McKesson 2014 Annual Report Download - page 55

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McKESSON CORPORATION
FINANCIAL REVIEW (Concluded)
52
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk: Our long-term debt bears interest predominately at fixed rates, whereas our short-term borrowings are at
variable interest rates. At March 31, 2014, we had $1.0 billion in outstanding debt with variable interest rates.
Our cash and cash equivalents balances earn interest at variable rates. At March 31, 2014, we had $4.2 billion in cash and
cash equivalents. The effect of a hypothetical 50 bp increase in the underlying interest rate on our cash and cash equivalents, net
of short-term borrowings and variable rate debt, would have resulted in a favorable impact to earnings in 2014 of approximately
$12 million.
Foreign exchange risk: Historically, we have recorded foreign revenues and earnings primarily from Canada, the United
Kingdom, Ireland, other European countries and Israel, which exposed us to changes in foreign currency exchange rates. Our
acquisition of a majority interest in Celesio in the fourth quarter of 2014 increased our exposure to changes in foreign currency
exchange rates and expanded our portfolio of foreign currency forward-exchange contracts. As substantially all revenues and
earnings of Celesio are generated outside of the United States, changes in the U.S. dollar relative to the functional currency in the
countries in which Celesio operates, primarily the Euro and the British pound, could impact future earnings. We seek to manage
our foreign exchange risk in part through operational means, including managing same currency revenues in relation to same
currency costs, and same currency assets in relation to same currency liabilities. Foreign exchange risk is also managed through
the use of foreign currency forward-exchange contracts. These contracts are used to offset the potential earnings effects from
mostly intercompany foreign currency loans.
As of March 31, 2014, the effect of a hypothetical adverse 10% change in the underlying foreign currency exchange rates
would have impacted the fair value of Celesio’s foreign exchange contracts by approximately $94 million. As of March 31, 2014,
the effect of a hypothetical adverse 10% change in the underlying foreign currency exchange rates would have impacted the fair
value of our remaining foreign exchange contracts by approximately $40 million. However, Celesio’s risk management programs
are designed such that the potential loss in value of these risk management portfolios described above would be largely offset by
changes in the value of the underlying exposure. Refer to Financial Note 18, “Hedging Activities,” for more information on our
foreign currency forward-exchange contracts.
The selected hypothetical change in interest rates and foreign currency exchange rates does not reflect what could be considered
the best or worst case scenarios.