Cardinal Health 2008 Annual Report Download - page 128

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manage changes in interest rates. In addition, the Company enters into interest rate swaps to further manage its
exposure to interest rate variations related to its borrowings and to lower its overall borrowing costs.
At June 30, 2008, the Company held three pay-fixed interest rate swaps to hedge the variability of cash
flows relating to forecasted transactions. These contracts were classified as cash flow hedges and matured
through 2008 and 2009. The Company adjusted these pay-fixed interest rate swaps to current market values
through other comprehensive income, as the contracts were effective in offsetting the interest rate exposure of the
forecasted transactions. During fiscal 2008, the Company held three additional pay-fixed interest rate swaps to
hedge the variability of cash flows related to forecasted transactions. All of these contracts matured through
2013. These contracts were all terminated during fiscal 2008, resulting in cash receipts totalling $6.4 million. The
ineffective portion of the contracts, totalling a gain of $0.1 million, was recorded in interest expense and other
during fiscal 2008. The remaining $6.3 million of the receipts that relate to the portion of the contracts that was
effective was recorded to other comprehensive income during fiscal 2008, and an adjustment will be recognized
in interest expense and other in future periods in conjunction with the occurrence of the originally forecasted
transactions.
At June 30, 2007, the Company held no pay-fixed interest rate swaps. During fiscal 2007, the Company held
six pay-fixed interest rate swaps to hedge the variability of cash flows related to forecasted transactions. Four of
these contracts matured through 2012 (“2012 Contracts”) and the other two contracts matured through 2016
(“2016 Contracts”). These contracts were all terminated during fiscal 2007, resulting in cash receipts totaling
$3.4 million for the 2012 Contracts and cash payments totaling $3.4 million for the 2016 Contracts. The
ineffective portion of the 2012 Contracts, totaling a gain of $0.1 million, was recorded in interest expense and
other during fiscal 2007. The ineffective portion of the 2016 Contracts, totaling a loss of $0.1 million, was
recorded in interest expense and other during fiscal 2007. The remaining amounts that relate to the portion of the
contracts that was effective were recorded to other comprehensive income during fiscal 2007, and an adjustment
is being recognized in interest expense and other in conjunction with the occurrence of the originally forecasted
transactions.
The Company also holds pay-floating interest rate swaps to hedge the change in fair value of the fixed-rate
debt related to fluctuations in interest rates. These contracts are classified as fair value hedges and mature
through June 2017. The gain/(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/(loss) recorded in interest expense and other.
The following table shows the notional amount hedged and fair value of the interest rate swaps outstanding
at June 30, 2008 and 2007 included in other assets/liabilities. The net gains/(losses) for pay-fixed interest rate
swaps recognized through interest expense and other during fiscal 2008, 2007 and 2006 were approximately
$(3.0) million, $(0.3) million, and less than $0.1 million, respectively. The net gains/(losses) for pay-floating
interest rate swaps recognized through interest expense and other during fiscal 2008, 2007 and 2006 were
approximately $4.2 million, $(11.2) million, and $(6.4) million, respectively.
(in millions)
June 30,
2008
June 30,
2007
Pay-fixed interest rate swaps:
Notional amount ............................................. $ 498.0 $ —
Assets ..................................................... — —
Liabilities ................................................... 7.5 —
Pay-floating interest rate swaps:
Notional amount ............................................. $1,250.0 $1,250.0
Assets ..................................................... 39.2 —
Liabilities ................................................... 24.5 68.7
The Company had net deferred gains/(losses) on previously settled pay-fixed interest rate swaps of
$6.7 million and $0.9 million recorded in other comprehensive income at June 30, 2008 and 2007, respectively.
104