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Fair Value Measurements (Tables)

3 Months Ended

Mar. 29, 2020

The following table is a summary of the activity related to derivatives and hedges for the fiscal first quarters ended in 2020 and 2019, net of tax:



	March 29, 2020									March 31, 2019
(Dollars in Millions)	Sales		Cost of Products Sold		R&D Expense		Interest (Income) Expense	Other (Income) Expense		Sales		Cost of Products Sold		R&D Expense		Interest (Income) Expense	Other (Income) Expense
The effects of fair value, net investment and cash flow hedging:
Gain (Loss) on net investment hedging relationship:
Cross currency interest rate swaps contracts:
Amount of gain or (loss) recognized in income on derivative amount excluded from effectiveness testing	—		—		—		40	—		—		—		—		38	—
Amount of gain or (loss) recognized in AOCI	—		—		—		40	—		—		—		—		38	—

Gain (Loss) on cash flow hedging relationship:
Forward foreign exchange contracts:
Amount of gain or (loss) reclassified from AOCI into income	9		(173	)	(110	)	—	(2	)	(21	)	(35	)	(139	)	—	6

Amount of gain or (loss) recognized in AOCI	11		302		(110	)	—	(36	)	(6	)	(296	)	(110	)	—	(13	)

Cross currency interest rate swaps contracts:
Amount of gain or (loss) reclassified from AOCI into income	—		—		—		98	—		—				—		55	—
Amount of gain or (loss) recognized in AOCI	$	—	—		—		625	—		—		—		—		59	—

The following table is the effect of net investment hedges for the fiscal first quarters ended in 2020 and 2019



	Gain/(Loss) Recognized In Accumulated OCI			Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income Into Income	Gain/(Loss) Reclassified From Accumulated OCI Into Income
(Dollars in Millions)	March 29, 2020		March 31, 2019		March 29, 2020	March 31, 2019
Debt	$	46	71	Interest (income) expense	—	—
Cross Currency interest rate swaps	$	827	370	Interest (income) expense	—	—

Schedule of Derivatives Recorded in Consolidated Balance Sheet

Schedule of Effect of Derivatives not Designated as Hedging Instruments



		Gain/(Loss) Recognized In Income on Derivative
(Dollars in Millions)	Location of Gain /(Loss) Recognized in Income on Derivative	Fiscal First Quarter Ended
Derivatives Not Designated as Hedging Instruments		March 29, 2020		March 31, 2019
Foreign Exchange Contracts	Other (income) expense	$	89	(38	)

Summary of Activity Related to Equity Investments

The following table is a summary of the activity related to equity investments:



(Dollars in Millions)	December 29, 2019					March 29, 2020
	Carrying Value		Changes in Fair Value Reflected in Net Income ⁽¹⁾		Sales/ Purchases/Other ⁽²⁾	Carrying Value	Non Current Other Assets
Equity Investments with readily determinable value	$	1,148	(327	)	5	826	826

Equity Investments without readily determinable value	$	712	(33	)	15	694	694

⁽¹⁾ Recorded in Other Income/Expense

⁽²⁾ Other includes impact of currency

Financial Assets and Liabilities at Fair Value

The Company’s significant financial assets and liabilities measured at fair value as of March 29, 2020 and December 29, 2019 were as follows:



	March 29, 2020					December 29, 2019
(Dollars in Millions)	Level 1		Level 2	Level 3	Total	Total⁽¹⁾
Derivatives designated as hedging instruments:
Assets:
Forward foreign exchange contracts	$	—	941	—	941	209
Interest rate contracts ⁽²⁾⁽³⁾	—		1,569	—	1,569	693
Total	—		2,510	—	2,510	902
Liabilities:
Forward foreign exchange contracts	—		530	—	530	426
Interest rate contracts ⁽³⁾	—		247	—	247	193
Total	—		777	—	777	619
Derivatives not designated as hedging instruments:
Assets:
Forward foreign exchange contracts	—		120	—	120	23
Liabilities:
Forward foreign exchange contracts	—		106	—	106	33
Other Investments:
Equity investments ⁽⁴⁾	826		—	—	826	1,148
Debt securities⁽⁵⁾	$	—	5,673	—	5,673	4,368
Other Liabilities
Contingent consideration ⁽⁶⁾				784	784	1,715



Gross to Net Derivative Reconciliation	March 29, 2020			December 29, 2019
(Dollars in Millions)
Total Gross Assets	$	2,630		925
Credit Support Agreement (CSA)	(2,530		)	(841	)
Total Net Asset	100			84

Total Gross Liabilities	883			652
Credit Support Agreement (CSA)	(531		)	(586	)
Total Net Liabilities	$	352		66

Summarized information about changes in liabilities for contingent consideration is as follows:



	Fiscal first quarter ended
	March 29, 2020			March 31, 2019
(Dollars in Millions)
Beginning Balance	$	1,715		$	397
Changes in estimated fair value ⁽⁷⁾	(977		)	32
Additions	106			23
Payments	(60		)	—
Ending Balance	$	784		$	452


⁽¹⁾	December 30, 2019 assets and liabilities are all classified as Level 2 with the exception of equity investments of $1,148 million, which are classified as Level 1 and contingent consideration of $1,715 million, classified as Level 3.


