Note 7: 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 monitor 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.

At December 31, 2013, we had outstanding foreign currency forward commitments to purchase 462.6 million U.S. dollars and sell 337.6 million euro; commitments to purchase 520.7 million euro and sell 716.8 million U.S. dollars; commitments to purchase 180.7 million British pounds and sell 216.0 million euro; and commitments to purchase 234.4 million U.S. dollars and sell 24.35 billion Japanese yen, which will all settle within 30 days.

At December 31, 2013, substantially all of our total debt is at a fixed rate. We have converted approximately 65 percent of our fixed-rate debt to floating rates through the use of interest rate swaps.

During 2013 we entered into forward-starting interest rate swaps with a notional amount of $500.0 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 Statement of Operations

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



	2013			2012			2011
Fair value hedges:
Effect from hedged fixed-rate debt	$	(308.2	)	$	51.5		$	259.6
Effect from interest rate contracts	308.2			(51.5		)	(259.6		)
Cash flow hedges:
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss	9.0			9.0			9.0
Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments	15.4			(35.8		)	97.4

The effective portion of net gains (losses) on equity contracts in designated cash flow hedging relationships recorded in other comprehensive income (loss) was $(149.6) million, $0.0 million, and $35.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. There were no equity contracts in designated cash flow hedging relationships in 2012. During the next 12 months, we expect to sell the underlying equity securities in designated cash flow hedging relationships that were outstanding at December 31, 2013, and will reclassify to earnings the accumulated other comprehensive loss related to the cash flow hedges and the unrealized gains on the underlying equity securities. The unrealized gains are in excess of the losses on the cash flow hedges.

For forward-starting interest rate swaps in designated cash flow hedging relationships associated with an anticipated debt issuance, the effective portion of net gains recorded in other comprehensive income (loss) was $16.7 million for the year ended December 31, 2013. There were no forward-starting interest rate swaps in designated cash flow hedging relationships in 2012 and 2011.

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 years ended December 31, 2013, 2012, and 2011, 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 December 31 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
December 31, 2013
Cash and cash equivalents	$	3,830.2	$	3,830.2	$	3,772.6	$	57.6	$	$	3,830.2
Short-term investments:
U.S. government and agencies	$	276.4	$	276.6	$	276.4	$		$	$	276.4
Corporate debt securities	931.7		929.8				931.7			931.7
Other securities	2.7		2.7				2.7			2.7
Marketable equity	356.3		75.0		356.3					356.3
Short-term investments	$	1,567.1	$	1,284.1
Noncurrent investments:
U.S. government and agencies	$	1,115.6	$	1,126.1	$	1,035.6	$	80.0	$	$	1,115.6
Corporate debt securities	4,940.5		4,933.7				4,940.5			4,940.5
Mortgage-backed	636.0		652.4				636.0			636.0
Asset-backed	490.0		494.5				490.0			490.0
Other securities	7.3		8.3				7.3			7.3
Marketable equity	81.2		22.8		81.2					81.2
Equity method and other investments⁽¹⁾	354.3		354.3
Noncurrent investments	$	7,624.9	$	7,592.1

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⁾	233.7		233.7
Noncurrent investments	$	6,313.9	$	6,204.4


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
December 31, 2013	$	(5,212.9	)	$	$	(5,490.9	)	$	$	(5,490.9	)
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
December 31, 2013
Risk-management instruments
Interest rate contracts designated as hedging instruments:
Other receivables	$	20.1		$	$	20.1		$	$	20.1
Sundry	278.7				278.7				278.7
Other noncurrent liabilities	(0.9		)		(0.9		)		(0.9		)
Foreign exchange contracts not designated as hedging instruments:
Other receivables	6.7				6.7				6.7
Other current liabilities	(7.1		)		(7.1		)		(7.1		)
Equity contracts designated as hedging instruments:
Other current liabilities	(149.6		)		(149.6		)		(149.6		)

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 December 31, 2013:



	Maturities by Period
	Total		Less Than 1 Year		1-5 Years		6-10 Years		More Than 10 Years
Fair value of debt securities	$	8,400.2	$	1,210.8	$	5,977.4	$	471.3	$	740.7

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:



	2013		2012
Unrealized gross gains	$	375.6	$	140.5
Unrealized gross losses	59.8		29.0
Fair value of securities in an unrealized gain position	4,982.7		5,246.0
Fair value of securities in an unrealized loss position	3,664.7		2,102.0

Other-than-temporary impairment losses on investment securities of $11.3 million, $22.6 million, and $31.1 million were recognized in the consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011, 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 December 31, 2013.

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



	2013		2012		2011
Proceeds from sales	$	13,753.5	$	6,529.8	$	2,268.3
Realized gross gains on sales	49.5		82.3		140.0
Realized gross losses on sales	15.4		10.9		9.9