XML 38 R13.htm IDEA: XBRL DOCUMENT

Fair Value Measurements

9 Months Ended

Oct. 01, 2023

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 product 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. Both 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 cross currency interest rate swaps and 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. The Company maintains credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of October 1, 2023, the cumulative amount of cash collateral paid by the Company under the CSA amounted to $1.7 billion net, related to net investment and cash flow hedges. 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 1, 2023, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $42.9 billion, $39.5 billion and $10.0 billion, respectively. As of January 1, 2023, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $41.5 billion, $36.2 billion and $10.0 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. Foreign exchange contracts designated as cash flow hedges are accounted for under the forward method and all gains/losses associated with these contracts will be recognized in the income statement when the hedged item impacts earnings. Changes in the fair value of these derivatives 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 within accumulated other comprehensive income. The portion excluded from effectiveness testing is recorded through interest (income) expense using the spot method. 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.

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.

As of October 1, 2023, the balance of deferred net loss on derivatives included in accumulated other comprehensive income was $626 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 and net investment hedge 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 and hedges for the fiscal third quarters ended October 1, 2023 and October 2, 2022, net of tax:


	October 1, 2023						October 2, 2022
(Dollars in Millions)	Sales		Cost of Products Sold	R&D Expense	Interest (Income) Expense	Other (Income) Expense	Sales	Cost of Products Sold	R&D Expense	Interest (Income) Expense	Other (Income) Expense


The effects of fair value, net investment and cash flow hedging:
Gain (Loss) on fair value hedging relationship:
Interest rate swaps contracts:
Hedged items	$	—	—	—	(61)	—	—	—	—	(322)	—
Derivatives designated as hedging instruments	—		—	—	61	—	—	—	—	322	—

Gain (Loss) on net investment hedging relationship:
Cross currency interest rate swaps contracts:
Amount of gain or (loss) recognized in income on derivative amount excluded from effectiveness testing	—		—	—	31	—	—	—	—	13	—
Amount of gain or (loss) recognized in AOCI	—		—	—	31	—	—	—	—	13	—

Gain (Loss) on cash flow hedging relationship:
Forward foreign exchange contracts:
Amount of gain or (loss) reclassified from AOCI into income	6		102	(5)	—	4	(20)	(83)	53	—	22



Amount of gain or (loss) recognized in AOCI	(11)		(166)	49	—	38	(45)	(94)	91	—	36

Cross currency interest rate swaps contracts:
Amount of gain or (loss) reclassified from AOCI into income	—		—	—	41	—	—	—	—	120	—

Amount of gain or (loss) recognized in AOCI	$	—	—	—	(454)	—	—	—	—	(205)	—

The following table is a summary of the activity related to derivatives and hedges for the fiscal nine months ended October 1, 2023 and October 2, 2022, net of tax:


	October 1, 2023						October 2, 2022
(Dollars in Millions)	Sales		Cost of Products Sold	R&D Expense	Interest (Income) Expense	Other (Income) Expense	Sales	Cost of Products Sold	R&D Expense	Interest (Income) Expense	Other (Income) Expense


The effects of fair value, net investment and cash flow hedging:
Gain (Loss) on fair value hedging relationship:
Interest rate swaps contracts:
Hedged items	$	—	—	—	(1,165)	—	—	—	—	(1,094)	—
Derivatives designated as hedging instruments	—		—	—	1,165	—	—	—	—	1,094	—

Gain (Loss) on net investment hedging relationship:
Cross currency interest rate swaps contracts:
Amount of gain or (loss) recognized in income on derivative amount excluded from effectiveness testing	—		—	—	98	—	—	—	—	102	—
Amount of gain or (loss) recognized in AOCI	—		—	—	98	—	—	—	—	102	—

Gain (Loss) on cash flow hedging relationship:
Forward foreign exchange contracts:
Amount of gain or (loss) reclassified from AOCI into income	3		12	(30)	—	9	(54)	(141)	118	—	(35)



Amount of gain or (loss) recognized in AOCI	(1)		230	20	—	42	(48)	(153)	193	—	(75)

Cross currency interest rate swaps contracts:
Amount of gain or (loss) reclassified from AOCI into income	—		—	—	223	—	—	—	—	342	—

Amount of gain or (loss) recognized in AOCI	$	—	—	—	(469)	—	—	—	—	(273)	—

As of October 1, 2023, and January 1, 2023, the following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustment for fair value hedges:

Line item in the Consolidated Balance Sheet in which the hedged item is included

Carrying Amount of the Hedged Liability

Cumulative Amount of Fair Value Hedging Gain/ (Loss) Included in the Carrying Amount of the Hedged Liability

