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Derivative instruments | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative instruments | Derivative instruments The Company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. To reduce our risks related to such exposures, we utilize or have utilized certain derivative instruments, including foreign currency forward, foreign currency option, cross-currency swap, forward interest rate and interest rate swap contracts. We do not use derivatives for speculative trading purposes. Cash flow hedges We are exposed to possible changes in the values of certain anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, associated primarily with our euro-denominated international product sales. Increases and decreases in the cash flows associated with our international product sales due to movements in foreign currency exchange rates are offset partially by corresponding increases and decreases in the cash flows from our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations on our international product sales, we enter into foreign currency forward and option contracts to hedge a portion of our projected international product sales primarily over a three-year time horizon, with, at any given point in time, a higher percentage of nearer-term projected product sales being hedged than in successive periods. As of September 30, 2017 and December 31, 2016, we had open foreign currency forward contracts with notional amounts of $4.0 billion and $3.4 billion, respectively, and open foreign currency option contracts with notional amounts of $131 million and $608 million, respectively. We have designated these foreign currency forward and foreign currency option contracts, which are primarily euro based, as cash flow hedges; and accordingly, we report the effective portions of the unrealized gains and losses on these contracts in AOCI in the Condensed Consolidated Balance Sheets, and we reclassify them to earnings in the same periods during which the hedged transactions affect earnings. To hedge our exposure to foreign currency exchange rate risk associated with certain of our long-term debt denominated in foreign currencies, we enter into cross-currency swap contracts. Under the terms of such contracts, we paid euros, pounds sterling and Swiss francs and received U.S. dollars for the notional amounts at the inception of the contracts; and based on these notional amounts, we exchange interest payments at fixed rates over the lives of the contracts by paying U.S. dollars and receiving euros, pounds sterling and Swiss francs. In addition, we will pay U.S. dollars to and receive euros, pounds sterling and Swiss francs from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged debt, effectively converting the interest payments and principal repayment on the debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges, and accordingly, the effective portions of the unrealized gains and losses on these contracts are reported in AOCI in the Condensed Consolidated Balance Sheets and reclassified to earnings in the same periods during which the hedged debt affects earnings. The notional amounts and interest rates of our cross-currency swaps as of September 30, 2017, were as follows (notional amounts in millions):
|  | Foreign currency |  | U.S. dollars
Hedged notes |  | Notional amount |  | Interest rate |  | Notional amount |  | Interest rate
2.125% 2019 euro Notes |  | € | 675 |  |  | 2.125 | % |  | $ | 864 |  |  | 2.6 | %
1.25% 2022 euro Notes |  | € | 1,250 |  |  | 1.25 | % |  | $ | 1,388 |  |  | 3.2 | %
0.41% 2023 Swiss franc Bonds |  | CHF | 700 |  |  | 0.41 | % |  | $ | 704 |  |  | 3.4 | %
2.00% 2026 euro Notes |  | € | 750 |  |  | 2.00 | % |  | $ | 833 |  |  | 3.9 | %
5.50% 2026 pound sterling Notes |  | £ | 475 |  |  | 5.50 | % |  | $ | 747 |  |  | 6.0 | %
4.00% 2029 pound sterling Notes |  | £ | 700 |  |  | 4.00 | % |  | $ | 1,111 |  |  | 4.5 | %
In connection with anticipated issuances of long-term fixed-rate debt, we entered into forward interest rate contracts during the three months ended June 30, 2017. The forward interest rate contracts hedged the variability in cash flows due to changes in the applicable Treasury rate between the time we entered into these contracts and the time the related debt was issued in May 2017. During the three months ended September 30, 2017, we entered into additional forward interest rate contracts with an aggregate notional amount of $550 million in connection with the anticipated issuance of additional long-term fixed-rate debt. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, were recognized in AOCI i n the Condensed Consolidated Balance Sheets and are amortized into earnings over the lives of the associated debt issuances. The effective portions of the unrealized gain (loss) recognized in other comprehensive income for our derivative instruments designated as cash flow hedges were as follows (in millions):
|  | Three months ended September 30, |  | Nine months ended September 30,
Derivatives in cash flow hedging relationships |  | 2017 |  | 2016 |  | 2017 |  | 2016
Foreign currency contracts |  | $ | (110 | ) |  | $ | (26 | ) |  | $ | (360 | ) |  | $ | (88 | )
Cross-currency swap contracts |  | 165 |  |  | 67 |  |  | 446 |  |  | (128 | )
Forward interest rate contracts |  | 10 |  |  | (6 | ) |  | 13 |  |  | (10 | )
Total |  | $ | 65 |  |  | $ | 35 |  |  | $ | 99 |  |  | $ | (226 | )
The locations in the Condensed Consolidated Statements of Income and the effective portions of the gain (loss) reclassified out of AOCI and into earnings for our derivative instruments designated as cash flow hedges were as follows (in millions):
|  |  |  | Three months ended September 30, |  | Nine months ended September 30,
Derivatives in cash flow hedging relationships |  | Statements of Income location |  | 2017 |  | 2016 |  | 2017 |  | 2016
Foreign currency contracts |  | Product sales |  | $ | (2 | ) |  | $ | 67 |  |  | $ | 88 |  |  | $ | 242 |
Cross-currency swap contracts |  | Interest and other income, net |  | 143 |  |  | (1 | ) |  | 514 |  |  | (143 | )
Forward interest rate contracts |  | Interest expense, net |  | (1 | ) |  | (1 | ) |  | (1 | ) |  | (1 | )
Total |  |  |  | $ | 140 |  |  | $ | 65 |  |  | $ | 601 |  |  | $ | 98 |
