Quest Diagnostics 2013 Annual Report Download - page 105

F- 33
14. FINANCIAL INSTRUMENTS
Interest Rate Derivatives – Cash Flow Hedges
During the fourth quarter of 2013, the Company entered into various forward starting interest rate swap agreements
(the "Forward Starting Interest Rate Swap Agreements") for an aggregate notional amount of $100 million. The Forward
Starting Interest Rate Swap Agreements have fixed interest rates ranging from 3.625% to 3.744%. The Forward Starting
Interest Rate Swaps Agreements were 23 to 24 month forward agreements that covered a ten-year hedging period and were
entered into to hedge part of the Company's interest rate exposure associated with forecasted new debt issuances related to the
refinancing of certain debt maturing through 2016. Through time the Company has entered into various interest rate lock
agreements and forward starting interest rate swap agreements to hedge part of the Company's interest rate exposure associated
with the variability in future cash flows attributable to changes in interest rates. Prior to their maturity or settlement, the
Company records derivative financial instruments, which have been designated as cash flow hedges, as either an asset or
liability measured at their fair value. The effective portion of changes in the fair value of these derivatives represent deferred
gains or losses that are recorded in accumulated other comprehensive (loss) income that are reclassified from accumulated other
comprehensive (loss) income to the statement of operations in the same period or periods during which the hedged transaction
affects earnings, which is when the Company recognizes interest expense on the hedged cash flows. The total net loss, net of
taxes, recognized in accumulated other comprehensive (loss) income, related to the Company's cash flow hedges as of
December 31, 2013 and 2012 was $5 million and $7 million, respectively. The loss recognized on the Company's cash flow
hedges for the years ended December 31, 2013, 2012 and 2011, as a result of ineffectiveness, was not material. The net amount
of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive (loss) income
into earnings within the next twelve months is $1 million.
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. 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%. 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 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 $72 million and the amount to be amortized as a reduction of interest expense over the
remaining terms of the hedged debt instruments was $65 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. In November 2013, the Company terminated the interest rate swaps associated with the
Senior Notes due 2015. The asset value of these interest rate swaps through the date of termination was not material.
Concurrently with the termination of the interest rate swaps associated with the Senior Notes due 2015, the Company entered
into additional fixed-to-variable interest rate swap agreements. The fixed-to-variable interest rate swap agreements entered into
in November 2013 have an aggregate notional amount of $200 million and variable interest rates based on one-month LIBOR
plus a spread ranging from 2.45% to 2.46%. These derivative financial instruments are accounted for as fair value hedges on a
portion of the Senior Notes due 2021.
The interest rate swaps associated with the Senior Notes due 2016, 2020 and 2021 are classified as liabilities with an
aggregate fair value of $34 million at December 31, 2013. The interest rate swaps associated with the Senior Notes due 2016
were classified as assets with fair values of $1 million at December 31, 2012. The interest rate swaps associated with the
Senior Notes due 2015, 2020 and 2021 were classified as liabilities with and aggregate fair value of $3 million at December 31,
2012. 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, 2013, 2012 and 2011 as a result of hedge ineffectiveness.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)