6. Derivatives

Foreign Exchange Risk Management

The Company transacts business in more than 100 countries and is subject to risks associated with fluctuating foreign exchange rates. The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate movements. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on non-functional currency assets and liabilities (“Balance Sheet Hedging”) to (i) hedge certain forecasted foreign exchange cash flows arising from service contracts (“Service Contract Hedging”) and (ii) hedge non-United States Dollar anticipated intercompany royalties (“Royalty Hedging”). It is the Company’s policy to enter into foreign currency transactions only to the extent necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for investment or speculative purposes. The principal currencies hedged are the Euro, the British Pound, the Japanese Yen, the Swiss Franc and the Canadian Dollar.

Balance Sheet Hedging contracts entered into for balance sheet risk management purposes are not designated as hedges and are carried at fair value, with changes in the fair value recorded to other expense (income), net in the accompanying consolidated statements of income. These contracts do not subject the Company to material balance sheet risk because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

Service Contract Hedging and Royalty Hedging contracts are designated as hedges and are carried at fair value, with changes in the fair value recorded to AOCI. The change in fair value is reclassified from AOCI to earnings in the period in which the hedged transaction occurs. These contracts have various expiration dates through November 2017.

As of December 31, 2016, the Company had 62 open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2017 with notional amounts totaling $300 million. As of December 31, 2015, the Company had 15 open Service Contract Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2016. For accounting purposes these hedges are deemed to be highly effective. As of December 31, 2016 and 2015, the Company had recorded gross unrealized gains (losses) of $1 million and ($5 million), respectively, related to these contracts. Upon expiration of the hedge instruments in 2017, the Company will reclassify the unrealized gains and losses on the derivative instruments included in AOCI into earnings. The unrealized gains (losses) are included in other current assets and liabilities on the accompanying consolidated balance sheets as of December 31, 2016 and 2015.

Interest Rate Risk Management

The Company purchases interest rate caps and has entered into interest rate swap agreements for purposes of managing its risk in interest rate fluctuations.

On June 9, 2011, the Company entered into six interest rate swaps which expired between September 30, 2013 and March 31, 2016, in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. During May 2015, in conjunction with the debt refinancing described in Note 11, the Company terminated the remaining open interest rate swaps for a cash payment to the counterparty of $12 million, which included $1 million of accrued interest. Since the hedged forecasted cash transactions continued to be probable of occurring, the accumulated loss ($3 million at December 31, 2015) related to the terminated interest rate swaps in AOCI was reclassified to earnings as a component of interest expense in the same periods as the hedged forecasted transactions occurred over the first three months of 2016.

In April 2014, the IMS Health purchased United States Dollar denominated interest rate caps (“2014 Caps”) with a total notional value of $1 billion at strike rates ranging between 2% and 3%. These caps were effective at various times between April 2014 and April 2016, and expire at various times between April 2017 and April 2019. The total premiums paid were $21 million. The 2014 Caps are designated as cash flow hedges.

IMS Health also entered into United States Dollar and Euro denominated interest rate swap agreements in April 2014 (“2014 Swaps”) to hedge interest rate exposure on notional amounts of approximately $600 million of its borrowings. The 2014 Swaps were effective between April and June 2014, and expire at various times from March 2017 through March 2021. On these agreements, the Company pays a fixed rate ranging from 1.4% to 2.1% and receives a variable rate of interest equal to the greater of three-month United States Dollar London Interbank Offered Rate (“LIBOR”) or three-month Euro Interbank Offered Rate (“EURIBOR”), and 1%. The 2014 Swaps are designated as cash flow hedges.

On June 3, 2015, the Company entered into seven forward starting interest rate swaps (“2015 Swaps”) in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. Interest on the swaps began accruing on June 30, 2016 and the interest rate swaps expire between March 31, 2017 and March 31, 2020. Payments on the 2015 Swaps, together with the variable rate of interest incurred on the underlying debt, result in a fixed rate of interest of 2.1% plus the applicable margin on the affected borrowings.

The critical terms of the 2014 Swaps and 2015 Swaps are substantially the same as the underlying borrowings. These interest rate swaps are being accounted for as cash flow hedges as these transactions were executed to hedge the Company’s interest payments, and for accounting purposes these hedges are deemed to be highly effective. As such, changes in the fair value of these derivative instruments are recorded as unrealized gains (losses) on derivatives included in AOCI. The fair value of these interest rate swaps represents the present value of the anticipated net payments the Company will make to the counterparty, which, when they occur, are reflected as interest expense on the consolidated statements of income. These interest rate swaps will result in a total debt mix of approximately 52% fixed rate debt and 48% variable rate debt, before the additional protection arising from the interest rate caps.

Net Investment Risk Management

Beginning in the 2016, the Company designated its foreign currency denominated debt as a hedge of its net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the United States Dollar. As of December 31, 2016, these borrowings (net of original issue discount) were €2,025 million ($2,131 million). The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the cumulative translation adjustment component of AOCI with the related offset in long-term debt. Those amounts would be reclassified from AOCI to earnings upon the sale or substantial liquidation of these net investments. The amount of foreign exchange gains (losses) related to the net investment hedge included in cumulative translation adjustment for the year ended December 31, 2016 was $131 million.

The fair values of the Company’s derivative instruments and the line items on the accompanying consolidated balance sheets to which they were recorded are summarized in the following table (in millions):


			December 31, 2016						December 31, 2015
	Balance Sheet Classification		Assets		Liabilities		Notional		Assets		Liabilities		Notional
Derivatives designated as hedging instruments:
Foreign exchange forward contracts		Other current assets and liabilities	$	11	$	9	$	300	$	—	$	5	$	118
Interest rate swaps		Other current liabilities		—		15		945		—		6		440
Interest rate caps		Deposits and other assets		1		—		1,000		—		—		—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts		Other current liabilities		—		1		189		—		—		—

Total derivatives			$	12	$	25			$	—	$	11

The effect of the Company’s cash flow hedging instruments on other comprehensive income (loss) is summarized in the following table (in millions):


	Year Ended December 31,
	2016		2015			2014
Foreign exchange forward contracts	$	16	$	(1	)	$	(8	)
Interest rate derivatives		8		6			10

Total	$	24	$	5		$	2

The Company expects $2 million of pre-tax unrealized losses related to its foreign exchange contracts and interest rate derivatives included in AOCI at December 31, 2016 to be reclassified into earnings within the next twelve months.