Note 6: Financial Instruments

Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-sciences products account for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations. Major financial institutions represent the largest component of our investments in corporate debt securities. In accordance with documented corporate policies, we limit the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.

Accounting Policy for Risk-Management Instruments

Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and do not create additional risk because gains and losses on derivative contracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are initiated, we designate the instruments individually as either a fair value hedge or a cash flow hedge. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.

For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges, the effective portion of gains and losses on these contracts is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. Hedge ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized currently in earnings during the period of change.

We may enter into foreign currency forward contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At September 30, 2013, we had outstanding foreign currency forward commitments to purchase 872.3 million U.S. dollars and sell 651.7 million euro, commitments to purchase 287.3 million euro and sell 388.6 million U.S. dollars, commitments to purchase 362.3 million U.S. dollars and sell 35.83 billion Japanese yen, which will all settle within 30 days.

In the normal course of business, our operations are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact of fluctuations in interest rates on earnings. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and investment positions and may enter into interest rate swaps or collars to help maintain that balance.

Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. At September 30, 2013, substantially all of our total debt is at a fixed rate. We have converted approximately 60 percent of our fixed-rate debt to floating rates through the use of interest rate swaps.

We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of earnings and cash flow associated with forecasted sales of available-for-sale securities.

We may enter into forward-starting interest rate swaps as part of any anticipated future debt issuances. Upon completion of a debt issuance and termination of the swap, the change in fair value of these instruments is recorded as part of other comprehensive income (loss) and is amortized to interest expense over the life of the debt agreement. During the third quarter of 2013, in order to reduce the risk of cash flow volatility from future changes in interest rates, we entered into forward-starting interest rate swaps with a notional amount of $400.0 million and maturities not exceeding 30 years to hedge a portion of the cash flows associated with the planned refinancing of our $1.00 billion March 2014 debt maturity.

The Effect of Risk-Management Instruments on the Consolidated Condensed Statement of Operations

The following effects of risk-management instruments were recognized in other–net, (income) expense:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Fair value hedges:
Effect from hedged fixed-rate debt	$	31.3		$	12.1		$	244.6		$	43.8
Effect from interest rate contracts	(31.3		)	(12.1		)	(244.6		)	(43.8		)
Cash flow hedges:
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss	2.3			2.3			6.7			6.7
Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments	33.9			(23.7		)	26.4			(38.5		)

For equity contracts in designated cash flow hedging relationships, the effective portion of net losses recorded in other comprehensive income (loss) was $33.0 million and $41.9 million for the three and nine months ended September 30, 2013, respectively. There were no equity contracts in designated cash flow hedging relationships in 2012.

During the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings $8.8 million of pretax net losses on cash flow hedges of the variability in expected future interest payments on our floating rate debt.

During the three and nine months ended September 30, 2013 and 2012, net losses related to ineffectiveness, as well as net losses related to the portion of our risk-management hedging instruments, fair value hedges, and cash flow hedges that were excluded from the assessment of effectiveness, were not material.

Fair Value of Financial Instruments

The following tables summarize certain fair value information at September 30, 2013 and December 31, 2012 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments:



					Fair Value Measurements Using
Description	Carrying Amount		Amortized Cost		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)	Fair Value
September 30, 2013
Cash and cash equivalents	$	4,368.9	$	4,368.9	$	4,315.2	$	53.7	$	$	4,368.9

Short-term investments:
U.S. government and agencies	$	162.2	$	162.1	$	162.2	$		$	$	162.2
Corporate debt securities	843.2		841.2				843.2			843.2
Other securities	5.0		5.0				5.0			5.0
Short-term investments	$	1,010.4	$	1,008.3

Noncurrent investments:
U.S. government and agencies	$	1,131.9	$	1,138.6	$	1,045.6	$	86.3	$	$	1,131.9
Corporate debt securities	4,508.1		4,513.4				4,508.1			4,508.1
Mortgage-backed	588.1		603.5				588.1			588.1
Asset-backed	359.0		363.6				359.0			359.0
Other securities	7.4		8.2				7.4			7.4
Marketable equity	370.8		139.8		370.8					370.8
Equity method and other investments⁽¹⁾	254.9		254.9
Noncurrent investments	$	7,220.2	$	7,022.0

December 31, 2012
Cash and cash equivalents	$	4,018.8	$	4,018.8	$	3,964.4	$	54.4	$	$	4,018.8

