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Derivative instruments | 3 Months Ended
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Mar. 31, 2018
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 use or have used 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 with regard to 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 March 31, 2018 and December 31, 2017, we had open foreign currency forward contracts with notional amounts of $5.1 billion and $4.6 billion, respectively, and open foreign currency option contracts with notional amounts of $60 million and $74 million, respectively. We have designated these foreign currency forward and foreign currency option contracts, which are primarily euro based, as cash flow hedges. 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, thereby 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. 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 March 31, 2018, 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 U.S. 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 i n the Condensed Consolidated Balance Sheets and are amortized into earnings over the lives of the associated debt issuances. Amounts recognized in connection with forward interest rate swaps during the three months ended March 31, 2018, and amounts expected to be recognized during the subsequent 12 months are not material. 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):
|  | Three months ended March 31,
Derivatives in cash flow hedging relationships |  | 2018 |  | 2017
Foreign currency contracts |  | $ | (89 | ) |  | $ | (47 | )
Cross-currency swap contracts |  | 238 |  |  | 64 |
Total unrealized gains |  | $ | 149 |  |  | $ | 17 |
The locations in the Condensed 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):
|  |  |  | Three months ended March 31,
Derivatives in cash flow hedging relationships |  | Condensed Consolidated Statements of Income location |  | 2018 |  | 2017
Foreign currency contracts |  | Product sales |  | $ | (34 | ) |  | $ | 57 |
Cross-currency swap contracts |  | Interest and other income, net |  | 164 |  |  | 74 |
Total realized gains |  |  |  | $ | 130 |  |  | $ | 131 |
No portions of our cash flow hedge contracts are excluded from the assessment of hedge effectiveness. The gains and losses of the ineffective portions of these hedging instruments were not material for the three months ended March 31, 2018 and 2017. As of March 31, 2018, the amount expected to be reclassified out of AOCI and into earnings during the next 12 months is $202 million of net losses on our foreign currency and cross-currency swap contracts. Fair value hedges To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that qualified for and were designated as fair value hedges. The terms of these interest rate swap contracts correspond to the related hedged debt and effectively converted fixed-rate coupons to floating-rate LIBOR-based coupons over the lives of the respective notes. As of March 31, 2018 and December 31, 2017, we had interest rate swap agreements with an aggregate notional amount of $9.45 billion that hedge certain of our long-term debt issuances. The contracts have rates that range from three-month LIBOR plus 0.3% to three-month LIBOR plus 2.0%. For derivative instruments that qualify for and are designated as fair value hedges, we recognize in Interest expense, net, in the Condensed Consolidated Statements of Income, 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. The following table presents such net unrealized gains and losses (in millions):
|  | Three months ended March 31,
Derivatives in fair value hedging relationships |  | 2018 |  | 2017
Net unrealized losses recognized for interest rate swap contracts |  | $ | (164 | ) |  | $ | (19 | )
Net unrealized gains recognized for related hedged debt |  | $ | 164 |  |  | $ | 19 |
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 March 31, 2018 and December 31, 2017, the total notional amounts of these foreign currency forward contracts were $335 million and $757 million, respectively. The location in the Condensed Consolidated Statements of Income and the amounts of gains recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
|  |  |  | Three months ended March 31,
Derivatives not designated as hedging instruments |  | Condensed Consolidated Statements of Income location |  | 2018 |  | 2017
Foreign currency contracts |  | Interest and other income, net |  | $ | 7 |  |  | $ | 1 |
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
|  | Derivative assets |  | Derivative liabilities
March 31, 2018 |  | Condensed Consolidated Balance Sheet location |  | Fair value |  | Condensed Consolidated Balance Sheet location |  | Fair value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets/ Other assets |  | $ | 17 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | $ | 259 |
Cross-currency swap contracts |  | Other current assets/ Other assets |  | 433 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 148 |
Interest rate swap contracts |  | Other current assets/ Other assets |  | — |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 215 |
Total derivatives designated as hedging instruments |  |  |  | $ | 450 |  |  |  |  | $ | 622 |
|  | Derivative assets |  | Derivative liabilities
December 31, 2017 |  | Condensed Consolidated Balance Sheet location |  | Fair value |  | Condensed Consolidated Balance Sheet location |  | Fair value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency contracts |  | Other current assets/ Other assets |  | $ | 6 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | $ | 204 |
Cross-currency swap contracts |  | Other current assets/ Other assets |  | 270 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 220 |
Interest rate swap contracts |  | Other current assets/ Other assets |  | 10 |  |  | Accrued liabilities/ Other noncurrent liabilities |  | 61 |
Total derivatives designated as hedging instruments |  |  |  | $ | 286 |  |  |  |  | $ | 485 |
Our derivative contracts that were in liability positions as of March 31, 2018, 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 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 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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