Quest Diagnostics 2007 Annual Report Download - page 82

Investments at December 31, 2007 and 2006 consisted of the following:
2007 2006
Available-for-sale equity securities ...................................... $ 9,690 $10,106
Trading equity securities ............................................... 33,903 29,969
Other investments ...................................................... 16,460 13,290
Total ............................................................. $60,053 $53,365
Investments in available-for-sale equity securities consist of equity securities in public corporations.
Investments in trading equity securities represent participant directed investments of deferred employee
compensation and related Company matching contributions held in a trust pursuant to the Company’s
supplemental deferred compensation plan (see Note 13). Other investments do not have readily determinable fair
values and consist of investments in preferred and common shares of privately held companies and are accounted
for under the cost method.
As of December 31, 2007 and 2006, the Company had gross unrealized losses from available-for-sale equity
securities of $3.5 million and $4.7 million, respectively. For the year ended December 31, 2007, “other expense,
net”, within the consolidated statements of operations, includes a $4.0 million charge associated with the write-
down of an available-for-sale equity security. For the year ended December 31, 2006, “other expense, net”,
within the consolidated statements of operations, includes $16.2 million of charges associated with the write-down
of available-for-sale equity securities, $10.0 million of charges associated with the write-down of other
investments and a $15.8 million gain associated with the sale of an investment. For the year ended December 31,
2005, “other expense, net” includes a $7.1 million charge associated with the write-down of other investments.
For the years ended December 31, 2007, 2006 and 2005, gains from trading equity securities totaled $2.7 million,
$3.2 million and $1.6 million, respectively, and are included in “other expense, net”.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage its market risks. This includes the use of
interest rate swap agreements to manage its exposure to movements in interest rates. The Company has
established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative
financial instrument activities. These policies prohibit holding or issuing derivative financial instruments for
speculative purposes.
Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal
or notional amounts. Net payments are recognized as an adjustment to interest expense. When the swaps are
terminated, unrealized gains or losses are deferred in stockholders’ equity, as a component of “accumulated other
comprehensive income (loss)”, and are amortized as an adjustment to interest expense over the shorter of the
remaining original term of the hedging instrument or the remaining life of the underlying debt instrument.
The Company formally documents its hedge relationships, including identifying the hedging instruments and
the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction.
On the date the derivative is entered into, the Company designates the type of derivative as a fair value hedge or
cash flow hedge, and accounts for the derivative in accordance with its designation as prescribed by SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended. The Company
currently holds only cash flow hedges, designated as a hedge of the variability of cash outflows related to the
Company’s long-term debt due to changes in interest rates. Both at inception and at least quarterly thereafter, the
Company also formally assesses whether the derivatives that are used in hedging transactions are highly effective
in offsetting changes in the cash flows of the hedged item. All components of each derivative financial
instrument’s gain or loss are included in the assessment of hedge effectiveness.
The Company accounts for derivatives in conformity with SFAS No. 133, as amended, and records
derivatives as either an asset or liability measured at its fair value. The fair value is based upon quoted market
prices obtained from third-party institutions. For derivatives that have been formally designated as a cash flow
hedge (interest rate swap agreements), the effective portion of changes in the fair value of the derivatives is
recorded in “accumulated other comprehensive income (loss)”. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income, depending on whether a derivative is
F-12
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)