⁽²⁾	Includes $1 million of non-current other assets as of March 29, 2020 and December 29, 2019.


⁽³⁾	Includes cross currency interest rate swaps and interest rate swaps.


⁽⁴⁾	Classified as non-current other assets.


⁽⁵⁾	Classified within cash equivalents and current marketable securities.


⁽⁶⁾	Includes $759 million and $1,631 million (primarily related to Auris Health), classified as non-current other liabilities as of March 29, 2020 and December 29, 2019, respectively. Includes $25 million and $84 million classified as current liabilities as of March 29, 2020 and December 29, 2019, respectively.


⁽⁷⁾	Ongoing fair value adjustment amounts are primarily recorded in Research and Development expense.

During the fiscal first quarter of 2020, the Company recorded a contingent consideration reversal of $983 million related to the timing of certain developmental milestones associated with the Auris Health acquisition. The one-time reversal of the contingent consideration was recorded in Other income and expense. As of March 29, 2020 the estimated fair value of the remaining contingent consideration is $165 million. For additional details see Note 10 to the Consolidated Financial Statements.

Marketable Securities

The Company's cash, cash equivalents and current marketable securities as of March 29, 2020 comprised:



(Dollars in Millions)	Carrying Amount		Unrecognized Gain	Unrecognized Loss		Estimated Fair Value	Cash & Cash Equivalents	Current Marketable Securities
Cash	$	2,499	—	—		2,499	2,499
Non-U.S. sovereign securities⁽¹⁾	90		—	—		90	90	—
U.S. reverse repurchase agreements	3,965		—	—		3,965	3,965	—
Other reverse repurchase agreements	473		—	—		473	473
Corporate debt securities⁽¹⁾	2,135		1	(1	)	2,135	1,039	1,096
Money market funds	2,424		—	—		2,424	2,424
Time deposits⁽¹⁾	765		—	—		765	765
Subtotal	12,351		1	(1	)	12,351	11,255	1,096

			Unrealized Gain	Unrealized Loss
U.S. Gov't securities	5,418		4	—		5,422	4,260	1,162
Corporate debt securities	253		—	(2	)	251	15	236
Subtotal available for sale debt⁽²⁾	$	5,671	4	(2	)	5,673	4,275	1,398
Total cash, cash equivalents and current marketable securities	$	18,022	5	(3	)	18,024	15,530	2,494

⁽¹⁾Held to maturity investments are reported at amortized cost and gains or losses are reported in earnings.

⁽²⁾Available for sale debt securities are reported at fair value with unrealized gains and losses reported net of taxes in other comprehensive income.

Schedule of Available for Sale Securities Maturities

The contractual maturities of the available for sale securities as of March 29, 2020 are as follows:



(Dollars in Millions)	Cost Basis		Fair Value
Due within one year	$	5,632	5,635
Due after one year through five years	39		38
Due after five years through ten years	—		—
Total debt securities	$	5,671	5,673

Financial Liabilities not Measured at Fair Value

Financial Instruments not measured at Fair Value:

The following financial liabilities are held at carrying amount on the consolidated balance sheet as of March 29, 2020:



(Dollars in Millions)	Carrying Amount		Estimated Fair Value

Financial Liabilities

Current Debt	$	2,190	2,234

Non-Current Debt
3.55% Notes due 2021	449		463
2.45% Notes due 2021	350		356
0.250% Notes due 2022 (1B Euro 1.0980)	1,097		1,096
2.25% Notes due 2022	998		1,019
6.73% Debentures due 2023	250		301
3.375% Notes due 2023	804		875
2.05% Notes due 2023	499		512
0.650% Notes due 2024 (750MM Euro 1.0980)	821		826
5.50% Notes due 2024 (500 MM GBP 1.2023)	597		697
2.625% Notes due 2025	748		796
2.45% Notes due 2026	1,993		2,112
2.95% Notes due 2027	997		1,074
2.90% Notes due 2028	1,494		1,640
1.150% Notes due 2028 (750MM Euro 1.0980)	817		833
6.95% Notes due 2029	297		419
4.95% Debentures due 2033	498		661
4.375% Notes due 2033	856		1,099
1.650% Notes due 2035 (1.5B Euro 1.0980)	1,631		1,699
3.55% Notes due 2036	989		1,172
5.95% Notes due 2037	992		1,477
3.625% Notes due 2037	1,487		1,719
3.40% Notes due 2038	991		1,144
5.85% Debentures due 2038	696		1,072
4.50% Debentures due 2040	539		689
4.85% Notes due 2041	297		432
4.50% Notes due 2043	495		696
3.70% Notes due 2046	1,973		2,406
3.75% Notes due 2047	991		1,230
3.50% Notes due 2048	742		890
Other	5		5
Total Non-Current Debt	$	25,393	29,410