Derivative Instruments and Hedging Activities | 9 Months Ended |
Sep. 30, 2013 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities |
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Our revenue, earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency forward contracts, foreign currency option contracts, treasury rate lock agreements and interest rate swap contracts. |
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Foreign Currency Risk Management |
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We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings and changes in the fair value of assets and liabilities denominated in foreign currencies. |
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Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next three years. We manage our anticipated transaction exposure principally with foreign currency forward contracts and occasionally foreign currency put and call options. |
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Foreign Currency Forward Contracts: We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies. |
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We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries. The foreign currency forward hedging contracts outstanding at September 30, 2013 and December 31, 2012 had settlement dates within 36 months. These foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses on them are reported in other comprehensive income (loss) (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect operations. Any ineffectiveness on these foreign currency forward contracts is reported in other income (expense), net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at September 30, 2013 and December 31, 2012: |
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| | Notional Amount | | | | | | | | | | |
Foreign Currency | | September 30, 2013 | | December 31, 2012 | | | | | | | | | | |
Australian Dollar | | $ | 53.7 | | | $ | 5.1 | | | | | | | | | | | |
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British Pound | | 313.8 | | | 77.9 | | | | | | | | | | | |
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Canadian Dollar | | 84.7 | | | 134.4 | | | | | | | | | | | |
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Euro | | 2,425.30 | | | 969.3 | | | | | | | | | | | |
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Japanese Yen | | 703.2 | | | 236.2 | | | | | | | | | | | |
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Total | | $ | 3,580.70 | | | $ | 1,422.90 | | | | | | | | | | | |
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We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis. As of September 30, 2013, credit risk did not materially change the fair value of our foreign currency forward contracts. |
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We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in other income (expense), net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at September 30, 2013 and December 31, 2012 were $816.1 million and $795.4 million, respectively. |
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Foreign Currency Option Contracts: We hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in euros. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and amounts but with different strike prices; this combination of transactions is generally referred to as a “collar”. The expiration dates and notional amounts correspond to the amount and timing of forecasted future foreign currency sales. If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. dollar equivalent value of our anticipated foreign currency cash flows, however this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the call option partially offsets the premium paid for the purchased put option, resulting in a net cost for the collars. |
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In order to fully offset the net cost of collars entered into to hedge sales, we sold local currency put options with a lower strike price and the same expiration dates and amounts as the option contracts included in the collars. These written put options introduced risk of loss if the U.S. dollar were to strengthen beyond the strike price of the written put options. We entered into purchased put options that were not designated as hedges in order to partially offset the risk of loss that would be incurred on the written put options if the US dollar were to strengthen beyond the strike price of the written put. Gains and losses associated with the non-hedge put options have been recorded on the income statement as other income (expense), net. |
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Foreign currency option contracts entered into to hedge forecasted revenue and expenses were as follows at September 30, 2013 and December 31, 2012: |
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| | Notional Amount* | | | | | | | | | | |
Foreign Currency Option | | September 30, 2013 | | December 31, 2012 | | | | | | | | | | |
Designated as hedging activity: | | | | | | | | | | | | | | | | |
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Purchased Put | | $ | 24.3 | | | $ | 228.8 | | | | | | | | | | | |
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Written Call | | $ | 25.4 | | | $ | 235.9 | | | | | | | | | | | |
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Not designated as hedging activity: | | | | | | | | | | | | | | | | |
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Purchased Put | | $ | 22.7 | | | $ | 160.5 | | | | | | | | | | | |
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Written Put | | $ | (22.7 | ) | | $ | (216.0 | ) | | | | | | | | | | |
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* U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied times the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activity are equal to each other. |
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Interest Rate Risk Management |
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In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the treasury rate locks or forward starting swaps are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes. |
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Forward Starting Interest Rate Swaps: During September 2013 we entered into a forward starting swap, that was designated as a cash flow hedge, with a notional value of $100.0 million, an effective date in November 2014 and a maturity of ten years to hedge against changes in interest rates that could impact an anticipated issuance of debt. During October 2013, we entered into additional forward starting swaps with an effective date in November 2014 and an aggregate notional value of $150.0 million, consisting of $100 million with a five year maturity and $50 million with a ten year maturity. |
