Quest Diagnostics 2007 Annual Report Download - page 77

settlement. In 2007, 2006 and 2005, approximately 17%, 17% and 18%, respectively, of net revenues were
generated by Medicare and Medicaid programs. Under capitated arrangements with healthcare insurers, the
Company recognizes revenue based on a predetermined monthly reimbursement rate for each member of an
insurer’s health plan regardless of the number or cost of services provided by the Company.
Taxes on Income
The Company uses the asset and liability approach to account for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the expected future tax consequences of differences between the
carrying amounts of assets and liabilities and their respective tax bases using tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109
“Accounting for Income Taxes.” FIN 48 provides guidance on recognizing, measuring, presenting and disclosing
in the financial statements uncertain tax positions that a company has taken or expects to take on a tax return.
See Note 5 for further information related to FIN 48.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income by the weighted average common
shares outstanding. Diluted earnings per common share is calculated by dividing net income, adjusted for the
after-tax impact of the interest expense associated with the Company’s 1
3
⁄ 4 % contingent convertible debentures
due 2021 (the “Debentures”), by the weighted average common shares outstanding after giving effect to all
potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the
dilutive effect of outstanding stock options, performance share units and restricted common shares granted under
the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated
Director Long-Term Incentive Plan and the Debentures. The Debentures were called for redemption by the
Company in December 2004 and redeemed as of January 18, 2005.
The computation of basic and diluted earnings per common share (using the if-converted method) was as
follows (in thousands, except per share data):
2007 2006 2005
Income from continuing operations – basic . . ....................... $ 553,828 $625,692 $573,196
Loss from discontinued operations – basic . . ....................... (213,889) (39,271) (26,919)
Net income available to common stockholders – basic .............. 339,939 586,421 546,277
Add: Interest expense associated with the Debentures, net of related
tax effects. . . ................................................... - - 82
Net income available to common stockholders – diluted ............ $ 339,939 $586,421 $546,359
Weighted average common shares outstanding – basic .............. 193,241 196,985 201,833
Effect of dilutive securities:
Stock options . . ................................................... 2,019 2,535 3,533
Restricted common shares and performance share units ............. 2 22 11
Debentures ....................................................... - - 153
Weighted average common shares outstanding – diluted ............ 195,262 199,542 205,530
Earnings per common share – basic:
Income from continuing operations ................................ $ 2.87 $ 3.18 $ 2.84
Loss from discontinued operations . ................................ (1.11) (0.20) (0.13)
Net income....................................................... $ 1.76 $ 2.98 $ 2.71
Earnings per common share – diluted:
Income from continuing operations ................................ $ 2.84 $ 3.14 $ 2.79
Loss from discontinued operations . ................................ (1.10) (0.20) (0.13)
Net income....................................................... $ 1.74 $ 2.94 $ 2.66
F-7
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)