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Derivatives
12 Months Ended
Dec. 31, 2018
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivatives

5. 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. Accordingly, the Company enters into foreign currency forward contracts 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 reduce earnings and cash flow volatility associated with foreign exchange rate movements. 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.  

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 2019.

As of December 31, 2018, the Company had open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2019 with notional amounts totaling $202 million. As of December 31, 2017, the Company had open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2018. For accounting purposes these hedges are considered highly effective. As of December 31, 2018 and 2017, the Company had recorded gross unrealized gains (losses) of $5 million and ($3) million and $5 million and ($4) million, respectively, related to these contracts. Upon expiration of the hedge instruments in 2019, the Company will reclassify the unrealized holding 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, 2018 and 2017.

Interest Rate Risk Management

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

In April 2014, IMS Health purchased three United States dollar denominated interest rate caps (“2014 Caps”) with a total notional value of $1 billion at strike prices between 2% and 3%. These caps commenced at various times between April 2014 and April 2016 and expire in April 2019. The 2014 Caps are accounted for as cash flow hedges. As of December 31, 2018, only two of the 2014 Caps remain unexpired, with a notional value of $700 million. 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 commenced between April and June 2014 and expire at various times through March 2021. As of December 31, 2018, only two of the 2014 Swaps remain unexpired, with a notional value of $432 million. On these agreements, the Company pays a fixed rate ranging from 1.6% 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”), three-month Euro Interbank Offered Rate (“EURIBOR”) or the equivalent to LIBOR, and 1%. During 2017, the 2014 Swaps ceased to be considered highly effective for accounting purposes and as such, the Company discontinued hedge accounting and prospective changes in the fair value of the Swaps are recognized in earnings.

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 (as defined below). Interest on the swaps began accruing on June 30, 2016, and the interest rate swaps expire at various times through March 2020. As of December 31, 2018, only four of the 2015 Swaps were still outstanding. The Company pays a fixed rate ranging from 1.9% to 2.1% and receives a variable rate of interest equal to the three-month LIBOR on these agreements.

The critical terms of the 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 are considered highly effective. As such, the effective portion of the hedges is recorded as unrealized gains (losses) on derivatives included in AOCI and the ineffective portion of the hedges is recognized in earnings.

On July 19, 2018, the Company entered into two forward starting interest rate swaps (“2018 Swaps”) with a total notional value of $500 million in an effort to limit its exposure to changes in the variable interest rate on its Senior Secured Credit Facilities (as defined below). Interest on the 2018 Swaps begins accruing on June 28, 2019 and the interest rate swaps expire on June 28, 2024.  The Company pays a fixed rate of 3.0% and receives a variable rate of interest equal to the three-month LIBOR on the 2018 Swaps.

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 50% fixed rate debt and 50% variable rate debt, before the additional protection arising from the interest rate caps.

Net Investment Risk Management

The Company designates its foreign currency denominated debt as a hedge of its net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the United States dollar, which is accounted for as a cash flow hedge. As of December 31, 2018, these borrowings (net of original issue discount) were €4,590 million ($5,253 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 related to the net investment hedge included in the cumulative translation adjustment component of AOCI for the year ended December 31, 2018 was $228 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:

 

 

 

 

December 31, 2018

 

 

December 31, 2017

 

(in millions)

 

Balance Sheet

Classification

 

Assets

 

 

Liabilities

 

 

Notional

 

 

Assets

 

 

Liabilities

 

 

Notional

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

Other current assets

   and liabilities

 

$

5

 

 

$

3

 

 

$

202

 

 

$

5

 

 

$

4

 

 

$

282

 

Interest rate swaps

 

Other assets

   and liabilities

 

 

3

 

 

 

9

 

 

 

890

 

 

 

 

 

 

1

 

 

 

405

 

Interest rate caps

 

Deposits and other

  assets

 

 

1

 

 

 

 

 

 

700

 

 

 

1

 

 

 

 

 

 

700

 

Derivatives not designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Other liabilities

 

 

 

 

 

5

 

 

 

432

 

 

 

 

 

8

 

 

447

 

Total derivatives

 

 

 

$

9

 

 

$

17

 

 

 

 

 

 

$

6

 

 

$

13

 

 

 

 

 

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

 

 

Year Ended December 31,

 

(in millions)

 

2018

 

 

2017

 

 

2016

 

Foreign exchange forward contracts

 

$

(9

)

 

$

(5

)

 

$

16

 

Interest rate derivatives

 

 

(6

)

 

 

9

 

 

 

8

 

Total

 

$

(15

)

 

$

4

 

 

$

24

 

 

The Company expects approximately $6 million of pre-tax unrealized gains related to its foreign exchange contracts and interest rate derivatives included in AOCI at December 31, 2018 to be reclassified into earnings within the next twelve months.