LabCorp 2010 Annual Report Download - page 48

46
The noncontrolling interest puts are valued at their
contractually determined values, which approximate fair
values. The fair values for the embedded derivatives and
interest rate swap are based on observable inputs or quoted
market prices from various banks for similar instruments.
The carrying amounts of cash and cash equivalents, 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 $419.5 and $374.6 as of December 31, 2010
and 2009, respectively. The fair market value of the senior
notes, based on market pricing, was approximately $1,549.8
and $645.2 as of December 31, 2010 and 2009, respectively.
As of December 31, 2010 and 2009, the estimated fair market
value of the Company’s variable rate debt of $370.1 and $486.4,
respectively, was estimated by calculating the net present value
of related cash flows, discounted at current market rates.
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 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 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 $2.4 and $10.6 at December 31, 2010
and 2009, 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, 2010 and 2009. These embedded
derivatives also had no impact on the consolidated statements
of operations for the years ended December 31, 2010, 2009
and 2008.
The following table summarizes the fair value and presentation
in the consolidated balance sheets for derivatives designated
as hedging instruments (interest rate swap liability derivative)
as of December 31, 2010 and 2009, respectively:
Fair Value as of
December 31,
Balance Sheet Location 2010 2009
Other liabilities
$ 2.4 $ 10.6
LABORATORY CORPORATION OF AMERICA
Notes to Consolidated Financial Statements