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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
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. We work only with major banks and closely monitor current market conditions, which limits the risk that counterparties to our 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 other income (expense), 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 other income (expense), net. The effective component of our hedge is recorded as an unrealized gain or loss on the hedging instrument in accumulated other comprehensive income (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 March 31, 2012 will be reclassified to product sales within 12 months.
We had notional amounts on foreign currency exchange contracts outstanding of $3.90 billion and $4.03 billion at March 31, 2012 and December 31, 2011, respectively.
The following table summarizes information about the fair values of derivative instruments on our Condensed Consolidated Balance Sheets (in thousands):
 
March 31, 2012
 
Asset Derivatives
 
Liability Derivatives
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
$
47,498

 
Other accrued liabilities
 
$
14,564

Foreign currency exchange contracts
Other noncurrent assets
 
4,459

 
Other long-term obligations
 
3,778

Total derivatives designated as hedges
 
 
51,957

 
 
 
18,342

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
1

 
Other accrued liabilities
 
61

Total derivatives not designated as hedges
 
 
1

 
 
 
61

Total derivatives
 
 
$
51,958

 
 
 
$
18,403

 
 
December 31, 2011
 
Asset Derivatives
 
Liability Derivatives
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
$
77,066

 
Other accrued liabilities
 
$
5,052

Foreign currency exchange contracts
Other noncurrent assets
 
23,169

 
Other long-term obligations
 
620

Total derivatives designated as hedges
 
 
100,235

 
 
 
5,672

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
240

 
Other accrued liabilities
 
38

Total derivatives not designated as hedges
 
 
240

 
 
 
38

Total derivatives
 
 
$
100,475

 
 
 
$
5,710


The following table summarizes the effect of our foreign currency exchange contracts on our Condensed Consolidated Statements of Income (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Derivatives designated as hedges:
 
 
 
Net gains (losses) recognized in OCI (effective portion)
$
(48,886
)
 
$
(127,499
)
Net gains (losses) reclassified from accumulated OCI into product sales (effective portion)
$
11,227

 
$
9,929

Net gains (losses) recognized in other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
$
(3,212
)
 
$
995

Derivatives not designated as hedges:
 
 
 
Net gains (losses) recognized in other income (expense), net
$
(27,174
)
 
$
(85,846
)

There were no material amounts recorded in other income (expense), net, for the three months ended March 31, 2012 and 2011 as a result of the discontinuance of cash flow hedges.