Loans Payable, Long-Term Debt and Leases

12 Months Ended

Dec. 31, 2019

Loans Payable, Long-Term Debt and Other Commitments

Loans Payable, Long-Term Debt and Leases

Loans Payable

Loans payable at December 31, 2019 included $1.9 billion of notes due in 2020, $1.4 billion of commercial paper and $226 million of long-dated notes that are subject to repayment at the option of the holders. Loans payable at December 31, 2018 included $5.1 billion of commercial paper and $149 million of long-dated notes that are subject to repayment at the option of the holders. The weighted-average interest rate of commercial paper borrowings was 2.23% and 2.09% for the years ended December 31, 2019 and 2018, respectively.

Long-Term Debt

Long-term debt at December 31 consisted of:



	2019		2018
2.75% notes due 2025	$	2,492	$	2,490
3.70% notes due 2045	1,975		1,974
2.80% notes due 2023	1,747		1,745
3.40% notes due 2029	1,732		—
4.00% notes due 2049	1,468		—
2.35% notes due 2022	1,248		1,214
4.15% notes due 2043	1,238		1,237
3.875% notes due 2021	1,151		1,132
1.125% euro-denominated notes due 2021	1,113		1,134
1.875% euro-denominated notes due 2026	1,107		1,127
2.40% notes due 2022	1,010		983
3.90% notes due 2039	982		—
2.90% notes due 2024	745		—
6.50% notes due 2033	722		726
0.50% euro-denominated notes due 2024	555		565
1.375% euro-denominated notes due 2036	551		561
2.50% euro-denominated notes due 2034	550		560
3.60% notes due 2042	490		490
6.55% notes due 2037	412		414
5.75% notes due 2036	338		338
5.95% debentures due 2028	306		306
5.85% notes due 2039	271		270
6.40% debentures due 2028	250		250
6.30% debentures due 2026	135		135
1.85% notes due 2020	—		1,231
Floating-rate notes due 2020	—		699
Other	148		225
	$	22,736	$	19,806

Other (as presented in the table above) includes $147 million and $223 million at December 31, 2019 and 2018, respectively, of borrowings at variable rates that resulted in effective interest rates of 2.54% and 2.27% for 2019 and 2018, respectively.

With the exception of the 6.30% debentures due 2026, the notes listed in the table above are redeemable in whole or in part, at Merck’s option at any time, at varying redemption prices.

In March 2019, the Company issued $5.0 billion principal amount of senior unsecured notes consisting of $750 million of 2.90% notes due 2024, $1.75 billion of 3.40% notes due 2029, $1.0 billion of 3.90% notes due 2039, and $1.5 billion of 4.00% notes due 2049. The Company used the net proceeds from the offering of $5.0 billion for general corporate purposes, including the repayment of outstanding commercial paper borrowings.

Effective as of November 3, 2009, the Company executed a full and unconditional guarantee of the then existing debt of its subsidiary Merck Sharp & Dohme Corp. (MSD) and MSD executed a full and unconditional guarantee of the then existing debt of the Company (excluding commercial paper), including for payments of principal and interest. These guarantees do not extend to debt issued subsequent to that date.

Certain of the Company’s borrowings require that Merck comply with covenants and, at December 31, 2019, the Company was in compliance with these covenants.

The aggregate maturities of long-term debt for each of the next five years are as follows: 2020, $1.9 billion; 2021, $2.3 billion; 2022, $2.3 billion; 2023, $1.7 billion; 2024, $1.3 billion.

The Company has a $6.0 billion credit facility that matures in June 2024. The facility provides backup liquidity for the Company’s commercial paper borrowing facility and is to be used for general corporate purposes. The Company has not drawn funding from this facility.

Leases

As discussed in Note 1, on January 1, 2019, Merck adopted new guidance for the accounting and reporting of leases. The Company has operating leases primarily for manufacturing facilities, research and development facilities, corporate offices, employee housing, vehicles and certain equipment. As permitted under the transition guidance in ASC 842, the Company elected a package of practical expedients which, among other provisions, allowed the Company to carry forward historical lease classifications. The Company determines if an arrangement is a lease at inception. When evaluating contracts for embedded leases, the Company exercises judgment to determine if there is an explicit or implicit identified asset in the contract and if Merck controls the use of that asset. Embedded leases, primarily associated with contract manufacturing organizations, are immaterial.

Under ASC 842 transition guidance, Merck elected the hindsight practical expedient to determine the lease term for existing leases, which permits companies to consider available information prior to the effective date of the new guidance as to the actual or likely exercise of options to extend or terminate the lease. The lease term includes options to extend or terminate the lease when it is reasonably certain that Merck will exercise that option. Real estate leases for facilities have an average remaining lease term of eight years, which include options to extend the leases for up to four years where applicable. Vehicle leases are generally in effect for four years. The Company has made an accounting policy election not to record short-term leases (leases with an initial term of 12 months or less) on the balance sheet; however, Merck currently has no short-term leases.

Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease. Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term. Since the Company’s leases do not have a readily determinable implicit discount rate, the Company uses its incremental borrowing rate to calculate the present value of lease payments by asset class. On a quarterly basis, an updated incremental borrowing rate is determined based on the average remaining lease term of each asset class and the Company’s pretax cost of debt for that same term. The updated rates for each asset class are applied prospectively to new leases. As a practical expedient, the Company has made an accounting policy election for all asset classes not to separate lease components (e.g. payments for rent, real estate taxes and insurance costs) from non-lease components (e.g. common-area maintenance costs) in the event that the agreement contains both. Merck includes both the lease and non-lease components for purposes of calculating the right-of-use asset and related lease liability (if the non-lease components are fixed). For vehicle leases and employee housing, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.

Certain of the Company’s lease agreements contain variable lease payments that are adjusted periodically for inflation or for actual operating expense true-ups compared with estimated amounts; however, these amounts are immaterial. Sublease income and activity related to sale and leaseback transactions are immaterial. Merck’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease cost was $339 million in 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $281 million in 2019. Operating lease assets obtained in exchange for lease obligations was $129 million in 2019.

Supplemental balance sheet information related to operating leases is as follows:



December 31	2019
Assets
Other Assets ⁽¹⁾	$	1,073
Liabilities
Accrued and other current liabilities	236
Other Noncurrent Liabilities	768
	$	1,004
Weighted-average remaining lease term (years)	7.4
Weighted-average discount rate	3.2		%

⁽¹⁾ Includes prepaid leases that have no related lease liability.

Maturities of operating leases liabilities are as follows:



2020	$	264
2021	200
2022	168
2023	113
2024	89
Thereafter	297
Total lease payments	1,131
Less: Imputed interest	127
	$	1,004

At December 31, 2019, the Company had entered into additional real estate operating leases that had not yet commenced. The obligations associated with these leases total $538 million, of which $221 million relates to a lease that will commence in April 2020 and has a lease term of 10 years.

As of December 31, 2018, prior to the adoption of ASC 842, the minimum aggregate rental commitments under noncancellable leases were as follows: 2019, $188 million; 2020, $198 million; 2021, $150 million; 2022, $134 million; 2023, $84 million and thereafter, $243 million.