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Fair Value Measurements | 9 Months Ended
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Oct. 02, 2016
Fair Value Disclosures [Abstract] |
Fair Value Measurements | FAIR VALUE MEASUREMENTS The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany products and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. The Company also uses equity collar contracts to manage exposure to market risk associated with certain equity investments. All three types of derivatives are designated as cash flow hedges. Additionally, the Company uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate borrowings. These derivatives are designated as fair value hedges. The Company uses forward foreign exchange contracts designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward foreign exchange contracts are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features or requirements to post collateral (excluding equity collar contracts) by either the Company or the counter-party. For equity collar contracts, the Company pledged the underlying hedged marketable equity securities to the counter-party as collateral. On an ongoing basis, the Company monitors counter-party credit ratings. The Company considers credit non-performance risk to be low, because the Company primarily enters into agreements with commercial institutions that have at least an investment grade credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this footnote for receivables and payables with these commercial institutions. As of October 2, 2016, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps, interest rate swaps and equity collar contracts of $35.0 billion, $2.3 billion, $2.2 billion, and $0.4 billion respectively. All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction. The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains and losses associated with interest rate swaps and changes in fair value of hedged debt attributable to changes in interest rates are recorded to interest expense in the period in which they occur. Gains and losses on net investment hedges are accounted for through the currency translation account. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings in Other (income) expense, net for forward foreign exchange contracts, cross currency interest rate swaps, net investment hedges and equity collar contracts. For interest rate swaps designated as fair value hedges, hedge ineffectiveness, if any, is included in current period earnings within interest expense. For the current reporting period, hedge ineffectiveness associated with interest rate swaps was not material. During the fiscal second quarter of 2016, the Company designated its Euro denominated notes issued in May 2016 with due dates ranging from 2022 to 2035 as a net investment hedge of the Company's investments in certain of its international subsidiaries that use the Euro as their functional currency in order to reduce the volatility caused by changes in exchange rates. During the fiscal third quarter of 2016, the change in the carrying value due to remeasurement of these Euro notes resulted in a $76 million pretax gain reflected in foreign currency translation adjustment, within the Consolidated Statements of Comprehensive Income. As of October 2, 2016, the balance of deferred net losses on derivatives included in accumulated other comprehensive income was $364 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding interest rate contracts, net investment hedges and equity collar contracts. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative. The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal third quarters in 2016 and 2015:
|  | Gain/(Loss) Recognized In Accumulated OCI(1) |  | Gain/(Loss) Reclassified From Accumulated OCI Into Income(1) |  | Gain/(Loss) Recognized In Other Income/Expense(2)
(Dollars in Millions) |  | Fiscal Third Quarters Ended
Cash Flow Hedges By Income Statement Caption |  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
Sales to customers(3) |  | $ | (12 | ) |  | 3 |  |  | (8 | ) |  | (24 | ) |  | (1 | ) |  | (3 | )
Cost of products sold(3) |  | (4 | ) |  | 222 |  |  | 13 |  |  | (34 | ) |  | (4 | ) |  | 1 |
Research and development expense(3) |  | (5 | ) |  | (10 | ) |  | (2 | ) |  | 7 |  |  | 1 |  |  | — |
Interest (income)/Interest expense, net(4) |  | 29 |  |  | (13 | ) |  | 12 |  |  | 1 |  |  | — |  |  | — |
