Quest Diagnostics 2003 Annual Report Download - page 77

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(dollars in thousands unless otherwise indicated)
The following securities were not included in the diluted earnings per share calculation due to their
antidilutive effect (in thousands):
2003 2002 2001
Stock options ........................................... 2,009 2,352 1,820
Restricted common stock ................................ - - 20
Stock-Based Compensation
SFAS No. 123, “Accounting for Stock-Based Compensation’’ (“SFAS 123’’), as amended by SFAS
No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB
Statement No. 123’’ (“SFAS 148’’) encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. In addition, SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for stock-based employee compensation,
and amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
The Company has chosen to adopt the disclosure only provisions of SFAS 148 and continue to account for
stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB’’)
Opinion No. 25, “Accounting for Stock Issued to Employees’’ (“APB 25’’), and related interpretations. Under
this approach, the cost of restricted stock awards is expensed over their vesting period, while the imputed cost
of stock option grants and discounts offered under the Company’s Employee Stock Purchase Plan (“ESPP’’) is
disclosed, based on the vesting provisions of the individual grants, but not charged to expense. Stock-based
compensation expense recorded in accordance with APB 25, relating to restricted stock awards, was $5 million,
$9 million and $21 million in 2003, 2002 and 2001, respectively.
The Company has several stock ownership and compensation plans, which are described more fully in
Note 13. The following table presents net income and basic and diluted earnings per common share, had the
Company elected to recognize compensation cost based on the fair value at the grant dates for stock option
awards and discounts granted for stock purchases under the Company’s ESPP, consistent with the method
prescribed by SFAS 123, as amended by SFAS 148:
2003 2002 2001
Net income, as reported ................................. $436,717 $322,154 $162,303
Add: Stock-based compensation under APB 25 ........... 5,297 9,028 20,672
Deduct: Total stock-based compensation expense
determined under fair value method for all awards, net
of related tax effects .................................. (52,351) (47,393) (45,079)
Pro forma net income ................................... $389,663 $283,789 $137,896
Earnings per common share:
Basic—as reported ...................................... $ 4.22 $ 3.34 $ 1.74
Basic—pro forma ....................................... $ 3.77 $ 2.94 $ 1.48
Diluted—as reported .................................... $ 4.12 $ 3.23 $ 1.66
Diluted—pro forma ..................................... $ 3.72 $ 2.87 $ 1.41
F-8