Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 7, 2017)
  • 10-Q (Aug 7, 2017)
  • 10-Q (May 10, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (Aug 5, 2016)
  • 10-Q (May 6, 2016)

 
8-K

 
Other

Gilead Sciences 10-Q 2016
10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2016
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
Commission File No. 0-19731
 
 
GILEAD SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
94-3047598
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
 
333 Lakeside Drive, Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
650-574-3000
Registrant’s Telephone Number, Including Area Code
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý    Accelerated filer ¨    Non-accelerated filer ¨     Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨ No ý
Number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of April 29, 2016: 1,331,821,506
 




GILEAD SCIENCES, INC.
INDEX

PART I.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


We own or have rights to various trademarks, copyrights and trade names used in our business, including the following: GILEAD®, GILEAD SCIENCES®, AMBISOME®, CAYSTON®, COMPLERA®, DESCOVY®, EMTRIVA®, EVIPLERA®, GENVOYA®, HARVONI®, HEPSERA®, LETAIRIS®, ODEFSEY®, RANEXA®, RAPISCAN®, SOVALDI®, STRIBILD®, TRUVADA®, TYBOST®, VIREAD®, VITEKTA®, VOLIBRIS® and ZYDELIG®. ATRIPLA® is a registered trademark belonging to Bristol-Myers Squibb & Gilead Sciences, LLC. LEXISCAN® is a registered trademark belonging to Astellas U.S. LLC. MACUGEN® is a registered trademark belonging to Eyetech, Inc. SUSTIVA® is a registered trademark of Bristol-Myers Squibb Pharma Company. TAMIFLU® is a registered trademark belonging to Hoffmann-La Roche Inc. This report also includes other trademarks, service marks and trade names of other companies.




PART I.
FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions, except per share amounts)
 
March 31, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,315

 
$
12,851

Short-term marketable securities
2,004

 
1,756

Accounts receivable, net of allowances of $1,277 at March 31, 2016 and $1,032 at December 31, 2015
6,163

 
5,854

Inventories
1,880

 
1,955

Deferred tax assets
830

 
828

Prepaid and other current assets
2,075

 
1,518

Total current assets
19,267

 
24,762

Property, plant and equipment, net
2,431

 
2,276

Long-term portion of prepaid royalties
383

 
400

Long-term deferred tax assets
292

 
324

Long-term marketable securities
13,003

 
11,601

Intangible assets, net
9,923

 
10,247

Goodwill
1,172

 
1,172

Other long-term assets
1,294

 
934

Total assets
$
47,765

 
$
51,716

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
945

 
$
1,178

Accrued government and other rebates
4,766

 
4,118

Other accrued liabilities
2,925

 
3,172

Deferred revenues
529

 
440

Current portion of long-term debt and other obligations, net
1,745

 
982

Total current liabilities
10,910

 
9,890

Long-term debt, net
21,077

 
21,073

Long-term income taxes payable
1,385

 
1,243

Other long-term obligations
374

 
395

Commitments and contingencies (Note 9)


 


Equity component of currently redeemable convertible notes

 
2

Stockholders’ equity:
 

 
 

Preferred stock, par value $0.001 per share; 5 shares authorized; none outstanding

 

Common stock, par value $0.001 per share; shares authorized of 5,600 at March 31, 2016 and December 31, 2015; shares issued and outstanding of 1,348 at March 31, 2016 and 1,422 at December 31, 2015
1

 
1

Additional paid-in capital
516

 
444

Accumulated other comprehensive income (loss)
(164
)
 
88

Retained earnings
13,045

 
18,001

Total Gilead stockholders’ equity
13,398

 
18,534

Noncontrolling interest
621

 
579

Total stockholders’ equity
14,019

 
19,113

Total liabilities and stockholders’ equity
$
47,765

 
$
51,716


See accompanying notes.

