FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2023

Financial Instruments and Fair Value Measurements

FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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


	September 30, 2023						December 31, 2022
Dollars in millions	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Cash and cash equivalents
Money market and other securities	$	—	$	5,545	$	—	$	—	$	7,770	$	—
Marketable debt securities
Certificates of deposit	—		2		—		—		32		—
Commercial paper	—		29		—		—		98		—
Corporate debt securities	—		442		—		—		—		—
U.S. Treasury securities	—		23		—		—		—		—
Derivative assets	—		467		—		—		305		—
Equity investments	291		55		—		424		680		—
Derivative liabilities	—		120		—		—		213		—
Contingent consideration liability
Contingent value rights	4		—		—		5		—		—
Other acquisition related contingent consideration	—		—		9		—		—		24

As further described in "Item 8. Financial Statements and Supplementary Data—Note 9. Financial Instruments and Fair Value Measurements" in the Company's 2022 Form 10-K, the Company's fair value estimates use inputs that are either (1) quoted prices for identical assets or liabilities in active markets (Level 1 inputs); (2) observable prices for similar assets or liabilities in active markets or for identical or similar assets or liabilities in markets that are not active (Level 2 inputs); or (3) unobservable inputs (Level 3 inputs). The fair value of Level 2 equity investments is adjusted for characteristics specific to the security and is not adjusted for contractual sale restrictions. Equity investments subject to contractual sale restrictions were not material as of December 31, 2022 and the restrictions expired in April 2023.

Marketable Debt Securities

The following table summarizes marketable debt securities:


	September 30, 2023								December 31, 2022
Dollars in millions	Amortized Cost		Gross Unrealized						Amortized Cost		Gross Unrealized
			Gains		Losses		Fair Value				Gains		Losses		Fair Value
Certificates of deposit	$	2	$	—	$	—	$	2	$	32	$	—	$	—	$	32
Commercial paper	29		—		—		29		98		—		—		98
Corporate debt securities	445		—		(3)		442		—		—		—		—
U.S. Treasury securities	23		—		—		23		—		—		—		—
Total marketable debt securities(a)	$	499	$	—	$	(3)	$	496	$	130	$	—	$	—	$	130

(a) All marketable debt securities mature within three years as of September 30, 2023, and one year as of December 31, 2022.

Equity Investments

The following summarizes the carrying amount of equity investments:


Dollars in millions	September 30, 2023		December 31, 2022
Equity investments with readily determinable fair values	$	346	$	1,104
Equity investments without readily determinable fair values	654		537
Limited partnerships and other equity method investments	557		546
Total equity investments	$	1,557	$	2,187

The following summarizes the activity related to equity investments. Changes in fair value of equity investments are included in Other (income)/expense, net.


	Three Months Ended September 30,		Nine Months Ended September 30,
Dollars in millions	2023	2022	2023	2022
Equity investments with readily determinable fair values
Net loss recognized	15	75	203	927
Less: net (gain) loss recognized on investments sold	(86)	(1)	2	(17)
Net unrealized loss recognized on investments still held	101	76	201	944

Equity investments without readily determinable fair values
Upward adjustments	(3)	(64)	(9)	(70)
Impairments and downward adjustments	6	—	6	2
Equity in net (income)/loss of affiliates	(18)	3	13	107

Total equity investment losses	—	14	213	966

Cumulative upwards adjustments and cumulative impairments and downward adjustments based on observable price changes in equity investments without readily determinable fair values still held as of September 30, 2023 were $189 million and $67 million, respectively.

Qualifying Hedges and Non-Qualifying Derivatives

Cash Flow Hedges

BMS enters into foreign currency forward and purchased local currency put option contracts (foreign exchange contracts) to hedge certain forecasted intercompany inventory sales and certain other foreign currency transactions. The objective of these foreign exchange contracts is to reduce variability caused by changes in foreign exchange rates that would affect the U.S. dollar value of future cash flows derived from foreign currency denominated sales, primarily the euro and Japanese yen. The fair values of these derivative contracts are recorded as either assets (gain positions) or liabilities (loss positions) in the consolidated balance sheets. Changes in fair value for these foreign exchange contracts, which are designated as cash flow hedges, are temporarily recorded in Accumulated other comprehensive loss ("AOCL") and reclassified to net earnings when the hedged item affects earnings (typically within the next 24 months). As of September 30, 2023, assuming market rates remain constant through contract maturities, we expect to reclassify pre-tax gains of $179 million into Cost of products sold for our foreign exchange contracts out of AOCL during the next 12 months. The notional amount of outstanding foreign currency exchange contracts was primarily $5.0 billion for the euro contracts and $1.1 billion for Japanese yen contracts as of September 30, 2023.

