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-science 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, 2014, we had outstanding foreign currency forward commitments to purchase 330.6 million U.S. dollars and sell 270.3 million euro; commitments to purchase 1.18 billion euro and sell 1.45 billion U.S. dollars; commitments to purchase 190.4 million British pounds and sell 242.4 million euro; and commitments to purchase 332.6 million U.S. dollars and sell 40.04 billion Japanese yen, which will all settle within 30 days.

At December 31, 2014, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 55 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.

At December 31, 2014, the total notional amounts of forward-starting interest rate contracts in designated cash flow hedging instruments were $1.35 billion, which will all settle within three months.

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:



	2014			2013			2012
Fair value hedges:
Effect from hedged fixed-rate debt	$	156.9		$	(308.2	)	$	51.5
Effect from interest rate contracts	(156.9		)	308.2			(51.5		)
Cash flow hedges:
Effective portion of losses on equity contracts reclassified from accumulated other comprehensive loss⁽¹⁾	129.0			—			—
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	(20.4		)	15.4			(35.8		)
Net losses on interest rate contracts not designated as hedging instruments	3.4			—			—


¹	Realized gains on the sale of underlying equity securities recognized in other-net, (income) expense were $260.8 million during the year ended December 31, 2014. There were no realized gains on the sale of underlying equity securities during the years ended December 31, 2013 and 2012.

During the years ended December 31, 2014, 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 Hedges

During the year ended December 31, 2014, we terminated certain interest rate swaps designated as fair value hedges with an aggregate notional amount of $1.30 billion. As a result of the termination, we received cash of $340.7 million, which represented the fair value of the interest rate swaps at the time of termination. The related fair value adjustment was recorded as an increase to the carrying value of the underlying fixed-rate debt and will be amortized into earnings as a reduction of interest expense over the remaining life of the underlying debt.

Cash Flow Hedges

The effective portion of equity contracts in designated cash flow hedging relationships recorded in other comprehensive income (loss) was $149.6 million and $(149.6) million during the years ended December 31, 2014 and 2013, respectively. There were no equity contracts in designated cash flow hedging relationships in 2012. During the year ended December 31, 2014, we sold all of the underlying equity securities that had been in designated cash flow hedging relationships. At the time of the sales, we reclassified to earnings the accumulated other comprehensive loss related to the cash flow hedges and the previously unrealized gains on the underlying equity securities.

For forward-starting interest rate swaps in designated cash flow hedging relationships associated with an anticipated debt issuance, the effective portion of net gains (losses) recorded in other comprehensive income (loss) was $(164.7) million and $16.7 million for the years ended December 31, 2014 and 2013. There were no forward-starting interest rate swaps in designated cash flow hedging relationships in 2012.

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.

Non-Hedging Instruments

During the year ended December 31, 2014, we settled fixed-rate interest contracts used to manage interest rate risks on our investments in debt securities, which were not designed as hedging instruments. The aggregate notional amount of the settled contracts was $876.0 million, and we paid $3.4 million of cash to the counterparties upon settlement.

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, 2014
Cash equivalents	$	2,443.5	$	2,443.5	$	2,415.5	$	28.0	$	—	$	2,443.5
Short-term investments:
U.S. government and agencies	$	185.5	$	185.6	$	156.5	$	29.0	$	—	$	185.5
Corporate debt securities	767.4		766.7		—		767.4		—		767.4
Other securities	2.5		2.5		—		2.5		—		2.5
Short-term investments	$	955.4	$	954.8
Noncurrent investments:
U.S. government and agencies	$	756.7	$	757.5	$	747.5	$	9.2	$	—	$	756.7
Corporate debt securities	2,462.7		2,468.9		—		2,462.7		—		2,462.7
Mortgage-backed	217.0		217.6		—		217.0		—		217.0
Asset-backed	477.8		478.0		—		477.8		—		477.8
Other securities	3.2		3.2		—		3.2		—		3.2
Marketable equity	204.8		44.0		204.8		—		—		204.8
Equity method and other investments⁽¹⁾	446.7		446.7
Noncurrent investments	$	4,568.9	$	4,415.9

December 31, 2013
Cash equivalents	$	2,574.7	$	2,574.7	$	2,517.1	$	57.6	$	—	$	2,574.7
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
Short-term commercial paper borrowings
December 31, 2014	$	(2,680.6	)	$	—	$	(2,680.6	)	$	—	$	(2,680.6	)
December 31, 2013	—			—		—			—		—

Long-term debt, including current portion
December 31, 2014	$	(5,375.8	)	$	—	$	(5,722.1	)	$	—	$	(5,722.1	)
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
December 31, 2014
Risk-management instruments
Interest rate contracts designated as hedging instruments:
Other receivables	$	102.5		$	—	$	102.5		$	—	$	102.5
Other current liabilities	(149.5		)	—		(149.5		)	—		(149.5		)
Other noncurrent liabilities	(0.7		)	—		(0.7		)	—		(0.7		)
Foreign exchange contracts not designated as hedging instruments:
Other receivables	9.1			—		9.1			—		9.1
Other current liabilities	(14.0		)	—		(14.0		)	—		(14.0		)

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.

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



	Maturities by Period
	Total		Within 1 Year		After 1 Year Through 5 Years		After 5 Years Through 10 Years		After 10 Years
Fair value of debt securities	$	4,872.8	$	955.4	$	3,462.1	$	230.7	$	224.6

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:



	2014		2013
Unrealized gross gains	$	171.9	$	375.6
Unrealized gross losses	18.3		59.8
Fair value of securities in an unrealized gain position	1,778.8		4,982.7
Fair value of securities in an unrealized loss position	3,129.2		3,664.7

Other-than-temporary impairment losses on investment securities of $12.5 million, $11.3 million, and $22.6 million were recognized in the consolidated statements of operations for the years ended December 31, 2014, 2013, and 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 December 31, 2014.

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



	2014		2013		2012
Proceeds from sales	$	14,609.5	$	13,753.5	$	6,529.8
Realized gross gains on sales	353.5		49.5		82.3
Realized gross losses on sales	29.4		15.4		10.9