Other (income) expense, net(3) (5) |  | (4 | ) |  | (42 | ) |  | (12 | ) |  | 12 |  |  | — |  |  | (1 | )
Total |  | $ | 4 |  |  | 160 |  |  | 3 |  |  | (38 | ) |  | (4 | ) |  | (3 | )
The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal nine months in 2016 and 2015:
|  | Gain/(Loss) Recognized In Accumulated OCI(1) |  | Gain/(Loss) Reclassified From Accumulated OCI Into Income(1) |  | Gain/(Loss) Recognized In Other Income/Expense(2)
(Dollars in Millions) |  | Fiscal Nine Months Ended
Cash Flow Hedges By Income Statement Caption |  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015 |  | October 2, 2016 |  | September 27, 2015
Sales to customers(3) |  | $ | (39 | ) |  | (52 | ) |  | (29 | ) |  | (95 | ) |  | (1 | ) |  | (5 | )
Cost of products sold(3) |  | (226 | ) |  | 106 |  |  | 5 |  |  | 82 |  |  | (10 | ) |  | 15 |
Research and development expense(3) |  | (100 | ) |  | (13 | ) |  | (98 | ) |  | (2 | ) |  | — |  |  | — |
Interest (income)/Interest expense, net(4) |  | 38 |  |  | (42 | ) |  | 27 |  |  | (2 | ) |  | — |  |  | — |
Other (income) expense, net(3) (5) |  | (110 | ) |  | 27 |  |  | (14 | ) |  | 54 |  |  | (3 | ) |  | — |
Total |  | $ | (437 | ) |  | 26 |  |  | (109 | ) |  | 37 |  |  | (14 | ) |  | 10 |
All amounts shown in the table above are net of tax. (1) Effective portion (2) Ineffective portion (3) Forward foreign exchange contracts (4) Cross currency interest rate swaps (5) Includes equity collar contracts For the fiscal third quarters ended October 2, 2016 and September 27, 2015, a gain of $35 million and a loss of $8 million, respectively, was recognized in Other (income) expense, net, relating to forward foreign exchange contracts not designated as hedging instruments. For the fiscal nine months ended October 2, 2016 and September 27, 2015, a loss of $6 million and a gain of $32 million, respectively, was recognized in Other (income) expense, net, relating to forward foreign exchange contracts not designated as hedging instruments. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest. The fair value of a derivative financial instrument (i.e., forward foreign exchange contracts, interest rate contracts) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. Dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 and debt securities which are classified as Level 2. The Company did not have any other significant financial assets or liabilities which would require revised valuations under this standard that are recognized at fair value. The following three levels of inputs are used to measure fair value: Level 1 — Quoted prices in active markets for identical assets and liabilities. Level 2 — Significant other observable inputs. Level 3 — Significant unobservable inputs. The Company’s significant financial assets and liabilities measured at fair value as of October 2, 2016 and January 3, 2016 were as follows:
|  | October 2, 2016 |  |  |  | January 3, 2016
(Dollars in Millions) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Total(1)
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |
Forward foreign exchange contracts(7) |  | $ | — |  |  | 222 |  |  | — |  |  | 222 |  |  | 452 |
Interest rate contracts (2)(4)(7) |  | — |  |  | 50 |  |  | — |  |  | 50 |  |  | 28 |
Total |  | — |  |  | 272 |  |  | — |  |  | 272 |  |  | 480 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Forward foreign exchange contracts(8) |  | — |  |  | 542 |  |  | — |  |  | 542 |  |  | 358 |
Interest rate contracts (3)(4)(8) |  | — |  |  | 309 |  |  | — |  |  | 309 |  |  | 241 |
Equity collar contracts (8)(9) |  | — |  |  | 95 |  |  | — |  |  | 95 |  |  | — |
Total |  | — |  |  | 946 |  |  | — |  |  | 946 |  |  | 599 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |
Forward foreign exchange contracts(7) |  | — |  |  | 14 |  |  | — |  |  | 14 |  |  | 33 |
Liabilities: |  |  |  |  |  |  |  |  |  |
Forward foreign exchange contracts(8) |  | — |  |  | 33 |  |  | — |  |  | 33 |  |  | 41 |
Available For Sale Other Investments: |  |  |  |  |  |  |  |  |  |
Equity investments(5) |  | 1,332 |  |  | — |  |  | — |  |  | 1,332 |  |  | 1,494 |
Debt securities(6) |  | $ | — |  |  | 12,237 |  |  | — |  |  | 12,237 |  |  | 8,316 |
(1) | 2015 assets and liabilities are all classified as Level 2 with the exception of equity investments of $1,494 million, which are classified as Level 1.