2



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in millions, except per share amounts)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Revenues:
 
 
 
 
Product sales
 
$
7,681

 
$
7,405

Royalty, contract and other revenues
 
113

 
189

Total revenues
 
7,794

 
7,594

Costs and expenses:
 
 
 
 
Cost of goods sold
 
1,193

 
882

Research and development expenses
 
1,265

 
696

Selling, general and administrative expenses
 
685

 
645

Total costs and expenses
 
3,143

 
2,223

Income from operations
 
4,651

 
5,371

Interest expense
 
(230
)
 
(153
)
Other income (expense), net
 
81

 
21

Income before provision for income taxes
 
4,502

 
5,239

Provision for income taxes
 
935

 
907

Net income
 
3,567

 
4,332

Net income (loss) attributable to noncontrolling interest
 
1

 
(1
)
Net income attributable to Gilead
 
$
3,566

 
$
4,333

Net income per share attributable to Gilead common stockholders - basic
 
$
2.58

 
$
2.91

Shares used in per share calculation - basic
 
1,383

 
1,488

Net income per share attributable to Gilead common stockholders - diluted
 
$
2.53

 
$
2.76

Shares used in per share calculation - diluted
 
1,412

 
1,569

Cash dividends declared per share
 
$
0.43

 
$























See accompanying notes.

3



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Net income
 
$
3,567

 
$
4,332

Other comprehensive income (loss):
 
 
 
 
Net foreign currency translation gain (loss), net of tax
 
2

 
(10
)
Available-for-sale securities:
 
 
 
 
Net unrealized gain (loss), net of tax impact of $30 and $3
 
(24
)
 
6

Net change
 
(24
)
 
6

Cash flow hedges:
 
 
 
 
Net unrealized gain (loss), net of tax impact of $(10) and $6
 
(150
)
 
383

Reclassifications to net income, net of tax impact of $(6) and $(4)
 
(80
)
 
(141
)
Net change
 
(230
)
 
242

Other comprehensive income (loss)
 
(252
)
 
238

Comprehensive income
 
3,315

 
4,570

Comprehensive income (loss) attributable to noncontrolling interest
 
1

 
(1
)
Comprehensive income attributable to Gilead
 
$
3,314

 
$
4,571

































See accompanying notes.

4



GILEAD SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Operating Activities:
 
 
 
 
Net income
 
$
3,567

 
$
4,332

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
42

 
37

Amortization expense
 
241

 
232

Stock-based compensation expense
 
88

 
92

Excess tax benefits from stock-based compensation
 
(89
)
 
(186
)
Tax benefits from exercise and vesting of stock-based awards
 
87

 
186

Deferred income taxes
 
15

 
(121
)
In-process research and development impairment
 
114

 

Other
 
(19
)
 
(3
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(191
)
 
(348
)
Inventories
 
(14
)
 
(370
)
Prepaid expenses and other assets
 
(126
)
 
52

Accounts payable
 
(239
)
 
58

Income taxes payable
 
205

 
149

Accrued liabilities
 
195

 
1,530

Deferred revenues
 
37

 
61

Net cash provided by operating activities
 
3,913

 
5,701

 
 
 
 
 
Investing Activities:
 
 
 
 
Purchases of marketable securities
 
(4,977
)
 
(2,462
)
Proceeds from sales of marketable securities
 
2,959

 
249

Proceeds from maturities of marketable securities
 
443

 
38

Other investments
 
(357
)
 

Capital expenditures
 
(177
)
 
(124
)
Net cash used in investing activities
 
(2,109
)
 
(2,299
)
 
 
 
 
 
Financing Activities:
 
 
 
 
Proceeds from convertible note hedges
 
95

 
154

Repayments of debt and other obligations
 
(126
)
 
(199
)
Proceeds from issuances of common stock
 
92

 
118

Repurchases of common stock
 
(8,000
)
 
(3,001
)
Payments of dividends
 
(587
)
 

Excess tax benefits from stock-based compensation
 
89

 
186

Contributions from noncontrolling interest
 
41

 
20

Net cash used in financing activities
 
(8,396
)
 
(2,722
)
Effect of exchange rate changes on cash and cash equivalents
 
56

 
(72
)
Net change in cash and cash equivalents
 
(6,536
)
 
608

Cash and cash equivalents at beginning of period
 
12,851

 
10,027

Cash and cash equivalents at end of period
 
$
6,315

 
$
10,635




See accompanying notes.

