Debt, Financial Instruments and Fair Value Measurements | 6 Months Ended |
Jun. 30, 2014 |
Debt, Financial Instruments and Fair Value Measurements | ' |
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7. DEBT, FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS |
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Securitization arrangement |
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The following is a summary of the activity relating to the company’s securitization arrangement in Japan. |
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| | Three months ended | | | Six months ended | | | | | |
| | June 30, | | | June 30, | | | | | |
(in millions) | | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | |
Sold receivables at beginning of period | | | $109 | | | | $120 | | | | $114 | | | | $157 | | | | | |
Proceeds from sales of receivables | | | 117 | | | | 131 | | | | 240 | | | | 255 | | | | | |
Cash collections (remitted to the owners of the receivables) | | | (120 | ) | | | (123 | ) | | | (249 | ) | | | (264 | ) | | | | |
Effect of currency exchange rate changes | | | — | | | | 1 | | | | 1 | | | | (19 | ) | | | | |
Sold receivables at end of period | | | $106 | | | | $129 | | | | $106 | | | | $129 | | | | | |
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The net losses relating to the sales of receivables were immaterial for each period. Refer to the 2013 Annual Report for further information regarding the company’s securitization agreements. |
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Credit facilities and commercial paper |
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As of June 30, 2014, there were no outstanding borrowings under the company’s primary and Euro-denominated revolving credit facilities. As of December 31, 2013, there were no outstanding borrowings under the company’s primary revolving credit facility and approximately $124 million outstanding under the Euro-denominated revolving credit facility. Refer to the 2013 Annual Report for further discussion of the company’s credit facilities. |
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In July 2014, the company amended its primary and Euro-denominated revolving credit facilities to extend the termination date of the facilities to December 31, 2015. There were no other material changes to the terms of the facilities as a result of the amendments. |
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During the first six months of 2014, the company issued and redeemed commercial paper, of which $150 million was outstanding as of June 30, 2014 with a weighted-average interest rate of 0.165%. This commercial paper is classified as short-term debt. The company did not have any commercial paper outstanding as of December 31, 2013. |
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Concentrations of credit risk |
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The company invests excess cash in certificates of deposit or money market funds and diversifies the concentration of cash among different financial institutions. With respect to financial instruments, where appropriate, the company has diversified its selection of counterparties, and has arranged collateralization and master-netting agreements to minimize the risk of loss. |
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The company continues to do business with foreign governments in certain countries, including Greece, Spain, Portugal and Italy, that have experienced a deterioration in credit and economic conditions. As of June 30, 2014, the company’s net accounts receivable from the public sector in Greece, Spain, Portugal and Italy totaled $450 million (of which $37 million related to Greece). |
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Global economic conditions and liquidity issues in certain countries have resulted, and may continue to result, in delays in the collection of receivables and credit losses. Governmental actions and customer-specific factors may also require the company to re-evaluate the collectibility of its receivables and the company could potentially incur additional credit losses. These conditions may also impact the stability of the Euro. |
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Derivatives and hedging activities |
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The company operates on a global basis and is exposed to the risk that its earnings, cash flows and equity could be adversely impacted by fluctuations in foreign exchange and interest rates. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. |
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The company is primarily exposed to foreign exchange risk with respect to recognized assets and liabilities, forecasted transactions and net assets denominated in the Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, Brazilian Real, Colombian Peso, and Swedish Krona. The company manages its foreign currency exposures on a consolidated basis, which allows the company to net exposures and take advantage of any natural offsets. In addition, the company uses derivative and nonderivative instruments to further reduce the net exposure to foreign exchange. Gains and losses on the hedging instruments offset losses and gains on the hedged transactions and reduce the earnings and equity volatility resulting from foreign exchange. Financial market and currency volatility may limit the company’s ability to cost-effectively hedge these exposures. |
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The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company’s policy is to manage interest costs using a mix of fixed- and floating-rate debt that the company believes is appropriate. To manage this mix in a cost-efficient manner, the company periodically enters into interest rate swaps in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. |
