Financial Instruments

6 Months Ended

Feb. 29, 2016

Financial Instruments [Abstract]

Financial Instruments

Note 10. Financial Instruments

The Company uses derivative instruments to manage its exposure to interest rate and foreign currency exchange risks.

The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of February 29, 2016, excluding warrants which are presented separately in this footnote, were as follows (in millions):

	Notional(1)		Fair Value		Location in Consolidated Condensed Balance Sheets
Derivatives designated as fair value hedges:
Interest rate swaps	$	250	$	5	Other non-current assets
Derivatives not designated as hedges:
Foreign currency forwards		465		1	Other current assets
Foreign currency forwards		768		16	Other current liabilities
Basis swap		2		1	Other current liabilities

⁽¹⁾ Amounts are presented in U.S. dollar equivalents.

The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of August 31, 2015, excluding warrants which are presented separately in this footnote, are as follows (in millions):

	Notional(1)		Fair Value		Location in Consolidated Condensed Balance Sheets
Derivatives designated as fair value hedges:
Interest rate swaps	$	250	$	2	Other non-current assets
Derivatives not designated as hedges:
Foreign currency forwards		1,205		34	Other current assets
Foreign currency forwards		495		9	Other current liabilities
Basis swap		1		-	Other current assets

⁽¹⁾ Amounts are presented in U.S. dollar equivalents.

The Company uses interest rate swaps to manage the interest rate exposure associated with some of its fixed-rate borrowings and designates them as fair value hedges. The Company uses forward starting interest rate swaps to hedge its interest rate exposure of some of its anticipated debt issuances and designates them as cash flow hedges.

The Company utilizes foreign currency forward contracts and other foreign currency derivatives to hedge significant committed and highly probable future transactions and cash flows denominated in currencies other than the functional currency of the Company or its subsidiaries. The Company has significant non-US dollar denominated net investments and uses foreign currency denominated financial instruments, specifically foreign currency derivatives and foreign currency denominated debt, to hedge its foreign currency risk.

Fair Value Hedges

The Company entered into a series of interest rate swaps, converting $750 million of its 5.250% fixed rate notes to a floating interest rate based on the six month LIBOR in arrears plus a constant spread and an interest rate swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the one-month LIBOR in arrears plus a constant spread. All swap termination dates coincide with the notes maturity date, January 15, 2019. These swaps were designated as fair value hedges. On August 10, 2015, the Company terminated $500 million of the six month LIBOR in arrears swaps and all of the one-month LIBOR in arrears swaps in connection with the repayment of the associated debt as described in Note 9, Short-Term Borrowings and Long-Term Debt.

The gains and losses due to changes in fair value on the swaps and on the hedged notes attributable to interest rate risk were recognized as follows (in millions):

	Location in Consolidated	Three Months Ended						Six Months Ended
	Condensed Statements of Earnings	February 29, 2016			February 28, 2015			February 29, 2016			February 28, 2015
Interest rate swaps	Interest expense, net	$	(2	)	$	4		$	(3	)	$	(6	)
Notes	Interest expense, net		2			(4	)		3			6

The changes in fair value of the Company’s debt that was swapped from fixed to variable rate and designated as fair value hedges are included in short-term and long-term debt on the Consolidated Condensed Balance Sheets (see Note 9, Short-Term Borrowings and Long-Term Debt). At February 29, 2016 and August 31, 2015, the cumulative fair value adjustments resulted in an increase in long-term debt of $4 million and $1 million, respectively. No material gains or losses were recorded from ineffectiveness during the three and six months ended February 29, 2016 and February 28, 2015.

Derivatives not Designated as Hedges

The Company enters into derivative transactions that are not designated as accounting hedges. These derivative instruments are economic hedges of interest rate and foreign currency risks. The gains and losses due to changes in fair value of these derivative instruments were recognized in earnings as follows (in millions):

	Location in Consolidated	Three Months Ended						Six Months Ended
	Condensed Statements of Earnings	February 29, 2016			February 28, 2015			February 29, 2016			February 28, 2015
Interest rate swaps	Interest expense, net	$	-		$	(1	)	$	-		$	(1	)
Foreign currency forwards	Selling, general and administrative expenses		(23	)		(28	)		(25	)		(28	)
Second Step Transaction foreign currency forwards	Other income (expense)		-			(70	)		-			(166	)
Foreign currency forwards	Other income (expense)		33			-			33			-

Warrants

As of February 29, 2016, the Company held (a) warrants to purchase up to 22,696,912 shares of AmerisourceBergen common stock at an exercise price of $51.50 per share, exercisable during a six month period beginning in March 2016, (“Warrant 1”), and (b) warrants to purchase up to 22,696,912 shares of AmerisourceBergen common stock at an exercise price of $52.50 per share, exercisable during a six month period beginning in March 2017 (“Warrant 2” and together with Warrant 1, the “Warrants”). Warrant 1 was exercised in full on March 18, 2016. See Note 20, Subsequent Event for further information.

The Company reports the Warrants at fair value. The fair value and balance sheet presentation of the Warrants was as follows (in millions):

	Location in Consolidated Condensed Balance Sheets	February 29, 2016		August 31, 2015
Asset derivatives not designated as hedges:
Warrants	Other non-current assets	$	1,546	$	2,140

The gains and losses due to changes in fair value of the Warrants recognized in earnings were as follows (in millions):

		Three Months Ended					Six Months Ended
	Location in Consolidated Condensed Statements of Earnings	February 29, 2016			February 28, 2015		February 29, 2016			February 28, 2015
Warrants	Other income (expense)	$	(532	)	$	559	$	(594	)	$	849

Derivatives Credit Risk

Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of counterparty nonperformance, and the Company regularly monitors the credit worthiness of each counterparty.

Derivatives Offsetting

The Company does not offset the fair value amounts of derivative instruments subject to master netting agreements in the Consolidated Condensed Balance Sheets.