Cardinal Health 2013 Annual Report Download - page 27

Cardinal Health, Inc. and Subsidiaries
Quantitative and Qualitative Disclosures About Market Risk
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Our businesses are 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 price-related changes. We
maintain a hedging program to manage volatility related to these market
exposures which employs operational, economic and derivative financial
instruments in order to mitigate risk. See Notes 1 and 11 of the “Notes to
Consolidated Financial Statements” for further discussion regarding our
use of derivative instruments.
Foreign Exchange Rate Sensitivity
By nature of our global operations, our businesses are exposed to cash
flow and earnings fluctuations resulting from foreign exchange rate
variation. These exposures are transactional and translational in nature.
Principal drivers of this foreign exchange exposure include the Canadian
dollar, Chinese renminbi, European euro, Mexican peso, Thai baht,
Malaysian ringgit and Japanese yen.
Transactional Exposure
Our businesses' transactional exposure arises from the purchase and sale
of goods and services in currencies other than our functional currency or
the functional currency of our subsidiaries. As part of our risk management
program, at the end of each fiscal year we perform a sensitivity analysis
on our forecasted transactional exposure for the upcoming fiscal year.
These analyses include the estimated impact of our hedging program,
which mitigates our businesses' transactional exposure. At both June 30,
2013 and 2012, we had hedged approximately 45 percent of our
businesses' transactional exposures. The following table summarizes the
analysis as it relates to our businesses' transactional exposure and the
impact of a hypothetical 10 percent increase or decrease at June 30:
(in millions) 2013 2012
Net estimated transactional exposure $ 368 $ 357
Sensitivity gain/loss $ 37 $ 36
Estimated offsetting impact of hedges (17) (16)
Estimated net gain/loss $ 20 $ 20
Translational Exposure
We have exposure related to the translation of financial statements of our
foreign operations into U.S. dollars, our functional currency. We perform
a similar analysis to that described above related to this translational
exposure. We do not typically hedge any of our translational exposure and
no hedging impact was included in our analysis at June 30, 2013 and
2012. The following table summarizes our businesses' translational
exposure and the impact of a hypothetical 10 percent strengthening or
weakening in the U.S. dollar at June 30:
(in millions) 2013 2012
Net estimated translational exposure $ 53 $ 53
Sensitivity gain/loss 55
Interest Rate Sensitivity
We are exposed to changes in interest rates primarily as a result of our
borrowing and investing activities to maintain liquidity and fund business
operations. The nature and amount of our long-term and short-term debt
can be expected to fluctuate as a result of business requirements, market
conditions and other factors. Our policy is to manage exposures to interest
rates using a mix of fixed and floating rate debt as deemed appropriate
by management. We utilize interest rate swap instruments to mitigate our
exposure to interest rate movements.
As part of our risk management program, we perform an annual sensitivity
analysis on our forecasted exposure to interest rates for the following fiscal
year. This analysis assumes a hypothetical 10 percent change in interest
rates. At both June 30, 2013 and 2012, the potential increase or decrease
in annual interest expense under this analysis as a result of this
hypothetical change was $2 million.
Commodity Price Sensitivity
We are exposed to market price changes for commodities, including oil-
based resins, cotton, latex, and diesel fuel. We typically purchase raw
materials at market prices and some finished goods at prices based in
part on a commodity price index. As part of our risk management program,
we perform sensitivity analysis on our forecasted commodity exposure for
the following fiscal year. Our forecasted commodity exposure at June 30,
2013 decreased from the prior year primarily as a result of commodity
prices and changes in purchasing volumes.
At June 30, 2013 and 2012, we had hedged a portion of these commodity
exposures (see Note 11 of the “Notes to Consolidated Financial
Statements” for further discussion). The table below summarizes our
analysis of these forecasted commodity exposures and a hypothetical 10
percent fluctuation in commodity prices at June 30:
(in millions) 2013 2012
Estimated commodity exposure $ 369 $ 403
Sensitivity gain/loss $ 37 $ 40
Estimated offsetting impact of hedges (1) (1)
Estimated net gain/loss $ 36 $ 39
We also are exposed to fluctuations in commodities' prices through the
purchase of finished goods and various other energy-related commodities,
including natural gas and electricity, through our normal course of business
where our contracts are not directly tied to a commodity index. We believe
our total gross range of exposure to commodities, including the items listed
in the table above, is $500 million to $600 million at June 30, 2013.