LabCorp 2009 Annual Report Download - page 63

LABORATORY CORPORATION OF AMERICA 61
LABORATORY CORPORATION OF AMERICA
Notes to Consolidated Financial Statements
18. Derivative Instruments and
Hedging Activities
The Company addresses its exposure to market risks, principally
the market risk associated with changes in interest rates, through
a controlled program of risk management that includes, from
time to time, the use of derivative financial instruments such as
interest rate swap agreements (see Interest Rate Swap section
below). Although the Company’s zero-coupon subordinated
notes contain features that are considered to be embedded
derivative instruments (see Embedded Derivative section below),
the Company does not hold or issue derivative financial instru-
ments for trading purposes. The Company does not believe
that its exposure to market risk is material to the Company’s
financial position or results of operations.
Interest Rate Swap
The Company has an interest rate swap agreement with a
remaining term of approximately two years to hedge variable
interest rate risk on the Company’s variable interest rate term
loan. On a quarterly basis under the swap, the Company pays
a fixed rate of interest (2.92%) and receives a variable rate of
interest based on the three-month LIBOR rate on an amortiz-
ing 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 sheets and
any changes in the fair value are recorded as adjustments to
accumulated other comprehensive income (loss), 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.
Embedded Derivatives Related to the Zero-Coupon
Subordinated Notes
The Company’s zero-coupon subordinated notes contain
the following two features that are considered to be embedded
derivative instruments under authoritative guidance in
connection with 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
fair value at December 31, 2009 and 2008. These embedded
derivatives also had no impact on the consolidated statements
of operations for the years ended December 31, 2009, 2008
and 2007.
The following table summarizes the fair value and presentation
in the consolidated balance sheets for derivatives designated
as hedging instruments as of December 31, 2009 and 2008,
respectively:
Interest Rate Swap
Liability Derivative
Fair Value as of
December 31,
Balance Sheet Location 2009 2008
Other liabilities $ 10.6 $ 13.5
The following table summarizes the effect of the interest rate
swap on other comprehensive income (loss) for the years ended
December 31, 2009 and 2008:
2009 2008
Effective Portion of Derivative Gain (Loss) $ 2.9 $ (13.5)