Quest Diagnostics 2005 Annual Report Download - page 87

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)
2005 2004 2003
Dividend yield .......................................... 0.7% 0.7% 0.0%
Risk-free interest rate.................................... 4.0% 3.1% 2.8%
Expected volatility ...................................... 23.0% 47.2% 48.1%
Expected holding period, in years ........................ 6 5 5
The majority of options granted in 2003 were issued prior to the declaration of the Company’s initial
quarterly cash dividend in the fourth quarter of 2003 and as such carry a dividend yield of 0%, thereby
reducing the weighted average dividend yield for 2003 to 0.0%.
Foreign Currency
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates.
Income and expense items are translated at average exchange rates prevailing during the year. The translation
adjustments are recorded as a component of accumulated other comprehensive income within stockholders’
equity. Gains and losses from foreign currency transactions are included within “other operating expense
(income), net’’ in the consolidated statements of operations. Transaction gains and losses have not been material.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with maturities, at the time acquired by the
Company, of three months or less.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are principally
cash, cash equivalents, short-term investments and accounts receivable. The Company’s policy is to place its
cash, cash equivalents and short-term investments in highly rated financial instruments and institutions.
Concentration of credit risk with respect to accounts receivable is mitigated by the diversity of the Company’s
clients and their dispersion across many different geographic regions, and is limited to certain customers who
are large buyers of the Company’s services. To reduce risk, the Company routinely assesses the financial
strength of these customers and, consequently, believes that its accounts receivable credit risk exposure, with
respect to these customers, is limited. While the Company has receivables due from federal and state
governmental agencies, the Company does not believe that such receivables represent a credit risk since the
related healthcare programs are funded by federal and state governments, and payment is primarily dependent
on submitting appropriate documentation.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is
estimated and recorded in the period of the related revenue. The Company has implemented a standardized
approach to estimate and review the collectibility of its receivables based on a number of factors, including the
period they have been outstanding. Historical collection and payer reimbursement experience is an integral part
of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly
assesses the state of its billing operations in order to identify issues which may impact the collectibility of
receivables or reserve estimates. Revisions to the allowances for doubtful accounts estimates are recorded as an
adjustment to bad debt expense within selling, general and administrative expenses. Receivables deemed to be
uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-
off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful
accounts.
Inventories
Inventories, which consist principally of supplies, are valued at the lower of cost (first in, first out method)
or market.
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