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Treasury Rate Lock Agreements: During 2012, we entered into treasury rate locks in anticipation of issuing fixed-rate notes that were issued in August 2012. The treasury rate locks were settled during 2012, resulting in losses of $35.3 million that were recorded to OCI. No material amounts were recorded in income during the nine-month periods ended September 30, 2013 or 2012 as a result of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness. We have not entered into any treasury rate locks during the nine months ended September 30, 2013 and at September 30, 2013 we had no outstanding treasury rate locks. |
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Interest Rate Swap Contracts: From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swap are recorded on the Consolidated Balance Sheets with no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense. We may terminate the hedging relationship of certain swap contracts by settling the contracts or by entering into offsetting contracts. At the time a hedging relationship is terminated, accumulated gains or losses associated with the swap contract are measured and recorded as a reduction of current and future interest expense associated with the previously hedged notes. |
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During the nine-month period ended September 30, 2013, we entered into swap contracts that were designated as hedges of our fixed rate notes due in 2015, 2017, 2018, 2020, 2022 and 2023 and also terminated the hedging relationship by settling certain of those swap contracts during the nine-month period ended September 30, 2013. This resulted in net proceeds received of $21.9 million which is accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense. |
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At September 30, 2013, we were a party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes. The following table summarizes the notional amounts of our outstanding swap contracts at September 30, 2013 and December 31, 2012: |
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| | Notional Amount | | | | | | | | | | |
| | September 30, 2013 | | December 31, 2012 | | | | | | | | | | |
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes: | | | | | | | | | | | | | | | | |
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2.450% senior notes due 2015 | | $ | 300 | | | $ | — | | | | | | | | | | | |
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1.900% senior notes due 2017 | | 300 | | | 100 | | | | | | | | | | | |
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3.950% senior notes due 2020 | | 500 | | | — | | | | | | | | | | | |
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3.250% senior notes due 2022 | | 850 | | | 200 | | | | | | | | | | | |
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4.000% senior notes due 2023 | | 50 | | | — | | | | | | | | | | | |
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Total | | $ | 2,000.00 | | | $ | 300 | | | | | | | | | | | |
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The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of September 30, 2013 and December 31, 2012: |
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| | September 30, 2013 | | | | | | |
| | Asset Derivatives | | Liability Derivatives | | | | | | |
Instrument | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
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| | Other current assets | | $ | 62.6 | | | Other current assets | | $ | 24.7 | | | | | | | |
Foreign exchange contracts* | | | | | | |
| | Other current liabilities | | 35.2 | | | Other current liabilities | | 70.5 | | | | | | | |
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| | Other non-current assets | | 31.4 | | | Other non-current assets | | 19.5 | | | | | | | |
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| | Other non-current liabilities | | 0.9 | | | Other non-current liabilities | | 17.4 | | | | | | | |
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| | Other current assets | | 11.4 | | | Other current assets | | — | | | | | | | |
Interest rate swap agreements | | | | | | |
| | Other non-current assets | | 0.3 | | | Other non-current assets | | — | | | | | | | |
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| | Other non-current liabilities | | — | | | Other non-current liabilities | | 44.8 | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
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Foreign exchange contracts* | | Other current assets | | 20 | | | Other current assets | | 6.2 | | | | | | | |
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| Other current liabilities | | 5.5 | | | Other current liabilities | | 27.5 | | | | | | | |
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| Other non-current assets | | 1.1 | | | Other non-current assets | | — | | | | | | | |
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Interest rate swap agreements | | Other non-current assets | | 1.6 | | | Other non-current assets | | — | | | | | | | |
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Total | | | | $ | 170 | | | | | $ | 210.6 | | | | | | | |
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| | December 31, 2012 | | | | | | |
| | Asset Derivatives | | Liability Derivatives | | | | | | |
Instrument | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
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| | Other current assets | | $ | 35.2 | | | Other current assets | | $ | 12.7 | | | | | | | |
Foreign exchange contracts* | | | | | | |
| | Other current liabilities | | 9.1 | | | Other current liabilities | | 31.4 | | | | | | | |
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| | Other non-current assets | | 30.5 | | | Other non-current assets | | 13.8 | | | | | | | |
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| | Other current assets | | 0.1 | | | Other current assets | | — | | | | | | | |
Interest rate swap agreements | | | | | | |
| | Other non-current assets | | 0.1 | | | Other non-current assets | | 0.2 | | | | | | | |
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| | Other non-current liabilities | | — | | | Other non-current liabilities | | 0.6 | | | | | | | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
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Foreign exchange contracts* | | Other current assets | | 45.8 | | | Other current assets | | 36.3 | | | | | | | |
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| Other current liabilities | | 10.4 | | | Other current liabilities | | 21.4 | | | | | | | |
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Interest rate swap agreements | | Other current assets | | 0.6 | | | Other current assets | | — | | | | | | | |
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| Other non-current assets | | 1.7 | | | Other non-current assets | | — | | | | | | | |
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Total | | | | $ | 133.5 | | | | | $ | 116.4 | | | | | | | |
