Cardinal Health 2015 Annual Report Download - page 65

Notes to Financial Statements
Cardinal Health | Fiscal 2015 Form 10-K 64
The following table presents a reconciliation of those liabilities
measured at fair value on a recurring basis using unobservable inputs
(Level 3):
(in millions)
Contingent
Consideration
Obligation
Balance at June 30, 2013 $ —
Additions from acquisitions 12
Changes in fair value of contingent consideration (1) —
Payment of contingent consideration —
Balance at June 30, 2014 $ 12
Additions from acquisitions 40
Changes in fair value of contingent consideration (1) 8
Payment of contingent consideration (7)
Balance at June 30, 2015 $ 53
(1) Amount is included in amortization and other acquisition-related costs in the
consolidated statements of earnings.
12. Financial Instruments
We utilize derivative financial instruments to manage exposure to
certain risks related to our ongoing operations. The primary risks
managed through the use of derivative instruments include interest
rate risk, currency exchange risk and commodity price risk. We do
not use derivative instruments for trading or speculative purposes.
While the majority of our derivative instruments are designated as
hedging instruments, we also enter into derivative instruments that
are designed to hedge a risk, but are not designated as hedging
instruments. These derivative instruments are adjusted to current fair
value through earnings at the end of each period.
We are exposed to counterparty credit risk on all of our derivative
instruments. Accordingly, we have established and maintain strict
counterparty credit guidelines and enter into derivative instruments
only with major financial institutions that are investment grade or
better. We do not have significant exposure to any one counterparty
and we believe the risk of loss is remote. Additionally, we do not
require collateral under these agreements.
Interest Rate Risk Management
We are exposed to the impact of interest rate changes. Our objective
is to manage the impact of interest rate changes on cash flows and
the market value of our borrowings. We utilize a mix of debt maturities
along with both fixed-rate and variable-rate debt to manage changes
in interest rates. In addition, we enter into interest rate swaps to further
manage our exposure to interest rate variations related to our
borrowings and to lower our overall borrowing costs.
Currency Exchange Risk Management
We conduct business in several major international currencies and
are subject to risks associated with changing foreign exchange rates.
Our objective is to reduce earnings and cash flow volatility associated
with foreign exchange rate changes to allow management to focus
its attention on business operations. Accordingly, we enter into
various contracts that change in value as foreign exchange rates
change to protect the value of existing foreign currency assets and
liabilities, commitments and anticipated foreign currency revenue
and expenses.
Commodity Price Risk Management
We are exposed to changes in the price of certain commodities. Our
objective is to reduce earnings and cash flow volatility associated
with forecasted purchases of these commodities to allow
management to focus its attention on business operations.
Accordingly, we enter into derivative contracts when possible to
manage the price risk associated with certain forecasted purchases.
The following table summarizes the fair value of our assets and
liabilities related to derivatives designated as hedging instruments
and the respective line items in which they were recorded in the
consolidated balance sheets at June 30:
(in millions) 2015 2014
Assets:
Foreign currency contracts (1) $ 3 $ 1
Forward interest rate swaps (1) —10
Pay-floating interest rate swaps (2) 85
Commodity contracts (2) —1
Total assets $ 11 $ 17
Liabilities:
Foreign currency contracts (3) $ 2 $ 1
Forward interest rate swaps (4) —1
Pay-floating interest rate swaps (4) 15
Commodity contracts (3) 2—
Commodity contracts (4) 1—
Total liabilities $ 6 $ 7
(1) Included in prepaid expenses and other in the consolidated balance sheets.
(2) Included in other assets in the consolidated balance sheets.
(3) Included in other accrued liabilities in the consolidated balance sheets.
(4) Included in deferred income taxes and other liabilities in the consolidated
balance sheets.
Fair Value Hedges
We enter into pay-floating interest rate swaps to hedge the changes
in the fair value of fixed-rate debt resulting from fluctuations in interest
rates. These contracts are designated and qualify as fair value
hedges. Accordingly, the gain or loss recorded on the pay-floating
interest rate swaps is directly offset by the change in fair value of the
underlying debt. Both the derivative instrument and the underlying
debt are adjusted to market value at the end of each period with any
resulting gain or loss recorded in interest expense, net in the
consolidated statements of earnings.
During fiscal 2015, we entered into pay-floating interest rate swaps
with total notional amounts of $1,050 million, of which $250 million
and $450 million were in connection with the debt offerings in June
2015 and November 2014, respectively, as described in Note 7.
During fiscal 2014, we entered into pay-floating interest rate swaps
with total notional amounts of $300 million. These swaps have been
designated as fair value hedges of our fixed rate debt and are included