Quest Diagnostics 2008 Annual Report Download - page 108

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as discontinued operations in the accompanying consolidated statements of operations and related disclosures for
all periods presented.
During the third quarter of 2007, the government and the Company began settlement discussions with
respect to the government’s on going investigation involving NID and the Company, as discussed above (see
Note 14). In the course of those discussions, the government disclosed to the Company certain of the
government’s legal theories regarding the amount of damages allegedly incurred by the government. The
Company analyzed the government’s position and presented its own analysis which argued against many of the
government’s claims. In light of that analysis and based on the status of settlement discussions, the Company
established a reserve, in accordance with generally accepted accounting principles, reflected in discontinued
operations, of $241 million during 2007 in connection with these claims.
During the third quarter of 2008, the Company and NID reached an agreement in principle with the United
States Attorney’s Office to settle the federal government investigation involving NID and the Company regarding
NID test kits and tests performed using those test kits.
As a result of the agreement in principle in 2008, the Company recorded charges of $75 million in
discontinued operations to increase its reserve for the settlement and related matters. As of December 31, 2008,
the total reserve was $316 million. The Company has recorded deferred tax benefits of $58 million on the
reserve, reflecting the Company’s current estimate of the portion of the reserve expected to be deductible for tax
purposes. The reserve reflects the Company’s current estimate of the expected probable loss with respect to these
matters, assuming the settlement is finalized. If a settlement is not finalized, the eventual losses related to these
matters could be materially different than the amount reserved and could be material to the Company’s results of
operations, cash flows and financial condition in the period that such matters are determined or paid. See Note
14 for further details.
Summarized financial information for the discontinued operations of NID is set forth below:
2008 2007 2006
Net revenues .................................................... $ - $ - $ 3,610
Loss from discontinued operations before income taxes ............ (79,582) (250,278) (59,169)
Income tax benefit. . . ............................................ 28,888 36,389 19,898
Loss from discontinued operations, net of taxes . . ................. $(50,694) $(213,889) $(39,271)
Results for the year ended December 31, 2008 and 2007 reflect charges of $75 million and $241 million,
respectively, to reserve for the settlement and related matters in connection with various government claims (see
Note 14 for further details).
Results for 2006 reflect losses from NID’s operations, due to its voluntary product hold instituted late in the
second quarter of 2005 in connection with a quality review of all its products. In addition, results for 2006 also
reflect pre-tax charges of $32 million, primarily related to the wind down of NID’s operations. These charges
included: inventory write-offs of $7 million; asset impairment charges of $6 million; employee severance costs of
$6 million; contract termination costs of $6 million; facility closure costs of $2 million; and costs to support
activities to wind-down the business comprised primarily of employee costs and professional fees of $5 million.
The settlement reserve is included in “accounts payable and accrued expenses” in the consolidated balance
sheet at December 31, 2008 and 2007. The deferred tax asset recorded in connection with establishing the reserve
is included in “deferred income taxes” in the consolidated balance sheet at December 31, 2008 and 2007. The
remaining balance sheet information related to NID was not material at December 31, 2008 and 2007.
16. BUSINESS SEGMENT INFORMATION
Clinical testing is an essential element in the delivery of healthcare services. Physicians use clinical tests to
assist in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions.
Clinical testing is generally categorized as clinical laboratory testing and anatomic pathology services. Clinical
laboratory testing is performed on blood and body fluids, such as urine. Anatomic pathology services are
performed on tissues, such as biopsies, and other samples, such as human cells. Customers of the clinical testing
business include patients, physicians, hospitals, employers, governmental institutions and other commercial clinical
F-36
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)