Cardinal Health 2014 Annual Report Download - page 45

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
43
Accordingly, we enter into derivative contracts to manage the
price risk associated with these 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) 2014 2013
Assets:
Foreign currency contracts (1) $ 1 $ 4
Forward interest rate swaps (1) 10 —
Forward interest rate swaps (2) — 20
Pay-floating interest rate swaps (2) 5—
Commodity contracts (2) 1—
Total assets $ 17 $ 24
Liabilities:
Foreign currency contracts (3) $ 1 $ 1
Forward interest rate swaps (4) 1—
Pay-floating interest rate swaps (4) 511
Total liabilities $ 7 $ 12
(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 2014 and 2013, we entered into pay-floating
interest rate swaps with total notional amounts of $300 million
and $775 million, respectively. These swaps have been
designated as fair value hedges of our fixed rate debt.
During fiscal 2013, we terminated notional amounts of $350
million of pay-floating interest rate swaps and received net
settlement proceeds of $43 million. These swaps were
previously designated as fair value hedges. There was no
immediate impact to earnings; however, the fair value
adjustment to debt is being amortized over the life of the
underlying debt as a reduction to interest expense, net in the
consolidated statements of earnings.
The following tables summarize the outstanding interest rate
swaps designated as fair value hedges at June 30:
2014
(in millions) Notional Amount Maturity Date
Pay-floating interest rate
swaps $ 1,438 Jun 2015 -Jun 2022
2013
(in millions) Notional Amount Maturity Date
Pay-floating interest rate
swaps $ 1,138 Jun 2015 - Jun 2022
The following table summarizes the gain/(loss) recognized in
earnings for interest rate swaps designated as fair value hedges:
(in millions) 2014 2013 2012
Pay-floating interest rate swaps (1) $ 23 $ 28 $ 38
Fixed-rate debt (1) (23) (28) (38)
(1) Included in interest expense, net in the consolidated statements of
earnings.
There was no ineffectiveness associated with these derivative
instruments.
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to
changes in cash flows attributable to interest rate, foreign
currency and commodity price fluctuations associated with
certain forecasted transactions. These derivative instruments
are designated and qualify as cash flow hedges. Accordingly,
the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same line item
associated with the forecasted transaction and in the same
period during which the hedged transaction affects earnings.
The ineffective portion of the gain or loss on the derivative
instrument is recognized in earnings immediately.
We enter into forward interest rate swaps to manage variability
of expected future cash flows from changing interest rates.
During fiscal 2014 and 2013, we entered into forward interest
rate swaps with total notional amounts of $50 million and $250
million, respectively, to hedge probable, but not firmly
committed, future transactions associated with our debt.
We enter into foreign currency contracts to protect the value of
anticipated foreign currency revenues and expenses. At
June 30, 2014 and 2013, we held contracts to hedge probable,
but not firmly committed, revenue and expenses. The principal
currencies hedged are the Canadian dollar, Mexican peso,
European euro and Thai baht.
We enter into commodity contracts to manage the price risk
associated with forecasted purchases of certain commodities
used in our Medical segment.