LabCorp 2008 Annual Report Download - page 41

Notes to Consolidated Financial Statements
(Dollars and shares in millions, except per share data)
Laboratory Corporation of America
Laboratory Corporation of America® Holdings 2008 39
Derivative Financial Instruments
Interest rate swap agreements, which are currently being used by the Company 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 specified 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 value at December 31, 2008
and 2007.
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 $650.7 and $758.8 as of
December 31, 2008 and 2007, respectively. The fair market value of the senior notes, based
on market pricing, was approximately $539.7 and $591.2 as of December 31, 2008 and 2007,
respectively. As of December 31, 2008 and 2007, the estimated fair market value of the Company’s
variable rate debt was approximately $491.1 and $500.0, respectively.
Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
for financial assets and liabilities. SFAS No. 157 clarifies the definition of fair value, prescribes
methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to
measure fair value, and expands disclosures about fair value measurements. The three-tier fair
value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:
Level 1 – Valuations based on quoted prices for identical assets and liabilities in
active markets.
Level 2 – Valuations based on observable inputs other than quoted prices included in
Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets and liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data.
Level 3 – Valuations based on unobservable inputs reflecting the Company’s own
assumptions, consistent with reasonably available assumptions made by other market
participants. These valuations require significant judgment.
2) Business Acquisitions
During the year ended December 31, 2008, the Company acquired various laboratories and
related assets for approximately $203.9 in cash (net of cash acquired). These acquisitions were
made primarily to extend the Company’s geographic reach in important market areas or acquire
scientific differentiation and esoteric testing capabilities.
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 underlying
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.
Net sales of the Ontario joint venture were $249.0 for the twelve months ended
December 31, 2008.
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 scientific differentiation and esoteric testing capabilities.
3) Executive Retirements
In October 2008, the Company announced the retirement of its Executive Vice President, Corporate
Affairs (“EVP”), Bradford T. Smith, effective December 31, 2008. During the fourth quarter of
2008, the Company recorded charges of approximately $3.7, which included $2.0 related to
the acceleration of the recognition of stock compensation and $1.7 related to the acceleration
of certain defined benefit plan obligations.
Following the announcement of his retirement as EVP, Mr. Smith entered into a consulting
agreement with the Company effective January 1, 2009. The agreement provides for additional
services to be provided by Mr. Smith following the termination of his employment as EVP to assist
the Company during a transition period. Mr. Smith will remain as Vice Chairman of the Board
for a period expected to last until the annual meeting of shareholders in 2009. For purposes of
calculating pension benefits, the agreement provided for an unreduced pension benefit, starting
at age 55.