Financial Instruments

9 Months Ended

Oct. 02, 2022

A. Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis and Fair Value Hierarchy, using a Market Approach:


	October 2, 2022						December 31, 2021
(MILLIONS)	Total		Level 1		Level 2		Total		Level 1		Level 2
Financial assets:
Short-term investments
Equity securities with readily determinable fair values:
Money market funds	$	12,154	$	—	$	12,154	$	5,365	$	—	$	5,365

Available-for-sale debt securities:
Government and agency—non-U.S.	15,885		—		15,885		17,318		—		17,318
Government and agency—U.S.	2,931		—		2,931		4,050		—		4,050
Corporate and other	1,361		—		1,361		647		—		647
	20,176		—		20,176		22,014		—		22,014
Total short-term investments	32,330		—		32,330		27,379		—		27,379
Other current assets
Derivative assets:
Interest rate contracts	9		—		9		4		—		4
Foreign exchange contracts	1,950		—		1,950		704		—		704
Total other current assets	1,959		—		1,959		709		—		709
Long-term investments
Equity securities with readily determinable fair values(a)	2,972		2,960		12		3,876		3,849		27

Available-for-sale debt securities:
Government and agency—non-U.S.	285		—		285		465		—		465
Government and agency—U.S.	—		—		—		6		—		6
Corporate and other	73		—		73		50		—		50
	358		—		358		521		—		521
Total long-term investments	3,330		2,960		370		4,397		3,849		548
Other noncurrent assets
Derivative assets:
Interest rate contracts	—		—		—		16		—		16
Foreign exchange contracts	812		—		812		242		—		242
Total derivative assets	812		—		812		259		—		259
Insurance contracts(b)	631		—		631		808		—		808
Total other noncurrent assets	1,444		—		1,444		1,067		—		1,067
Total assets	$	39,063	$	2,960	$	36,103	$	33,552	$	3,849	$	29,703

Financial liabilities:
Other current liabilities
Derivative liabilities:

Foreign exchange contracts	$	295	$	—	$	295	$	476	$	—	$	476
Total other current liabilities	295		—		295		476		—		476
Other noncurrent liabilities
Derivative liabilities:
Interest rate contracts	330		—		330		—		—		—
Foreign exchange contracts	1,153		—		1,153		405		—		405
Total other noncurrent liabilities	1,482		—		1,482		405		—		405
Total liabilities	$	1,777	$	—	$	1,777	$	881	$	—	$	881

(a)Long-term equity securities of $139 million as of October 2, 2022 and $194 million as of December 31, 2021 were held in restricted trusts for U.S. non-qualified employee benefit plans.

(b)Includes life insurance policies held in restricted trusts for U.S. non-qualified employee benefit plans. The underlying invested assets in these contracts are marketable securities, which are carried at fair value, with changes in fair value recognized in Other (income)/deductions—net (see Note 4).

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis––The carrying value of Long-term debt, excluding the current portion was $33 billion as of October 2, 2022 and $36 billion as of December 31, 2021. The estimated fair value of such debt, using a market approach and Level 2 inputs, was $29 billion as of October 2, 2022 and $42 billion as of December 31, 2021.

The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities, long-term receivables and short-term borrowings not measured at fair value on a recurring basis were not significant as of October 2, 2022 and December 31, 2021. The fair value measurements of our held-to-maturity debt securities and short-term borrowings are based on Level 2 inputs. The fair value measurements of our long-term receivables and private equity securities are based on Level 3 inputs.

B. Investments

Total Short-Term, Long-Term and Equity-Method Investments


The following summarizes our investments by classification type:
(MILLIONS)	October 2, 2022		December 31, 2021
Short-term investments
Equity securities with readily determinable fair values(a)	$	12,154	$	5,365
Available-for-sale debt securities	20,176		22,014
Held-to-maturity debt securities	2,495		1,746
Total Short-term investments	$	34,825	$	29,125

Long-term investments
Equity securities with readily determinable fair values(b)	$	2,972	$	3,876

Available-for-sale debt securities	358		521
Held-to-maturity debt securities	36		34
Private equity securities at cost(b)	696		623
Total Long-term investments	$	4,062	$	5,054
Equity-method investments	9,826		16,472
Total long-term investments and equity-method investments	$	13,888	$	21,526
Held-to-maturity cash equivalents	$	969	$	268

(a)Includes money market funds primarily invested in U.S. Treasury and government debt.

(b)Represent investments in the life sciences sector.