(Dollars in Millions)

October 1, 2023

January 1, 2023

October 1, 2023

January 1, 2023

Long-term Debt

8,589

8,665

(1,523)

(1,435)

The following table is the effect of derivatives not designated as hedging instruments for the fiscal third quarters ended 2023 and 2022:

Gain/(Loss)
Recognized In
Income on Derivative

(Dollars in Millions)

Location of Gain /(Loss) Recognized in Income on Derivative

Fiscal Third Quarter Ended

Fiscal Nine Months Ended

Derivatives Not Designated as Hedging Instruments

October 1, 2023

October 2, 2022

October 1, 2023

October 2, 2022

Foreign Exchange Contracts

Other (income) expense

—

109

211

The following table is the effect of net investment hedges for the fiscal third quarters ended in 2023 and 2022:



	Gain/(Loss) Recognized In Accumulated OCI			Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income Into Income	Gain/(Loss) Reclassified From Accumulated OCI Into Income
(Dollars in Millions)	October 1, 2023		October 2, 2022		October 1, 2023	October 2, 2022
Debt	$	101	208	Interest (income) expense	—	—
Cross Currency interest rate swaps	$	214	261	Interest (income) expense	—	—

The following table is the effect of net investment hedges for the fiscal nine months ended in 2023 and 2022:



	Gain/(Loss) Recognized In Accumulated OCI			Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income Into Income	Gain/(Loss) Reclassified From Accumulated OCI Into Income
(Dollars in Millions)	October 1, 2023		October 2, 2022		October 1, 2023	October 2, 2022
Debt	$	35	478	Interest (income) expense	—	—
Cross Currency interest rate swaps	$	880	1,134	Interest (income) expense	—	—

The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company has elected to measure equity investments that do not have readily determinable fair

values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The following table is a summary of the activity related to equity investments:


(Dollars in Millions)	January 1, 2023				October 1, 2023
	Carrying Value		Changes in Fair Value Reflected in Net Income (1)	Sales/ Purchases/Other (2)	Carrying Value	Non Current Other Assets
Equity Investments with readily determinable value*	$	576	(813)	4,260	4,023	4,023

Equity Investments without readily determinable value	$	613	(24)	96	685	685

(1) Recorded in Other Income/Expense

(2) Other includes impact of currency

* Includes the 9.5% remaining stake in Kenvue and the $0.6 billion unfavorable change in the fair value of the investment between the separation date and the end of the fiscal quarter.

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. In accordance with ASC 820, a three-level hierarchy was established to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 inputs having the highest priority and Level 3 inputs 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 holds acquisition related contingent liabilities based upon certain regulatory and commercial events, which are classified as Level 3, whose values are determined using discounted cash flow methodologies or similar techniques for which the determination of fair value requires significant judgment or estimations.

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 1, 2023 and January 1, 2023 were as follows:


	October 1, 2023					January 1, 2023
(Dollars in Millions)	Level 1		Level 2	Level 3	Total	Total(1)
Derivatives designated as hedging instruments:
Assets:
Forward foreign exchange contracts	$	—	901	—	901	629
Interest rate contracts (2)	—		1,534	—	1,534	1,534

Total	—		2,435	—	2,435	2,163
Liabilities:
Forward foreign exchange contracts	—		577	—	577	511
Interest rate contracts (2)	—		3,669	—	3,669	2,778

Total	—		4,246	—	4,246	3,289
Derivatives not designated as hedging instruments:
Assets:
Forward foreign exchange contracts	—		58	—	58	38
Liabilities:
Forward foreign exchange contracts	—		47	—	47	68
Other Investments:
Equity investments (3)	4,023		—	—	4,023	576
Debt securities (4)	—		8,407	—	8,407	10,487
Other Liabilities
Contingent consideration (5)	$	—	—	1,178	1,178	1,120


Gross to Net Derivative Reconciliation	October 1, 2023		January 1, 2023
(Dollars in Millions)
Total Gross Assets	$	2,493	2,201
Credit Support Agreement (CSA)	(2,472)		(2,176)
Total Net Asset	21		25

Total Gross Liabilities	4,293		3,357
Credit Support Agreement (CSA)	(4,174)		(3,023)
Total Net Liabilities	$	119	334

Summarized information about changes in liabilities for contingent consideration for the fiscal third quarters ended October 1, 2023 and October 2, 2022 is as follows:



	October 1, 2023		October 2, 2022
(Dollars in Millions)
Beginning Balance	$	1,120	533
Changes in estimated fair value (6)	62		(85)
Additions	—		89
Payments	(4)		(12)
Ending Balance	$	1,178	525

(1)2022 assets and liabilities are all classified as Level 2 with the exception of equity investments of $576 million, which are classified as Level 1 and contingent consideration of $1,120 million, classified as Level 3.

