Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2023

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:


	September 30,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
(In millions)	2023		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	2,662	$	2,662	$	—	$	—
Bank time deposits	6		6		—		—
Investments	19		19		—		—
Warrants	11		—		11		—
Insurance contracts	193		—		193		—
Derivative contracts	88		—		88		—
Total assets	$	2,979	$	2,687	$	292	$	—

Liabilities
Derivative contracts	$	153	$	—	$	153	$	—
Contingent consideration	81		—		—		81
Total liabilities	$	234	$	—	$	153	$	81


	December 31,		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
(In millions)	2022		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	5,804	$	5,804	$	—	$	—
Investments	25		25		—		—
Warrants	12		—		12		—
Insurance contracts	162		—		162		—
Derivative contracts	79		—		79		—
Total assets	$	6,082	$	5,829	$	253	$	—

Liabilities
Derivative contracts	$	101	$	—	$	101	$	—
Contingent consideration	174		—		—		174
Total liabilities	$	275	$	—	$	101	$	174

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 three and nine months ended September 30, 2023, the company recorded $11 million and $(33) million, respectively, of net gains/(losses) on investments, which are included in other income/(expense) in the accompanying statements of income. In the three and nine months ended October 1, 2022, the company recorded $13 million and $136 million, respectively, of net losses on investments, which are included in other income/(expense) in the accompanying statements 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				Nine months ended
	September 30,		October 1,		September 30,		October 1,
(In millions)	2023		2022		2023		2022
Contingent consideration
Beginning balance	$	90	$	216	$	174	$	317
Acquisitions (including assumed balances)	—		—		1		(18)
Payments	(5)		(32)		(63)		(64)
Changes in fair value included in earnings	(4)		(16)		(31)		(67)
Ending balance	$	81	$	168	$	81	$	168

Derivative Contracts

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




(In millions)	September 30, 2023		December 31, 2022
Notional amount


Cross-currency interest rate swaps - designated as net investment hedges	$	5,650	$	2,100

Currency exchange contracts	1,607		2,434

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 sheets and statements of income.


	Fair value – assets				Fair value – liabilities
	September 30,		December 31,		September 30,		December 31,
(In millions)	2023		2022		2023		2022
Derivatives designated as hedging instruments

Cross-currency interest rate swaps (a)	$	87	$	77	$	152	$	85
Derivatives not designated as hedging instruments
Currency exchange contracts (b)	1		2		1		16

Total derivatives	$	88	$	79	$	153	$	101

(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				Nine months ended
	September 30,		October 1,		September 30,		October 1,
(In millions)	2023		2022		2023		2022







Derivatives designated as cash flow hedges
Interest rate swaps

Amount reclassified from accumulated other comprehensive items to interest expense	$	(1)	$	(1)	$	(6)	$	(3)
Financial instruments designated as net investment hedges
Foreign currency-denominated debt and other payables
Included in currency translation adjustment within other comprehensive items	364		658		158		1,691
Cross-currency interest rate swaps
Included in currency translation adjustment within other comprehensive items	(56)		46		(6)		120
Included in interest expense	35		6		68		12
Derivatives not designated as hedging instruments
Currency exchange contracts
Included in cost of product revenues	2		3		(1)		15
Included in other income/(expense)	(6)		20		(8)		32

Gains and losses recognized on currency exchange contracts are included in the accompanying statements of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.

The company uses foreign currency-denominated debt, certain foreign currency-denominated payables, 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, certain foreign currency-denominated payables, 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 certain foreign currency-denominated payables, 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 2022 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:


	September 30, 2023				December 31, 2022
	Carrying		Fair		Carrying		Fair
(In millions)	value		value		value		value
Senior notes	$	35,008	$	30,700	$	33,889	$	29,901

Commercial paper	—		—		310		310
Other	76		76		79		79
	$	35,084	$	30,776	$	34,278	$	30,290

The fair value of debt instruments, excluding private placement notes, 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. The fair value of private placement notes was determined based on internally developed pricing models and unobservable inputs, which represent level 3 measurements.