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The company does not hold any instruments for trading purposes and none of the company’s outstanding derivative instruments contain credit-risk-related contingent features. |
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All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets and are classified as short-term or long-term based on the scheduled maturity of the instrument. Based upon the exposure being hedged, the company designates its hedging instruments as cash flow or fair value hedges. |
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Cash Flow Hedges |
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The company may use options, including collars and purchased options, forwards and cross-currency swaps to hedge the foreign exchange risk to earnings relating to forecasted transactions and recognized assets and liabilities. The company periodically uses forward-starting interest rate swaps and treasury rate locks to hedge the risk to earnings associated with movements in interest rates relating to anticipated issuances of debt. Certain other firm commitments and forecasted transactions are also periodically hedged. |
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For each derivative instrument that is designated and effective as a cash flow hedge, the gain or loss on the derivative is accumulated in accumulated other comprehensive income (AOCI) and then recognized in earnings consistent with the underlying hedged item. Option premiums or net premiums paid are initially recorded as assets and reclassified to other comprehensive income (OCI) over the life of the option, and then recognized in earnings consistent with the underlying hedged item. Cash flow hedges are classified in net sales, cost of sales, and net interest expense, and primarily relate to forecasted third-party sales denominated in foreign currencies, forecasted intercompany sales denominated in foreign currencies, and anticipated issuances of debt, respectively. |
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The notional amounts of foreign exchange contracts were $1.6 billion and $2.1 billion as of June 30, 2014 and December 31, 2013, respectively. There were no interest rate contacts designated as cash flow hedges outstanding as of June 30, 2014 and December 31, 2013. The maximum term over which the company has cash flow hedge contracts in place related to forecasted transactions as of June 30, 2014 is 18 months. |
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Fair Value Hedges |
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The company uses interest rate swaps to convert a portion of its fixed-rate debt into variable-rate debt. These instruments hedge the company’s earnings from changes in the fair value of debt due to fluctuations in the designated benchmark interest rate. For each derivative instrument that is designated and effective as a fair value hedge, the gain or loss on the derivative is recognized immediately to earnings, and offsets the loss or gain on the underlying hedged item. Fair value hedges are classified in net interest expense, as they hedge the interest rate risk associated with certain of the company’s fixed-rate debt. |
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The total notional amount of interest rate contracts designated as fair value hedges was $1.7 billion and $1.2 billion as of June 30, 2014 and December 31, 2013, respectively. |
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Dedesignations |
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If it is determined that a derivative or nonderivative hedging instrument is no longer highly effective as a hedge, the company discontinues hedge accounting prospectively. If the company removes the cash flow hedge designation because the hedged forecasted transactions are no longer probable of occurring, any gains or losses are immediately reclassified from AOCI to earnings. Gains or losses relating to terminations of effective cash flow hedges in which the forecasted transactions are still probable of occurring are deferred and recognized consistent with the loss or income recognition of the underlying hedged items. |
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There were no hedge dedesignations in the first six months of 2014 resulting from changes in the company’s assessment of the probability that the hedged forecasted transactions would occur. In the first half of 2013, the company had $1 billion of interest rate contracts designated as cash flow hedges that matured or were terminated, resulting in a net gain of $5 million that was deferred in AOCI. In the second quarter of 2013, the company determined that certain forecasted transactions associated with these contracts were no longer probable of occurring and therefore dedesignated the hedge relationship, which, together with ineffectiveness, resulted in the immediate reclassification of a net gain of $11 million from AOCI to net interest expense. The remaining deferred net loss of $6 million from the matured or terminated interest rate contracts is being amortized to net interest expense against the related accrued interest payments. |
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If the company terminates a fair value hedge, an amount equal to the cumulative fair value adjustment to the hedged items at the date of termination is amortized to earnings over the remaining term of the hedged item. There were no fair value hedges terminated during the first half of 2014 and 2013. |
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Undesignated Derivative Instruments |
