DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 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 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. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes.

The derivative instruments we use to hedge our exposures for certain monetary assets and liabilities are not designated as hedges and, as a result, changes in their fair value are recorded in Other income (expense), net on our Condensed Consolidated Statements of Income.

The derivative instruments we use to hedge our exposures for forecasted product sales are designated as cash flow hedges and have maturities of 18 months or less. Upon executing a hedging contract and each reporting period thereafter, we assess hedge effectiveness using regression analysis. The unrealized gains or losses on these hedges are recorded in Accumulated other comprehensive income (“AOCI”) and are reclassified into Product sales on our Condensed Consolidated Statements of Income when the respective hedged transactions affect earnings. The majority of gains and losses related to the hedged forecasted transactions reported in AOCI as of September 30, 2022 are expected to be reclassified to Product sales within 12 months.

The cash flow effects of our derivative contracts for the nine months ended September 30, 2022 and 2021 were included within Net cash provided by operating activities on our Condensed Consolidated Statements of Cash Flows.

We had notional amounts of foreign currency exchange contracts outstanding of $3.0 billion as of September 30, 2022 and $2.9 billion as of December 31, 2021.

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 Condensed Consolidated Balance Sheets:


	September 30, 2022
	Derivative Assets			Derivative Liabilities
(in millions)	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	$	215	Accrued and other current liabilities	$	—
Foreign currency exchange contracts	Other long-term assets	17		Other long-term obligations	—
Total derivatives designated as hedges		232			—
Derivatives not designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	10		Accrued and other current liabilities	2
Total derivatives not designated as hedges		10			2
Total derivatives		$	242		$	2


	December 31, 2021
	Derivative Assets			Derivative Liabilities
(in millions)	Classification	Fair Value		Classification	Fair Value
Derivatives designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	$	75	Accrued and other current liabilities	$	4
Foreign currency exchange contracts	Other long-term assets	5		Other long-term obligations	1
Total derivatives designated as hedges		80			5
Derivatives not designated as hedges:
Foreign currency exchange contracts	Prepaid and other current assets	—		Accrued and other current liabilities	—
Total derivatives not designated as hedges		—			—
Total derivatives		$	80		$	5

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2022		2021		2022		2021
Derivatives designated as hedges:
Gains (losses) recognized in AOCI	$	162	$	42	$	292	$	104
Gains (losses) reclassified from AOCI into Product sales	$	48	$	(21)	$	115	$	(69)
Derivatives not designated as hedges:
Gains (losses) recognized in Other income (expense), net	$	6	$	5	$	70	$	24

From time to time, we may discontinue cash flow hedges and, as a result, record related amounts in Other income (expense), net on our Condensed Consolidated Statements of Income. There were no discontinuances of cash flow hedges for the three and nine months ended September 30, 2022 and 2021.

The following table summarizes the potential effect of offsetting our foreign currency exchange contracts on our Condensed Consolidated Balance Sheets:


			Gross Amounts Not Offset on the Condensed Consolidated Balance Sheets
(in millions)	Gross Amounts of Assets/Liabilities Presented on the Condensed Consolidated Balance Sheets		Derivative Financial Instruments		Cash Collateral Received/Pledged		Net Amount (Legal Offset)
As of September 30, 2022
Derivative assets	$	242	$	(2)	$	—	$	240
Derivative liabilities	$	2	$	(2)	$	—	$	—
As of December 31, 2021
Derivative assets	$	80	$	(4)	$	—	$	76
Derivative liabilities	$	5	$	(4)	$	—	$	1