Quest Diagnostics 2009 Annual Report Download - page 98

interest expense on the hedged cash flows. The total loss, net of tax benefit, recognized in “accumulated other
comprehensive loss” on the Interest Rate Swap Agreements and Forward Starting Interest Rate Swap Agreements
as of December 31, 2009 and December 31, 2008 was $6.2 million and $3.6 million, respectively. The loss
recognized on the Interest Rate Swap Agreements and Forward Starting Interest Rate Swap Agreements for the
years ended December 31, 2009 and 2008, as a result of ineffectiveness, was not material. The amount of
deferred gains or losses held in accumulated other comprehensive loss that is expected to be reclassified into
earnings within the next twelve months is not material.
Interest Rate Swap Agreements – Fair Value Hedges
In November 2009, the Company entered into various fixed-to-variable interest rate swap agreements (the
“Fixed-to-Variable Interest Rate Swap Agreements”) which have a notional amount totaling $350 million and a
variable interest rate based on one-month LIBOR plus 1.33%. These derivative financial instruments are
accounted for as fair value hedges of a portion of our Senior Notes due 2020 and effectively convert that portion
of the debt into variable interest rate debt. Accordingly, the Company recognizes the changes in the fair value of
both the Fixed-to-Variable Interest Rate Swap Agreements and the underlying debt obligation in “other expense,
net” as equal and offsetting gains and losses. The fair value of the Fixed-to-Variable Interest Rate Swap
Agreements was a liability of $14.4 million at December 31, 2009. Since inception, the fair value hedges were
effective; therefore, there is no impact on earnings for the year ended December 31, 2009 as a result of hedge
ineffectiveness.
Foreign Currency Forward Contracts
The Company uses foreign exchange forward contracts to manage its risk associated with foreign currency
denominated cash flows. The primary foreign currency exposures include Swedish krona and British pounds.
A summary of the fair values of derivative instruments in the consolidated balance sheets is stated in the
table below (in thousands):
Balance Sheet
Classification Fair Value
Balance Sheet
Classification Fair Value
December 31, 2009 December 31, 2008
Derivatives Designated as
Hedging Instruments
Liability Derivatives:
Interest rate swaps........ Other liabilities $14,398 Other current liabilities $5,888
Total. ...................... 14,398 5,888
Derivatives Not Designated
as Hedging Instruments
Asset Derivatives:
Foreign currency forward
contracts. . ............. Other current assets 2,357 Other current assets 2,617
Total. ...................... 2,357 2,617
Liability Derivatives:
Foreign currency forward
contracts. . ............. Other current liabilities 311 Other current liabilities 4,142
Total. ...................... 311 4,142
Total Net Derivatives
Liability ................. $12,352 $7,413
12. PREFERRED STOCK AND COMMON STOCKHOLDERS’ EQUITY
Series Preferred Stock
Quest Diagnostics is authorized to issue up to 10 million shares of Series Preferred Stock, par value $1.00
per share. The Company’s Board of Directors has the authority to issue such shares without stockholder approval
F-28
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)