Quest Diagnostics 2007 Annual Report Download - page 79

compensation cost associated with stock option awards and employee stock purchases under the Company’s
ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per
share data):
2005
Net income:
Net income, as reported ......................................................... $546,277
Add: Stock-based compensation under APB 25 ................................... 2,037
Deduct: Total stock-based compensation expense determined under fair value
method for all awards, net of related tax effects . ............................... (32,623)
Pro forma net income ........................................................... $515,691
Earnings per common share:
Basic – as reported . . ........................................................... $ 2.71
Basic – pro forma . . . ........................................................... $ 2.56
Diluted – as reported. ........................................................... $ 2.66
Diluted – pro forma. . ........................................................... $ 2.50
Foreign Currency
The Company predominately uses the U.S. dollar as its functional currency. The functional currency of the
Company’s foreign subsidiaries is the applicable local currency. Assets and liabilities denominated in non-U.S.
dollars are translated into U.S. dollars at exchange rates as of the end of the reporting period. 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 (loss)” within stockholders’ equity. Gains
and losses from foreign currency transactions are included within “other operating expense, 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 original 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
payers and their dispersion across many different geographic regions, and is limited to certain payers who are
large buyers of the Company’s services. To reduce risk, the Company routinely assesses the financial strength of
these payers and, consequently, believes that its accounts receivable credit risk exposure, with respect to these
payers, 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 the related revenue is recorded. 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
F-9
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)