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Derivative Financial Instruments
9 Months Ended
Sep. 30, 2011
Derivative Financial Instruments [Abstract] 
Derivative Financial Instruments

4. DERIVATIVE FINANCIAL INSTRUMENTS

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. In order to manage this risk, we hedge a portion of our foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted product sales using foreign currency exchange forward and option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The credit risk associated with these contracts is driven by changes in interest and currency exchange rates and, as a result, varies over time. By working only with major banks and closely monitoring current market conditions, we limit the risk that counterparties to these contracts may be unable to perform. We also limit our risk of loss by entering into contracts that permit net settlement at maturity. Therefore, our overall risk of loss in the event of a counterparty default is limited to the amount of any unrecognized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We do not enter into derivative contracts for trading purposes, nor do we hedge our net investment in any of our foreign subsidiaries.

We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our foreign subsidiaries that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are not designated as hedges, and as a result, changes in their fair value are recorded in interest and other income, net on our Condensed Consolidated Statements of Income.

We hedge our exposure to foreign currency exchange rate fluctuations for forecasted product sales that are denominated in a non-functional currency. The derivative instruments we use to hedge this exposure are designated as cash flow hedges and have maturity dates of 18 months or less. Upon executing a hedging contract and quarterly thereafter, we assess prospective hedge effectiveness using a regression analysis which calculates the change in cash flow as a result of the hedge instrument. On a monthly basis, we assess retrospective hedge effectiveness using a dollar offset approach. We exclude time value from our effectiveness testing and recognize changes in the time value of the hedge in interest and other income, net. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in accumulated OCI within stockholders' equity. When the hedged forecasted transaction occurs, the hedge is de-designated and the unrealized gains or losses are reclassified into product sales. The majority of gains and losses related to the hedged forecasted transactions reported in accumulated OCI at September 30, 2011 will be reclassified to product sales within 12 months.

We had notional amounts on foreign currency exchange contracts outstanding of $3.94 billion and $3.55 billion at September 30, 2011 and December 31, 2010, respectively.

 

The following table summarizes information about the fair values of derivative instruments on our Condensed Consolidated Balance Sheets (in thousands):

 

    September 30, 2011  
    Asset Derivatives     Liability Derivatives  
    Location   Fair Value     Location   Fair Value  

Derivatives designated as hedges:

        

Foreign currency exchange contracts

   Other current assets   $ 26,835      Other accrued liabilities   $ 38,709   

Foreign currency exchange contracts

   Other noncurrent assets     19,386      Other long-term obligations     146   
   

 

 

      

 

 

  

Total derivatives designated as hedges

       46,221          38,855   
   

 

 

      

 

 

  

Derivatives not designated as hedges:

        

Foreign currency exchange contracts

   Other current assets     8      Other accrued liabilities     264   
   

 

 

      

 

 

  

Total derivatives not designated as hedges

       8          264   
   

 

 

      

 

 

  

Total derivatives

     $ 46,229        $ 39,119   
   

 

 

      

 

 

  

 

    December 31, 2010  
    Asset Derivatives     Liability Derivatives  
    Location   Fair Value     Location   Fair Value  

Derivatives designated as hedges:

        

Foreign currency exchange contracts

   Other current assets   $ 59,276      Other accrued liabilities   $ 36,493   

Foreign currency exchange contracts

   Other noncurrent assets     5,089      Other long-term obligations     2,022   
   

 

 

      

 

 

  

Total derivatives designated as hedges

       64,365          38,515   
   

 

 

      

 

 

  

Derivatives not designated as hedges:

        

Foreign currency exchange contracts

   Other current assets     96      Other accrued liabilities     38   
   

 

 

      

 

 

  

Total derivatives not designated as hedges

       96          38   
   

 

 

      

 

 

  

Total derivatives

     $ 64,461        $ 38,553   
   

 

 

      

 

 

  

The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Statements of Income (in thousands):

 

    Three Months Ended
September 30,		     Nine Months Ended
September 30,		  
    2011     2010     2011     2010  

Derivatives designated as hedges:

        

Net gains (losses) recognized in OCI (effective portion)

   $ 107,871      $ (174,321 )    $ (66,236 )    $ 76,023   

Net gains (losses) reclassified from accumulated OCI into product sales (effective portion)

   $ (44,072 )    $ 31,526      $ (55,088 )    $ 69,080   

Net losses recognized in interest and other income, net (ineffective portion and amounts excluded from effectiveness testing)

   $ (7,759 )    $ 5,158      $ (10,825 )    $ 3,493   

Derivatives not designated as hedges:

        

Net gains (losses) recognized in interest and other income, net

   $ 86,781      $ (106,918 )    $ (33,409 )    $ 31,916   

 

The net unrealized gains related to our cash flow hedges included in accumulated OCI, net of taxes, were $7.6 million at September 30, 2011. Net unrealized gains related to our cash flow hedges included in accumulated OCI, net of taxes, were $21.6 million at December 31, 2010.

There were no material amounts recorded in interest and other income, net, for the three or nine months ended September 30, 2011 and 2010 as a result of the discontinuance of cash flow hedges.