5



GILEAD SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. The financial statements include all adjustments, consisting of normal recurring adjustments that the management of Gilead Sciences, Inc. (Gilead, we or us) believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying Condensed Consolidated Financial Statements include the accounts of Gilead, our wholly-owned subsidiaries and certain variable interest entities for which we are the primary beneficiary. All intercompany transactions have been eliminated. For consolidated entities where we own or are exposed to less than 100% of the economics, we record Net income (loss) attributable to noncontrolling interest in our Condensed Consolidated Statements of Income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties.
We assess whether we are the primary beneficiary of a variable interest entity (VIE) at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. As of March 31, 2016, the only material VIE was our joint venture with Bristol-Myers Squibb Company (BMS) which is described in Note 7, Collaborative Arrangements.
The accompanying Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.
Significant Accounting Policies, Estimates and Judgments
The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate our significant accounting policies and estimates. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed each period and updated to reflect current information. Actual results may differ significantly from these estimates.
Concentrations of Risk
We are subject to credit risk from our portfolio of cash, cash equivalents and marketable securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return. As of March 31, 2016, approximately 15% of our cash, cash equivalents and marketable securities were held at one financial institution. We mitigate risk by depositing funds with reputable institutions and by monitoring their risk profiles. To date, losses with respect to our concentrations of risk related to our cash, cash equivalents and marketable securities have been immaterial.
We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States, Europe and Japan.
As of March 31, 2016, our accounts receivable in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $819 million, of which $237 million were greater than 120 days past due, including $32 million greater than 365 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowance for doubtful accounts was adequate at March 31, 2016.

6



Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2015-03 (ASU 2015-03) "Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires the presentation of debt issuance costs as a direct deduction from the carrying amount of a recognized debt liability on the balance sheet. We adopted this ASU with retrospective application in the first quarter of 2016. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements. See Note 8, Debt and Credit Facility for further information.
In May 2014, the FASB issued Accounting Standard Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will become effective for us beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. In March and April 2016, the FASB issued ASU 2016-08 "Revenue From Contracts With Customers: Principal vs. Agent Considerations" and ASU 2016-10 “Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing” to provide supplemental adoption guidance and clarification to ASU 2014-09. We are evaluating the impact of the adoption of these standards on our Condensed Consolidated Financial Statements.
In November 2015, the FASB issued Accounting Standard Update No. 2015-17 (ASU 2015-17) "Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance will become effective for us beginning in the first quarter of 2017 and may be applied either prospectively or retrospectively. Early adoption is permitted. At the time of adoption, we will reclassify current deferred tax amounts on our Consolidated Balance Sheets as noncurrent. We are evaluating the impact of the method of adoption of this standard on our Condensed Consolidated Financial Statements.
In January 2016, the FASB issued Accounting Standard Update No. 2016-01(ASU 2016-01) "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will become effective for us beginning in the first quarter of 2018. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued Accounting Standard Update No. 2016-02 (ASU 2016-02) "Leases." ASU 2016-02 amends a number of aspects of lease accounting, including requiring lessees to recognize almost all leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. The guidance will become effective for us beginning in the first quarter of 2019 and is required to be adopted using a modified retrospective approach. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
In March 2016, the FASB issued Accounting Standard Update No. 2016-09 (ASU 2016-09) "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of employee share-based payment accounting, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance will become effective for us beginning in the first quarter of 2017. Early adoption is permitted. We are evaluating the impact of the adoption of this standard on our Condensed Consolidated Financial Statements.
2.
FAIR VALUE MEASUREMENTS
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

7



Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities, foreign currency exchange contracts and equity securities are reported at their respective fair values in our Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized cost in our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported in our Condensed Consolidated Balance Sheets at amounts that approximate current fair values. There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.
The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis, by level, within the fair value hierarchy (in millions):
 
