Financial Instruments

3 Months Ended

Apr. 04, 2021

A. Fair Value Measurements

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


	April 4, 2021						December 31, 2020
(MILLIONS)	Total		Level 1		Level 2		Total		Level 1		Level 2
Financial assets:
Short-term investments
Classified as equity securities with readily determinable fair values:
Money market funds	$	1,427	$	—	$	1,427	$	567	$	—	$	567

Classified as available-for-sale debt securities:
Government and agency—non-U.S.	6,169		—		6,169		7,719		—		7,719
Government and agency—U.S.	1,221		—		1,221		982		—		982
Corporate and other	902		—		902		1,008		—		1,008
	8,292		—		8,292		9,709		—		9,709
Total short-term investments	9,719		—		9,719		10,276		—		10,276
Other current assets
Derivative assets:
Interest rate contracts	5		—		5		18		—		18
Foreign exchange contracts	389		—		389		234		—		234
Total other current assets	394		—		394		251		—		251
Long-term investments
Classified as equity securities with readily determinable fair values(a)	3,123		3,046		77		2,809		2,776		32

Classified as available-for-sale debt securities:
Government and agency—non-U.S.	9		—		9		6		—		6
Government and agency—U.S.	66		—		66		121		—		121
Corporate and other	—		—		—		—		—		—
	75		—		75		128		—		128
Total long-term investments	3,198		3,046		152		2,936		2,776		160
Other noncurrent assets
Derivative assets:
Interest rate contracts	21		—		21		117		—		117
Foreign exchange contracts	106		—		106		5		—		5
Total derivative assets	127		—		127		122		—		122
Insurance contracts(b)	726		—		726		693		—		693
Total other noncurrent assets	853		—		853		814		—		814
Total assets	$	14,165	$	3,046	$	11,119	$	14,278	$	2,776	$	11,501

Financial liabilities:
Other current liabilities
Derivative liabilities:

Foreign exchange contracts	$	239	$	—	$	239	$	501	$	—	$	501
Total other current liabilities	239		—		239		501		—		501
Other noncurrent liabilities
Derivative liabilities:

Foreign exchange contracts	494		—		494		599		—		599
Total other noncurrent liabilities	494		—		494		599		—		599
Total liabilities	$	732	$	—	$	732	$	1,100	$	—	$	1,100

(a)Long-term equity securities of $168 million as of April 4, 2021 and $190 million as of December 31, 2020 were held in restricted trusts for 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


Carrying values and estimated fair values using a market approach:
	April 4, 2021				December 31, 2020
(MILLIONS)	Carrying Value		Estimated Fair Value at Level 2		Carrying Value		Estimated Fair Value at Level 2
Financial Liabilities
Long-term debt, excluding the current portion	$	35,347	$	40,504	$	37,133	$	45,533

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 April 4, 2021 and December 31, 2020. The fair value measurements of our held-to-maturity debt securities and our 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)	April 4, 2021		December 31, 2020
Short-term investments
Equity securities with readily determinable fair values(a)	$	1,427	$	567
Available-for-sale debt securities	8,292		9,709
Held-to-maturity debt securities	2,180		161
Total Short-term investments	$	11,899	$	10,437

Long-term investments
Equity securities with readily determinable fair values	$	3,123	$	2,809

Available-for-sale debt securities	75		128
Held-to-maturity debt securities	31		37
Private equity securities at cost(b)	467		432
Total Long-term investments	$	3,696	$	3,406
Equity-method investments	16,532		16,856
Total long-term investments and equity-method investments	$	20,228	$	20,262
Held-to-maturity cash equivalents	$	60	$	89

(a)As of April 4, 2021 and December 31, 2020, includes money market funds primarily invested in U.S. Treasury and government debt.

(b)Represent investments in the life sciences sector.

Debt Securities


At April 4, 2021, our debt 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:
	April 4, 2021														December 31, 2020
			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.	$	6,209	$	23	$	(54)	$	6,178	$	6,169	$	9	$	—	$	7,593	$	136	$	(4)	$	7,725
Government and agency––U.S.	1,288		—		(1)		1,287		1,221		66		—		1,104		—		(1)		1,103
Corporate and other	900		3		—		903		902		—		—		1,006		2		—		1,008
Held-to-maturity debt securities
Time deposits and other	423		—		—		423		397		16		10		283		—		—		283
Government and agency––non-U.S.	1,847		—		—		1,847		1,842		4		1		5		—		—		5
Total debt securities	$	10,667	$	25	$	(55)	$	10,637	$	10,531	$	94	$	11	$	9,991	$	138	$	(5)	$	10,124

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
(MILLIONS)		April 4, 2021		March 29, 2020
Net (gains)/losses recognized during the period on equity securities(a)		$	(401)	$	255
Less: Net (gains)/losses recognized during the period on equity securities sold during the period		(28)		(19)
Net unrealized (gains)/losses during the reporting period on equity securities still held at the reporting date(b)		$	(372)	$	274

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

(b)Included in net unrealized gains are observable price changes on equity securities without readily determinable fair values. Since January 1, 2018, there were cumulative impairments and downward adjustments of $87 million and upward adjustments of $61 million. Impairments, downward and upward adjustments were not significant in the first quarters of 2021 and 2020.

