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 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.

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 each instrument 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 in current 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 March 31, 2014, we had outstanding foreign currency forward commitments to purchase 290.4 million U.S. dollars and sell 209.9 million euro, commitments to purchase 422.7 million euro and sell 585.8 million U.S. dollars, commitments to purchase 269.2 million U.S. dollars and sell 27.47 billion Japanese yen, and commitments to purchase 100.6 million British pounds and sell 120.2 million euro, which will all settle within 30 days.

In the normal course of business, our operations are exposed to fluctuations in interest rates which 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 March 31, 2014, substantially all of our total debt is at a fixed rate. We have converted approximately 50 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 issuance in order to reduce the risk of cash flow volatility from future changes in interest rates. 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.

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
	March 31,
	2014			2013
Fair value hedges:
Effect from hedged fixed-rate debt	$	51.8		$	(69.0	)
Effect from interest rate contracts	(51.8		)	69.0
Cash flow hedges:
Effective portion of losses on equity contracts reclassified from accumulated other comprehensive loss⁽¹⁾	39.5			—
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss	2.2			2.2
Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments	(0.3		)	0.1

¹ Realized gains on the sale of the underlying equity securities recognized in other–net, (income) expense for the three months ended March 31, 2014 were $69.0 million.

The effective portion of net gains on equity contracts in designated cash flow hedging relationships recorded in other comprehensive income (loss) was $85.9 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively. During the next nine months, we expect to sell the underlying equity securities in designated cash flow hedging relationships that were outstanding at March 31, 2014, 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.

During the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings $9.0 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 months ended March 31, 2014 and 2013, 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 March 31, 2014 and December 31, 2013 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
March 31, 2014
Cash and cash equivalents	$	3,888.0	$	3,888.0	$	3,668.2	$	219.8	$	$	3,888.0

Short-term investments:
Government-related debt securities:
U.S. government and agencies	$	151.1	$	151.0	$	151.1	$		$	$	151.1
Foreign and other	106.8		106.8				106.8			106.8
Corporate debt securities	841.8		838.9				841.8			841.8
Other securities	2.5		2.5				2.5			2.5
Marketable equity	222.2		56.3		222.2					222.2
Short-term investments	$	1,324.4	$	1,155.5

Noncurrent investments:
Government-related debt securities:
U.S. government and agencies	$	854.0	$	860.3	$	843.2	$	10.8	$	$	854.0
Foreign and other	122.7		122.7				122.7			122.7
Corporate debt securities	4,569.5		4,545.5				4,569.5			4,569.5
Mortgage-backed	631.9		644.0				631.9			631.9
Asset-backed	541.8		546.0				541.8			541.8
Other securities	7.6		8.2				7.6			7.6
Marketable equity	108.7		22.8		108.7					108.7
Equity method and other investments⁽¹⁾	368.6		368.6
Noncurrent investments	$	7,204.8	$	7,118.1

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

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
March 31, 2014	$	(5,264.4	)	$	$	(5,595.5	)	$	$	(5,595.5	)
December 31, 2013	(5,212.9		)		(5,490.9		)		(5,490.9		)



				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
March 31, 2014
Risk-management instruments
Interest rate contracts designated as hedging instruments:
Sundry	$	334.1			$	334.1			$	334.1
Other noncurrent liabilities	(1.2		)		(1.2		)		(1.2		)
Foreign exchange contracts not designated as hedging instruments:
Other receivables	6.4				6.4				6.4
Other current liabilities	(8.0		)		(8.0		)		(8.0		)
Equity contracts designated as hedging instruments:
Other current liabilities	(63.7		)		(63.7		)		(63.7		)

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		)

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.

In February 2014, we issued $600.0 million of 1.95% and $400.0 million of 4.65% fixed-rate notes with interest to be paid semi-annually and maturity dates of March 15, 2019, and June 15, 2044, respectively. Current maturities of long-term debt of $1.00 billion were repaid in March 2014.

The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of March 31, 2014:



	Maturities by Period
	Total		Less Than 1 Year		2-5 Years		6-10 Years		More Than 10 Years
Fair value of debt securities	$	7,829.7	$	1,102.2	$	5,304.3	$	662.2	$	761.0

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:



	March 31, 2014		December 31, 2013
Unrealized gross gains	$	293.9	$	375.6
Unrealized gross losses	38.3		59.8
Fair value of securities in an unrealized gain position	5,356.0		4,982.7
Fair value of securities in an unrealized loss position	2,607.6		3,664.7

There were no other-than-temporary impairment losses on investment securities recognized in the consolidated condensed statement of operations for the three months ended March 31, 2014, compared with $5.2 million for the same period in 2013. 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 85 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 March 31, 2014.

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



	Three Months Ended
	March 31,
	2014		2013
Proceeds from sales	$	3,742.2	$	3,705.9
Realized gross gains on sales	79.8		10.0
Realized gross losses on sales	4.0		2.5

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.