LabCorp 2008 Annual Report Download - page 25

Laboratory Corporation of America® Holdings 2008 23
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (in millions)
Laboratory Corporation of America
geographic presence along with expanding capabilities in the specialty testing businesses. The
Company believes the acquisition market remains attractive, especially in light of recent credit
market corrections, with a number of opportunities to strengthen its scientific capabilities, grow
esoteric testing capabilities and increase presence in key geographic areas.
The Company has invested a total of $2.1 over the past three years in licensing new testing
technologies and had $40.5 net book value of capitalized patents, licenses and technology
at December 31, 2008. While the Company continues to believe its strategy of entering into
licensing and technology distribution agreements with the developers of leading-edge technologies
will provide future growth in revenues, there are certain risks associated with these investments.
These risks include, but are not limited to, the risk that the licensed technology will not gain
broad acceptance in the marketplace; or that insurance companies, managed care organizations,
or Medicare and Medicaid will not approve reimbursement for these tests at a level commensurate
with the costs of running the tests. Any or all of these circumstances could result in impairment
in the value of the related capitalized licensing costs.
Financing Activities
On October 26, 2007, the Company entered into senior unsecured credit facilities totaling $1,000.0.
The credit facilities consist of a five-year Revolving Facility in the principal amount of $500.0 and
a five-year, $500.0 Term Loan Facility. The balances outstanding on the Company’s Term Loan
Facility at December 31, 2008 and 2007 were $475.0 and $500.0, respectively. The balances
outstanding on the Company’s Revolving Facility at December 31, 2008 and 2007 were $70.8
and $0.0, respectively. The senior unsecured credit facilities bear interest at varying rates based
upon LIBOR plus a percentage based on the Company’s credit rating with Standard & Poor’s
Ratings Services.
The senior credit facilities contain certain debt covenants, which require that the Company
maintain leverage and interest coverage ratios of 2.5 to 1.0 and 5.0 to 1.0, respectively. Both
ratios are calculated in relation to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization). The covenants also restrict the payment of dividends. The Company is in compliance
with all covenants at December 31, 2008.
On September 15, 2008, Lehman Brothers Holdings, Inc. (“Lehman”), whose subsidiaries
have a $28.0 commitment in the Company’s Revolving Facility, filed for bankruptcy. Accordingly,
the Company does not expect Lehman will fulfill its pro rata share of any future borrowing
requests under the Revolving Facility. The Company is considering various options regarding
this current limitation on the Revolving Facility.
On March 31, 2008, the Company entered into a three-year interest rate swap agreement
to hedge variable interest rate risk on the Company’s variable interest rate term loan. Under
the swap the Company will, on a quarterly basis, pay a fixed rate of interest (2.92%) and receive
a variable rate of interest based on the three-month LIBOR rate on an amortizing notional
amount of indebtedness equivalent to the term loan balance outstanding. The swap has been
designated as a cash flow hedge. Accordingly, the Company recognizes the fair value of the
swap in the consolidated balance sheet and any changes in the fair value are recorded as
adjustments to accumulated other comprehensive income, net of tax. The fair value of the interest
rate swap agreement is the estimated amount that the Company would pay or receive to terminate
the swap agreement at the reporting date. The fair value of the swap was a liability of $13.5
at December 31, 2008 and is included in other liabilities in the consolidated balance sheet. The
Company is exposed to credit-related losses in the event of nonperformance by the counterparty
to the swap agreement. Management does not expect the counterparty to fail to meet its obligation
given the strong creditworthiness of the counterparty to the agreement.
As of December 31, 2008, the interest rates on the Term Loan Facility and the Revolving
Facility were 3.67% and 1.89%, respectively.
During 2008, the Company repurchased $330.6 of stock representing 4.6 shares. As of
December 31, 2008, the Company had outstanding authorization from the Board of Directors
to purchase approximately $95.2 of Company common stock.
On September 22, 2006, the Company announced that it had commenced an exchange
offer related to its zero-coupon subordinated notes due 2021. In the exchange offer, the Company
offered to exchange a new series of zero-coupon convertible subordinated notes due September 11,
2021 (the “New Notes”) and an exchange fee of $2.50 per $1,000 aggregate principal amount
at maturity for all of the outstanding zero-coupon subordinated notes due 2021 (the “Old Notes”).
The purpose of the exchange offer was to exchange the Old Notes for the New Notes
with certain different terms, including the addition of a net share settlement feature. The net
share settlement feature requires the Company to satisfy its obligation due upon conversion to
holders of the New Notes in cash for a portion of the conversion obligation equal to the accreted
principal of the New Notes and in shares for the remainder of the conversion value. In addition,
the New Notes provide that the Company eliminate its option to issue shares in lieu of paying
cash if and when the Company repurchases the New Notes at the option of holders.
On October 23, 2006, the exchange offer expired. Following settlement of the exchange,
$741.2 in aggregate principal amount at maturity of the New Notes and $2.6 in aggregate
principal amount at maturity of the Old Notes were outstanding.
Credit Ratings
The Company’s debt ratings of Baa3 from Moody’s and BBB from Standard and Poor’s contribute
to its ability to access capital markets.