Quest Diagnostics 2012 Annual Report Download - page 107

F- 34
on the appreciation of Company common stock in cash, shares of Company common stock or a combination thereof. The stock
appreciation rights are granted at an exercise price no less than the fair market value of the Company's common stock on the
date of grant. Stock options and stock appreciation rights granted under the ELTIP expire on the date designated by the Board
of Directors but in no event more than ten years from date of grant. No stock appreciation rights have been granted under the
ELTIP or the 1999 EEPP. The ELTIP allows eligible employees to receive awards of shares, or the right to receive shares, of
Company common stock, the equivalent value in cash or a combination thereof. These shares are generally earned on
achievement of financial performance goals and are subject to forfeiture if employment terminates prior to the end of the
vesting period prescribed by the Board of Directors. For performance share unit awards, the actual amount of performance
share awards earned is based on the achievement of the performance goals specified in the awards. Key executive, managerial
and technical employees are eligible to participate in the ELTIP. The provisions of the 1999 EEPP were similar to those
outlined above for the ELTIP. Certain options granted under the 1999 EEPP remain outstanding.
The maximum number of shares of Company common stock that may be optioned or granted under the ELTIP is
approximately 60 million shares.
In 2005, the Company established the DLTIP, to replace the Company's prior plan established in 1998. At the
Company's annual shareholders' meeting in May 2009, the shareholders approved certain amendments to the DLTIP including:
(i) increasing the number of shares available for award under the DLTIP by 0.4 million shares; (ii) increasing the maximum
term that the Board of Directors may establish for awards of stock options from seven to ten years, beginning with 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 an exercise price no less than the fair market value of the Company's common stock 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. For the years ended December 31, 2012, 2011 and 2010, grants under the
DLTIP totaled 72 thousand shares, 60 thousand shares and 77 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 14 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 1 month to 10 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:
2012 2011 2010
Weighted average fair value of options at grant date $15.87 $18.08 $17.60
Expected volatility 27% 27.2% 26.8%
Dividend yield 0.9% 0.8% 0.7%
Risk-free interest rate 1.3% - 1.5% 2.7% - 3.1% 2.8% - 3.2%
Expected holding period, in years 6.7 - 7.5 6.8 - 7.6 6.7 - 7.6
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.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)