Quest Diagnostics 2011 Annual Report Download - page 58

On a quarterly basis, we perform a review of our business to determine if events or changes in
circumstances have occurred which could have a material adverse effect on the fair value of the Company and its
goodwill. If such events or changes in circumstances were deemed to have occurred, we would perform an
impairment test of goodwill as of the end of the quarter, consistent with the annual impairment test performed at
the end of our fiscal year on December 31st, and record any noted impairment loss.
Accounting for stock-based compensation expense
We record stock-based compensation as a charge to earnings, net of the estimated impact of forfeited
awards. As such, we recognize stock-based compensation cost only for those stock-based awards that are
estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual
grants. The process of estimating the fair value of stock-based compensation awards and recognizing stock-based
compensation cost over their requisite service periods involves significant assumptions and judgments.
We estimate the fair value of stock option awards on the date of grant using a lattice-based option-valuation
model which requires management to make certain assumptions regarding: (i) the expected volatility in the
market price of the Company’s common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period
of time employees are expected to hold the award prior to exercise (referred to as the expected holding period).
The expected volatility under the lattice-based option-valuation model is based on the current and historical
implied volatilities from traded options of our common stock. The dividend yield is 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 is 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 awards granted is estimated
using the historical exercise behavior of employees. In addition, we estimate the expected impact of forfeited
awards and recognize stock-based compensation cost only for those awards expected to vest. We use historical
experience to estimate projected forfeitures. If actual forfeiture rates are materially different from our estimates,
stock-based compensation expense could be significantly different from what we have recorded in the current
period. We periodically review actual forfeiture experience and revise our estimates, as considered necessary. The
cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as
compensation cost in earnings in the period of the revision.
The terms of our performance share unit grants allow the recipients of such awards to earn a variable
number of shares based on the achievement of the performance goals specified in the awards. Stock-based
compensation expense associated with performance share units is recognized based on management’s best
estimates of the achievement of the performance goals specified in such awards and the resulting number of
shares that will be earned. If the actual number of performance share units earned is different from our estimates,
stock-based compensation could be significantly different from what we have recorded in the current period. The
cumulative effect on current and prior periods of a change in the estimated number of performance share units
expected to be earned is recognized as compensation cost in earnings in the period of the revision. While the
assumptions used to calculate and account for stock-based compensation awards represent management’s best
estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a
result, if revisions are made to our assumptions and estimates, our stock-based compensation expense could vary
significantly from period to period. In addition, the number of awards made under our equity compensation plans,
changes in the design of those plans, the price of our shares and the performance of our Company can all cause
stock-based compensation expense to vary from period to period.
Acquisitions
Acquisition of Athena Diagnostics
On February 24, 2011, we signed a definitive agreement to acquire Athena Diagnostics (“Athena”) from
Thermo Fisher Scientific, Inc., in an all-cash transaction valued at approximately $740 million. Athena is the
leading provider of advanced diagnostic tests related to neurological conditions, and generated revenues of
approximately $110 million in 2010. We completed the acquisition of Athena on April 4, 2011 (see Note 4 to
the Consolidated Financial Statements for further details).
Acquisition of Celera Corporation
On March 17, 2011, we entered into a definitive merger agreement with Celera Corporation (“Celera”) under
which we agreed to acquire Celera for $8 per share, in a transaction valued at approximately $344 million, net of
$326 million in acquired cash and short-term marketable securities. Additionally, we expect to utilize Celera’s
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