Short-term investments:
U.S. government and agencies	$	150.2	$	150.2	$	150.2	$		$	$	150.2
Corporate debt securities	1,503.5		1,501.5				1,503.5			1,503.5
Other securities	11.8		11.8				11.8			11.8
Short-term investments	$	1,665.5	$	1,663.5

Noncurrent investments:
U.S. government and agencies	$	1,362.7	$	1,360.3	$	1,122.4	$	240.3	$	$	1,362.7
Corporate debt securities	3,351.3		3,322.9				3,351.3			3,351.3
Mortgage-backed	668.1		677.7				668.1			668.1
Asset-backed	519.0		523.5				519.0			519.0
Other securities	3.3		3.3				3.3			3.3
Marketable equity	175.8		83.0		175.8					175.8
Equity method and other investments⁽¹⁾	233.1		233.1
Noncurrent investments	$	6,313.3	$	6,203.8

¹ Fair value not applicable



				Fair Value Measurements Using
Description	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)	Fair Value
Long-term debt, including current portion
September 30, 2013	$	(5,282.9	)	$	$	(5,570.2	)	$	$	(5,570.2	)
December 31, 2012	(5,531.3		)		(5,996.6		)		(5,996.6		)



				Fair Value Measurements Using
Description	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)	Fair Value
September 30, 2013
Risk-management instruments
Interest rate contracts designated as hedging instruments:
Other receivables	$	11.3		$	$	11.3		$	$	11.3
Sundry	336.6				336.6				336.6
Other current liabilities	(4.3		)		(4.3		)		(4.3		)
Foreign exchange contracts not designated as hedging instruments:
Other receivables	3.7				3.7				3.7
Other current liabilities	(15.4		)		(15.4		)		(15.4		)
Equity contracts designated as hedging instruments:
Other current liabilities	(37.5		)		(37.5		)		(37.5		)
Other noncurrent liabilities	(4.4		)		(4.4		)		(4.4		)

December 31, 2012
Risk-management instruments
Interest rate contracts designated as hedging instruments:
Sundry	$	589.4		$	$	589.4		$	$	589.4
Foreign exchange contracts not designated as hedging instruments:
Other receivables	11.0				11.0				11.0
Other current liabilities	(17.5		)		(17.5		)		(17.5		)

Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff associated with certain of the risk-management instruments above that are subject to an enforceable master netting arrangement or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management instruments above, individually, these financial rights are not material.

We determine fair values based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. The fair value of equity method investments and other investments is not readily available.

The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of September 30, 2013:



	Maturities by Period
	Total		Less Than 1 Year		1-5 Years		6-10 Years		More Than 10 Years
Fair value of debt securities	$	7,600.5	$	1,010.4	$	5,437.4	$	451.0	$	701.7

A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows:



	September 30, 2013		December 31, 2012
Unrealized gross gains	$	259.6	$	140.5
Unrealized gross losses	59.3		29.0
Fair value of securities in an unrealized gain position	4,289.1		5,246.0
Fair value of securities in an unrealized loss position	3,435.9		2,102.0

Other-than-temporary impairment losses on investment securities of $5.2 million were recognized in the statement of operations for the nine months ended September 30, 2013. No charges were recognized during the third quarter of 2013. Other-than-temporary impairment losses on investment securities of $0.8 million and $8.2 million were recognized in the statement of operations for the third quarter and first nine months of 2012, respectively. For fixed-income securities, the amount of credit losses represents the difference between the present value of cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing the credit loss were the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.

The securities in an unrealized loss position include fixed-rate debt securities of varying maturities. The value of fixed-income securities is sensitive to changes in the yield curve and other market conditions. Approximately 90 percent of the securities in a loss position are investment-grade debt securities. At this time, there is no indication of default on interest or principal payments for debt securities other than those for which an other-than-temporary impairment charge has been recorded. We do not intend to sell and it is not more likely than not we will be required to sell the securities in a loss position before the market values recover or the underlying cash flows have been received, and we have concluded that no additional other-than-temporary loss is required to be charged to earnings as of September 30, 2013.

Activity related to our investment portfolio, substantially all of which related to available-for-sale securities, was as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Proceeds from sales	$	2,785.5	$	1,698.8	$	10,230.6	$	5,334.1
Realized gross gains on sales	3.6		43.1		41.8		70.0
Realized gross losses on sales	4.2		2.2		12.1		7.4

Realized gains and losses on sales of investments are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.