Quest Diagnostics 2009 Annual Report Download - page 64

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Our objective is to mitigate the variability in cash outflows that result from changes in interest rates by
maintaining a balanced mix of fixed-rate and variable-rate debt obligations. In order to achieve these objectives,
we have entered into interest rate swaps. Interest rate swaps involve the periodic exchange of payments without
the exchange of underlying principal or notional amounts. Net payments are recognized as an adjustment to
interest expense.
In November 2009, the Company entered into various fixed-to-variable interest rate swap agreements that
effectively convert a portion of our 4.75% Senior Notes due 2020 to variable-interest rate debt based on LIBOR
plus 1.33%. At December 31, 2009, the interest rate swap agreements which expire in January 2020, have a
notional amount totaling $350 million. The fixed-to-variable interest rate swap agreements are accounted for as
fair value hedges of a portion of our outstanding 4.75% Senior Notes due 2020. Based on our net exposure to
interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing 3
basis points) would impact annual interest expense by $0.3 million, assuming no changes to the debt outstanding
at December 31, 2009.
The fair value of the fixed-to-variable interest rate swap agreements at December 31, 2009 was a liability of
$14.4 million. A hypothetical 10% decrease in interest rates (representing approximately 40 basis points) would
potentially decrease the fair value of the liability of these instruments by approximately $11 million. A
hypothetical 10% increase in interest rates would potentially increase the fair value of the liability of these
instruments by approximately $11 million.
For details regarding our outstanding debt and our financial instruments, see Notes 10 and 11 to the
Consolidated Financial Statements.
Risk Associated with Investment Portfolio
Our investment portfolio includes equity investments in publicly held companies that are classified as
available-for-sale securities and other strategic equity holdings in privately held companies. These securities are
exposed to price fluctuations and are generally concentrated in the life sciences industry. The carrying values of
our available-for-sale equity securities and privately held securities were $8 million at December 31, 2009.
We regularly evaluate the fair value measurements of our equity investments to determine if losses in value
are other than temporary and if an impairment loss has been incurred. The evaluation considers if the security
has the ability to recover and, if so, the estimated recovery period. Other factors that are considered in this
evaluation include the amount of the other-than-temporary decline and its duration, the issuer’s financial condition
and short-term prospects and whether the market decline was caused by overall economic conditions or
conditions specific to the individual security.
We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings
in privately held companies cannot be easily quantified, as our ability to realize returns on investments depends
on, among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing
operations or through liquidity events such as initial public offerings, mergers or private sales.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2009 totaled $534 million, compared to $254 million at
December 31, 2008. Cash and cash equivalents consist of highly liquid short-term investments, including time
deposits with highly-rated banks, and various insured money market funds, including those that invest in U.S.
Treasury securities. Cash flows from operating activities in 2009 of $1.0 billion were used to fund investing and
financing activities of $196 million and $521 million, respectively. Cash and cash equivalents at December 31,
2008 totaled $254 million, compared to $168 million at December 31, 2007. Cash flows from operating activities
in 2008 of $1.1 billion were used to fund investing and financing activities of $199 million and $778 million,
respectively.
Cash Flows from Operating Activities
Net cash provided by operating activities for 2009 was $1.0 billion compared to $1.1 billion in 2008. For
the year ended December 31, 2009, cash flows from operating activities includes second quarter 2009 payments
totaling $308 million associated with the final settlement agreement related to the federal government’s
investigation related to NID (see Note 16 to the Consolidated Financial Statements). After giving consideration to
the settlement payments, underlying cash flows from operating activities exceeded the prior year level, primarily
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