Quest Diagnostics 2007 Annual Report Download - page 76

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands unless otherwise indicated)
1. DESCRIPTION OF BUSINESS
Quest Diagnostics Incorporated and its subsidiaries (“Quest Diagnostics” or the “Company”) is the largest
provider of diagnostic testing, information and services in the United States, providing insights that enable
physicians and other healthcare professionals to make decisions to improve health. Quest Diagnostics offers
patients and physicians the broadest access to diagnostic laboratory services through the Company’s nationwide
network of laboratories and owned patient service centers. The Company provides interpretive consultation
through the largest medical and scientific staff in the industry, with approximately 900 M.D.s and Ph.D.s around
the country. Quest Diagnostics is the leading provider of gene-based testing and other esoteric testing, the leading
provider of anatomic pathology services, including dermatopathology, and the leading provider of testing for
drugs-of-abuse. The Company is also a leading provider of testing for clinical trials, and risk assessment services
for the life insurance industry. The Company’s diagnostics products business manufactures and markets diagnostic
test kits and specialized point-of-care testing. Quest Diagnostics empowers healthcare organizations and clinicians
with state-of-the-art information technology solutions that can improve patient care and medical practice.
During 2007, Quest Diagnostics processed approximately 145 million requisitions through its extensive
network of laboratories and patient service centers in virtually every major metropolitan area throughout the
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all entities controlled by the Company through
its direct or indirect ownership of a majority voting interest and the accounts of any variable interest entities, as
defined in Financial Accounting Standards Board (“FASB”) Interpretation No. 46 “Consolidation of Variable
Interest Entities”, where the Company is subject to a majority of the risk of loss from the variable interest
entity’s activities, or entitled to receive a majority of the entity’s residual returns or both. The Company’s
relationships with variable interest entities were not material at both December 31, 2007 and 2006. Investments in
entities which the Company does not control, but in which it has a substantial ownership interest (generally
between 20% and 49%) and can exercise significant influence, are accounted for using the equity method of
accounting. As of December 31, 2007 and 2006, the Company’s investments in affiliates accounted for under the
equity method of accounting totaled $37.5 million and $38.5 million, respectively. The Company’s share of
equity earnings from investments in affiliates, accounted for under the equity method, totaled $27.0 million, $28.5
million and $26.2 million, respectively, for 2007, 2006 and 2005. All significant intercompany accounts and
transactions are eliminated in consolidation.
Basis of Presentation
During the third quarter of 2006, the Company completed its wind-down of NID, a test kit manufacturing
subsidiary, and classified the operations of NID as discontinued operations. The accompanying consolidated
statements of operations and related disclosures have been prepared to report the results of NID as discontinued
operations for all periods presented. See Note 16 for a further discussion of discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
The Company primarily recognizes revenue for services rendered upon completion of the testing process.
Billings for services reimbursed by third-party payers, including Medicare and Medicaid, are recorded as revenues
net of allowances for differences between amounts billed and the estimated receipts from such payers.
Adjustments to the estimated receipts, based on final settlement with the third-party payers, are recorded upon
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