Derivative instruments

12 Months Ended

Dec. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. To reduce our risks related to such exposures, we use or have used certain derivative instruments, including foreign currency forward, foreign currency option, cross-currency swap, forward interest rate and interest rate swap contracts. We have designated certain of our derivatives as cash flow and fair value hedges; we also have derivatives not designated as hedges. We do not use derivatives for speculative trading purposes.

Cash flow hedges

We are exposed to possible changes in the values of certain anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates primarily associated with our euro-denominated international product sales. The foreign currency exchange rate fluctuation exposure associated with cash inflows from our international product sales is partially offset by corresponding cash outflows from our international operating expenses. To further reduce this exposure, we enter into foreign currency forward contracts to hedge a portion of our projected international product sales up to a maximum of three years into the future; and at any given point in time, a higher percentage of nearer-term projected product sales is being hedged than in successive periods.

As of December 31, 2023, 2022 and 2021, we had outstanding foreign currency forward contracts with aggregate notional amounts of $6.6 billion, $6.0 billion and $5.7 billion, respectively. We have designated these foreign currency forward contracts, which are primarily euro based, as cash flow hedges. Accordingly, we report unrealized gains and losses on these contracts in AOCI in the Consolidated Balance Sheets, and we reclassify them to Product sales in the Consolidated Statements of Income in the same periods during which the hedged transactions affect earnings.

To hedge our exposure to foreign currency exchange rate risk associated with certain of our long-term debt denominated in foreign currencies, we enter into cross-currency swap contracts. Under the terms of such contracts, we paid euros, pounds sterling and Swiss francs and received U.S. dollars for the notional amounts at inception of the contracts; and based on these notional amounts, we exchange interest payments at fixed rates over the lives of the contracts by paying U.S. dollars and receiving euros, pounds sterling and Swiss francs. In addition, we will pay U.S. dollars to and receive euros, pounds sterling and Swiss francs from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged debt, thereby effectively converting the interest payments and principal repayment on the debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges. Accordingly, the unrealized gains and losses on these contracts are reported in AOCI in the Consolidated Balance Sheets and reclassified to Other income (expense), net, in the Consolidated Statements of Income in the same periods during which the hedged debt affects earnings.

The notional amounts and interest rates of our cross-currency swaps as of December 31, 2023, were as follows (notional amounts in millions):


	Foreign currency				U.S. dollars
Hedged notes	Notional amounts		Interest rates		Notional amounts		Interest rates

2.00% 2026 euro Notes	€	750	2.0	%	$	833	3.9	%
5.50% 2026 pound sterling Notes	£	475	5.5	%	$	747	6.0	%
4.00% 2029 pound sterling Notes	£	700	4.0	%	$	1,111	4.6	%

During the first quarter of 2023, our 0.41% 2023 Swiss franc Bonds matured, and the related cross-currency swaps were settled.

In connection with the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate contracts in order to hedge the variability in cash flows due to changes in the applicable U.S. Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, are recognized in AOCI in the Consolidated Balance Sheets and are amortized into Interest expense, net, in the Consolidated Statements of Income over the lives of the associated debt issuances. Amounts expected to be recognized during the subsequent 12 months on forward interest rate contracts are not material.

The unrealized gains and losses recognized in AOCI for our derivative instruments designated as cash flow hedges were as follows (in millions):


	Years ended December 31,
Derivatives in cash flow hedging relationships	2023		2022		2021
Foreign currency forward contracts	$	(14)	$	308	$	373
Cross-currency swap contracts	73		(219)		(214)
Forward interest rate contracts	(31)		(5)		—
Total unrealized gains	$	28	$	84	$	159

Fair value hedges

To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that qualified for and were designated as fair value hedges. These interest rate swap contracts effectively convert fixed-rate coupons to floating-rate SOFR-based coupons over the terms of the related hedge contracts. As of both December 31, 2023 and 2022, we had interest rate swap contracts with aggregate notional amounts of $6.7 billion that hedge certain portions of our long-term debt issuances. See Note 16, Financing arrangements, for information on our interest rate swaps.