(2) Includes cross currency interest rate swaps and interest rate swaps.

(3) Classified as non-current other assets.

(4) Classified within cash equivalents and current marketable securities.

(5) Includes $1,172 million and $1,116 million, classified as non-current other liabilities as of October 1, 2023 and January 1, 2023, respectively.

(6) Ongoing fair value adjustment amounts are primarily recorded in Research and Development expense.

The Company's cash, cash equivalents and current marketable securities as of October 1, 2023 comprised:


(Dollars in Millions)	Carrying Amount		Gain/(Loss)	Estimated Fair Value	Cash & Cash Equivalents	Current Marketable Securities
Cash	$	3,214	—	3,214	3,214	—

Non-U.S. sovereign securities	150		—	150	150	—
U.S. reverse repurchase agreements	7,261		—	7,261	7,261	—

Corporate debt securities(1)	228		—	228	78	150
Money market funds	3,503		—	3,503	3,503	—
Time deposits(1)	748		—	748	748	—
Subtotal	15,104		—	15,104	14,954	150

			Unrealized Loss
U.S. Gov’t securities	8,062		(1)	8,061	4,728	3,333
U.S. Gov’t Agencies	95		(2)	93	—	93
Other sovereign securities	6		—	6	2	4
Corporate debt securities	247		—	247	44	203
Subtotal available for sale debt(2)	$	8,410	(3)	8,407	4,774	3,633
Total cash, cash equivalents and current marketable securities	$	23,514	(3)	23,511	19,728	3,783

(1) Held to maturity investments are reported at amortized cost and gains or losses are reported in earnings.

(2) Available for sale debt securities are reported at fair value with unrealized gains and losses reported net of taxes in other comprehensive income.

As of the fiscal year ended January 1, 2023, the carrying amount was approximately the same as the estimated fair value.

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 to fund current operations and are classified as either cash equivalents or current marketable securities.

The contractual maturities of the available for sale securities as of October 1, 2023 are as follows:


(Dollars in Millions)	Cost Basis		Fair Value
Due within one year	$	8,400	8,397
Due after one year through five years	10		10
Due after five years through ten years	—		—
Total debt securities	$	8,410	8,407

Financial Instruments not measured at Fair Value

The following financial liabilities are held at carrying amount on the consolidated balance sheet as of October 1, 2023:


(Dollars in Millions)	Carrying Amount		Estimated Fair Value

Financial Liabilities

Current Debt	$	3,870	3,852

Non-Current Debt


5.50% Notes due 2024 (500MM GBP 1.2190)	609		609
2.625% Notes due 2025	750		726
0.55% Notes due 2025	947		916

2.45% Notes due 2026	1,997		1,879
2.95% Notes due 2027	882		937

0.95% Notes due 2027	1,409		1,290
2.90% Notes due 2028	1,497		1,384
1.150% Notes due 2028 (750MM Euro 1.0534)	786		705
6.95% Notes due 2029	298		337
1.30% Notes due 2030	1,604		1,377
4.95% Debentures due 2033	499		507
4.375% Notes due 2033	854		809
1.650% Notes due 2035 (1.5B Euro 1.0534)	1,568		1,282
3.55% Notes due 2036	831		852
5.95% Notes due 2037	994		1,060
3.625% Notes due 2037	1,321		1,261
3.40% Notes due 2038	993		823
5.85% Debentures due 2038	697		735
4.50% Debentures due 2040	541		502
2.10% Notes due 2040	809		639
4.85% Notes due 2041	297		282
4.50% Notes due 2043	496		450
3.70% Notes due 2046	1,977		1,555
3.75% Notes due 2047	787		788
3.50% Notes due 2048	743		564
2.25% Notes due 2050	776		573
2.45% Notes due 2060	1,025		695
Other	64		62
Total Non-Current Debt	$	26,051	23,599

The weighted average effective interest rate on non-current debt is 3.08%.

The excess of the carrying value over the estimated fair value of debt was $1.6 billion at January 1, 2023.

Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.

The current debt balance as of October 1, 2023 includes $2.0 billion of commercial paper which has a weighted average interest rate of 5.31% and a weighted average maturity of approximately two months.

- 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 + Details