FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial instruments include cash and cash equivalents, marketable securities, accounts receivable and payable, debt instruments and derivatives.

Changes in exchange rates and interest rates create exposure to market risk. Certain derivative financial instruments are used when available on a cost-effective basis to hedge the underlying economic exposure. These instruments qualify as cash flow, net investment and fair value hedges upon meeting certain criteria, including effectiveness of offsetting hedged exposures. Changes in fair value of derivatives that do not qualify for hedge accounting are recognized in earnings as they occur. Derivative financial instruments are not used for trading purposes.

Financial instruments are subject to counterparty credit risk which is considered as part of the overall fair value measurement. Counterparty credit risk is monitored on an ongoing basis and mitigated by limiting amounts outstanding with any individual counterparty, utilizing conventional derivative financial instruments and only entering into agreements with counterparties that meet high credit quality standards. The consolidated financial statements would not be materially impacted if any counterparty failed to perform according to the terms of its agreement. Collateral is not required by any party whether derivatives are in an asset or liability position under the terms of the agreements.

Fair Value Measurements – The fair value of financial instruments are classified into one of the following categories:

Level 1 inputs utilize unadjusted quoted prices in active markets accessible at the measurement date for identical assets or liabilities. The fair value hierarchy provides the highest priority to Level 1 inputs.

Level 2 inputs utilize observable prices for similar instruments and quoted prices for identical or similar instruments in non-active markets. Additionally, certain corporate debt securities utilize a third-party matrix pricing model using significant inputs corroborated by market data for substantially the full term of the assets. Equity and fixed income funds are primarily invested in publicly traded securities valued at the respective NAV of the underlying investments. Level 2 derivative instruments are valued using LIBOR yield curves, less credit valuation adjustments, and observable forward foreign exchange rates at the reporting date. Valuations of derivative contracts may fluctuate considerably from volatility in underlying foreign currencies and underlying interest rates driven by market conditions and the duration of the contract.

Level 3 unobservable inputs are used when little or no market data is available. There were no Level 3 financial assets or liabilities as of December 31, 2018 and 2017.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:



	December 31, 2018					December 31, 2017
Dollars in Millions	Level 1		Level 2			Level 1		Level 2
Cash and cash equivalents - Money market and other securities	$	—	$	6,173		$	—	$	4,728
Marketable securities:
Certificates of deposit	—		971			—		141
Commercial paper	—		273			—		50
Corporate debt securities	—		2,379			—		3,548
Equity investments	—		125			—		132
Derivative assets	—		44			—		13
Equity investments	88		266			67		—
Derivative liabilities	—		(31		)	—		(52		)

Available-for-sale Securities

Changes in fair value of equity investments are included in Other income (net) upon adoption of ASU 2016-01 in the first quarter of 2018. The following table summarizes our debt and equity securities, classified as available-for-sale:



	December 31, 2018									December 31, 2017
Dollars in Millions	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
Dollars in Millions	Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
Certificates of deposit	$	971	$	—	$	—		$	971	$	141	$	—	$	—		$	141
Commercial paper	273		—		—			273		50		—		—			50
Corporate debt securities	2,416		—		(37		)	2,379		3,555		3		(10		)	3,548
Equity investments^(a)	—		—		—			—		31		37		(1		)	67
	$	3,660	$	—	$	(37	)	$	3,623	$	3,777	$	40	$	(11	)	$	3,806

Equity investments^(b)								479									132
Total								$	4,102								$	3,938



Dollars in Millions	December 31, 2018		December 31, 2017
Current marketable securities	$	1,973	$	1,391
Non-current marketable securities^(c)	1,775		2,480
Other assets^(a)	354		67
Total	$	4,102	$	3,938


(a)	Includes equity investments with readily determinable fair values not measured using the fair value option as of December 31, 2017.


(b)	Includes equity and fixed income funds measured using the fair value option at December 31, 2017. Refer to “—Note.1 Accounting Policies and Recently Issued Accounting Standards” for more information.


(c)	All non-current marketable securities mature within five years as of December 31, 2018 and December 31, 2017.

Equity investments not measured at fair value and excluded from the above table were limited partnerships and other equity method investments of $114 million at December 31, 2018 and $66 million at December 31, 2017 and other equity investments without readily determinable fair values of $206 million at December 31, 2018 and $152 million at December 31, 2017. These amounts are included in Other assets. Adjustments to equity investments without readily determinable fair values were $19 million resulting from observable price changes for similar securities of the same issuer and were recorded in Other income (net).