C. Short-Term Borrowings


Short-term borrowings include:
(MILLIONS)	April 4, 2021		December 31, 2020
Commercial paper	$	416	$	556
Current portion of long-term debt, principal amount	3,679		2,004
Other short-term borrowings, principal amount(a)	260		145
Total short-term borrowings, principal amount	4,355		2,705
Net fair value adjustments related to hedging and purchase accounting	—		—
Net unamortized discounts, premiums and debt issuance costs	(3)		(2)
Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted	$	4,352	$	2,703

(a)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)	April 4, 2021		December 31, 2020
Total long-term debt, principal amount	$	34,032	$	35,774
Net fair value adjustments related to hedging and purchase accounting	1,512		1,562
Net unamortized discounts, premiums and debt issuance costs	(200)		(207)
Other long-term debt	4		4
Total long-term debt, carried at historical proceeds, as adjusted	$	35,347	$	37,133
Current portion of long-term debt, carried at historical proceeds, as adjusted (not included above)	$	3,676	$	2,002

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. 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, Swedish krona, Canadian dollar and Chinese renminbi. Additionally, we hedge a portion of our forecasted intercompany inventory sales denominated in euro, Japanese yen, Chinese renminbi, Canadian dollar, U.K. pound and Australian dollar for up to two years.

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):
	April 4, 2021						December 31, 2020
			Fair Value						Fair Value
(MILLIONS)	Notional		Asset		Liability		Notional		Asset		Liability
Derivatives designated as hedging instruments:
Foreign exchange contracts(a)	$	22,799	$	408	$	654	$	24,369	$	145	$	1,005
Interest rate contracts	450		26		—		1,950		135		—
			435		654				280		1,005

Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	14,726	86		78		$	15,063	94		95

Total			$	521	$	732			$	373	$	1,100

(a)The notional amount of outstanding foreign exchange contracts hedging our intercompany forecasted inventory sales was $5.1 billion as of April 4, 2021 and $5.0 billion as of December 31, 2020.


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)	April 4, 2021		March 29, 2020		April 4, 2021		March 29, 2020		April 4, 2021		March 29, 2020
Three Months Ended




















Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(b)	$	—	$	—	$	202	$	(529)	$	(268)	$	(46)
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		12		29		9		27

Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	(26)		386		—		—		—		—
Hedged item	26		(386)		—		—		—		—



Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		154		384		—		—
The portion of foreign exchange contracts excluded from the assessment of hedge effectiveness(c)	—		—		(1)		147		29		41

Non-Derivative Financial Instruments in Net Investment Hedge Relationships:(d)
Foreign currency short-term borrowings	—		—		38		8		—		—
Foreign currency long-term debt	—		—		56		45		—		—

Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	42		(59)		—		—		—		—
All other net(c)	—		—		—		(1)		—		—
	$	42	$	(59)	$	460	$	83	$	(230)	$	23

(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 loss of $45 million in the first quarter of 2021; and

•a net gain of $70 million in the first quarter of 2020.

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 loss of $20 million 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 22 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 short-term borrowings carrying value as of April 4, 2021 was $1.2 billion. The long-term debt carrying values as of April 4, 2021 and December 31, 2020 were $872 million and $2.1 billion, respectively.


The following summarizes cumulative basis adjustments for fair value hedges to our long-term debt:
	April 4, 2021						December 31, 2020
			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




Long-term debt	$	494	$	21	$	1,202	$	2,016	$	117	$	1,149

(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 drug wholesalers. For additional information on our trade accounts receivables with significant customers, see Note 13B below and Note 17B in our 2020 Form 10-K.

As of April 4, 2021, the largest investment exposures in our portfolio represent primarily sovereign debt instruments issued by the U.S., U.K., Germany, France, Japan and Canada.

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 (ISDA) 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 April 4, 2021, the aggregate fair value of these derivative financial instruments that are in a net payable position was $613 million, for which we have posted collateral of $675 million with a corresponding amount reported in Short-term investments. As of April 4, 2021, the aggregate fair value of our derivative financial instruments that are in a net receivable position was $53 million, for which we have received collateral of $124 million with a corresponding amount reported in Short-term borrowings, including current portion of long-term debt.