Investments and Fair Value Measurements

12 Months Ended

Jan. 03, 2021


3. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Debt Securities

Our short-term investments are primarily available-for-sale debt securities that consisted of the following:


	January 3, 2021		December 29, 2019
In millions	Amortized Cost		Gross Unrealized Gains		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Estimated Fair Value

Debt securities in government-sponsored entities	$	10	$	—	$	10	$	18	$	—	$	18
Corporate debt securities	445		—		445		627		3		630
U.S. Treasury securities	830		1		831		616		2		618
Total	$	1,285	$	1	$	1,286	$	1,261	$	5	$	1,266

Contractual maturities of available-for-sale debt securities, as of January 3, 2021, were as follows:


In millions	Estimated Fair Value
Due within one year	$	1,286
After one but within five years	—
Total	$	1,286

Strategic Investments

Marketable Equity Securities

As of January 3, 2021 and December 29, 2019, the fair value of our marketable equity securities, included in short-term investments, totaled $376 million and $106 million, respectively. Total unrealized gains on our marketable equity securities, included in other income, net, were $270 million, $53 million, and $21 million in 2020, 2019, and 2018, respectively.

Non-Marketable Equity Securities

As of January 3, 2021 and December 29, 2019, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $314 million and $220 million, respectively.

One of our investments, GRAIL, is a VIE for which we have concluded that we are not the primary beneficiary, and therefore, we do not consolidate GRAIL in our consolidated financial statements. On September 20, 2020, we entered into an agreement to acquire GRAIL, as described in note “4. Intangible Assets, Goodwill, and Acquisitions ”. We have determined our maximum exposure to loss, excluding any amounts associated with the pending acquisition of GRAIL, to be the carrying value of our investment, which was $250 million and $190 million as of January 3, 2021 and December 29, 2019, respectively, recorded in other assets. During 2020, we made an additional $60 million investment in GRAIL.

Revenue recognized from transactions with our strategic investees was $62 million, $71 million, and $143 million in 2020, 2019, and 2018, respectively.

Venture Funds

We invest in two venture capital investment funds (the Funds) with capital commitments of $100 million, callable through April 2026, and up to $160 million, callable through July 2029, respectively, of which $35 million and up to $140 million, respectively, remained callable as of January 3, 2021. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $104 million and $53 million as of January 3, 2021 and December 29, 2019, respectively.

Previously Consolidated Variable Interest Entity

Helix Holdings I, LLC (Helix)

In July 2015, we obtained a 50% voting equity ownership interest in Helix. At that time, we determined that we had unilateral power over one of the activities that most significantly impacts the economic performance of Helix through its contractual arrangements and, as a result, we were deemed to be the primary beneficiary of Helix and were required to consolidate Helix. The operations of Helix are included in the accompanying consolidated statements of income for 2018 and 2019, up to the date of the deconsolidation, described below. During this period, we absorbed 50% of Helix’s losses.

On April 25, 2019, we entered into an agreement to sell our interest in, and relinquish control over, Helix. As part of the agreement, (i) Helix repurchased all of our outstanding equity interests in exchange for a contingent value right with a 7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events, (ii) we ceased having a controlling financial interest in Helix, including unilateral power over one of the activities that most significantly impacts the economic performance of Helix, (iii) we were relieved of any potential obligation to redeem certain noncontrolling interests, and (iv) we no longer have representation on Helix’s board of directors. As a result, we deconsolidated Helix’s financial statements effective April 25, 2019 and recorded a gain on deconsolidation in 2019 of $39 million in other income, net. The gain on deconsolidation included (i) the contingent value right received from Helix recorded at a fair value of approximately $30 million, (ii) the derecognition of the carrying amounts of Helix’s assets and liabilities, and (iii) the derecognition of the noncontrolling interests related to Helix.

Changes in the fair value of the contingent value right resulted in an unrealized gain of $7 million in 2020 and an unrealized loss of $1 million in 2019, included in other income, net.

