Cardinal Health 2015 Annual Report Download - page 28

Disclosures About Market Risk
27 Cardinal Health | Fiscal 2015 Form 10-K
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
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 upcoming fiscal year. This analysis assumes a hypothetical 10
percent change in interest rates. At June 30, 2015 and 2014, the
potential increase or decrease in annual interest expense under this
analysis as a result of this hypothetical change was $3 million and
$4 million, respectively.
During fiscal 2015 and 2014, we purchased marketable securities,
which are classified as available-for-sale and are carried at fair value
in the consolidated balance sheets. The fair value is subject to change
primarily as a result of changes in market interest rates and
investment risk related to the issuers' credit worthiness. At June 30,
2015 and 2014, a hypothetical increase or decrease of 100 basis
points in interest rates would cause a potential increase or decrease
of up to $2 million and $1 million, respectively, in the estimated fair
value.
Commodity Price Sensitivity
We are directly exposed to market price changes for certain
commodities, including oil-based resins, nitrile, cotton, diesel fuel and
latex. We typically purchase raw materials at either market prices or
prices tied to a commodity index and some finished goods at prices
based in part on a commodity price index. We also are indirectly
exposed to fluctuations in certain commodity prices through the
purchase of finished goods and various 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. As part of our risk management program, we perform
sensitivity analysis on our forecasted commodity exposure for the
upcoming fiscal year. Our forecasted commodity exposure at
June 30, 2015 increased from the prior year primarily as a result of
changes in purchasing volumes and commodity pricing. At June 30,
2015 and 2014, we had hedged a portion of these direct commodity
exposures (see Note 12 of the “Notes to Consolidated Financial
Statements” for further discussion).
The table below summarizes our analysis of these forecasted direct
and indirect commodity exposures and the potential gain/loss given
a hypothetical 10 percent fluctuation in commodity prices, assuming
pricing collectively shifts in the same direction, for the upcoming fiscal
year period:
June 30
(in millions) 2015 (1) 2014 (1)
Estimated commodity exposure $ 405 $ 321
Sensitivity gain/loss $ 41 $ 32
Estimated offsetting impact of hedges (1) (1)
Estimated net gain/loss $ 40 $ 31
(1) This analysis excludes exposures that may be added as a result of acquisitions
that have not yet closed as of June 30, 2015.
We believe our total gross range of direct and indirect exposure to
commodities, including the items listed in the table above but
excluding exposures that may be added as a result of acquisitions
that have not yet closed as of June 30, 2015, is $400 million to $500
million for fiscal 2016.