March 31, 2016
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
2,128

 
$

 
$

 
$
2,128

 
$
10,161

 
$

 
$

 
$
10,161

Corporate debt securities

 
7,284

 

 
7,284

 

 
5,773

 

 
5,773

U.S. treasury securities
3,987

 

 

 
3,987

 
4,389

 

 

 
4,389

Residential mortgage and asset-backed securities

 
2,233

 

 
2,233

 

 
1,695

 

 
1,695

U.S. government agencies securities

 
775

 

 
775

 

 
707

 

 
707

Certificates of deposit

 
364

 

 
364

 

 
448

 

 
448

Non-U.S. government securities

 
378

 

 
378

 

 
313

 

 
313

Municipal debt securities

 
34

 

 
34

 

 
34

 

 
34

Equity securities
280

 

 

 
280

 

 

 

 

Convertible note hedges (1)

 
792

 

 
792

 

 

 

 

Foreign currency derivative contracts

 
74

 

 
74

 

 
210

 

 
210

Deferred compensation plan
74

 

 

 
74

 
66

 

 

 
66

 
$
6,469

 
$
11,934

 
$

 
$
18,403

 
$
14,616

 
$
9,180

 
$

 
$
23,796

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Conversion spread of convertible senior notes (1)
$

 
$
792

 
$

 
$
792

 
$

 
$

 
$

 
$

Contingent consideration

 

 
33

 
33

 

 

 
59

 
59

Deferred compensation plan
74

 

 

 
74

 
66

 

 

 
66

Foreign currency derivative contracts

 
140

 

 
140

 

 
41

 

 
41

 
$
74

 
$
932

 
$
33

 
$
1,039

 
$
66

 
$
41

 
$
59

 
$
166

_________________________________________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) See Note 4, Derivative Financial Instruments for further information.
Level 2 Inputs
We estimate the fair values of Level 2 instruments by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.
Substantially all of our foreign currency derivative contracts have maturities within an 18 months time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor’s, Moody’s Investors Service, Inc. or Fitch, Inc. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency rates, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.

8



The total estimated fair values of our convertible senior notes and senior unsecured notes, determined using Level 2 inputs based on their quoted market values, were approximately $24.7 billion at March 31, 2016 and $23.7 billion at December 31, 2015, and the carrying values were $22.0 billion at March 31, 2016 and $22.1 billion at December 31, 2015.
Level 3 Inputs
As of March 31, 2016 and December 31, 2015, the only assets or liabilities that were measured using Level 3 inputs were our contingent consideration liabilities, which were immaterial as of March 31, 2016 and December 31, 2015. Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.
3.
AVAILABLE-FOR-SALE SECURITIES
Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services. The following table is a summary of our available-for-sale securities (in millions):
 
 
March 31, 2016
 
December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
2,128

 
$

 
$

 
$
2,128

 
$
10,161

 
$

 
$

 
$
10,161

Corporate debt securities
 
7,261

 
28

 
(5
)
 
7,284

 
5,795

 
1

 
(23
)
 
5,773

U.S. treasury securities
 
3,980

 
8

 
(1
)
 
3,987

 
4,407

 

 
(18
)
 
4,389

Residential mortgage and asset-backed securities
 
2,229

 
5

 
(1
)
 
2,233

 
1,701

 

 
(6
)
 
1,695

U.S. government agencies securities
 
774

 
1

 

 
775

 
709

 

 
(2
)
 
707

Certificates of deposit
 
364

 

 

 
364

 
448

 

 

 
448

Non-U.S. government securities
 
378

 

 

 
378

 
315

 

 
(2
)
 
313

Municipal debt securities
 
34

 

 

 
34

 
34

 

 

 
34

Equity securities
 
357

 

 
(77
)
 
280

 

 

 

 

Total
 
$
17,505

 
$
42

 
$
(84
)
 
$
17,463

 
$
23,570

 
$
1

 
$
(51
)
 
$
23,520

The following table summarizes the classification of the available-for-sale securities in our Condensed Consolidated Balance Sheets (in millions):
 