(2) | Includes $35 million and $20 million of non-current other assets for October 2, 2016 and January 3, 2016, respectively.
(3) | Includes $309 million and $239 million of non-current other liabilities for October 2, 2016 and January 3, 2016, respectively.
(4) | Includes cross currency interest rate swaps and interest rate swaps.
(5) | Classified as non-current other assets with the exception of $345 million of current other assets for October 2, 2016. The carrying amount of the equity investments were $544 million and $528 million as of October 2, 2016 and January 3, 2016, respectively. The unrealized gains were $802 million and $979 million as of October 2, 2016 and January 3, 2016, respectively. The unrealized losses were $14 million and $13 million as of October 2, 2016 and January 3, 2016, respectively.
(6) | Classified as current marketable securities.
(7) | Classified as other current assets.
(8) | Classified as accounts payable.
(9) | Includes $16 million of non-current other liabilities for October 2, 2016.
The Company's cash, cash equivalents and current marketable securities as of October 2, 2016 comprised:
| October 2, 2016
(Dollars in Millions) | Carrying Amount |  | Unrecognized Gain |  | Unrecognized Loss |  | Estimated Fair Value |  | Cash & Cash Equivalents |  | Current Marketable Securities
Cash | $ | 1,971 |  |  | — |  |  | — |  |  | 1,971 |  |  | 1,971 |  |  |
U.S. Gov't Securities(1) | 10,498 |  |  | 1 |  |  | — |  |  | 10,499 |  |  | 6,997 |  |  | 3,501 |
Other Sovereign Securities(1) | 3,385 |  |  | — |  |  | — |  |  | 3,385 |  |  | 952 |  |  | 2,433 |
U.S. Reverse repurchase agreements(1) | 5,883 |  |  | — |  |  | — |  |  | 5,883 |  |  | 4,882 |  |  | 1,001 |
Other Reverse repurchase agreements(1) | 96 |  |  | — |  |  | — |  |  | 96 |  |  | 96 |  |  |
Corporate debt securities(1) | 3,501 |  |  | 1 |  |  | — |  |  | 3,502 |  |  | 790 |  |  | 2,711 |
Money market funds | 1,448 |  |  | — |  |  | — |  |  | 1,448 |  |  | 1,448 |  |  |
Time deposits(1) | 1,069 |  |  | — |  |  | — |  |  | 1,069 |  |  | 1,069 |  |  |
Subtotal | 27,851 |  |  | 2 |  |  | — |  |  | 27,853 |  |  | 18,205 |  |  | 9,646 |
|  |  | Unrealized Gain |  | Unrealized Loss |  |  |  |  |  |
Gov't securities | 10,235 |  |  | 120 |  |  | (1 | ) |  | 10,354 |  |  | — |  |  | 10,354 |
Other Sovereign Securities | 91 |  |  | — |  |  | — |  |  | 91 |  |  | — |  |  | 91 |
Corporate debt securities | 1,782 |  |  | 11 |  |  | (1 | ) |  | 1,792 |  |  | — |  |  | 1,792 |
Equity investments | 50 |  |  | 314 |  |  | (19 | ) |  | 345 |  |  | — |  |  | 345 |
Subtotal Available for Sale(2) | $ | 12,158 |  |  | 445 |  |  | (21 | ) |  | 12,582 |  |  | — |  |  | 12,582 |
Total cash, cash equivalents and current marketable securities |  |  |  |  |  |  |  |  |  |  |  |  | 18,205 |  |  | 22,228 |