Debt Securities


At October 2, 2022, our investment portfolio consisted of debt securities issued across diverse governments, corporate and financial institutions, which are investment-grade. The contractual or estimated maturities, are as follows:
	October 2, 2022														December 31, 2021
			Gross Unrealized						Maturities (in Years)								Gross Unrealized
(MILLIONS)	Amortized Cost		Gains		Losses		Fair Value		Within 1		Over 1 to 5		Over 5		Amortized Cost		Gains		Losses		Fair Value
Available-for-sale debt securities
Government and agency––non-U.S.	$	16,711	$	26	$	(567)	$	16,169	$	15,885	$	285	$	—	$	18,032	$	13	$	(263)	$	17,783
Government and agency––U.S.	2,932		—		(1)		2,931		2,931		—		—		4,056		—		(1)		4,055
Corporate and other	1,446		—		(12)		1,434		1,361		73		—		698		—		(1)		697
Held-to-maturity debt securities
Time deposits and other	1,557		—		—		1,557		1,525		20		12		947		—		—		947
Government and agency––non-U.S.	1,943		—		—		1,943		1,939		3		1		1,102		—		—		1,102
Total debt securities	$	24,589	$	26	$	(580)	$	24,034	$	23,641	$	381	$	13	$	24,835	$	14	$	(265)	$	24,584

Any expected credit losses to these portfolios would be immaterial to our financial statements.

Equity Securities


The following presents the calculation of the portion of unrealized (gains)/losses that relates to equity securities, excluding equity-method investments, held at the reporting date:
	Three Months Ended				Nine Months Ended
(MILLIONS)	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
Net (gains)/losses recognized during the period on equity securities(a)	$	112	$	(400)	$	1,353	$	(1,601)
Less: Net (gains)/losses recognized during the period on equity securities sold during the period	(5)		(78)		(84)		(83)
Net unrealized (gains)/losses during the reporting period on equity securities still held at the reporting date(b)	$	116	$	(322)	$	1,436	$	(1,518)

(a)Reported in Other (income)/deductions––net. See Note 4.

(b)Included in net unrealized (gains)/losses are observable price changes on equity securities without readily determinable fair values. As of October 2, 2022, there were cumulative impairments and downward adjustments of $148 million and upward adjustments of $201 million. Impairments, downward and upward adjustments were not significant in the third quarter and first nine months of 2022 and 2021.

C. Short-Term Borrowings


Short-term borrowings include:
(MILLIONS)	October 2, 2022		December 31, 2021

Current portion of long-term debt, principal amount	$	2,550	$	1,636
Other short-term borrowings, principal amount(a)	1,474		605
Total short-term borrowings, principal amount	4,024		2,241
Net fair value adjustments related to hedging and purchase accounting	16		—

Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted	$	4,040	$	2,241

(a)Primarily includes cash collateral. See Note 7F.

D. Long-Term Debt


The following summarizes the aggregate principal amount of our senior unsecured long-term debt, and adjustments to report our aggregate long-term debt:
(MILLIONS)	October 2, 2022		December 31, 2021
Total long-term debt, principal amount	$	31,831	$	34,948
Net fair value adjustments related to hedging and purchase accounting	976		1,438
Net unamortized discounts, premiums and debt issuance costs	(178)		(195)
Other long-term debt	—		4
Total long-term debt, carried at historical proceeds, as adjusted	$	32,629	$	36,195

E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk––A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. Where foreign exchange risk is not offset by other exposures, we manage our foreign exchange risk principally through the use of derivative financial instruments and foreign currency debt. These financial instruments serve to mitigate the impact on net income as a result of remeasurement into another currency, or against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.

The derivative financial instruments primarily hedge or offset exposures in the euro, U.K. pound, Japanese yen, and Canadian dollar, and include a portion of our forecasted foreign exchange-denominated intercompany inventory sales hedged up to two years. We may seek to protect against possible declines in the reported net investments of our foreign business entities.

Interest Rate Risk––Our interest-bearing investments and borrowings are subject to interest rate risk. Depending on market conditions, we may change the profile of our outstanding debt or investments by entering into derivative financial instruments like interest rate swaps, either to hedge or offset the exposure to changes in the fair value of hedged items with fixed interest rates, or to convert variable rate debt or investments to fixed rates. The derivative financial instruments primarily hedge U.S. dollar fixed-rate debt.


The following summarizes the fair value of the derivative financial instruments and notional amounts (including those reported as part of discontinued operations):
	October 2, 2022						December 31, 2021
			Fair Value						Fair Value
(MILLIONS)	Notional		Asset		Liability		Notional		Asset		Liability
Derivatives designated as hedging instruments:
Foreign exchange contracts(a)	$	33,274	$	2,479	$	1,175	$	29,576	$	787	$	717
Interest rate contracts	2,250		9		330		2,250		21		—
			2,488		1,505				808		717
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	26,426	283		273		$	21,419	160		164
Total			$	2,771	$	1,777			$	968	$	881

(a)The notional amount of outstanding foreign exchange contracts hedging our intercompany forecasted inventory sales was $4.5 billion as of October 2, 2022 and $4.8 billion as of December 31, 2021.


