Cardinal Health 2014 Annual Report Download - page 44

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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obligations vary in scope and, when defined, in duration. In many
cases, a maximum obligation is not explicitly stated, and
therefore the overall maximum amount of the liability under such
indemnification obligations cannot be reasonably estimated.
Where appropriate, such indemnification obligations are
recorded as a liability. Historically, we have not, individually or
in the aggregate, made payments under these indemnification
obligations in any material amounts. In certain circumstances,
we believe that existing insurance arrangements, subject to the
general deduction and exclusion provisions, would cover
portions of the liability that may arise from these indemnification
obligations. In addition, we believe that the likelihood of a
material liability being triggered under these indemnification
obligations is not significant.
From time to time we enter into agreements that obligate us to
make fixed payments upon the occurrence of certain events.
Such obligations primarily relate to obligations arising under
acquisition transactions, where we have agreed to make
payments based upon the achievement of certain financial
performance measures by the acquired business. Generally, the
obligation is capped at an explicit amount.
11. Fair Value Measurements
The following tables present the fair values for those assets
measured on a recurring basis at June 30:
2014
(in millions) Level 1 Level 2 Level 3 Total
Cash equivalents (1) $ 740 $ — $ — $ 740
Forward contracts (2) — 10 — 10
Available-for-sale securities (3) — 100 — 100
Other investments (4) 106 — — 106
Total $ 846 $ 110 $ — $ 956
2013
(in millions) Level 1 Level 2 Level 3 Total
Cash equivalents (1) $ 348 $ — $ — $ 348
Forward contracts (2) — 12 — 12
Other investments (4) 89 — — 89
Total $ 437 $ 12 $ — $ 449
(1) Cash equivalents are comprised of highly liquid investments purchased
with a maturity of three months or less. The carrying value of these cash
equivalents approximates fair value due to their short-term maturities.
(2) The fair value of interest rate swaps, foreign currency contracts and
commodity contracts is determined based on the present value of
expected future cash flows considering the risks involved, including non-
performance risk, and using discount rates appropriate for the respective
maturities. Observable level 2 inputs are used to determine the present
value of expected future cash flows. The fair value of these derivative
contracts, which are subject to master netting arrangements under certain
circumstances, is presented on a gross basis in the consolidated balance
sheets.
(3) During fiscal 2014, we purchased marketable securities, which are
classified as available-for-sale and are carried at fair value in the
consolidated balance sheets. Observable level 2 inputs such as quoted
prices for similar securities, interest rate spreads, yield curves and credit
risk are used to determine the fair value. See Note 6 for additional
information regarding available-for-sale securities.
(4) The other investments balance includes investments in mutual funds,
which are used to offset fluctuations in deferred compensation liabilities.
These mutual funds primarily invest in the equity securities of companies
with large market capitalization and high quality fixed income debt
securities. The fair value of these investments is determined using quoted
market prices.
12. Financial Instruments
We utilize derivative financial instruments to manage exposure
to certain risks related to our ongoing operations. The primary
risks managed through the use of derivative instruments include
interest rate risk, currency exchange risk and commodity price
risk. We do not use derivative instruments for trading or
speculative purposes. While the majority of our derivative
instruments are designated as hedging instruments, we also
enter into derivative instruments that are designed to hedge a
risk, but are not designated as hedging instruments. These
derivative instruments are adjusted to current fair value through
earnings at the end of each period.
We are exposed to counterparty credit risk on all of our derivative
instruments. Accordingly, we have established and maintain
strict counterparty credit guidelines and enter into derivative
instruments only with major financial institutions that are
investment grade or better. We do not have significant exposure
to any one counterparty and we believe the risk of loss is remote.
Additionally, we do not require collateral under these
agreements.
Interest Rate Risk Management
We are exposed to the impact of interest rate changes. Our
objective is to manage the impact of interest rate changes on
cash flows and the market value of our borrowings. We utilize
a mix of debt maturities along with both fixed-rate and variable-
rate debt to manage changes in interest rates. In addition, we
enter into interest rate swaps to further manage our exposure
to interest rate variations related to our borrowings and to lower
our overall borrowing costs.
Currency Exchange Risk Management
We conduct business in several major international currencies
and are subject to risks associated with changing foreign
exchange rates. Our objective is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes to
allow management to focus its attention on business operations.
Accordingly, we enter into various contracts that change in value
as foreign exchange rates change to protect the value of existing
foreign currency assets and liabilities, commitments and
anticipated foreign currency revenue and expenses.
Commodity Price Risk Management
We are exposed to changes in the price of certain commodities.
Our objective is to reduce earnings and cash flow volatility
associated with forecasted purchases of these commodities to
allow management to focus its attention on business operations.