(1) Held to maturity investments are reported at amortized cost and gains or losses are reported in earnings. (2) Available for sale securities are reported at fair value with unrealized gains and losses reported net of taxes in other comprehensive income. Fair value of government securities and obligations and corporate debt securities was estimated using quoted broker prices and significant other observable inputs. The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. Available for sale securities with stated maturities of greater than one year from the date of purchase are available for current operations and are classified as current marketable securities. The estimated fair value was the same as the amortized cost as of January 3, 2016. The contractual maturities of the available for sale securities at October 2, 2016 are as follows:
(Dollars in Millions) |  | Cost Basis |  | Fair Value
Due within one year |  | $ | 475 |  |  | 475 |
Due after one year through five years |  | 11,445 |  |  | 11,575 |
Due after five years through ten years |  | 188 |  |  | 187 |
Total debt securities |  | $ | 12,108 |  |  | 12,237 |
Financial Instruments not measured at Fair Value: The following financial liabilities are held at carrying amount on the consolidated balance sheet as of October 2, 2016:
(Dollars in Millions) |  | Carrying Amount |  | Estimated Fair Value
Financial Liabilities |  |  |  |
Current Debt |  | $ | 3,443 |  |  | 3,443 |
Non-Current Debt |  |  |  |
1.125% Notes due 2017 |  | 703 |  |  | 705 |
5.15% Debentures due 2018 |  | 899 |  |  | 958 |
1.65% Notes due 2018 |  | 608 |  |  | 616 |
4.75% Notes due 2019 (1B Euro 1.1198) |  | 1,115 |  |  | 1,287 |
1.875% Notes due 2019 |  | 511 |  |  | 524 |
0.89% Notes due 2019 |  | 299 |  |  | 300 |
1.125% Notes due 2019 |  | 699 |  |  | 700 |
3% Zero Coupon Convertible Subordinated Debentures due in 2020 |  | 94 |  |  | 152 |
2.95% Debentures due 2020 |  | 545 |  |  | 578 |
3.55% Notes due 2021 |  | 447 |  |  | 491 |
2.45% Notes due 2021 |  | 349 |  |  | 367 |
1.65% Notes due 2021 |  | 997 |  |  | 1,013 |
0.250% Notes due 2022 (1B Euro 1.1198) |  | 1,116 |  |  | 1,132 |
6.73% Debentures due 2023 |  | 249 |  |  | 335 |
3.375% Notes due 2023 |  | 807 |  |  | 875 |
2.05% Notes due 2023 |  | 497 |  |  | 507 |
0.650% Notes due 2024 (750MM Euro 1.1198) |  | 834 |  |  | 863 |
5.50% Notes due 2024 (500 MM GBP 1.3000) |  | 643 |  |  | 868 |
2.45% Notes due 2026 |  | 1,989 |  |  | 2,059 |
1.150% Notes due 2028 (750MM Euro 1.1198) |  | 830 |  |  | 886 |
6.95% Notes due 2029 |  | 296 |  |  | 440 |
4.95% Debentures due 2033 |  | 497 |  |  | 635 |
4.375% Notes due 2033 |  | 857 |  |  | 1,026 |
1.650% Notes due 2035 (1.5B Euro 1.1198) |  | 1,660 |  |  | 1,884 |
3.55% Notes due 2036 |  | 987 |  |  | 1,098 |
5.95% Notes due 2037 |  | 991 |  |  | 1,457 |
5.85% Debentures due 2038 |  | 695 |  |  | 1,016 |
4.50% Debentures due 2040 |  | 537 |  |  | 674 |
4.85% Notes due 2041 |  | 296 |  |  | 390 |
4.50% Notes due 2043 |  | 495 |  |  | 624 |
3.70% Notes due 2046 |  | 1,970 |  |  | 2,213 |
Other |  | 34 |  |  | 34 |
Total Non-Current Debt |  | $ | 23,546 |  |  | 26,707 |
The weighted average effective interest rate on non-current debt is 3.14%. The excess of the estimated fair value over the carrying value of debt was $1.7 billion at January 3, 2016. Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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