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The company uses forward contracts to hedge earnings from the effects of foreign exchange relating to certain of the company’s intercompany and third-party receivables and payables denominated in a foreign currency. These derivative instruments are generally not formally designated as hedges, and the change in fair value, which substantially offsets the change in book value of the hedged items, is recorded directly to other expense (income), net. The terms of these instruments generally do not exceed one month. |
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The total notional amount of undesignated derivative instruments was $397 million as of June 30, 2014 and $381 million as of December 31, 2013. In the fourth quarter of 2012 and the first quarter of 2013, the company entered into option contracts with a total notional amount of $3.7 billion to hedge anticipated foreign currency cash outflows associated with the planned acquisition of Gambro. These contracts matured in June 2013, and in the second quarter of 2013, the company entered into undesignated forward contracts with a total notional amount of $1.5 billion also to hedge anticipated foreign currency cash outflows associated with the planned acquisition of Gambro. These contracts matured in the third quarter of 2013. |
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The company recorded losses of $55 million and $72 million in the three and six months ended June 30, 2013, respectively, associated with the Gambro-related option and forward contracts, which more than offset net gains on other undesignated derivative instruments. |
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Gains and Losses on Derivative Instruments |
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The following table summarizes the income statement locations and gains and losses on the company’s derivative instruments for the three months ended June 30, 2014 and 2013. |
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| | Gain (loss) recognized in OCI | | | Location of gain (loss) | | | Gain (loss) reclassified from AOCI | |
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(in millions) | | 2014 | | | 2013 | | | in income statement | | 2014 | | | 2013 | |
Cash flow hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | $— | | | | $21 | | | | Net interest expense | | | | $— | | | | $11 | |
Foreign exchange contracts | | | 1 | | | | 1 | | | | Net sales | | | | 1 | | | | (1 | ) |
Foreign exchange contracts | | | 5 | | | | (17 | ) | | | Cost of sales | | | | (3 | ) | | | 16 | |
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Total | | | $ 6 | | | | $ 5 | | | | | | | | $ (2 | ) | | | $26 | |
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| | | | | Gain (loss) recognized in income | | | | | | | | | |
(in millions) | | Location of gain (loss) in income statement | | | 2014 | | | 2013 | | | | | | | | | |
Fair value hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | Net interest expense | | | | $ 17 | | | | $(21 | ) | | | | | | | | |
Undesignated derivative instruments | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | Other expense (income), net | | | | $(22 | ) | | | $(44 | ) | | | | | | | | |
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The following table summarizes the income statement locations and gains and losses on the company’s derivative instruments for the six months ended June 30, 2014 and 2013. |
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| | Gain (loss) recognized in OCI | | | Location of gain (loss) | | | Gain (loss) reclassified from AOCI | |
| into income |
(in millions) | | 2014 | | | 2013 | | | in income statement | | 2014 | | | 2013 | |
Cash flow hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | $— | | | | $26 | | | | Net interest expense | | | | $(1 | ) | | | $11 | |
Foreign exchange contracts | | | — | | | | — | | | | Net sales | | | | 1 | | | | (1 | ) |
Foreign exchange contracts | | | (6 | ) | | | 36 | | | | Cost of sales | | | | 2 | | | | 18 | |
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Total | | | $ (6 | ) | | | $62 | | | | | | | | $ 2 | | | | $28 | |
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| | | | | Gain (loss) recognized in income | | | | | | | | | |
(in millions) | | Location of gain (loss) in income statement | | | 2014 | | | 2013 | | | | | | | | | |
Fair value hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | Net interest expense | | | | $ 31 | | | | $(26 | ) | | | | | | | | |
Undesignated derivative instruments | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | Other expense (income), net | | | | $(10 | ) | | | $(45 | ) | | | | | | | | |
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For the company’s fair value hedges, equal and offsetting losses of $17 million and $31 million were recognized in net interest expense in the second quarter and first half of 2014, respectively, and equal and offsetting gains of $21 million and $26 million were recognized in net interest expense in the second quarter and first half of 2013, respectively, as adjustments to the underlying hedged item, fixed-rate debt. Ineffectiveness related to the company’s cash flow and fair value hedges for the six months ended June 30, 2014 was not material. |
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As of June 30, 2014, $3 million of deferred, net after-tax losses on derivative instruments included in AOCI are expected to be recognized in earnings during the next 12 months, coinciding with when the hedged items are expected to impact earnings. |
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Fair Values of Derivative Instruments |
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The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of June 30, 2014. |
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| | Derivatives in asset positions | | | Derivatives in liability positions | | | | | |