The following table summarizes net loss recorded for equity investments with readily determinable fair values held as of December 31, 2018:



	Year Ended December 31,
Dollars in Millions	2018
Net loss recognized	$	(530	)
Less: Net gain recognized for equity investments sold	7
Net unrealized loss on equity investments held	$	(537	)

Qualifying Hedges and Non-Qualifying Derivatives

Cash Flow Hedges — Foreign currency forward contracts are used to hedge certain forecasted intercompany inventory purchases and sales transactions and certain foreign currency transactions. The fair value for contracts designated as cash flow hedges is temporarily reported in Accumulated other comprehensive loss and included in earnings when the hedged item affects earnings. Upon adoption of the amended guidance for derivatives and hedging, the entire change in fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in the derivatives qualifying as cash flow hedges component of Other Comprehensive (Loss)/Income. The net gain or loss on foreign currency forward contracts is expected to be reclassified to net earnings (primarily included in Cost of products sold) within the next 12 months. The notional amount of outstanding foreign currency forward contracts was primarily attributed to the euro of $1.2 billion and Japanese yen of $464 million at December 31, 2018.

The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not significant during all periods presented. Cash flow hedge accounting is discontinued when the forecasted transaction is no longer probable of occurring within 60 days after the originally forecasted date or when the hedge is no longer effective. Assessments to determine whether derivatives designated as qualifying hedges are highly effective in offsetting changes in the cash flows of hedged items are performed at inception and on a quarterly basis. Foreign currency forward contracts not designated as hedging instruments are used to offset exposures in certain foreign currency denominated assets, liabilities and earnings. Changes in the fair value of these derivatives are recognized in earnings as they occur.

Net Investment Hedges — Non-U.S. dollar borrowings of €950 million ($1.1 billion) at December 31, 2018 are designated to hedge euro currency exposures of the net investment in certain foreign affiliates. These borrowings are designated as net investment hedges and recognized in long term debt. The effective portion of foreign exchange gain on the remeasurement of euro debt was $45 million and $48 million in 2018 and 2016, respectively, and a loss of $134 million in 2017, and were recorded in the foreign currency translation component of Accumulated other comprehensive loss with the related offset in long-term debt.

In January 2018, BMS entered into $300 million of cross-currency interest rate swap contracts maturing in December 2022 designated to hedge Japanese yen currency exposures of the Company's net investment in its Japan subsidiary. Contract fair value changes are recorded in the foreign currency translation component of Other Comprehensive (Loss)/Income with a related offset in Pension and other liabilities.

Fair Value Hedges — Fixed to floating interest rate swap contracts are designated as fair value hedges and used as an interest rate risk management strategy to create an appropriate balance of fixed and floating rate debt. The contracts and underlying debt for the hedged benchmark risk are recorded at fair value. The effective interest rate for the contracts is one-month LIBOR (2.50% as of December 31, 2018) plus an interest rate spread ranging from 0.3% to 4.6%. Gains or losses resulting from changes in fair value of the underlying debt attributable to the hedged benchmark interest rate risk are recorded in interest expense with an associated offset to the carrying value of debt. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, all changes in fair value of the swap are recorded in interest expense with an associated offset to the derivative asset or liability on the consolidated balance sheet. As a result, there was no net impact in earnings. When the underlying swap is terminated prior to maturity, the fair value adjustment to the underlying debt is amortized as a reduction to interest expense over the remaining term of the debt.

The following summarizes the fair value of outstanding derivatives:



	December 31, 2018									December 31, 2017
	Asset^(a)				Liability^(b)					Asset^(a)				Liability^(b)
Dollars in Millions	Notional		Fair Value		Notional		Fair Value			Notional		Fair Value		Notional		Fair Value
Derivatives designated as hedging instruments:
Interest rate swap contracts	$	—	$	—	$	755	$	(10	)	$	—	$	—	$	755	$	(6	)
Cross-currency interest rate swap contracts	50		—		250		(5		)	—		—		—		—
Foreign currency forward contracts	1,503		44		496		(10		)	944		12		489		(9		)

Derivatives not designated as hedging instruments:
Foreign currency forward contracts	54		—		600		(6		)	206		1		1,369		(37		)


(a)	Included in prepaid expenses and other and other assets.


(b)	Included in accrued liabilities and pension and other liabilities.

The following table summarizes the financial statement classification and amount of gain/(loss) recognized on hedging instruments:



	Year Ended December 31,
	2018				2017					2016
Dollars in Millions	Cost of products sold		Other income (net)		Cost of products sold		Other income (net)			Cost of products sold			Other income (net)
Interest rate swap contracts	$	—	$	23	$	—	$	31		$	—		$	36
Cross-currency interest rate swap contracts	—		8		—		—			—			—
Foreign currency forward contracts	4		14		12		(52		)	(20		)	(36		)

The following table summarizes the effect of derivative and non-derivative instruments designated as hedging instruments in Other Comprehensive (Loss)/Income:



	Year Ended December 31,
Dollars in Millions	2018			2017			2016
Derivatives qualifying as cash flow hedges
Foreign currency forward contracts gain/(loss):
Recognized in Other Comprehensive (Loss)/Income^(a)	$	86		$	(108	)	$	6
Reclassified to Cost of products sold	(4		)	(12		)	20
Reclassified to Other income (net)	—			36			(8		)

Derivatives qualifying as net investment hedges
Cross-currency interest rate swap contracts loss:
Recognized in Other Comprehensive (Loss)/Income	(5		)	—			—

Non-derivatives qualifying as net investment hedges
Non U.S. dollar borrowings gain/(loss):
Recognized in Other Comprehensive (Loss)/Income	45			(134		)	48


(a)	The amount is expected to be reclassified into earnings in the next 12 months.

