Quest Diagnostics 2010 Annual Report Download - page 77

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trading securities are recorded currently in earnings as a component of non-operating expenses within other
income (expense), net in the consolidated statements of operations. Unrealized gains and losses, net of tax, for
available-for-sale securities are recorded as a component of accumulated other comprehensive income (loss)
within stockholders’ equity. Recognized gains and losses for available-for-sale securities are recorded in other
income (expense), net in the consolidated statements of operations. Gains and losses on securities sold are based
on the average cost method.
The Company periodically reviews its investments to determine whether a decline in fair value below the
cost basis is other than temporary. The primary factors considered in the determination are: the length of time
that the fair value of the investment is below carrying value; the financial condition, operating performance and
near term prospects of the investee; and the Company’s intent and ability to hold the investment for a period of
time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than
temporary, the cost basis of the security is written down to fair value.
Investments at December 31, 2010 and 2009 consisted of the following:
2010 2009
Available-for-sale equity securities ............................................... $ 5,066 $ —
Trading equity securities......................................................... 38,740 33,871
Cash surrender value of life insurance policies. . .................................. 20,314 15,873
Other investments . . ............................................................. 12,570 8,360
Total. ...................................................................... $76,690 $58,104
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). The Company purchases life insurance policies, with the
Company named as beneficiary of the policies, for the purpose of funding a non-qualified deferred compensation
program. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes
in the value of the underlying investments. 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, 2010 and 2009, the Company had no gross unrealized losses from available-for-sale
equity securities. For the year ended December 31, 2009, other income (expense), net within the consolidated
statements of operations, includes $7.8 million of charges principally associated with the write-down of an
investment accounted for under the cost method. For the year ended December 31, 2008, other income (expense),
net includes $8.9 million of charges associated with the write-down of available-for-sale equity securities. For the
years ended December 31, 2010, 2009 and 2008, gains (losses) from trading equity securities totaled $3.3 million,
$6.0 million and $(9.9) million, respectively, and are included in other income (expense), net. For the years
ended December 31, 2010 and 2009, gains from changes in the cash surrender value of life insurance policies
totaled $2.4 million and $2.4 million, respectively, and are included in other income (expense), net.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage its exposure to market risks for changes in
interest rates and foreign currencies. This strategy includes the use of interest rate swap agreements, forward
starting interest rate swap agreements and foreign currency forward contracts to manage its exposure to
movements in interest and currency 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. The Company does not enter
into derivative financial instruments that contain credit-risk-related contingent features or requirements to post
collateral.
F-11
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)