(in millions) | | Balance sheet location | | | Fair value | | | Balance sheet location | | | Fair value | | | | | |
Derivative instruments designated as hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | Other long-term assets | | | | $52 | | | | | | | | | | | | | |
Foreign exchange contracts | | | Prepaid expenses and other | | | | 19 | | | | | | | | | | | | | |
Foreign exchange contracts | | | Other long-term assets | | | | 2 | | | | Accounts payable | | | | 4 | | | | | |
and accrued liabilities | | | | | |
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Total derivative instruments designated as hedges | | | | | | | $73 | | | | | | | | $4 | | | | | |
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Undesignated derivative instruments | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | Prepaid expenses and other | | | | $— | | | | Accounts payable | | | | $1 | | | | | |
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and accrued liabilities | | | | | |
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Total derivative instruments | | | | | | | $73 | | | | | | | | $5 | | | | | |
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The following table summarizes the classification and fair values of derivative instruments reported in the condensed consolidated balance sheet as of December 31, 2013. |
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| | Derivatives in asset positions | | | Derivatives in liability positions | | | | | |
(in millions) | | Balance sheet location | | | Fair value | | | Balance sheet location | | | Fair value | | | | | |
Derivative instruments designated as hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | Other long-term assets | | | | $35 | | | | Other long-term liabilities | | | | $14 | | | | | |
Foreign exchange contracts | | | Prepaid expenses and other | | | | 37 | | | | Accounts payable | | | | 7 | | | | | |
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and accrued liabilities | | | | | |
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Total derivative instruments designated as hedges | | | | | | | $72 | | | | | | | | $21 | | | | | |
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Undesignated derivative instruments | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | Prepaid expenses and other | | | | $— | | | | Accounts payable | | | | $ 1 | | | | | |
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and accrued liabilities | | | | | |
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Total derivative instruments | | | | | | | $72 | | | | | | | | $22 | | | | | |
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While the company’s derivatives are all subject to master netting arrangements, the company presents its assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets. Additionally, the company is not required to post collateral for any of its outstanding derivatives. |
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The following table provides information on the company’s derivative positions as if they were presented on a net basis, allowing for the right of offset by counterparty: |
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| | June 30, 2014 | | | December 31, 2013 | | | | | |
(in millions) | | Asset | | | Liability | | | Asset | | | Liability | | | | | |
Gross amounts recognized in the consolidated balance sheet | | | $ 73 | | | | $ 5 | | | | $ 72 | | | | $ 22 | | | | | |
Gross amount subject to offset in master netting arrangements not offset in the consolidated balance sheet | | | (5 | ) | | | (5 | ) | | | (17 | ) | | | (17 | ) | | | | |
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Total | | | $ 68 | | | | $ — | | | | $ 55 | | | | $ 5 | | | | | |
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Fair value measurements |
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The following tables summarize the bases used to measure financial assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheets. |
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| | | | | Basis of fair value measurement | | | | | |
(in millions) | | Balance as of | | | Quoted prices in | | | Significant other | | | Significant | | | | | |
| active markets for | observable inputs | unobservable | | | | |
June 30, 2014 | identical assets | | | | | | |
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Assets | | | | | | | | | | | | | | | | | | | | |
Foreign currency hedges | | | $ 21 | | | | $ — | | | | $21 | | | | $ — | | | | | |
Interest rate hedges | | | 52 | | | | — | | | | 52 | | | | — | | | | | |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | |
Equity securities | | | 100 | | | | 100 | | | | — | | | | — | | | | | |
Foreign government debt securities | | | 18 | | | | — | | | | 18 | | | | — | | | | | |
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Total assets | | | $191 | | | | $100 | | | | $91 | | | | $ — | | | | | |
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Liabilities | | | | | | | | | | | | | | | | | | | | |
Foreign currency hedges | | | $ 5 | | | | $ — | | | | $ 5 | | | | $ — | | | | | |
Contingent payments related to acquisitions | | | 523 | | | | — | | | | — | | | | 523 | | | | | |
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Total liabilities | | | $528 | | | | $ — | | | | $ 5 | | | | $523 | | | | | |
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| | | | | Basis of fair value measurement | | | | | |
(in millions) | | Balance as of | | | Quoted prices in | | | Significant other | | | Significant | | | | | |
December 31, 2013 | active markets for | observable inputs | unobservable | | | | |
| identical assets | | | | | | |
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| (Level 1) | | | | | | |
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Assets | | | | | | | | | | | | | | | | | | | | |
Foreign currency hedges | | | $ 37 | | | | $ — | | | | $37 | | | | $ — | | | | | |