For interest rate swap contracts that qualify for and are designated as fair value hedges, we recognize in Interest expense, net, in the Consolidated Statements of Income the unrealized gain or loss on the derivative resulting from the change in fair value during the period, as well as the offsetting unrealized loss or gain of the hedged item resulting from the change in fair value during the period attributable to the hedged risk. If a hedging relationship involving an interest rate swap contract is terminated, the gain or loss realized on contract termination is recorded as an adjustment to the carrying value of the debt and amortized into Interest expense, net, over the remaining life of the previously hedged debt.

The hedged liabilities and related cumulative-basis adjustments for fair value hedges of those liabilities were recorded in the Consolidated Balance Sheets as follows (in millions):


	Carrying amounts of hedged liabilities(1)				Cumulative amounts of fair value hedging adjustments related to the carrying amounts of the hedged liabilities(2)
	December 31,				December 31,
Consolidated Balance Sheets locations	2023		2022		2023		2022
Current portion of long-term debt	$	1,441	$	82	$	41	$	82
Long-term debt	$	4,788	$	6,017	$	(355)	$	(519)

____________

(1)Current portion of long-term debt includes $69 million and $82 million of carrying value with discontinued hedging relationships as of December 31, 2023 and 2022, respectively. Long-term debt includes $288 million and $357 million of carrying value with discontinued hedging relationships as of December 31, 2023 and 2022, respectively.

(2)Current portion of long-term debt includes $69 million and $82 million of hedging adjustments on discontinued hedging relationships as of December 31, 2023 and 2022, respectively. Long-term debt includes $188 million and $257 million of hedging adjustments on discontinued hedging relationships as of December 31, 2023 and 2022, respectively.

Impact of hedging transactions

The following tables summarize the amounts recorded in income and expense line items and the effects thereon from fair value and cash flow hedging, including discontinued hedging relationships (in millions):


	Year ended December 31, 2023
	Product sales		Other income (expense), net		Interest expense, net
Total amounts recorded in income and (expense) line items presented in the Consolidated Statements of Income	$	26,910	$	2,833	$	(2,875)
The effects of cash flow and fair value hedging:
Gains on cash flow hedging relationships reclassified out of AOCI:
Foreign currency forward contracts	$	180	$	—	$	—
Cross-currency swap contracts	$	—	$	42	$	—
(Losses) gains on fair value hedging relationships—interest rate swap agreements:
Hedged items(1)	$	—	$	—	$	(118)
Derivatives designated as hedging instruments	$	—	$	—	$	205


	Year ended December 31, 2022
	Product sales		Other income (expense), net		Interest expense, net
Total amounts recorded in income and (expense) line items presented in the Consolidated Statements of Income	$	24,801	$	(814)	$	(1,406)
The effects of cash flow and fair value hedging:
Gains (losses) on cash flow hedging relationships reclassified out of AOCI:
Foreign currency forward contracts	$	231	$	—	$	—
Cross-currency swap contracts	$	—	$	(233)	$	—
Gains (losses) on fair value hedging relationships—interest rate swap agreements:
Hedged items(1)	$	—	$	—	$	716
Derivatives designated as hedging instruments	$	—	$	—	$	(636)


	Year ended December 31, 2021
	Product sales		Other income (expense), net		Interest expense, net
Total amounts recorded in income and (expense) line items presented in the Consolidated Statements of Income	$	24,297	$	259	$	(1,197)
The effects of cash flow and fair value hedging:
Losses on cash flow hedging relationships reclassified out of AOCI:
Foreign currency forward contracts	$	(8)	$	—	$	—
Cross-currency swap contracts	$	—	$	(245)	$	—

Gains (losses) on fair value hedging relationships—interest rate swap agreements:
Hedged items(1)	$	—	$	—	$	281
Derivatives designated as hedging instruments	$	—	$	—	$	(192)

__________

(1) Gains on hedged items do not completely offset losses on the related designated hedging instruments due to amortization of the cumulative amounts of fair value hedging adjustments included in the carrying amount of the hedged debt for discontinued hedging relationships and the recognition of gains on terminated hedges when the corresponding hedged item was paid down in the period.

