Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2012

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

7.    Derivative Instruments and Hedging Activities

Foreign Currency Forward Contracts:  We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies and to reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.

We enter into foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries.  The foreign currency forward hedging contracts outstanding at June 30, 2012 and December 31, 2011 had settlement dates within 36 months.  These foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses on them are reported in other comprehensive income (loss), or OCI, and reclassified to operations in the same periods during which the underlying hedged transactions affect operations.  Any ineffectiveness on these foreign currency forward contracts is reported in other income (expense), net.  Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at June 30, 2012 and December 31, 2011:

		Notional Amount
Foreign Currency		June 30, 2012		December 31, 2011
Australian Dollar	$	23,061	$	17,169
British Pound		95,514		53,764
Canadian Dollar		56,749		67,281
Euro		574,659		714,446
Japanese Yen		514,960		606,538
Swiss Franc		38,007		49,182
Total	$	1,302,950	$	1,508,380

We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis.  As of June 30, 2012, credit risk did not materially change the fair value of our foreign currency forward contracts.

We also enter into foreign currency forward contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies.  These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in other income (expense), net in the current period.  The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at June 30, 2012 and December 31, 2011 were $923.2 million and $916.9 million, respectively.

Treasury Rate Lock Agreements:  During the three-month period ended June 30, 2012, we entered into treasury rate lock agreements, or treasury rate locks, in anticipation of issuing fixed-rate notes during 2012.  With the exception of a short period in June when certain outstanding treasury rate locks were not designated as hedges, our treasury rate locks are designated as cash flow hedges and, to the extent effective, any realized or unrealized gains or losses on them are reported in OCI and will be recognized in income over the life of the anticipated fixed-rate notes.  Treasury rate locks were settled in May and June 2012 which required us to pay $29.9 million that is included in OCI.  During the short period in June when we had outstanding treasury rate locks that were not considered hedging instruments, we recorded the change in fair value of $3.7 million in other income (expense), net.  No material amounts were recorded in income during the three- or six-month periods ended June 30, 2012 or 2011 as a result of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness. At June 30, 2012 we had outstanding treasury rate locks with a notional amount of $500.0 million which mature in August 2012.

Interest Rate Swap Contracts:  From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts.  The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates.  Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swaps are recorded on the Consolidated Balance Sheets with no net impact recorded in income.  Any net interest payments made or received on interest rate swap contracts are recognized as interest expense.  In August 2011, we settled interest rate swap contracts we entered into in February and March 2011 resulting in the receipt of $34.3 million.  The proceeds from the settlements are being accounted for as a reduction of current and future interest expense associated with our $500.0 million, 2.45% fixed-rate notes due in 2015.  There were no interest rate swap contracts outstanding at June 30, 2012.

The following table summarizes the fair value and presentation in the consolidated balance sheets for derivative instruments as of June 30, 2012 and December 31, 2011:

	June 30, 2012
	Asset Derivatives				Liability Derivatives
	Balance Sheet				Balance Sheet
Instrument	Location		Fair Value		Location		Fair Value
Foreign currency forward contracts designated as hedging instruments*	Other current assets Other non-current assets Other non-current liabilities	$	62,6139,37513		Other current assetsOther non-current assetsOther non-current liabilities	$		19,7597882,473
Treasury rate lock agreements designated as hedging instruments	Other current assets		1,816		Other current assets			-
Foreign currency forward contracts not designated as hedging instruments*	Other current assetsOther current liabilitiesOther non-current assets		67,6071,09325,804		Other current assetsOther current liabilitiesOther non-current assets		27,35810,71123,651
Total		$	168,321			$		84,740
	December 31, 2011
	Asset Derivatives				Liability Derivatives
	Balance Sheet				Balance Sheet
Instrument	Location		Fair Value		Location		Fair Value
Foreign currency forward contracts designated as hedging instruments*	Other current assetsOther current liabilitiesOther non-current liabilities	$		68,889 129 -	Other current assetsOther current liabilitiesOther non-current liabilities	$			32,4303,94024,832
Foreign currency forward contracts not designated as hedging instruments*	Other current assetsOther current liabilitiesOther non-current assets		66,6392,46236,684		Other current assets Other current liabilities Other non-current assets		10,39522,28932,356
Total		$		174,803		$			126,242

*Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20.

