Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Oct. 02, 2021

Fair Value Measurements and Fair Value of Financial Instruments [Text Block]

Note 10. Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of October 2, 2021 and December 31, 2020:


	October 2,		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	2021		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	10,518	$	10,518	$	—	$	—
Investments in common stock, mutual funds and other similar instruments	61		61		—		—
Warrants	18		—		18		—
Insurance contracts	178		—		178		—
Derivative contracts	75		—		75		—
Total Assets	$	10,850	$	10,579	$	271	$	—

Liabilities
Derivative contracts	$	4	$	—	$	4	$	—
Contingent consideration	171		—		—		171
Total Liabilities	$	175	$	—	$	4	$	171


	December 31,		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	2020		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	8,971	$	8,971	$	—	$	—
Investments in common stock, mutual funds and other similar instruments	21		21		—		—
Warrants	7		—		7		—
Insurance contracts	157		—		157		—
Derivative contracts	28		—		28		—
Total Assets	$	9,184	$	8,992	$	192	$	—

Liabilities
Derivative contracts	$	132	$	—	$	132	$	—
Contingent consideration	70		—		—		70
Total Liabilities	$	202	$	—	$	132	$	70

The company uses the Black-Scholes model to value its warrants. The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The company initially measures the fair value of acquisition-related contingent consideration based on amounts expected to be transferred (probability-weighted) discounted to present value. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense. The following table provides a rollforward of the fair value, as determined by level 3 inputs (such as likelihood of achieving production or revenue milestones), of the contingent consideration.


	Three Months Ended				Nine Months Ended
	October 2,		September 26,		October 2,		September 26,
(In millions)	2021		2020		2021		2020
Contingent Consideration
Beginning Balance	$	149	$	53	$	70	$	55
Acquisitions (including assumed balances)	—		—		179		—
Payments	(1)		(1)		(43)		(3)
Changes in fair value included in earnings	23		(8)		(35)		(8)
Ending Balance	$	171	$	44	$	171	$	44

Derivative Contracts

The following table provides the aggregate notional value of outstanding derivative contracts.


	October 2,		December 31,
(In millions)	2021		2020
Notional Amount
Interest rate swaps - fair value hedges	$	—	$	1,000

Cross-currency interest rate swaps - designated as net investment hedges	900		900

Currency exchange contracts	4,823		5,206

While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the balance sheet. The following tables present the fair value of derivative instruments in the

accompanying balance sheet and statement of income.


	Fair Value – Assets				Fair Value – Liabilities
	October 2,		December 31,		October 2,		December 31,
(In millions)	2021		2020		2021		2020
Derivatives Designated as Hedging Instruments
Interest rate swaps (a)	$	—	$	25	$	—	$	—
Cross-currency interest rate swaps (a)	10		—		4		46
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts (b)	65		3		—		86

Total Derivatives	$	75	$	28	$	4	$	132

(a) The fair values of the interest rate swaps and cross-currency interest rate swaps are included in the accompanying balance sheet under the caption other assets or other long-term liabilities.

(b) The fair value of the currency exchange contracts is included in the accompanying balance sheet under the captions other current assets or other accrued expenses.

The following amounts related to cumulative basis adjustments for fair value hedges were included in the accompanying balance sheet under the caption long-term obligations:


	Carrying Amount of the Hedged Liability				Cumulative Amount of Fair Value Hedging Adjustment - Increase (Decrease) Included in Carrying Amount of Liability
	October 2,		December 31,		October 2,		December 31,
(In millions)	2021		2020		2021		2020
Long-term Obligations	$	—	$	1,020	$	—	$	25


	Gain (Loss) Recognized
	Three Months Ended				Nine Months Ended
	October 2,		September 26,		October 2,		September 26,
(In millions)	2021		2020		2021		2020
Fair Value Hedging Relationships
Interest rate swaps
Hedged long-term obligations - included in other income (expense)	$	—	$	—	$	25	$	(43)
Derivatives designated as hedging instruments - included in other income (expense)	—		—		(3)		43
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
Included in unrealized losses on hedging instruments within other comprehensive items	—		—		—		(85)
Amount reclassified from accumulated other comprehensive items to other expense	(2)		(8)		(21)		(14)
Financial Instruments Designated as Net Investment Hedges
Foreign currency-denominated debt
Included in currency translation adjustment within other comprehensive items	297		(295)		673		(276)
Cross-currency interest rate swaps
Included in currency translation adjustment within other comprehensive items	20		(30)		52		(30)
Included in other income (expense)	2		2		6		9


	Gain (Loss) Recognized
	Three Months Ended		Nine Months Ended
	October 2,	September 26,	October 2,	September 26,
(In millions)	2021	2020	2021	2020
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts
Included in cost of product revenues	7	(2)	8	(2)
Included in other income (expense)	(8)	51	147	7
Cross-currency interest rate swaps
Included in other income (expense)	—	1	—	(9)

Gains and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the accompanying statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.

The company uses foreign currency-denominated debt and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The majority of the company’s euro-denominated senior notes and its cross-currency interest rate swaps have been designated as, and are effective as, economic hedges of part of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments and contract fair value changes on the cross-currency interest rate swaps, excluding interest accruals, are included in currency translation adjustment within other comprehensive items and shareholders’ equity.

See Note 1 to the consolidated financial statements for 2020 included in the company's Annual Report on Form 10-K for additional information on the company's risk management objectives and strategies.

Fair Value of Other Financial Instruments

The carrying value and fair value of the company’s debt instruments are as follows:


	October 2, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
(In millions)	Value		Value		Value		Value
Senior notes	$	21,521	$	23,418	$	21,723	$	24,653


Other	77		77		5		5
	$	21,598	$	23,495	$	21,728	$	24,658

The fair value of debt instruments was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends which represent level 2 measurements.