LabCorp 2007 Annual Report Download - page 42

Notes to Consolidated Financial Statements
(Dollars and shares in millions, except per share data)
40 Laboratory Corporation of America® Holdings 2007
Derivative Financial Instruments
Interest rate swap agreements, which have been used by the Company
from time to time in the management of interest rate exposure, are
accounted for at fair value.
The Company’s zero-coupon subordinated notes contain the following
two features that are considered to be embedded derivative instruments
under Statement of Financial Accounting Standards (“SFAS”) No. 133
“Accounting for Derivative Instruments and Hedging Activities”:
1) The Company will pay contingent cash interest on the zero-
coupon subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of
the sum of the issue price, accrued original issue discount
and contingent additional principal, if any, for a specifi ed
measurement period.
2) Holders may surrender zero-coupon subordinated notes for
conversion during any period in which the rating assigned to
the zero-coupon subordinated notes by Standard & Poor’s
Ratings Services is BB- or lower.
The Company believes these embedded derivatives had no fair
value at December 31, 2007 and 2006.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, income taxes receivable, and accounts payable
are considered to be representative of their respective fair values due
to their short-term nature. The fair market value of the zero-coupon
subordinated notes, based on market pricing, was approximately $758.8
and $729.7 as of December 31, 2007 and 2006, respectively. The fair
market value of the senior notes, based on market pricing, was approxi-
mately $591.2 and $585.9 as of December 31, 2007 and 2006,
respectively. As of December 31, 2007, the $500.0 book value of the
Company’s variable rate debt approximates fair value.
BUSINESS ACQUISITIONS
On February 3, 2005, the Company acquired all of the outstanding
shares of US Pathology Labs, Inc. and Subsidiaries (“US LABS”) for
approximately $155 in cash. US LABS, based in Irvine, California,
is a national, anatomic pathology reference laboratory devoted to
comprehensive, high-quality, rapid-response cancer testing. The
company provides diagnostic, prognostic, and predictive cancer
testing services to hospitals, physician offi ces and surgery centers.
On May 11, 2005, the Company acquired all of the outstanding
shares of Esoterix, Inc. and Subsidiaries (“Esoterix”) for approximately
$150 in cash. Esoterix, based in Austin, Texas, is a leading provider of
specialty reference testing.
During the year ended December 31, 2007, the Company
acquired various medical reference laboratories and related assets for
approximately $222.3 in cash. These acquisitions were primarily done
to extend the Company’s geographic reach in important market areas
or acquire scientifi c differentiation and esoteric testing capabilities.
CEO RETIREMENT
In July 2006, the Company announced the retirement of its Chief
Executive Offi cer (“CEO”), Thomas P. Mac Mahon, effective December 31,
2006. During the second half of 2006, the Company recorded charges
of approximately $12.3, which included $11.6 related to the accelera-
tion of the recognition of stock compensation and $0.7 related to the
acceleration of certain defi ned benefi t plan obligations.
In July 2006, Mr. Mac Mahon entered into a consulting agreement
with the Company effective January 1, 2007, following the announce-
ment of his retirement as CEO on December 31, 2006. The agreement
provides for additional services to be provided by Mr. Mac Mahon
following the termination of his employment as CEO to assist the
Company during a transition period. Mr. Mac Mahon will remain as
Chairman of the Board. The Agreement provided for an additional fi ve
years of age for purposes of calculating pension benefi ts and has a
term of sixteen months.
RESTRUCTURING AND
OTHER SPECIAL CHARGES
During 2007, the Company recorded charges related to reductions in
work force and consolidation of redundant and underutilized facilities.
For 2007, the Company recorded net restructuring charges of $50.6.
Of this amount, $24.8 related to employee severance benefi ts for
approximately 1,560 employees primarily in management, adminis-
trative, technical, service and support functions and $19.4 related to
contractual obligations and other costs associated with the closure
of facilities. The charges also included a write-off of approximately
$6.5 of accounts receivable balances remaining on a subsidiary’s
billing system that was abandoned during the year and $0.9 related
to settlement of a preacquisition employment liability. The Company
also recorded a credit of $1.0, comprised of $0.7 of previously
recorded facility costs and $0.3 of employee severance benefi ts.
Laboratory Corporation of America