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* Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20. |
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The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2013 and 2012: |
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| Three-Month Period Ended September 30, 2013 | | | |
| Amount of | | Location of | | Amount of | | Location of | | Amount of | | | |
Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | |
Recognized in OCI | Reclassified from | Reclassified from | Recognized in | Recognized in | |
on Derivative (1) | Accumulated OCI | Accumulated OCI | Income on | Income on | |
| into Income | into Income | Derivative | Derivative | |
Instrument | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | (Ineffective Portion | | (Ineffective Portion | | | |
and Amount Excluded | and Amount Excluded | |
From Effectiveness | From Effectiveness | |
Testing) | Testing) | |
Foreign exchange contracts | $ | (89.8 | ) | | Net product sales | | $ | 11.9 | | | Other income, net | | $ | 5.1 | | | -2 | |
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Treasury rate lock agreements | $ | — | | | Interest expense | | $ | (0.9 | ) | | | | | | | | |
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(1) Net losses of $1.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months. |
(2) The amount of net gains recognized in income represents $5.3 million of gains related to amounts excluded from the assessment of hedge effectiveness and $0.2 million of losses related to the ineffective portion of the hedging relationships. |
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| Three-Month Period Ended September 30, 2012 | | | |
| Amount of | | Location of | | Amount of | | Location of | | Amount of | | | |
Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | |
Recognized in OCI | Reclassified from | Reclassified from | Recognized in | Recognized in | |
on Derivative | Accumulated OCI | Accumulated OCI | Income on | Income on | |
| into Income | into Income | Derivative | Derivative | |
Instrument | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | (Ineffective Portion | | (Ineffective Portion | | | |
and Amount Excluded | and Amount Excluded | |
From Effectiveness | From Effectiveness | |
Testing) | Testing) | |
Foreign exchange contracts | $ | (24.5 | ) | | Net product sales | | $ | 24.8 | | | Other income, net | | $ | (1.7 | ) | | -1 | |
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Treasury rate lock agreements | $ | (3.5 | ) | | Interest expense | | $ | (0.5 | ) | | | | | | | | |
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(1) The amount of net losses recognized in income represents $2.2 million in losses related to the ineffective portion of the hedging relationships and $0.5 million of gains related to amounts excluded from the assessment of hedge effectiveness. |
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| Nine-Month Period Ended September 30, 2013 | | |
| Amount of | | Location of | | Amount of | | Location of | | Amount of | | |
Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) |
Recognized in OCI | Reclassified from | Reclassified from | Recognized in | Recognized in |
on Derivative | Accumulated OCI | Accumulated OCI | Income on | Income on |
| into Income | into Income | Derivative | Derivative |
Instrument | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | (Ineffective Portion | | (Ineffective Portion | | |
and Amount Excluded | and Amount Excluded |
From Effectiveness | From Effectiveness |
Testing) | Testing) |
Foreign exchange contracts | $ | (3.2 | ) | | Net product sales | | $ | 7.6 | | | Other income, net | | $ | 9 | | | (1 | ) |
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Treasury rate lock agreements | $ | — | | | Interest expense | | $ | (2.5 | ) | | | | | | | |
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(1) The amount of net gains recognized in income represents $1.7 million in gains related to the ineffective portion of the hedging relationships and $7.3 million of gains related to amounts excluded from the assessment of hedge effectiveness. |
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| Nine-Month Period Ended September 30, 2012 | | | |
| Amount of | | Location of | | Amount of | | Location of | | Amount of | | | |
Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | Gain/(Loss) | |
Recognized in OCI | Reclassified from | Reclassified from | Recognized in | Recognized in | |
on Derivative | Accumulated OCI | Accumulated OCI | Income on | Income on | |
| into Income | into Income | Derivative | Derivative | |
Instrument | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | (Ineffective Portion | | (Ineffective Portion | | | |
and Amount Excluded | and Amount Excluded | |
From Effectiveness | From Effectiveness | |
Testing) | Testing) | |
Foreign exchange contracts | $ | 43.3 | | | Net product sales | | $ | 62.8 | | | Other income, net | | $ | (3.4 | ) | | -1 | |
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Treasury rate lock agreements | $ | (35.3 | ) | | Interest expense | | $ | (0.5 | ) | | | | | | | | |
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(1) The amount of net losses recognized in income represents $7.5 million in losses related to the ineffective portion of the hedging relationships and $4.1 million of gains related to amounts excluded from the assessment of hedge effectiveness. |
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The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2013 and 2012: |
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| | | | Amount of Gain (Loss) Recognized in |
Income on Derivative |
| | Location of Gain (Loss) Recognized in Income | | Three-Month Periods Ended September 30, | | Nine-Month Periods Ended September 30, |
Instrument | | on Derivative | | 2013 | | 2012 | | 2013 | | 2012 |
Interest rate swap agreements | | Interest expense | | $ | 9.8 | | | $ | 2 | | | $ | 21.8 | | | $ | 5.6 | |
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The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2013 and 2012: |
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| | | | Amount of Gain (Loss) Recognized in |
Income on Derivative |
| | Location of Gain (Loss) Recognized in Income | | Three-Month Periods Ended September 30, | | Nine-Month Periods Ended September 30, |
Instrument | | on Derivative | | 2013 | | 2012 | | 2013 | | 2012 |
Foreign exchange contracts | | Other income, net | | $ | (27.0 | ) | | $ | (11.5 | ) | | $ | (42.2 | ) | | $ | 4.5 | |
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Treasury rate lock agreements | | Other income, net | | $ | — | | | $ | — | | | $ | — | | | $ | 3.7 | |
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The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included in other income (expense), net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods. |