Debt Obligations

Short-term debt obligations include:



	December 31,
Dollars in Millions	2018		2017
Commercial paper	$	—	$	299
Non-U.S. short-term borrowings	320		512
Current portion of long-term debt	1,249		—
Other	134		176
Total	$	1,703	$	987

The average amount of commercial paper outstanding was $19 million and $389 million at a weighted-average interest rate of 1.27% and 1.17% during 2018 and 2017, respectively. The maximum amount of commercial paper outstanding was $300 million with no outstanding borrowings at December 31, 2018. The maximum amount of commercial paper outstanding was $1.3 billion with $299 million outstanding borrowings at December 31, 2017.

Long-term debt and the current portion of long-term debt includes:



	December 31,
Dollars in Millions	2018			2017
Principal Value:
1.750% Notes due 2019	$	500		$	500
1.600% Notes due 2019	750			750
2.000% Notes due 2022	750			750
7.150% Notes due 2023	302			302
3.250% Notes due 2023	500			500
1.000% Euro Notes due 2025	655			682
6.800% Notes due 2026	256			256
3.250% Notes due 2027	750			750
1.750% Euro Notes due 2035	655			682
5.875% Notes due 2036	287			287
6.125% Notes due 2038	226			230
3.250% Notes due 2042	500			500
4.500% Notes due 2044	500			500
6.875% Notes due 2097	87			87
0.13% - 5.75% Other - maturing 2019 - 2024	58			59
Subtotal	6,776			6,835

Adjustments to Principal Value:
Fair value of interest rate swap contracts	(10		)	(6		)
Unamortized basis adjustment from swap terminations	201			227
Unamortized bond discounts and issuance costs	(72		)	(81		)
Total	$	6,895		$	6,975

Current portion of long-term debt	$	1,249		$	—
Long-term debt	5,646			6,975

The fair value of long-term debt was $7.1 billion and $7.5 billion at December 31, 2018 and 2017, respectively, valued using Level 2 inputs which are based upon the quoted market prices for the same or similar debt instruments. The fair value of short-term borrowings approximates the carrying value due to the short maturities of the debt instruments.

Senior unsecured notes were issued in registered public offerings in 2017. The notes rank equally in right of payment with all of BMS's existing and future senior unsecured indebtedness and are redeemable in whole or in part, at any time at a predetermined redemption price. The following table summarizes the issuance of long-term debt obligations in 2017 (none in 2018 and 2016):



Dollars in Millions	2017
Principal Value:
1.600% Notes due 2019	$	750
3.250% Notes due 2027	750
Total	$	1,500

Proceeds net of discount and deferred loan issuance costs	$	1,488

Forward starting interest rate swap contracts terminated:
Notional amount	$	750
Realized gain	6
Unrealized loss	(2		)

BMS repaid $750 million of 0.875% Notes at maturity in 2017. The Company repurchased certain long-term debt obligations with interest rates ranging from 5.875% to 6.875% in 2017. The following summarizes the debt redemption activity:



Dollars in Millions	2017
Principal amount	$	337
Carrying value	366
Debt redemption price	474
Loss on debt redemption^(a)	109


(a)	Including acceleration of debt issuance costs, gain on previously terminated interest rate swap contracts and other related fees.

Interest payments were $212 million in 2018, $215 million in 2017 and $191 million in 2016 net of amounts received from interest rate swap contracts.

At December 31, 2018, the Company had three separate revolving credit facilities totaling $5.0 billion from a syndicate of lenders including two $1.5 billion facilities expiring in September 2022 and July 2023 that are extendable annually by one year on the anniversary date with the consent of the lenders. In January 2019, an existing 364 day $2.0 billion facility expiring in March 2019 was replaced with a new 364 day $2.0 billion facility expiring in January 2020 and a new three-year $1.0 billion facility expiring in January 2022 was entered into. All credit facilities provide for customary terms and conditions with no financial covenants. No borrowings were outstanding under any revolving credit facility at December 31, 2018 or 2017.

Available financial guarantees provided in the form of bank overdraft facilities, stand-by letters of credit and performance bonds were approximately $1.0 billion at December 31, 2018. Stand-by letters of credit are issued through financial institutions in support of guarantees for various obligations. Performance bonds are issued to support a range of ongoing operating activities, including sale of products to hospitals and foreign ministries of health, bonds for customs, duties and value added tax and guarantees related to miscellaneous legal actions.