Amgen 2012 Annual Report Download - page 83

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We believe our estimations of future cash flows used for assessing impairment of long-lived assets are based on reasonable
assumptions given the facts and circumstances as of the related dates of the assessments.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks that may result from changes in interest rates, foreign currency exchange rates and prices
of equity instruments as well as changes in general economic conditions in the countries where we conduct business. To reduce
certain of these risks, we enter into various types of foreign currency and interest rate derivative hedging transactions as part of
our risk management program. We do not use derivatives for speculative trading purposes.
In the capital and credit markets, strong demand for fixed-income instruments led to continued low interest rates on corporate
debt issuances during 2012. Short-term interest rates on U.S. Treasury instruments remained near historical lows due to a
combination of the Federal Reserve’s monetary policies and the challenging macroeconomic environment. As a result, in the
discussion that follows, we have assumed a hypothetical change in interest rates of 100 basis points from those at December 31,
2012 and 2011. Continued uncertainty surrounding European sovereign debt resulted in ongoing volatility in the foreign exchange
markets, and we have consequently assumed a hypothetical 20% change in foreign currency exchange rates against the U.S. dollar
based on its position relative to other currencies as of December 31, 2012 and 2011.
Interest rate sensitive financial instruments
Our portfolio of available-for-sale interest-bearing securities at December 31, 2012 and 2011, was comprised of: U.S.
Treasury securities and other government-related debt securities; corporate debt securities; residential mortgage-backed and other
mortgage- and asset-backed securities; money market mutual funds; and additionally at December 31, 2012, other short-term
interest-bearing securities, composed principally of commercial paper. The fair values of our investment portfolio of interest-
bearing securities were $23.7 billion and $20.0 billion at December 31, 2012 and 2011, respectively. Duration is a sensitivity
measure that can be used to approximate the change in the value of a security that will result from a 100 basis point change in
interest rates. Applying a duration model, a hypothetical 100 basis point increase in interest rates at December 31, 2012 and 2011,
would not have resulted in a material effect on the fair values of these securities on these dates. In addition, a hypothetical 100
basis point decrease in interest rates at December 31, 2012 and 2011, would not result in a material effect on the related income
or cash flows in the respective ensuing year.
As of December 31, 2012, we had outstanding debt with a carrying value of $26.5 billion and a fair value of $29.9 billion.
As of December 31, 2011, we had outstanding debt with a carrying value of $21.4 billion and a fair value of $23.0 billion. Our
outstanding debt at December 31, 2012 and 2011, was comprised entirely of debt with fixed interest rates. Changes in interest
rates do not affect interest expense or cash flows on fixed-rate debt. Changes in interest rates would, however, affect the fair values
of fixed-rate debt. A hypothetical 100 basis point decrease in interest rates relative to interest rates at December 31, 2012, would
have resulted in an increase of approximately $2.6 billion in the aggregate fair value of our outstanding debt on this date. A
hypothetical 100 basis point decrease in interest rates relative to the interest rates at December 31, 2011, would have resulted in
an increase of approximately $2.1 billion in the aggregate fair value of our outstanding debt on this date. The analysis for the debt
does not consider the impact that hypothetical changes in interest rates would have on the related interest rate swap contracts,
while outstanding, and cross-currency swap contracts.
To achieve a desired mix of fixed and floating interest rate debt, we entered into interest rate swap contracts, which qualified
and were designated for accounting purposes as fair value hedges, for certain of our fixed-rate debt. These derivative contracts
effectively converted a fixed-rate interest coupon to a floating-rate LIBOR-based coupon over the life of the respective note. Due
to historically low interest rates, we terminated all of these swap contracts in May 2012. Interest rate swap contracts with notional
amounts totaling $3.6 billion were outstanding at December 31, 2011. A hypothetical 100 basis point increase in interest rates
relative to interest rates at December 31, 2011, would have resulted in a reduction in fair value of approximately $200 million on
our interest rate swap contracts on this date and would not result in a material effect on the related income or cash flows in the
respective ensuing year. The analysis for the interest rate swap contracts does not consider the impact that hypothetical changes
in interest rates would have on the related fair values of debt that these interest rate sensitive instruments were designed to offset.
As of December 31, 2012 and 2011, we had outstanding cross-currency swap contracts with aggregate notional amounts of
$2.7 billion and $748 million, respectively, that hedge certain of our foreign denominated debt and related interest payments.
These contracts effectively convert interest payments and principal repayment of this debt to U.S. dollars from euros/pounds
sterling and are designated for accounting purposes as cash flow hedges. A hypothetical 100 basis point adverse movement in
interest rates relative to interest rates at December 31, 2012, would have resulted in approximately a $400 million reduction in
the fair value of our cross-currency swap contracts on this date but would have no effect on cash flows or income in the ensuing
year. A hypothetical 100 basis point adverse movement in interest rates relative to interest rates at December 31, 2011, would have
resulted in approximately a $130 million reduction in the fair value of our cross-currency swap contracts on this date but would
have no effect on cash flows or income in the ensuing year.