 
March 31, 2016
 
December 31, 2015
Cash and cash equivalents
 
$
2,176

 
$
10,163

Short-term marketable securities
 
2,004

 
1,756

Long-term marketable securities
 
13,003

 
11,601

Other long-term assets
 
280

 

Total
 
$
17,463

 
$
23,520

Cash and cash equivalents in the table above exclude cash of $4.1 billion as of March 31, 2016 and $2.7 billion as of December 31, 2015.
The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in millions):
 
 
March 31, 2016
 
 
Amortized Cost
 
Fair Value
Less than one year
 
$
4,180

 
$
4,180

Greater than one year but less than five years
 
12,750

 
12,785

Greater than five years but less than ten years
 
185

 
185

Greater than ten years
 
33

 
33

Total
 
$
17,148

 
$
17,183


9



The following table summarizes our available-for-sale securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in millions):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
(5
)
 
$
1,834

 
$

 
$
50

 
$
(5
)
 
$
1,884

U.S. treasury securities
 
(1
)
 
1,075

 

 

 
(1
)
 
1,075

Residential mortgage and asset-backed securities
 
(1
)
 
667

 

 
24

 
(1
)
 
691

U.S. government agencies securities
 

 
116

 

 

 

 
116

Non-U.S. government securities
 

 
221

 

 

 

 
221

Equity securities
 
(77
)
 
280

 

 

 
(77
)
 
280

Total
 
$
(84
)
 
$
4,193

 
$

 
$
74

 
$
(84
)
 
$
4,267

 
 
 

 
 

 
 

 
 

 
 

 
 

December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt securities
 
$
(23
)
 
$
4,891

 
$

 
$
43

 
$
(23
)
 
$
4,934

U.S. treasury securities
 
(18
)
 
4,342

 

 

 
(18
)
 
4,342

Residential mortgage and asset-backed securities
 
(6
)
 
1,626

 

 
20

 
(6
)
 
1,646

U.S. government agencies securities
 
(2
)
 
707

 

 

 
(2
)
 
707

Non-U.S. government securities
 
(2
)
 
313

 

 

 
(2
)
 
313

Municipal debt securities
 

 
21

 

 

 

 
21

Total
 
$
(51
)
 
$
11,900

 
$

 
$
63

 
$
(51
)
 
$
11,963

We held a total of 1,073 positions as of March 31, 2016 and 2,742 positions as of December 31, 2015 related to our debt securities that were in an unrealized loss position.
Based on our review of our available-for-sale securities, we believe we had no other-than-temporary impairments on these securities as of March 31, 2016 and December 31, 2015, because we do not intend to sell these securities nor do we believe that we will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were immaterial for the three months ended March 31, 2016 and 2015.
4.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exposure
Our operations in foreign countries expose 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 are the Euro and Yen. In order to manage this risk, we may 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 or 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 seek to limit the risk that counterparties to these contracts may be unable to perform. We also seek to 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.
We hedge our exposure to foreign currency exchange rate fluctuations for certain monetary assets and liabilities of our entities 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 in 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

10



hedge effectiveness using regression analysis which calculates the change in cash flow as a result of the hedge instrument. On a quarterly 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 (loss) (AOCI) 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 AOCI at March 31, 2016 are expected to be reclassified to product sales within 12 months.
The cash flow effects of our derivative contracts for the three months ended March 31, 2016 and 2015 are included within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.
We had notional amounts on foreign currency exchange contracts outstanding of $9.9 billion at March 31, 2016 and $9.1 billion at December 31, 2015.
While all of our derivative contracts allow us the right to offset assets or liabilities, we have presented amounts on a gross basis. Under the International Swap Dealers Association, Inc. master agreements with the respective counterparties of the foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The following table summarizes the classification and fair values of derivative instruments in our Condensed Consolidated Balance Sheets (in millions):
 
 
March 31, 2016
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value 
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
71

 
Other accrued liabilities
 
$
(121
)
Foreign currency exchange contracts
 
Other long-term assets
 
2

 
Other long-term obligations
 
(18
)
Total derivatives designated as hedges
 
 
 