BMS also enters into cross-currency swap contracts to hedge exposure to foreign currency exchange rate risk associated with its long-term debt denominated in euros. These contracts convert interest payments and principal repayment of the long-term debt to U.S. dollars from euros and are designated as cash flow hedges. The unrealized gains and losses on these contracts are reported in AOCL and reclassified to Other (income)/expense, net, in the same periods during which the hedged debt affects earnings. The notional amount of cross-currency swap contracts associated with long-term debt denominated in euros was $1.2 billion as of September 30, 2023.

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. The earnings impact related to discontinued cash flow hedges and hedge ineffectiveness was not material during all periods presented. Foreign currency exchange contracts not designated as a cash flow hedge 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

Cross-currency swap contracts and foreign currency forward contracts of $1.8 billion as of September 30, 2023 are designated to hedge currency exposure of BMS's net investment in its foreign subsidiaries. Contract fair value changes are recorded in the foreign currency translation component of AOCL with a related offset in derivative asset or liability in the consolidated balance sheets. The notional amount of outstanding cross-currency swap and foreign currency forward contracts was primarily attributed to the Japanese yen of $650 million and euro of $794 million as of September 30, 2023.

During the first quarter of 2023, the Company de-designated its remaining net investment hedge in debt denominated in euros of €375 million. The related net investment hedge was entered into to hedge euro currency exposures of the net investment in certain foreign affiliates and was recognized in Long-term debt. The effective portion of foreign exchange gain or loss on the remeasurement of debt denominated in euros was included in the foreign currency translation component of AOCL with the related offset in Long-term debt.

During the three and nine months ended September 30, 2023, the amortization of gains related to the portion of our net investment hedges that was excluded from the assessment of effectiveness was not material.

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. 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 align with 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 in the consolidated balance sheets. As a result, there was no net impact in earnings. If the underlying swap is terminated prior to maturity, then the fair value adjustment to the underlying debt is amortized as a reduction to interest expense over the remaining term of the debt.

Derivative cash flows, with the exception of net investment hedges, are principally classified in the operating section of the consolidated statements of cash flows, consistent with the underlying hedged item. Cash flows related to net investment hedges are classified in investing activities.

The following table summarizes the fair value and the notional values of outstanding derivatives:


	September 30, 2023								December 31, 2022
	Asset(a)				Liability(b)				Asset(a)				Liability(b)
Dollars in millions	Notional		Fair Value		Notional		Fair Value		Notional		Fair Value		Notional		Fair Value
Designated as cash flow hedges
Foreign currency exchange contracts	$	6,420	$	326	$	926	$	(26)	$	5,771	$	271	$	2,281	$	(80)
Cross-currency swap contracts	584		12		626		(14)		—		—		584		(7)
Designated as net investment hedges
Foreign currency exchange contracts	416		20		—		—		—		—		—		—
Cross-currency swap contracts	481		23		947		(18)		72		1		1,157		(78)
Designated as fair value hedges
Interest rate swap contracts	—		—		3,755		(24)		—		—		255		(18)
Not designated as hedges
Foreign currency exchange contracts	2,048		86		1,486		(21)		1,564		33		1,703		(19)
Total return swap contracts (c)	—		—		359		(17)		—		—		322		(11)

(a) Included in Other current assets and Other non-current assets.

(b) Included in Other current liabilities and Other non-current liabilities.

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


	Three Months Ended September 30, 2023				Nine Months Ended September 30, 2023
Dollars in millions	Cost of products sold		Other (income)/expense, net		Cost of products sold		Other (income)/expense, net
Foreign currency exchange contracts	$	(51)	$	(40)	$	(261)	$	(100)
Cross-currency swap contracts	—		26		—		(2)
Interest rate swap contracts	—		—		—		(7)

	Three Months Ended September 30, 2022				Nine Months Ended September 30, 2022
Dollars in millions	Cost of products sold		Other (income)/expense, net		Cost of products sold		Other (income)/expense, net
Foreign currency exchange contracts	$	(195)	$	(61)	$	(408)	$	(136)
Cross-currency swap contracts	—		13		—		5
Interest rate swap contracts	—		(5)		—		(23)

The following table summarizes the effect of derivative and non-derivative instruments designated as hedges in Other comprehensive income:


	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars in millions	2023		2022		2023		2022
Derivatives designated as cash flow hedges
Foreign exchange contracts gain/(loss):
Recognized in Other comprehensive income	$	173	$	548	$	226	$	1,149
Reclassified to Cost of products sold	(51)		(195)		(261)		(408)
Cross-currency swap contracts gain/(loss):
Recognized in Other comprehensive income	(23)		(43)		5		(43)
Reclassified to Other (income)/expense, net	35		20		26		20
Forward starting interest rate swap contract loss:
Reclassified to Other (income)/expense, net	—		—		—		(3)
Derivatives designated as net investment hedges
Cross-currency swap contracts gain/(loss):
Recognized in Other comprehensive income	59		71		94		135
Foreign exchange contracts gain/(loss):
Recognized in Other comprehensive income	18		—		18		—
Non-derivatives designated as net investment hedges
Non-U.S. dollar borrowings gain/(loss):
Recognized in Other comprehensive income	—		40		(10)		123