Quest Diagnostics 2012 Annual Report Download - page 104

F- 31
Interest Rate Derivatives – Fair Value Hedges
The Company maintains various fixed-to-variable interest rate swaps to convert a portion of the Company's long-term
debt into variable interest rate debt. These derivative financial instruments are accounted for as fair value hedges of a portion of
the Senior Notes due 2016 and a portion of the Senior Notes due 2020. In prior years, the Company entered into various fixed-
to-variable interest rate swap agreements with an aggregate notional amount of $550 million and variable interest rates based on
six-month LIBOR plus 0.54% and one-month LIBOR plus 1.33%. In July 2012, the Company monetized the value of these
interest rate swap assets by terminating the hedging instruments. The asset value, including accrued interest through the date of
termination, was $71.8 million and the amount to be amortized as a reduction of interest expense over the remaining terms of
the hedged debt instruments was $65.2 million. Immediately after the termination of these interest rate swaps, the Company
entered into new fixed-to-variable interest rate swap agreements on the same Senior Notes. The fixed-to-variable interest rate
swap agreements that the Company entered into in July 2012 have an aggregate notional amount of $550 million and variable
interest rates based on six-month LIBOR plus 2.3% and one-month LIBOR plus 3.6%. During the fourth quarter of 2012, the
Company entered into additional fixed-to-variable interest rate swap agreements with an aggregate notional amount of $400
million and variable interest rates based on one-month LIBOR plus a spread ranging from 3.4% to 5.1%. These derivative
financial instruments are accounted for as fair value hedges on a portion of the Senior Notes due 2015 and a portion of the
Senior Notes due 2021.
The interest rate swaps associated with the Senior Notes due 2016 are classified as assets with fair values of $0.8
million and $10.9 million at December 31, 2012 and 2011, respectively. The interest rate swaps associated with the Senior
Notes due 2015, 2020 and 2021 are classified as liabilities with an aggregate fair value of $3.1 million at December 31, 2012.
The interest rate swaps associated with the Senior Notes due 2020 were classified as assets with a fair value of $45.7 million at
December 31, 2011. Since inception, the fair value hedges have been effective or highly effective; therefore, there is no impact
on earnings for the years ended December 31, 2012, 2011 and 2010 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. As of December 31, 2012, the gross notional amount of foreign currency forward contracts in U.S.
dollars was $7.3 million and principally consists of contracts in Swedish krona.
A summary of the fair values of derivative instruments in the consolidated balance sheets is stated in the table below:
December 31, 2012 December 31, 2011
Balance Sheet
Classification Fair Value
Balance Sheet
Classification Fair Value
Derivatives Designated as Hedging Instruments
Asset Derivatives:
Interest rate swaps Other assets $ 830 Other assets $ 56,520
Liability Derivatives:
Interest rate swaps Other liabilities 3,129 Other liabilities —
Derivatives Not Designated as Hedging Instruments
Asset Derivatives:
Foreign currency forward contracts Other current assets 403 Other current assets 180
Liability Derivatives:
Foreign currency forward contracts Other current liabilities — Other current liabilities 1,648
Total Net Derivatives (Liability) Asset $(1,896) $ 55,052
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)