73

 
 
 
(139
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
1

 
Other accrued liabilities
 
(1
)
Total derivatives not designated as hedges
 
 
 
1

 
 
 
(1
)
Total derivatives
 
 
 
$
74

 
 
 
$
(140
)
 
 
December 31, 2015
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Classification
 
Fair Value
 
Classification
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
200

 
Other accrued liabilities
 
$
(32
)
Foreign currency exchange contracts
 
Other long-term assets
 
9

 
Other long-term obligations
 
(8
)
Total derivatives designated as hedges
 
 
 
209

 
 
 
(40
)
Derivatives not designated as hedges:
 
 
 
 

 
 
 
 

Foreign currency exchange contracts
 
Other current assets
 
1

 
Other accrued liabilities
 
(1
)
Total derivatives not designated as hedges
 
 
 
1

 
 
 
(1
)
Total derivatives
 
 
 
$
210

 
 
 
$
(41
)

11



The following table summarizes the effect of our foreign currency exchange contracts in our Condensed Consolidated Financial Statements (in millions):
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Derivatives designated as hedges:
 
 
 
 
Gains (losses) recognized in AOCI (effective portion)
 
$
(160
)
 
$
389

Gains reclassified from AOCI into product sales (effective portion)
 
$
86

 
$
145

Gains recognized in Other income (expense), net (ineffective portion and amounts excluded from effectiveness testing)
 
$
14

 
$
1

Derivatives not designated as hedges:
 
 
 
 
Gains (losses) recognized in Other income (expense), net
 
$
(151
)
 
$
108

From time to time, we may discontinue cash flow hedges and as a result, record related amounts in Other income (expense), net in our Condensed Consolidated Statements of Income. There were no material amounts recorded in Other income (expense), net for the three months ended March 31, 2016 and 2015 as a result of the discontinuance of cash flow hedges.
As of March 31, 2016 and December 31, 2015, we held one type of financial instrument, derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument in our Condensed Consolidated Balance Sheets (in millions):
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
in the Condensed
Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Amounts of Assets/Liabilities Presented
in the Condensed Consolidated
Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received/Pledged
 
Net Amount (Legal Offset)
As of March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
74

 
$

 
$
74

 
$
(66
)
 
$

 
$
8

Derivative liabilities
 
(140
)
 

 
(140
)
 
66

 

 
(74
)
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
 
$
210

 
$

 
$
210

 
$
(38
)
 
$

 
$
172

Derivative liabilities
 
(41
)
 

 
(41
)
 
38

 

 
(3
)
May 2016 Convertible Senior Notes and Convertible Note Hedges
In March 2016, we exercised our option to elect cash for the settlement of the conversion value in excess of the principal amount (the conversion spread) of our remaining convertible senior notes due in May 2016 (the May 2016 Notes) and for the related convertible note hedges. Until our cash settlement election, the conversion spread of the May 2016 Notes and the convertible note hedges met the applicable criteria for equity classification and were therefore recorded in stockholders’ equity in our Condensed Consolidated Balance Sheets. Upon our cash settlement election, we reclassified $733 million of the fair value of the conversion spread from stockholders’ equity to Current portion of long-term debt and other obligations, net, and reclassified $733 million of the fair value of the convertible note hedges from Stockholders’ equity to Prepaid and other current assets in our Condensed Consolidated Balance Sheets.
At March 31, 2016, we revalued both the conversion spread and the convertible note hedges at $792 million, respectively, and recorded a loss of $59 million on the conversion spread and a gain of $59 million on the convertible note hedges in our Condensed Consolidated Statements of Income. Both the conversion spread and the convertible note hedges associated with our May 2016 Notes will be settled during the second quarter of 2016 when the May 2016 Notes are due.

12



5.
OTHER FINANCIAL INFORMATION
Inventories
Inventories are summarized as follows (in millions):
 
 
March 31, 2016
 
December 31, 2015
Raw materials
 
$
1,239

 
$
1,332

Work in process
 
761