Interest rate hedges | | | 35 | | | | — | | | | 35 | | | | — | | | | | |
Available-for-sale securities | | | | | | | | | | | | | | | | | | | | |
Equity securities | | | 102 | | | | 102 | | | | — | | | | — | | | | | |
Foreign government debt securities | | | 18 | | | | — | | | | 18 | | | | — | | | | | |
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Total assets | | | $192 | | | | $102 | | | | $90 | | | | $ — | | | | | |
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Liabilities | | | | | | | | | | | | | | | | | | | | |
Foreign currency hedges | | | $ 8 | | | | $ — | | | | $ 8 | | | | $ — | | | | | |
Interest rate hedges | | | 14 | | | | — | | | | 14 | | | | — | | | | | |
Contingent payments related to acquisitions and investments | | | 340 | | | | — | | | | — | | | | 340 | | | | | |
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Total liabilities | | | $362 | | | | $ — | | | | $22 | | | | $340 | | | | | |
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As of June 30, 2014, cash and equivalents of $1.9 billion included money market funds of approximately $25 million, which would be considered Level 2 in the fair value hierarchy. |
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For assets that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The majority of the derivatives entered into by the company are valued using internal valuation techniques as no quoted market prices exist for such instruments. The principal techniques used to value these instruments are discounted cash flow and Black-Scholes models. The key inputs are considered observable and vary depending on the type of derivative, and include contractual terms, interest rate yield curves, foreign exchange rates and volatility. The fair values of foreign government debt securities are obtained from pricing services or broker/dealers who use proprietary pricing applications, which include observable market information for like or same securities. |
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Contingent payments related to acquisitions consist of development and commercial milestone payments, in addition to sales-based payments, and are valued using discounted cash flow techniques. The fair value of development and commercial milestone payments reflects management’s expectations of probability of payment, and increases as the probability of payment increases or expectation of timing of payments is accelerated. As of June 30, 2014, management’s expected weighted-average probability of payment for development and commercial milestone payments decreased to approximately 27% largely due to the contingent payments related to the acquisitions completed in the quarter. The fair value of sales-based payments is based upon probability-weighted future revenue estimates, and increases as revenue estimates increase, probability weighting of higher revenue scenarios increase or expectation of timing of payment is accelerated. |
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At June 30, 2014, the company held available-for-sale equity securities that had an amortized cost basis and fair value of $118 million and $100 million, respectively. The company had net unrealized losses of $18 million, comprised of unrealized losses of $47 million, which the company believes to be temporary in nature, and unrealized gains of $29 million. At December 31, 2013, the amortized cost basis and fair value of the available-for-sale equity securities was $111 million and $102 million, respectively. The company had net unrealized losses of $9 million, comprised of unrealized losses of $31 million, which the company believes to be temporary in nature, and unrealized gains of $22 million. |
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Unrealized losses on equity securities of $45 million and $30 million as of June 30, 2014 and December 31, 2013, respectively, relate to Baxter’s holdings in the common stock of Onconova Therapeutics, Inc. (Onconova). The amortized cost basis was $59 million and $60 million as of June 30, 2014 and December 31, 2013, respectively. Onconova common stock has been in a loss position for less than 12 months and Baxter believes the losses are temporary in nature due to future development opportunities for Onconova’s most advanced product candidate, rigosertib, in addition to its other candidates in clinical trials and pre-clinical stages. |
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The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consists of contingent payments related to acquisitions. |
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(in millions) | | Contingent | | | | | | | | | | | | | | | | | |
payments | | | | | | | | | | | | | | | | |
Fair value as of December 31, 2013 | | | $340 | | | | | | | | | | | | | | | | | |
Additions | | | 142 | | | | | | | | | | | | | | | | | |
Net losses recognized in earnings | | | 43 | | | | | | | | | | | | | | | | | |
CTA | | | (2 | ) | | | | | | | | | | | | | | | | |
Fair value as of June 30, 2014 | | | $523 | | | | | | | | | | | | | | | | | |
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The company’s additions in 2014 relate to the contingent payment liabilities of $77 million associated with the acquisition of Chatham Therapeutics and $65 million associated with the acquisition of AesRx. The net loss recognized in earnings primarily relates to an increase in the estimated fair value of contingent payment liabilities for certain milestones associated with the 2013 acquisition of the investigational hemophilia compound OBI-1 and related assets from Inspiration BioPharmaceuticals and Ipsen Pharma S.A.S. The loss was reported in other expense (income), net. The contingent liabilities were increased based on updated information indicating that the probability of achieving certain sales levels, and the resulting sales-based payments, was higher than previously expected. |
