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Derivative instruments | 12 Months Ended
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Dec. 31, 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 December 31, 2017, 2016 and 2015, we had open foreign currency forward contracts with notional amounts of $4.6 billion, $3.4 billion and $3.3 billion, respectively, and open foreign currency option contracts with notional amounts of $74 million, $608 million and $225 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 Consolidated Balance Sheets, and we reclassify them to earnings in the same periods during which the hedged transactions affect earnings. To manage counterparty risk resulting from favorable movements in U.S. dollar/foreign currency exchange rates, we effectively terminated outstanding foreign currency forward and option contracts with a notional amount of $2.3 billion during the year ended December 31, 2015. We received $340 million from the counterparties, which was included in Net cash provided by operating activities in the Consolidated Statement of Cash Flows. This amount was recorded in AOCI and is being recognized in Product sales in the Consolidated Statements of Income when the related international product sales affect earnings. In addition, during the year ended December 31, 2015, we entered into new foreign currency forward and option contracts that hedge these forecasted international product sales. 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 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 December 31, 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 the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate contracts in order to hedge the variability in cash flows due to changes in the applicable Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, are recognized in AOCI in the Consolidated Balance Sheets and are amortized into earnings over the lives of the associated debt issuances. The effective portions of unrealized gains and losses recognized in AOCI for our derivative instruments designated as cash flow hedges were as follows (in millions):
|  |  |  | Years ended December 31,
Derivatives in cash flow hedging relationships |  |  |  | 2017 |  | 2016 |  | 2015
Foreign currency contracts |  |  |  | $ | (402 | ) |  | $ | 115 |  |  | $ | 425 |
Cross-currency swap contracts |  |  |  | 581 |  |  | (281 | ) |  | (275 | )
Forward interest rate contracts |  |  |  | 13 |  |  | (10 | ) |  | — |
Total unrealized gains (losses) |  |  |  | $ | 192 |  |  | $ | (176 | ) |  | $ | 150 |
The locations in the Consolidated Statements of Income and the effective portions of the gains and losses reclassified out of AOCI and into earnings for our derivative instruments designated as cash flow hedges were as follows (in millions):
|  |  |  | Years ended December 31,
Derivatives in cash flow hedging relationships |  | Consolidated Statements of Income location |  | 2017 |  | 2016 |  | 2015
Foreign currency contracts |  | Product sales |  | $ | 65 |  |  | $ | 308 |  |  | $ | 326 |
Cross-currency swap contracts |  | Interest and other income, net |  | 574 |  |  | (446 | ) |  | (182 | )
Forward interest rate contracts |  | Interest expense, net |  | (1 | ) |  | (1 | ) |  | (1 | )
Total realized gains (losses) |  |  |  | $ | 638 |  |  | $ | (139 | ) |  | $ | 143 |
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 years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, the amounts expected to be reclassified out of AOCI and into earnings over the next 12 months are $175 million of net losses on our foreign currency and cross-currency swap contracts. The net amount expected to be reclassified out of AOCI and into earnings over the next 12 months on our forward interest rate contracts is not material. 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, 2017 and 2016, we had interest rate swap agreements with aggregate notional amounts of $9.45 billion and $6.65 billion, respectively, that hedge certain of our long-term debt issuances. See Note 14, Financing arrangements—Interest rate swaps. For derivative instruments that qualify for and are designated as fair value hedges, we recognize in earnings the unrealized gain or loss on the derivative resulting from the change in fair value during the period as well as the offsetting unrealized loss or gain of the hedged item resulting from the change in fair value during the period attributable to the hedged risk. During the years ended December 31, 2017 and 2016, we included unrealized losses on interest rate swap agreements of $85 million and $34 million, respectively, in the same line item, Interest expense, net, in the Consolidated Statements of Income, as the offsetting unrealized gains of $85 million and $34 million, respectively, on the related hedged debt. During the year ended December 31, 2015, we included unrealized gains on interest rate swap agreements of $48 million in the same line item, Interest expense, net, in the Consolidated Statement of Income, as the offsetting unrealized losses of $48 million 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 December 31, 2017, 2016 and 2015, the total notional amounts of these foreign currency forward contracts were $757 million, $666 million and $911 million, respectively. The location in the Consolidated Statements of Income and the amount of gains (losses) recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
|  |  |  | Years ended December 31,
Derivatives not designated as hedging instruments |  | Consolidated Statements of Income location |  | 2017 |  | 2016 |  | 2015
Foreign currency contracts |  | Interest and other income, net |  | $ | 24 |  |  | $ | (56 | ) |  | $ | (16 | )
The fair values of derivatives included on the Consolidated Balance Sheets were as follows (in millions):
|  | Derivative assets |  | Derivative liabilities
December 31, 2017 |  | Consolidated Balance Sheet location |  | Fair value |  | Consolidated Balance Sheet location |  | Fair value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets/ Other noncurrent assets |  | $ | 6 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | $ | 204 |
Cross-currency swap contracts |  | Other current assets/ Other noncurrent assets |  | 270 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 220 |
Interest rate swap contracts |  | Other current assets/ Other noncurrent assets |  | 10 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 61 |
Total derivatives designated as hedging instruments |  |  |  | $ | 286 |  |  |  |  | $ | 485 |
|  | Derivative assets |  | Derivative liabilities
December 31, 2016 |  | Consolidated Balance Sheet location |  | Fair value |  | Consolidated 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 current assets/ Other noncurrent assets |  | — |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 523 |
Interest rate swap contracts |  | Other current assets/ Other noncurrent assets |  | 41 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 7 |
Total derivatives designated as hedging instruments |  |  |  | $ | 244 |  |  |  |  | $ | 534 |
Our derivative contracts that were in liability positions as of December 31, 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 these 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 only 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 are included within Net cash provided by operating activities in the 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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