Quest Diagnostics 2009 Annual Report Download - page 101

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awards in 2009; and (iii) extending the term of the DLTIP until the date of the 2019 annual shareholders’
meeting.
The DLTIP provides for the grant to non-employee directors of non-qualified stock options to purchase
shares of Company common stock at a price of no less than the fair market value on the date of grant. The
DLTIP also permits awards of restricted stock and restricted stock units to non-employee directors. Stock options
granted under the DLTIP expire on the date designated by the Board of Directors but in no event more than ten
years from date of grant, and generally become exercisable in three equal annual installments beginning on the
first anniversary date of the grant of the option regardless of whether the optionee remains a director of the
Company. The maximum number of shares that may be issued under the DLTIP is 2.4 million shares. During
2009, 2008 and 2007, grants under the DLTIP totaled 77, 77 and 81 thousand shares, respectively.
In general, the Company’s practice has been to issue shares related to its stock-based compensation program
from shares of its common stock held in treasury. See Note 12 for further information regarding the Company’s
share repurchase program.
The fair value of each stock option award granted was estimated on the date of grant using a lattice-based
option-valuation model. The expected volatility under the lattice-based option-valuation model was based on the
current and the historical implied volatilities from traded options of the Company’s common stock. The dividend
yield was based on the approved annual dividend rate in effect and current market price of the underlying
common stock at the time of grant. The risk-free interest rate of each stock option granted was based on the U.S.
Treasury yield curve in effect at the time of grant for bonds with maturities ranging from one month to ten
years. The expected holding period of the options granted was estimated using the historical exercise behavior of
employees. The weighted average assumptions used in valuing options granted in the periods presented are:
2009 2008 2007
Weighted average fair value of options at grant date .... $15.78 $11.58 $18.05
Expected volatility . . . ................................. 29.4% 22.5% 21.5%
Dividend yield ........................................ 0.8% 0.8% 0.7%
Risk-free interest rate. ................................. 2.1% - 2.3% 2.6% - 2.8% 4.7% - 4.8%
Expected holding period, in years ...................... 6.2 - 7.2 5.2 - 5.9 5.3 - 6.2
The fair value of restricted stock awards and performance share units is the average market price of the
Company’s common stock at the date of grant.
Transactions under the stock option plans for 2009 were as follows:
Shares
(in
thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding, beginning of year ......... 13,993 $43.12
Options granted ............................... 1,428 51.33
Options exercised ............................. (2,389) 36.76
Options forfeited and cancelled . . .............. (352) 43.85
Options outstanding, end of year . .............. 12,680 $45.19 4.1 $192,574
Exercisable, end of year ....................... 9,520 $43.83 3.3 $157,564
Vested and expected to vest, end of year . . ..... 11,670 $44.71 4.1 $182,904
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference
between the Company’s closing common stock price on the last trading day of 2009 and the exercise price,
multiplied by the number of in-the-money options) that would have been received by the option holders had all
option holders exercised their options on December 31, 2009. This amount changes based on the fair market
value of the Company’s common stock. Total intrinsic value of options exercised in 2009, 2008 and 2007 was
$44 million, $20 million and $52 million, respectively.
As of December 31, 2009, there was $12 million of unrecognized stock-based compensation cost related to
stock options which is expected to be recognized over a weighted average period of 1.8 years.
F-31
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)