The following tables summarize the effect of derivative instruments designated as cash flow hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2012 and 2011, respectively:

		Three Month-Period Ended June 30, 2012
		Amount of Gain/(Loss) Recognized in OCI on Derivative (1)	Location of Gain/(Loss) Reclassified from Accumulated OCI into Income		Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income	Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Recognized in Income on Derivative
Instrument		(Effective Portion)	(Effective Portion)		(Effective Portion)	(Ineffective Portion and Amount Excluded From Effectiveness Testing)		(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Foreign currency forward contracts	$	44,223	Net product sales	$	18,980	Other income, net	$	137	(2)
Treasury rate lock agreements	$	(31,762)

(1)Net gains of $41,503 are expected to be reclassified from Accumulated OCI into income in the next 12 months.

(2)The amount of net gains recognized in income represents $798 in losses related to the ineffective portion of the hedging relationships and $935 of gains related to amounts excluded from the assessment of hedge effectiveness.

		Three Month-Period Ended June 30, 2011
		Amount of Gain/(Loss) Recognized in OCI on Derivative	Location of Gain/(Loss) Reclassified from Accumulated OCI into Income		Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income	Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Recognized in Income on Derivative
Instrument		(Effective Portion)	(Effective Portion)		(Effective Portion)	(Ineffective Portion and Amount Excluded From Effectiveness Testing)		(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Foreign currency forward contracts	$	(31,221)	Net product sales	$	(7,600)	Other income, net	$	(2,925)	(1)

(1)The amount of net loss recognized in income represents $2,611 in losses related to the ineffective portion of the hedging relationships and $314 of losses related to amounts excluded from the assessment of hedge effectiveness.

		Six-Month Period Ended June 30, 2012
		Amount of Gain/(Loss) Recognized in OCI on Derivative (1)	Location of Gain/(Loss) Reclassified from Accumulated OCI into Income		Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income	Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Recognized in Income on Derivative
Instrument		(Effective Portion)	(Effective Portion)		(Effective Portion)	(Ineffective Portion and Amount Excluded From Effectiveness Testing)		(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Foreign currency forward contracts	$	67,758	Net product sales	$	38,035	Other income, net	$	(1,741)	(2)
Treasury rate lock agreements	$	(31,762)

(1)Net gains of $41,503 are expected to be reclassified from Accumulated OCI into income in the next 12 months.

(2)The amount of net losses recognized in income represents $5,242 in losses related to the ineffective portion of the hedging relationships and $3,501 of gains related to amounts excluded from the assessment of hedge effectiveness.

		Six-Month Period Ended June 30, 2011
		Amount of Gain/(Loss) Recognized in OCI on Derivative	Location of Gain/(Loss) Reclassified from Accumulated OCI into Income		Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income	Location of Gain/(Loss) Recognized in Income on Derivative		Amount of Gain/(Loss) Recognized in Income on Derivative
Instrument		(Effective Portion)	(Effective Portion)		(Effective Portion)	(Ineffective Portion and Amount Excluded From Effectiveness Testing)		(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Foreign currency forward contracts	$	(57,176)	Net product sales	$	(3,031)	Other income, net	$	235	(1)

(1)The amount of net gains recognized in income represents $2,691 in losses related to the ineffective portion of the hedging relationships and $2,926 of gains related to amounts excluded from the assessment of hedge effectiveness.

The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2012 and 2011:

		Location of Gain (Loss)	Amount of Gain (Loss) Recognized in Income on Derivative
		Recognized in Income	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
Instrument		on Derivative	2012		2011		2012		2011
Interest rate swaps	(1)	Interest Expense	$	-	$	2,752	$	-	$	3,736

(1)The interest rate swaps were designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The hedged debt was marked to market, offsetting the effect of marking the interest rate swaps to market.  As of June 30, 2011, the fair value of the interest rate swaps was a $14,336 unrealized gain, $11,001 current assets and $3,335 non-current assets, on the consolidated balance sheet.

The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2012 and 2011:

	Location of Gain (Loss)	Amount of Gain (Loss) Recognized in Income on Derivative
	Recognized in Income	Three-Month Periods Ended June 30,				Six-Month Periods Ended June 30,
Instrument	on Derivative	2012		2011		2012		2011
Foreign currency forward contracts	Other income, net	$	23,810	$	5,969	$	15,927	$	34,920
Treasury rate lock agreements	Other income, net	$	3,718	$	-	$	3,718	$	-

The impact of gains and losses on derivatives not designated as hedging instruments are generally offset by net foreign exchange gains and losses, which are also included in other income (expense), net for all periods presented.