No portions of our cash flow hedge contracts were excluded from the assessment of hedge effectiveness. As of December 31, 2023, we expected to reclassify $35 million of net gains on our foreign currency and cross-currency swap contracts out of AOCI and into earnings during the next 12 months.

Derivatives not designated as hedges

To reduce our exposure to foreign currency fluctuations in certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. Most of these exposures are hedged on a month-to-month basis. As of December 31, 2023, 2022 and 2021, the total notional amounts of these foreign currency forward contracts were $457 million, $517 million and $680 million, respectively. Gains and losses recognized in earnings for our derivative instruments not designated as hedging instruments were not material for the years ended December 31, 2023, 2022 and 2021.

Fair values of derivatives

The fair values of derivatives included in the Consolidated Balance Sheets were as follows (in millions):


	Derivative assets			Derivative liabilities
December 31, 2023	Consolidated Balance Sheets locations	Fair values		Consolidated Balance Sheets locations	Fair values
Derivatives designated as hedging instruments:
Foreign currency forward contracts	Other current assets/ Other noncurrent assets	$	145	Accrued liabilities/ Other noncurrent liabilities	$	116
Cross-currency swap contracts	Other current assets/ Other noncurrent assets	—		Accrued liabilities/ Other noncurrent liabilities	405
Interest rate swap contracts	Other current assets/ Other noncurrent assets	—		Accrued liabilities/ Other noncurrent liabilities	571
Forward interest rate contracts	Other current assets/ Other noncurrent assets	—		Accrued liabilities/ Other noncurrent liabilities	—
Total derivatives designated as hedging instruments		145			1,092



Total derivatives		$	145		$	1,092

	Derivative assets			Derivative liabilities
December 31, 2022	Consolidated Balance Sheets locations	Fair values		Consolidated Balance Sheets locations	Fair values
Derivatives designated as hedging instruments:
Foreign currency forward contracts	Other current assets/ Other noncurrent assets	$	287	Accrued liabilities/ Other noncurrent liabilities	$	76
Cross-currency swap contracts	Other current assets/ Other noncurrent assets	54		Accrued liabilities/ Other noncurrent liabilities	541
Interest rate swap contracts	Other current assets/ Other noncurrent assets	—		Accrued liabilities/ Other noncurrent liabilities	776
Forward interest rate contracts	Other current assets/ Other noncurrent assets	—		Accrued liabilities/ Other noncurrent liabilities	5
Total derivatives designated as hedging instruments		341			1,398



Total derivatives		$	341		$	1,398

For additional information, see Note 18, Fair value measurement.

Our derivative contracts that were in liability positions as of December 31, 2023, contain certain credit-risk-related contingent provisions that would be triggered if (i) we were to undergo a change-in-control and (ii) our or the surviving entity’s creditworthiness deteriorates, which is generally defined as having either a credit rating that is below investment grade or a materially weaker creditworthiness after the change-in-control. If these events were to occur, the counterparties would have the right, but not the obligation, to close the contracts under early-termination provisions. In such circumstances, the counterparties could request immediate settlement of these contracts for amounts that approximate the then current fair values of the contracts. In addition, our derivative contracts are not subject to any type of master netting arrangement, and amounts due either to or from a counterparty under the contracts may be offset against other amounts due either to or from the same counterparty only if an event of default or termination, as defined, were to occur.

The cash flow effects of our derivative contracts in the Consolidated Statements of Cash Flows are included in Net cash provided by operating activities, except for the settlement of notional amounts of cross-currency swaps, which are included in Net cash used in financing activities.