LabCorp 2008 Annual Report Download - page 26

24 Laboratory Corporation of America® Holdings 2008
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (in millions)
Laboratory Corporation of America
Off-Balance Sheet Arrangements
The Company does not have transactions or relationships with “special purpose” entities, and the
Company does not have any off balance sheet financing other than normal operating leases.
Other Commercial Commitments
At December 31, 2008, the Company provided letters of credit aggregating approximately $97.4,
primarily in connection with certain insurance programs and contractual guarantees on obligations
under the Company’s contract with UnitedHealthcare. The UnitedHealthcare contract requires
that the Company provide a $50.0 letter of credit, as security for the Company’s contingent
obligation to reimburse up to $200.0 in transition costs during the first three years of the contract.
Letters of credit provided by the Company are secured by the Company’s senior credit facilities
and are renewed annually, around mid-year.
Effective January 1, 2008 the Company acquired additional partnership units in its Ontario,
Canada (“Ontario”) joint venture for approximately $140.9 in cash (net of cash acquired),
bringing the Company’s percentage interest owned up to 85.6%. Concurrent with this acquisition,
the terms of the joint venture’s partnership agreement were amended. Based upon the
amended terms of this agreement, the Company began including the consolidated operating
results, financial position and cash flows of the Ontario joint venture in the Company’s consolidated
financial statements on January 1, 2008. The amended joint venture’s partnership agreement
also enables the holders of the minority interest to put the remaining partnership units to the
Company in defined future periods, at an initial amount equal to the consideration paid by
the Company in 2008, and subject to adjustment based on market value formulas contained
in the agreement. The initial difference of $123.0 between the value of the put and the under-
lying minority interest was recorded as additional minority interest liability and as a reduction
to additional paid-in capital in the consolidated financial statements. The contractual value of
the put, in excess of the current minority interest of $22.5, totals $98.8 at December 31, 2008.
At December 31, 2008, the Company was a guarantor on approximately $6.4 of equipment
leases. These leases were entered into by a joint venture in which the Company owns a fifty percent
interest and have a remaining term of approximately three years.
Based on current and projected levels of operations, coupled with availability under its
senior credit facilities, the Company believes it has sufficient liquidity to meet both its anticipated
short-term and long-term cash needs; however, the Company continually reassesses its liquidity
position in light of market conditions and other relevant factors.
New Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets
and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” (“SFAS 159”).
SFAS 159 permits an entity to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value. The Company adopted
this Statement as of January 1, 2008 and has elected not to apply the fair value option to any
of its financial instruments.
Contractual Cash Obligations
Payments Due by Period
2014 and
Total 2009 2010-2011 2012 -2013 thereafter
Operating lease obligations $ 376.6 $ 100.8 $ 136.2 $ 71.4 $ 68.2
Contingent future licensing payments(a) 52.0 2.7 7.6 13.9 27.8
Minimum royalty payments 24.1 6.8 8.0 5.8 3.5
Minimum purchase obligations 20.0 10.0 10.0 – –
Zero-coupon subordinated notes(b) 573.5 – 573.5 – –
Scheduled interest payments on Senior Notes 185.1 33.3 66.7 57.0 28.1
Term loan and revolving credit facility 545.8 120.8 125.0 300.0 –
Long-term debt, other than term loan, revolving credit facility and
zero-coupon subordinated notes 602.0 0.5 1.0 350.5 250.0
Total contractual cash obligations(c)(d)(e) $ 2,379.1 $ 274.9 $ 928.0 $ 798.6 $ 377.6
(a) Contingent future licensing payments will be made if certain events take place, such as the launch of a specific test, the transfer of certain technology, and when specified revenue milestones are met.
(b) Holders of the zero-coupon subordinated notes may require the Company to purchase in cash all or a portion of their notes on September 11, 2011 at $819.54 per note ($604.7 in the aggregate). Should the holders put the notes to the Company on that date, the Company
believes that it will be able to satisfy this contingent obligation with cash on hand, borrowings on the revolving credit facility, and additional financing if necessary. As announced by the Company on January 6, 2009, the zero-coupon subordinated notes may not be converted
during the period of January 1, 2009 through March 31, 2009 because the common stock trading price conversion feature of the zero-coupon subordinated notes was not triggered by fourth quarter 2008 trading prices. See “Note 12 to Consolidated Financial Statements” for
further information regarding the Company’s zero-coupon subordinated notes.
(c) The table does not include obligations under the Company’s pension and postretirement benefit plans, which are included in “Note 17 to Consolidated Financial Statements.” Benefits under the Company’s postretirement medical plan are made when claims are submitted for
payment, the timing of which are not practicable to estimate. The Company plans to contribute $54.8 to the defined benefit pension plan during 2009.
(d) The table does not include the Company’s contingent obligation to reimburse up to $200.0 in transition costs during the first three years of the UnitedHealthcare contract. The Company anticipates that it has approximately $51.2 remaining to be paid out on this contingent obligation.
(e) The table does not include the Company’s reserves for unrecognized tax benefits. The Company had an $86.7 and $66.5 reserve for unrecognized tax benefits, including interest and penalties, at December 31, 2008 and 2007, respectively, which is included in “Note 14 to
Consolidated Financial Statements.” Substantially all of these tax reserves are classified in other long-term liabilities in the Company’s Consolidated Balance Sheets at December 31, 2008 and 2007.