Cardinal Health 2009 Annual Report Download - page 81

option forfeiture rates. Effective with all options granted subsequent to the adoption of SFAS No. 123(R), the
Company estimates its future stock price volatility based on implied volatility from traded options on the
Company’s Common Shares and historical volatility over a period of time commensurate with the contractual
term of the option grant (7 years). The Company analyzed historical data to estimate option exercise behaviors
and employee terminations to estimate the expected option life and forfeiture rates. The Company calculated
separate option valuations for three separate groups of employees with similar historical exercise behaviors.
Once employee stock option values are determined, current accounting practices do not permit them to be
changed, even if the estimates used in the valuation model are different from actual results. SFAS No. 123(R)
requires, however, the Company to compare its estimated option forfeiture rates to actual forfeiture rates and
record any adjustments as necessary. See Note 18 of “Notes to Consolidated Financial Statements” for additional
information regarding equity-based compensation.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to cash flow and earnings fluctuations as a result of certain market risks. These
market risks primarily relate to foreign exchange, interest rate, and commodity related changes. The Company
maintains a comprehensive hedging program to manage volatility related to these market exposures. It employs
operational, economic, and derivative financial instruments in order to mitigate risk. See Notes 1 and 13 of
“Notes to Consolidated Financial Statements” for further discussion regarding the Company’s use of derivative
instruments.
Foreign Exchange Rate Sensitivity
By nature of the Company’s global operations, it is exposed to cash flow and earnings fluctuations resulting
from foreign exchange rate variation. These exposures are transactional and translational in nature. Since the
Company manufactures and sells its products throughout the world, its foreign currency risk is diversified.
Principal drivers of this diversified foreign exchange exposure include the Canadian dollar, European euro,
Mexican peso, Thai baht, British pound, and Australian dollar.
Transactional Exposure
The Company’s transactional exposure arises from the purchase and sale of goods and services in currencies
other than the functional currency of the parent or its subsidiaries. As part of its risk management program, at the
end of each fiscal year the Company performs a sensitivity analysis on its forecasted transactional exposure for
the upcoming fiscal year. The fiscal 2009 and fiscal 2008 analyses utilize a currency portfolio model,
encompassing both implied volatility and historical correlation to estimate the net potential gain or loss. These
analyses included the estimated impact of its hedging program, which mitigates the Company’s transactional
exposure. At June 30, 2009 and 2008, the Company had hedged approximately 44% and 45%, respectively, of its
transactional exposures. The following table summarizes the analysis as it relates to the Company’s transactional
exposure (in millions):
2009 2008
Net estimated transactional exposure .............................................. $633.4 $725.6
Sensitivity gain/loss ........................................................... $ 72.3 $ 53.5
Estimated offsetting impact of hedges ............................................. (35.4) (25.0)
Estimated net gain/loss ......................................................... $ 36.9 $ 28.5
Translational Exposure
The Company also has exposure related to the translation of financial statements of its foreign divisions into
U.S. dollars, the functional currency of the parent. It performs a similar analysis as described above related to this
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