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Book Values and Fair Values of Financial Instruments |
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In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. For these financial instruments, the following table provides the values recognized on the condensed consolidated balance sheets and the approximate fair values as of June 30, 2014 and December 31, 2013. |
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| | Book values | | | Approximate fair values | | | | | |
(in millions) | | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | | |
Assets | | | | | | | | | | | | |
Long-term insurance receivables | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | | | |
Investments | | | 63 | | | | 53 | | | | 64 | | | | 53 | | | | | |
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Liabilities | | | | | | | | | | | | |
Short-term debt | | | 186 | | | | 181 | | | | 186 | | | | 181 | | | | | |
Current maturities of long-term debt and lease obligations | | | 1,125 | | | | 859 | | | | 1,143 | | | | 862 | | | | | |
Long-term debt and lease obligations | | | 7,528 | | | | 8,126 | | | | 7,869 | | | | 8,298 | | | | | |
Long-term litigation liabilities | | | 55 | | | | 72 | | | | 54 | | | | 70 | | | | | |
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The following tables summarize the bases used to measure the approximate fair value of the financial instruments as of June 30, 2014 and December 31, 2013. |
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| | | | | Basis of fair value measurement | | | | | |
(in millions) | | Fair value as of | | | Quoted prices in | | | Significant other | | | Significant | | | | | |
| | | | | | | |
30-Jun-14 | active markets for | observable inputs | unobservable | | | | |
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| identical assets | (Level 2) | inputs | | | | |
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| (Level 1) | | (Level 3) | | | | |
Assets | | | | | | | | | | | | | | | | | | | | |
Long-term insurance receivables | | | $ 2 | | | | $— | | | | $ — | | | | $ 2 | | | | | |
Investments | | | 64 | | | | — | | | | 19 | | | | 45 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | $ 66 | | | | $— | | | | $ 19 | | | | $47 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | | $ 186 | | | | $— | | | | $ 186 | | | | $— | | | | | |
Current maturities of long-term debt and lease obligations | | | 1,143 | | | | — | | | | 1,143 | | | | — | | | | | |
Long-term debt and lease obligations | | | 7,869 | | | | — | | | | 7,869 | | | | — | | | | | |
Long-term litigation liabilities | | | 54 | | | | — | | | | — | | | | 54 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | $9,252 | | | | $— | | | | $9,198 | | | | $54 | | | | | |
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| | | | | Basis of fair value measurement | | | | | |
(in millions) | | Fair value as of | | | Quoted prices in | | | Significant other | | | Significant | | | | | |
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December 31, 2013 | active markets for | observable inputs | unobservable | | | | |
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| identical assets | (Level 2) | inputs | | | | |
| | | | | | | |
| (Level 1) | | (Level 3) | | | | |
Assets | | | | | | | | | | | | | | | | | | | | |
Long-term insurance receivables | | | $ 2 | | | | $— | | | | $ — | | | | $ 2 | | | | | |
Investments | | | 53 | | | | — | | | | 17 | | | | 36 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | $ 55 | | | | $— | | | | $ 17 | | | | $38 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | | $ 181 | | | | $— | | | | $ 181 | | | | $— | | | | | |
Current maturities of long-term debt and lease obligations | | | 862 | | | | — | | | | 862 | | | | — | | | | | |
Long-term debt and lease obligations | | | 8,298 | | | | — | | | | 8,298 | | | | — | | | | | |
Long-term litigation liabilities | | | 70 | | | | — | | | | — | | | | 70 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | $9,411 | | | | $— | | | | $9,341 | | | | $70 | | | | | |
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The estimated fair values of long-term insurance receivables and long-term litigation liabilities were computed by discounting the expected cash flows based on currently available information, which in many cases does not include final orders or settlement agreements. The discount factors used in the calculations reflect the non-performance risk of the insurance providers and the company, respectively. |
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Investments in 2014 and 2013 included certain cost method investments and held-to-maturity debt securities. |
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The fair value of held-to-maturity debt securities is calculated using a discounted cash flow model that incorporates observable inputs, including interest rate yields, which represents a Level 2 basis of fair value measurement. |
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In determining the fair value of cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. |
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The estimated fair values of current and long-term debt were computed by multiplying price by the notional amount of the respective debt instrument. Price is calculated using the stated terms of the respective debt instrument and yield curves commensurate with the company’s credit risk. The carrying values of the other financial instruments approximate their fair values due to the short-term maturities of most of these assets and liabilities. |
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In the first quarter of 2014, the company recognized a $44 million gain related to the sale of certain equity method investments in other expense (income), net. |