LabCorp 2013 Annual Report Download - page 54

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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
$155.5 and $179.1 as of December 31, 2013 and 2012, respectively.
The fair market value of the senior notes, based on market pricing,
was approximately $2,907.8 and $2,720.5 as of December 31, 2013
and 2012, respectively. The Company’s note and debt instruments
are considered level 2 instruments, as the fair market values of
these instruments are determined using other observable inputs.
The Company’s investment in equity securities of $16.4 is considered
a level 1 instrument, as the fair market value of this instrument is
determined using observable inputs.
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 instruments 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
During the third quarter of 2013, the Company entered into two
fixed-to-variable interest rate swap agreements for the 4.625%
senior notes due 2020 with an aggregate notional amount of
$600.0 and variable interest rates based on one-month LIBOR plus
2.298% to hedge against changes in the fair value of a portion of
the Company’s long-term debt. These derivative financial instruments
are accounted for as fair value hedges of the senior notes due 2020.
These interest rate swaps are included in other long-term assets or
liabilities, as applicable, and added to the value of the senior notes,
with an aggregate fair value of $0.0 at December 31, 2013. As the
specific terms and notional amounts of the derivative financial
instruments match those of the fixed-rate debt being hedged, the
derivative instruments are assumed to be perfectly effective
hedges and accordingly, there is no impact to the Company’s
consolidated statements of operations. Cash flows from the interest
rate swaps are included in operating activities. There were no
derivative instruments designated as accounting hedges in 2012.
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, 2013 and 2012. These embedded derivatives
also had no impact on the consolidated statements of operations
for the years ended December 31, 2013, 2012 and 2011.
LABORATORY CORPORATION OF AMERICA
Notes to Consolidated Financial Statements