driven by our healthcare
information technology and point-of-care businesses.
Operating Costs and Expenses
Total operating costs and expenses for the year ended December 31, 2008 increased $414 million from the
prior year period. These increases were primarily due to the full year effect of costs associated with the acquired
operations of AmeriPath, and increased costs associated with annual compensation adjustments, partially offset by
actions taken to improve our operating efficiency and reduce the size of our workforce. Results for the year
ended December 31, 2008 also include fourth quarter charges of $16.2 million primarily associated with
workforce reductions ($7.7 million recorded in costs of services and $8.5 million included in selling, general and
administrative).
Results for the year ended December 31, 2007 reflect first quarter costs of $10.7 million associated with
workforce reductions ($3.9 million included in cost of services and $6.8 million included in selling, general and
administrative), $4 million of in-process research and development costs associated with the acquisition of
HemoCue, which was recorded in “other operating (income) expense, net”, and costs associated with efforts to
retain business and clarify for patients, physicians and employers misinformation regarding the UNH contract
change.
Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 58.7% of net
revenues for the year ended December 31, 2008, compared to 59.2% of net revenues in 2007. The improvement
over the prior year reflects actions taken to reduce our cost structure and higher revenue per requisition.
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 24.0% of net revenues for the year
ended December 31, 2008, compared to 24.1% in the prior year period. The improvement was primarily due to
actions taken to reduce our cost structure and higher revenue per requisition, partially offset by the full year
impact of the acquired operations of AmeriPath and costs associated with workforce reductions.
Selling, general and administrative expenses for the year ended December 31, 2007 included costs associated
with workforce reductions and costs associated with efforts to retain business and clarify for patients, physicians
and employers misinformation regarding the UNH contract change.
For the year ended December 31, 2008, bad debt expense was 4.5% of net revenues, similar to 2007. For
2008, the full year inclusion of AmeriPath, which carries a higher bad debt rate than the rest of our business,
primarily due to its revenue and customer mix, increased the consolidated bad debt rate by approximately half a
percent for 2008. The impact was principally offset by progress in our billing and collection processes, resulting
in improvements in bad debt, days sales outstanding and the cost of our billing operation.
Amortization of intangible assets for the year ended December 31, 2008 increased $9.4 million over the
prior year period. This increase was primarily due to the amortization of intangible assets acquired in conjunction
with the acquisition of AmeriPath.
Other operating (income) expense, net represents miscellaneous income and expense items related to
operating activities, including gains and losses associated with the disposal of operating assets and provisions for
restructurings and other special charges. For the year ended December 31, 2007, other operating (income)
expense, net includes a $4.0 million first quarter charge related to in-process research and development expense
recorded in connection with the acquisition of HemoCue.
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 adversely impacted operating income for the
year ended December 31, 2008 by approximately $8 million, compared to the prior year.
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