The following summarizes information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk exposures (including those reported as part of discontinued operations):
	Gains/(Losses) Recognized in OID(a)				Gains/(Losses) Recognized in OCI(a)				Gains/(Losses) Reclassified from OCI into OID and COS(a)
	Three Months Ended
(MILLIONS)	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(b)	$	—	$	—	$	528	$	204	$	558	$	(59)
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		61		10		57		10
Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	(124)		(5)		—		—		—		—
Hedged item	124		5		—		—		—		—


Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		680		177		—		—
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		78		19		32		26
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:(d)
Foreign currency short-term borrowings	—		—		—		25		—		—
Foreign currency long-term debt	—		—		49		19		—		—
Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	(420)		(74)		—		—		—		—
All other net(c)	—		—		—		—		—		—
	$	(420)	$	(74)	$	1,396	$	453	$	647	$	(21)



	Gains/(Losses) Recognized in OID(a)				Gains/(Losses) Recognized in OCI(a)				Gains/(Losses) Reclassified from OCI into OID and COS(a)
	Nine Months Ended
(MILLIONS)	October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(b)	$	—	$	—	$	1,339	$	147	$	872	$	(314)
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		105		31		100		28
Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	(346)		(6)		—		—		—		—
Hedged item	346		6		—		—		—		—


Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		1,613		332		—		—
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		63		54		95		82
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:(d)
Foreign currency short-term borrowings	—		—		26		52		—		—
Foreign currency long-term debt	—		—		119		66		—		—
Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	(832)		(97)		—		—		—		—
All other net(c)	—		—		—		1		—		1
	$	(832)	$	(97)	$	3,264	$	683	$	1,068	$	(204)

(a)OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. COS = Cost of Sales, included in Cost of sales in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.

(b)The amounts reclassified from OCI into COS were:

•a net gain of $125 million in the third quarter of 2022;

•a net gain of $227 million in the first nine months of 2022;

•a net loss of $18 million in the third quarter of 2021; and

•a net loss of $94 million in the first nine months of 2021.

The remaining amounts were reclassified from OCI into OID. Based on quarter-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax gain of $1 billion within the next 12 months into income. The maximum length of time over which we are hedging our exposure to the variability in future foreign exchange cash flows is approximately 21 years and relates to foreign currency debt.

(c)The amounts reclassified from OCI were reclassified into OID.

(d)Short-term borrowings and long-term debt include foreign currency borrowings, which are used in net investment hedges. The related short-term borrowings’ carrying value as of December 31, 2021 was $1.1 billion. The related long-term debt carrying values as of October 2, 2022 and December 31, 2021 were $726 million and $844 million, respectively.


The following summarizes cumulative basis adjustments to our debt in fair value hedges:
	October 2, 2022						December 31, 2021
			Cumulative Amount of Fair Value Hedging Adjustment Increase/(Decrease) to Carrying Amount						Cumulative Amount of Fair Value Hedging Adjustment Increase/(Decrease) to Carrying Amount
(MILLIONS)	Carrying Amount of Hedged Assets/Liabilities(a)		Active Hedging Relationships		Discontinued Hedging Relationships		Carrying Amount of Hedged Assets/Liabilities(a)		Active Hedging Relationships		Discontinued Hedging Relationships


Short-term borrowings, including current portion of long-term debt	$	—	$	—	$	16	$	—	$	—	$	—

Long-term debt	$	2,235	$	(330)	$	1,061	$	2,233	$	16	$	1,154

(a)Carrying amounts exclude the cumulative amount of fair value hedging adjustments.

F. Credit Risk

A significant portion of our trade accounts receivable balances are due from wholesalers and governments. For additional information on our trade accounts receivables with significant customers, see Note 13C below and Note 17C in our 2021 Form 10-K.

As of October 2, 2022, the largest investment exposures in our portfolio represent primarily sovereign debt instruments issued by Germany, the U.S., the Netherlands, Japan, the U.K., France, and Canada, as well as money market funds primarily invested in U.S. Treasury and government debt.

With respect to our derivative financial instrument agreements with financial institutions, we do not expect to incur a significant loss from failure of any counterparty. Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements with credit-support annexes that contain zero threshold provisions requiring collateral to be exchanged daily depending on levels of exposure. As a result, there are no significant concentrations of credit risk with any individual financial institution. As of October 2, 2022, the aggregate fair value of these derivative financial instruments that are in a net payable position was $595 million, for which we have posted collateral of $612 million with a corresponding amount reported in Short-term investments. As of October 2, 2022, the aggregate fair value of our derivative financial instruments that are in a net receivable position was $1.5 billion, for which we have received collateral of $1.5 billion with a corresponding amount reported in Short-term borrowings, including current portion of long-term debt.