Amgen 2011 Annual Report Download - page 163

AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Borrowings
We estimate the fair values of our convertible notes by using an income-based industry standard valuation
model for which all significant inputs are observable either directly or indirectly, including benchmark yields
adjusted for our credit risk (Level 2). The fair value of our convertible notes represent only the liability
components of these instruments, as their equity components are included in Common stock and additional
paid-in capital in the Consolidated Balance Sheets. We estimate the fair values of our other long-term notes by
taking into consideration indicative prices obtained from a third-party financial institution that utilizes industry
standard valuation models, including both income- and market-based approaches, for which all significant inputs
are observable either directly or indirectly. These inputs include reported trades of and broker/dealer quotes on
the same or similar securities; credit spreads; benchmark yields; and other observable inputs (Level 2). As of
December 31, 2011 and 2010, the aggregate fair values of our long-term debt were $23.0 billion and $14.5
billion, respectively, and the carrying values were $21.4 billion and $13.4 billion, respectively.
17. Derivative instruments
The Company is exposed to foreign currency exchange rate and interest rate risks related to its business
operations. To reduce our risks related to these exposures, we utilize certain derivative instruments, including
foreign currency forward, foreign currency option, cross currency swap, forward interest rate and interest rate
swap contracts. We do not use derivatives for speculative trading purposes.
Cash flow hedges
We are exposed to possible changes in the values of certain anticipated foreign currency cash flows
resulting from changes in foreign currency exchange rates, associated primarily with our euro-denominated
international product sales. Increases or decreases in the cash flows associated with our international product
sales due to movements in foreign currency exchange rates are offset partially by the corresponding increases and
decreases in our international operating expenses resulting from these foreign currency exchange rate
movements. To further reduce our exposure to foreign currency exchange rate fluctuations on our international
product sales, we enter into foreign currency forward and option contracts to hedge a portion of our projected
international product sales primarily over a three-year time horizon, with, at any given point in time, a higher
percentage of nearer-term projected product sales being hedged than in successive periods. As of December 31,
2011, 2010 and 2009, we had open foreign currency forward contracts with notional amounts of $3.5 billion,
$3.2 billion and $3.4 billion and open foreign currency option contracts with notional amounts of $292 million,
$398 million and $376 million, respectively. These foreign currency forward and option contracts, primarily
euro-based, have been designated as cash flow hedges, and accordingly, the effective portion of the unrealized
gains and losses on these contracts are reported in AOCI and reclassified to earnings in the same periods during
which the hedged transactions affect earnings.
In order to hedge our exposure to foreign currency exchange rate risk associated with our pound sterling
denominated long-term notes issued in 2011, we entered into cross currency swap contracts. Under the terms of
these contracts, we receive interest payments in pounds sterling at a fixed rate of 5.5% on £475 million and pay
interest in U.S. dollars at a fixed rate of 5.8% on $748 million, the aggregate notional amounts paid to/received
from the counterparties upon exchange of currencies at the inception of these contracts. We will pay U.S. dollars
to and receive pounds sterling from the counterparties at the maturity of the contracts for the same notional
amounts. The terms of these contracts correspond to the related hedged notes, effectively converting the interest
payments and principal repayment on these notes from pounds sterling to U.S. dollars. These cross currency
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