Derivative Financial Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

Our operations in foreign countries expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, primarily the Euro. To manage this risk, we may hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates, and as a result, varies over time.

We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in Other income (expense), net, on our Consolidated Statements of Income.

We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess hedge effectiveness using regression analysis. The unrealized gains or losses in AOCI are reclassified into product sales when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI at December 31, 2020 are expected to be reclassified to product sales within 12 months.

The cash flow effects of our derivative contracts for the years ended December 31, 2020, 2019 and 2018 are included within Net cash provided by operating activities on our Consolidated Statements of Cash Flows.

We had notional amounts on foreign currency exchange contracts outstanding totaling $2.4 billion and $2.9 billion at December 31, 2020 and 2019, respectively.

While all our derivative contracts allow us the right to offset assets and liabilities, we have presented amounts on a gross basis. The following table summarizes the classification and fair values of derivative instruments in our Consolidated Balance Sheets:


	December 31, 2020
	Asset Derivatives			Liability Derivatives
(in millions)	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	$	—	Other accrued liabilities	$	(113)
Foreign currency exchange contracts	Other long-term assets	—		Other long-term obligations	(7)
Total derivatives designated as hedges		—			(120)
Derivatives not designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	12		Other accrued liabilities	(1)
Total derivatives not designated as hedges		12			(1)
Total derivatives		$	12		$	(121)


	December 31, 2019
	Asset Derivatives			Liability Derivatives
(in millions)	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	$	36	Other accrued liabilities	$	(6)
Foreign currency exchange contracts	Other long-term assets	—		Other long-term obligations	(2)
Total derivatives designated as hedges		36			(8)
Derivatives not designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	1		Other accrued liabilities	—
Total derivatives not designated as hedges		1			—
Total derivatives		$	37		$	(8)

The following table summarizes the effect of our foreign currency exchange contracts on our Consolidated Financial Statements:


	Year Ended December 31,
(in millions)	2020		2019		2018
Derivatives designated as hedges:
Gain (loss) recognized in AOCI	$	(118)	$	76	$	114
Gain (loss) reclassified from AOCI into product sales	$	47	$	127	$	(87)
Derivatives not designated as hedges:
Gain (loss) recognized in Other income (expense), net	$	(51)	$	22	$	(2)

From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net on our Consolidated Statements of Income. There were no discontinuances of cash flow hedges for the years presented.

As of December 31, 2020 and 2019, we only held foreign currency exchange contracts. The following table summarizes the potential effect of offsetting our foreign currency exchange contracts on our Consolidated Balance Sheets:


							Gross Amounts Not Offset on the Consolidated Balance Sheets
(in millions)	Gross Amounts of Recognized Assets/Liabilities		Gross Amounts Offset on the Consolidated Balance Sheets		Amounts of Assets/Liabilities Presented on the Consolidated Balance Sheets		Derivative Financial Instruments		Cash Collateral Received/Pledged		Net Amount (Legal Offset)
As of December 31, 2020
Derivative assets	$	12	$	—	$	12	$	(12)	$	—	$	—
Derivative liabilities	$	(121)	$	—	$	(121)	$	12	$	—	$	(109)
As of December 31, 2019
Derivative assets	$	37	$	—	$	37	$	(6)	$	—	$	31
Derivative liabilities	$	(8)	$	—	$	(8)	$	7	$	—	$	(1)