Fair Value Measurements and Fair Value of Financial Instruments

3 Months Ended

Apr. 02, 2022

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:


	April 2,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
(In millions)	2022		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	833	$	833	$	—	$	—
Investments	141		141		—		—
Warrants	14		—		14		—
Insurance contracts	172		—		172		—
Derivative contracts	55		—		55		—
Total assets	$	1,215	$	974	$	241	$	—

Liabilities
Derivative contracts	$	2	$	—	$	2	$	—
Contingent consideration	261		—		—		261
Total liabilities	$	263	$	—	$	2	$	261


	December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
(In millions)	2021		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	2,210	$	2,210	$	—	$	—
Investments	298		298		—		—
Warrants	15		—		15		—
Insurance contracts	181		—		181		—
Derivative contracts	36		—		36		—
Total assets	$	2,740	$	2,508	$	232	$	—

Liabilities
Derivative contracts	$	1	$	—	$	1	$	—
Contingent consideration	317		—		—		317
Total liabilities	$	318	$	—	$	1	$	317

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.

In the first quarter of 2022 and 2021 the company recorded $139 million and $1 million, respectively, of net losses on investments which are included in other income/(expense) in the accompanying statement of income.

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, as well as changes in the fair values of the investments underlying a recapitalization investment portfolio), of the contingent consideration.


	Three months ended
		April 2,		April 3,
(In millions)		2022		2021
Contingent consideration
Beginning balance		$	317	$	70
Acquisitions (including assumed balances)		(18)		162
Payments		(30)		(7)
Changes in fair value included in earnings		(8)		2
Ending balance		$	261	$	227

Derivative Contracts

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


	April 2,		December 31,
(In millions)	2022		2021
Notional amount


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

Currency exchange contracts	1,674		2,149

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
	April 2,		December 31,		April 2,		December 31,
(In millions)	2022		2021		2022		2021
Derivatives designated as hedging instruments

Cross-currency interest rate swaps (a)	$	49	$	25	$	—	$	—
Derivatives not designated as hedging instruments
Currency exchange contracts (b)	6		11		2		1

Total derivatives	$	55	$	36	$	2	$	1

(a) The fair value of the cross-currency interest rate swaps is 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.


		Gain (loss) recognized
	Three months ended
		April 2,		April 3,
(In millions)		2022		2021
Fair value hedging relationships
Interest rate swaps
Hedged long-term obligations - included in other income/(expense)		$	—	$	25
Derivatives designated as hedging instruments - included in other income/(expense)		—		(3)
Derivatives designated as cash flow hedges
Interest rate swaps

Amount reclassified from accumulated other comprehensive items to other income/(expense)		(1)		(17)
Financial instruments designated as net investment hedges
Foreign currency-denominated debt
Included in currency translation adjustment within other comprehensive items		362		466
Cross-currency interest rate swaps
Included in currency translation adjustment within other comprehensive items		23		38
Included in other income/(expense)		2		2
Derivatives not designated as hedging instruments
Currency exchange contracts
Included in cost of product revenues		(9)		12
Included in other income/(expense)		(1)		183

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. A portion 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 2021 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:


	April 2, 2022				December 31, 2021
	Carrying		Fair		Carrying		Fair
(In millions)	value		value		value		value
Senior notes	$	31,132	$	30,324	$	32,072	$	33,449

Commercial paper	1,852		1,852		2,522		2,522
Other	76		76		76		76
	$	33,060	$	32,252	$	34,670	$	36,047

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.