Derivative Assets Related to Terminated Acquisition

On November 1, 2018, we entered into an Agreement and Plan of Merger (the Merger Agreement) to acquire Pacific Biosciences of California, Inc. (PacBio) for an all-cash price of approximately $1.2 billion (or $8.00 per share). On January 2, 2020, we entered into an agreement to terminate the Merger Agreement (the Termination Agreement). Pursuant to the Termination Agreement, we made a cash payment to PacBio of $98 million on January 2, 2020, which represented the Reverse Termination Fee (as defined in the Merger Agreement). The Reverse Termination Fee was repayable, without interest, if PacBio entered into a definitive agreement providing for, or consummating, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement), and such transaction was consummated by the two-year anniversary of the execution of the definitive agreement for such Change of Control Transaction. PacBio did not enter into a definitive agreement that provided for, or consummated, a Change of Control Transaction by September 30, 2020 (as defined in the Termination Agreement); therefore, the Reverse Termination Fee is no longer repayable. In addition, we made cash payments of $18 million in Q4 2019, pursuant to Amendment No. 1 to the PacBio Merger Agreement, and $34 million in Q1 2020, pursuant to the Termination Agreement, collectively referred to as the Continuation Advances. Up to the $52 million of Continuation Advances is repayable without interest to us if, within two years of March 31, 2020, PacBio enters into a Change of Control Transaction or raises at least $100 million in equity or debt financing in a single transaction (with the amount repayable dependent on the amount raised by PacBio). On February 10, 2021, PacBIo announced their entry into an investment agreement with SB Northstar LP relating to the issuance and sale of $900 million in aggregate principal amount of PacBio’s convertible notes. Pursuant to the PacBio Merger Agreement, we expect that, upon the closing of the convertible notes issuance, PacBio will be obligated to repay to us $52 million of Continuation Advances.

The potential repayment of the Continuation Advances and Reverse Termination Fee meet the definition of derivative assets and are recorded at fair value. The $92 million difference between the $132 million in cash paid during Q1 2020 for the Continuation Advances and Reverse Termination Fee and the $40 million fair value of these derivative assets on the payment dates was recorded as selling, general and administrative expenses in 2020. The $8 million difference between the $18 million in Continuation Advances paid in Q4 2019 and the $10 million fair value of the derivative asset on the payment date was recorded as selling, general, and administrative expenses in 2019. Changes in the fair value of the derivative assets are included in other income, net, and totaled $25 million in unrealized losses in 2020.

Fair Value Measurements

The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:


	January 3, 2021								December 29, 2019
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds (cash equivalents)	$	1,512	$	—	$	—	$	1,512	$	1,732	$	—	$	—	$	1,732
Debt securities in government-sponsored entities	—		10		—		10		—		18		—		18
Corporate debt securities	—		445		—		445		—		630		—		630
U.S. Treasury securities	831		—		—		831		618		—		—		618
Marketable equity securities	376		—		—		376		106		—		—		106
Contingent value right	—		—		35		35		—		—		29		29
Derivative assets related to terminated acquisition	—		—		26		26		—		—		10		10
Deferred compensation plan assets	—		55		—		55		—		48		—		48
Total assets measured at fair value	$	2,719	$	510	$	61	$	3,290	$	2,456	$	696	$	39	$	3,191
Liabilities:

Deferred compensation plan liability	$	—	$	51	$	—	$	51	$	—	$	46	$	—	$	46

Our available-for-sale securities consist of highly-liquid, investment-grade debt securities and marketable equity securities. We consider information provided by our investment accounting and reporting service provider in the measurement of fair value of our debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. Our marketable equity securities are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary. We elected the fair value option to measure the contingent value right received from Helix. The fair value of our contingent value right, included in other assets, is derived using a Monte Carlo simulation. The derivative assets related to the terminated acquisition of PacBio are financial instruments measured at fair value, included in other assets. Significant estimates and assumptions required for these valuations include, but are not limited to, probabilities related to the timing and outcome of future financing and/or liquidity events and an assumption regarding collectibility. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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