Amgen 2012 Annual Report Download - page 138

F-39
Borrowings
We estimate the fair values of our convertible notes (Level 2) 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.
The fair value of our convertible notes represents only the liability components of these instruments, because 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 (Level 2) 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; foreign currency exchange rates, as applicable; and other observable
inputs. As of December 31, 2012 and 2011, the aggregate fair values of our long-term debt were $29.9 billion and $23.0 billion,
respectively, and the carrying values were $26.5 billion and $21.4 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 or have utilized 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 and
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 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, 2012, 2011 and 2010, we had open foreign
currency forward contracts with notional amounts of $3.7 billion, $3.5 billion and $3.2 billion, respectively, and open foreign
currency option contracts with notional amounts of $200 million, $292 million and $398 million, respectively. These foreign
currency forward and option contracts, primarily euro based, have been designated as cash flow hedges, and accordingly, the
effective portions 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.
To hedge our exposure to foreign currency exchange rate risk associated with certain of our long-term notes denominated
in foreign currencies, we entered into cross-currency swap contracts. Under the terms of these contracts, we paid euros/pounds
sterling and received U.S. dollars for the notional amounts at the inception of the contracts, and we exchange interest payments
based on these notional amounts at fixed rates over the lives of the contracts in which we pay U.S. dollars and receive euros/
pounds sterling. In addition, we will pay U.S. dollars to and receive euros/pounds sterling from the counterparties at the maturities
of the contracts for these 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 euros/pounds sterling to U.S. dollars. These cross-
currency swap contracts have been designated as cash flow hedges, and accordingly, the effective portions 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 debt
affects earnings. The notional amounts and interest rates of our cross-currency swaps are as follows (notional amounts in millions):
Foreign currency U.S. dollars
Hedged notes Notional Amount Interest rate Notional Amount Interest rate
2.125% 2019 euro Notes € 675 2.125% $ 864 2.6%
5.50% 2026 pound sterling Notes £ 475 5.50% $ 748 5.8%
4.00% 2029 pound sterling Notes £ 700 4.00% $ 1,122 4.3%
In connection with the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate
contracts in order to hedge the variability in cash flows due to changes in the applicable Treasury rate between the time we enter
into these contracts and the time the related debt is issued. Gains and losses on such contracts, which are designated as cash flow
hedges, are reported in AOCI and amortized into earnings over the lives of the associated debt issuances.