LabCorp 2009 Annual Report Download - page 28

LABORATORY CORPORATION OF AMERICA
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
26 LABORATORY CORPORATION OF AMERICA
The Company has invested a total of $25.8 over the past
three years in licensing new testing technologies (including
approximately $24.3 estimated fair market value of technology
acquired with the purchase of Monogram) and had $56.8 net
book value of capitalized patents, licenses and technology at
December 31, 2009. 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 failure of the licensed technology to gain
broad acceptance in the marketplace and/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, 2009 and 2008 were $425.0 and $475.0,
respectively. The balances outstanding on the Company’s
Revolving Facility at December 31, 2009 and 2008 were
$75.0 and $70.8, 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 a leverage ratio of no
more than 2.5 to 1.0 and an interest coverage ratio of at least
5.0 to 1.0. Both ratios are calculated in relation to EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization).
The credit agreement allows payment of dividends provided
that the Company is not in default (as defined in the agreement)
and its leverage ratio is less than 2.0 to 1.0. The Company is
in compliance with all covenants at December 31, 2009.
On September 15, 2008, Lehman Brothers Holdings, Inc.
(“Lehman”), whose subsidiaries had a $28.0 commitment in
the Company’s Revolving Facility, filed for bankruptcy. During
the fourth quarter of 2009, another bank assumed Lehman’s
commitment in the Company’s 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 outstand-
ing. 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 com-
prehensive 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 $10.6
and $13.5 at December 31, 2009 and 2008, respectively, and is
included in other liabilities in the consolidated balance sheets.
As of December 31, 2009, the interest rates on the Term
Loan Facility and the Revolving Facility were 3.67% and 0.58%,
respectively.
During 2009, the Company repurchased $273.5 of stock
representing 3.9 shares. As of December 31, 2009, the Company
had outstanding authorization from the Board of Directors to
purchase approximately $71.8 of Company common stock. On
February 11, 2010, the Board of Directors authorized the purchase
of $250.0 of additional shares of the Company’s common stock.
During the second quarter of 2009, the Company redeemed
approximately $369.5 principal amount at maturity of its zero-
coupon subordinated notes, equaling approximately 50% of
the principal amount at maturity outstanding of the zero-coupon
subordinated notes. The total cash used for these redemptions
was $289.4. As a result of certain holders of the zero-coupon
subordinated notes electing to convert their notes, the Company
also issued 0.4 additional shares of common stock and reversed
approximately $11.3 of deferred tax liability to reflect the tax
benefit realized upon issuance of these shares.
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.