No portions of our cash flow hedge contracts are excluded from the assessment of hedge effectiveness, and the gains and losses of the ineffective portions of these hedging instruments were not material for the three and nine months ended September 30, 2017 and 2016. As of September 30, 2017, the amounts expected to be reclassified out of AOCI and into earnings during the next 12 months are approximately $172 million of net losses on our foreign currency and cross-currency swap contracts and approximately $1 million of losses on forward interest rate contracts. Fair value hedges To achieve the desired mix of fixed and floating interest rates on our long-term debt, we entered into interest rate swap contracts that qualified and are designated as fair value hedges. The terms of these interest rate swap contracts correspond to the related hedged debt instruments and effectively convert a fixed interest rate coupon to a floating LIBOR-based coupon over the lives of the respective notes. As of December 31, 2016, we had interest rate swap agreements with aggregate notional amounts of $6.65 billion that hedge certain of our long-term debt issuances. The contracts have rates that range from three-month LIBOR plus 0.4% to three-month LIBOR plus 2.0%. During the nine months ended September 30, 2017, we entered into interest rate swap contracts with an aggregate notional amount of $3.65 billion with respect to our 3.625% 2024 Notes, 3.125% 2025 Notes and 2.60% 2026 Notes. The contracts have rates that range from three-month LIBOR plus 0.3% to three-month LIBOR plus 1.4%. In addition, during the nine months ended September 30, 2017, interest rate swap contracts that had an aggregate notional amount of $850 million matured. These contracts had rates of three-month LIBOR plus 0.4%. For derivative instruments that qualify and are designated as fair value hedges, we recognize in current earnings the unrealized gain or loss on the derivative resulting from a change in fair value during the period, as well as the offsetting unrealized loss or gain of the hedged item resulting from a change in fair value during the period attributable to the hedged risk. For the three and nine months ended September 30, 2017, we included unrealized losses of $17 million and unrealized gains of $1 million, respectively, on our interest rate swap agreements in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized gains of $17 million and unrealized losses of $1 million, respectively, on the related hedged debt. For the three and nine months ended September 30, 2016, we included unrealized losses of $61 million and unrealized gains of $137 million, respectively, on our interest rate swap agreements in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized gains of $61 million and unrealized losses of $137 million, respectively, on the related hedged debt. Derivatives not designated as hedges To reduce our exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. These exposures are hedged on a month-to-month basis. As of September 30, 2017 and December 31, 2016, the total notional amounts of these foreign currency forward contracts were $779 million and $666 million, respectively. The location in the Condensed Consolidated Statements of Income and the amounts of gain (loss) recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
|  |  |  | Three months ended September 30, |  | Nine months ended September 30,
Derivatives not designated as hedging instruments |  | Statements of Income location |  | 2017 |  | 2016 |  | 2017 |  | 2016
Foreign currency contracts |  | Interest and other income, net |  | $ | (2 | ) |  | $ | 1 |  |  | $ | 12 |  |  | $ | (33 | )
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
|  | Derivative assets |  | Derivative liabilities
September 30, 2017 |  | Balance Sheet location |  | Fair value |  | Balance Sheet location |  | Fair value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets/ Other noncurrent assets |  | $ | 7 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | $ | 179 |
Cross-currency swap contracts |  | Other noncurrent assets |  | 224 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 308 |
Interest rate swap contracts |  | Other noncurrent assets |  | 40 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 5 |
Forward interest rate contracts |  | Other current assets |  | 10 |  |  | Accrued liabilities |  | — |
Total derivatives designated as hedging instruments |  |  |  | 281 |  |  |  |  | 492 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets |  | — |  |  | Accrued liabilities |  | — |
Total derivatives not designated as hedging instruments |  |  |  | — |  |  |  |  | — |
Total derivatives |  |  |  | $ | 281 |  |  |  |  | $ | 492 |
|  | Derivative assets |  | Derivative liabilities
December 31, 2016 |  | Balance Sheet location |  | Fair value |  | Balance Sheet location |  | Fair value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets/ Other noncurrent assets |  | $ | 203 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | $ | 4 |
Cross-currency swap contracts |  | Other noncurrent assets |  | — |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 523 |
Interest rate swap contracts |  | Other noncurrent assets |  | 41 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 7 |
Total derivatives designated as hedging instruments |  |  |  | 244 |  |  |  |  | 534 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets |  | — |  |  | Accrued liabilities |  | — |
Total derivatives not designated as hedging instruments |  |  |  | — |  |  |  |  | — |
Total derivatives |  |  |  | $ | 244 |  |  |  |  | $ | 534 |
Our derivative contracts that were in liability positions as of September 30, 2017, contain certain credit-risk-related contingent provisions that would be triggered if: (i) we were to undergo a change in control and (ii) our or the surviving entity’s creditworthiness deteriorates, which is generally defined as having either a credit rating that is below investment grade or a materially weaker creditworthiness after the change in control. If these events were to occur, the counterparties would have the right, but not the obligation, to close the contracts under early-termination provisions. In such circumstances, the counterparties could request immediate settlement of the contracts for amounts that approximate the then current fair values of the contracts. In addition, our derivative contracts are not subject to any type of master netting arrangement, and amounts due either to or from a counterparty under the contracts may be offset against other amounts due either to or from the same counterparty only if an event of default or termination, as defined, were to occur. The cash flow effects of our derivative contracts for the nine months ended September 30, 2017 and 2016, are included within Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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