Derivative Instruments and Hedging Activities

Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. In instances where these financial instruments are accounted for as cash flow hedges or fair value hedges, we may from time to time terminate the hedging relationship. If a hedging relationship is terminated we generally either settle the instrument or enter into an offsetting instrument.

Foreign Currency Risk Management

We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings and changes in the fair value of assets and liabilities denominated in foreign currencies.

Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next three years. We manage our anticipated transaction exposure principally with foreign currency forward contracts and occasionally foreign currency put and call options.

Foreign Currency Forward Contracts: We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.

We manage a portfolio of 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 December 31, 2015 and December 31, 2014 had settlement dates within 36 months. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses are reported in other comprehensive income (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. Any ineffectiveness on these foreign currency forward contracts is reported on the Consolidated Statements of Income in other income (expense), net. The forward point components of these foreign currency forward contracts are not designated as cash flow hedges and all fair value adjustments of forward point amounts are recorded to other income (expense), net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at December 31, 2015 and December 31, 2014:



	Notional Amount
Foreign Currency:	2015		2014
Australian Dollar	$	45.1	$	18.8
British Pound	289.3		304.8
Canadian Dollar	135.9		43.7
Euro	2,934.3		3,375.7
Japanese Yen	510.4		541.1
Total	$	3,915.0	$	4,284.1

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 December 31, 2015, credit risk did not materially change the fair value of our foreign currency forward contracts.

We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. 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 December 31, 2015 and December 31, 2014 were $920.0 million and $835.5 million, respectively.

Foreign Currency Option Contracts: From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. dollar equivalent value of our anticipated foreign currency cash flows; however, this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the sale of the call option is equal to the premium paid for the purchased put option, resulting in a net zero cost for each collar. Outstanding foreign currency option contracts entered into to hedge forecasted revenue were as follows at December 31, 2015 and 2014:



	Notional Amount¹
	2015		2014
Foreign currency option contracts designated as hedging activity:
Purchased Put	$	641.5	$	152.6
Written Call	$	690.0	$	160.9

¹ U.S. dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.

Interest Rate Risk Management

In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the treasury rate locks or forward starting swaps are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

Forward Starting Interest Rate Swaps and Treasury Rate Locks: During 2014, we entered into forward starting swaps that were designated as cash flow hedges to hedge against changes in interest rates that could impact an anticipated issuance of debt in 2015. During 2015, we entered into additional forward starting swaps and treasury rate locks. Forward starting swaps and treasury rate locks with a combined aggregate notional value of $2.900 billion were settled upon the issuance of debt in August 2015, when the net fair value of the forward starting swaps and treasury rate locks in accumulated other comprehensive income was in a loss position of $21.6 million. The net loss will be recognized as interest expense over the life of the associated senior notes. During 2015 and in January 2016, we entered into forward starting swaps with effective dates in September 2017 and maturing in ten years.

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 swap 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. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.

We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes and also terminated the hedging relationship by settling certain of those swap contracts during 2013, 2014 and 2015. The settlement of swap contracts due to terminations and maturities resulted in the receipt of net proceeds of $10.8 million and $25.5 million in 2015 and 2014, respectively, which are accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense.

The following table summarizes the notional amounts of our outstanding interest rate swap contracts at December 31, 2015 and December 31, 2014:



	Notional Amount
	2015		2014
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
2.450% senior notes due 2015	$	—	$	300.0
1.900% senior notes due 2017	300.0		300.0
2.300% senior notes due 2018	200.0		200.0
2.250% senior notes due 2019	500.0		500.0
3.950% senior notes due 2020	500.0		500.0
3.250% senior notes due 2022	1,000.0		750.0
4.000% senior notes due 2023	700.0		150.0
3.625% senior notes due 2024	100.0		—
3.875% senior notes due 2025	250.0		—
Total	$	3,550.0	$	2,700.0

The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of December 31, 2015 and 2014:



		December 31, 2015
		Fair Value
Instrument	Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	$	356.2	$	18.0
	Other non-current assets	287.8		28.0
Interest rate swap agreements	Other current assets	30.7		—
	Other non-current assets	26.1		4.7
	Other non-current liabilities	0.2		0.9
Derivatives not designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	46.0		5.9
	Other current liabilities	2.9		7.4
Interest rate swap agreements	Other current assets	2.4		2.3
	Other non-current assets	2.4		1.4
Total		$	754.7	$	68.6



		December 31, 2014
		Fair Value
Instrument	Balance Sheet Location	Asset Derivatives		Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	$	264.9	$	44.9
	Other current liabilities	0.1		1.7
	Other non-current assets	322.3		17.5
Interest rate swap agreements	Other current assets	17.9		—
	Other non-current assets	4.8		0.3
	Other non-current liabilities	—		3.8
Derivatives not designated as hedging instruments:
Foreign exchange contracts¹	Other current assets	39.7		6.0
	Other current liabilities	0.1		1.1
Interest rate swap agreements	Other current assets	0.1		—
	Other non-current assets	1.3		—
Total		$	651.2	$	75.3

¹Derivative 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 table summarizes the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the years ended December 31, 2015 and 2014:



	2015
	(Effective Portion)							(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Instrument	Amount of Gain/(Loss) Recognized in OCI on Derivative¹			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
Foreign exchange contracts	$	429.4		Net product sales	$	354.4		Other income, net	$	20.0		²
Treasury rate lock agreements	$	(27.9	)	Interest expense	$	(4.2	)	Other income, net	$	(0.2	)	³
Forward starting interest rate swaps	$	9.0		Interest expense	$	(1.5	)	Other income, net	$	0.3		³


¹	Net gains of $364.8 million 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 $23.0 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $3.0 million in losses related to the ineffective portion of the hedging relationships.


³	The amount of net (loss) gain recognized in income relates to the ineffective portion of the hedging relationships.



	2014
	(Effective Portion)							(Ineffective Portion and Amount Excluded From Effectiveness Testing)
Instrument	Amount of Gain/(Loss) Recognized in OCI on Derivative¹			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
Foreign exchange contracts	$	600.4		Net product sales	$	27.5		Other income, net	$	(12.2	)	¹
Treasury rate lock agreements	$	—		Interest expense	$	(3.5	)
Forward starting interest rate swaps	$	(32.3	)	Interest expense	$	(0.9	)	Other income, net	(3.6		)	²


¹	The amount of net gain recognized in income represents $18.0 million in losses related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $5.8 million of gains related to the ineffective portion of the hedging relationships.


²	The amount of net loss recognized in income relates to the ineffective portion of the hedging relationships.

The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the years ended December 31, 2015 and 2014:



	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
Instrument	Location of Gain (Loss) Recognized in Income on Derivative	2015		2014
Interest rate swaps	Interest expense	$	60.3	$	43.0

The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the years ended December 31, 2015 and 2014:



	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
Instrument	Location of Gain (Loss) Recognized in Income on Derivative	2015			2014
Foreign exchange contracts	Other income, net	$	81.2		$	79.3
Put options sold	Other income, net	$	(9.9	)	$	11.6

The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Income in other income (expense), net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods.