Fair Value Measurements

9 Months Ended

Sep. 29, 2024

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair value measurements

The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges.

Additionally, the Company uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate borrowings. These derivatives are designated as fair value hedges. The Company uses cross currency interest rate swaps and forward foreign exchange contracts designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward foreign exchange contracts are not designated as hedges, and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities.

The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features. The Company maintains credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of September 29, 2024, the cumulative amount of cash collateral paid by the Company under the CSA amounted to $3.3 billion net, related to net investment and cash flow hedges. On an ongoing basis, the Company monitors counter-party credit ratings. The Company considers credit non-performance risk to be low because the Company primarily enters into agreements with commercial institutions that have at least an investment grade credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this footnote for receivables and payables with these commercial institutions. As of September 29, 2024, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $46.9 billion, $40.4 billion and $9.0 billion, respectively. As of December 31, 2023, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $42.9 billion, $39.7 billion and $10.0 billion, respectively.

All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.

The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Foreign exchange contracts designated as cash flow hedges are accounted for under the forward method and all gains/losses associated with these contracts will be recognized in the income statement when the hedged item impacts earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income until the underlying transaction affects earnings and are then reclassified to earnings in the same account as the hedged transaction.

Gains and losses associated with interest rate swaps and changes in fair value of hedged debt attributable to changes in interest rates are recorded to interest expense in the period in which they occur. Gains and losses on net investment hedges are accounted for through the currency translation account within accumulated other comprehensive income. The portion excluded from effectiveness testing is recorded through interest (income) expense using the spot method. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued.

The Company designated its Euro denominated notes with due dates ranging from 2024 to 2044 as a net investment hedge of the Company's investments in certain of its international subsidiaries that use the Euro as their functional currency in order to reduce the volatility caused by changes in exchange rates.

As of September 29, 2024, the balance of deferred net loss on derivatives included in accumulated other comprehensive income was $641 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding interest rate contracts and net investment hedge contracts. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.

The following table is a summary of the activity related to derivatives and hedges for the fiscal third quarters ended September 29, 2024 and October 1, 2023, net of tax:

	September 29, 2024					October 1, 2023
(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 fair value hedging relationship:
Interest rate swaps contracts:
Hedged items	$—	—	—	343	—	—	—	—	(61)	—
Derivatives designated as hedging instruments	—	—	—	(343)	—	—	—	—	61	—
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	—	—	—	35	—	—	—	—	31	—
Amount of gain or (loss) recognized in AOCI	—	—	—	35	—	—	—	—	31	—
Gain (Loss) on cash flow hedging relationship:
Forward foreign exchange contracts:
Amount of gain or (loss) reclassified from AOCI into income	1	44	—	—	(4)	6	102	(5)	—	4
Amount of gain or (loss) recognized in AOCI	—	(30)	(21)	—	1	(11)	(166)	49	—	38
Cross currency interest rate swaps contracts:
Amount of gain or (loss) reclassified from AOCI into income	—	—	—	72	—	—	—	—	41	—
Amount of gain or (loss) recognized in AOCI	$—	—	—	420	—	—	—	—	(454)	—

The following table is a summary of the activity related to derivatives and hedges for the fiscal nine months ended September 29, 2024 and October 1, 2023, net of tax:

	September 29, 2024					October 1, 2023
(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 fair value hedging relationship:
Interest rate swaps contracts:
Hedged items	$—	—	—	298	—	—	—	—	(67)	—
Derivatives designated as hedging instruments	—	—	—	(298)	—	—	—	—	67	—
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	—	—	—	102	—	—	—	—	98	—
Amount of gain or (loss) recognized in AOCI	—	—	—	102	—	—	—	—	98	—
Gain (Loss) on cash flow hedging relationship:
Forward foreign exchange contracts:
Amount of gain or (loss) reclassified from AOCI into income	1	303	12	—	(3)	3	12	(30)	—	9
Amount of gain or (loss) recognized in AOCI	(1)	17	12	—	6	(1)	230	20	—	42
Cross currency interest rate swaps contracts:
Amount of gain or (loss) reclassified from AOCI into income	—	—	—	162	—	—	—	—	223	—
Amount of gain or (loss) recognized in AOCI	$—	—	—	177	—	—	—	—	(469)	—

As of September 29, 2024, and December 31, 2023, the following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustment for fair value hedges:

Line item in the Consolidated Balance Sheet in which the hedged item is included	Carrying Amount of the Hedged Liability		Cumulative Amount of Fair Value Hedging Gain/ (Loss) Included in the Carrying Amount of the Hedged Liability
(Dollars in Millions)	September 29, 2024	December 31, 2023	September 29, 2024	December 31, 2023
Long-term Debt	$8,202	8,862	(829)	(1,216)

The following table is the effect of derivatives not designated as hedging instruments for the fiscal third quarters ended 2024 and 2023:

		Gain/(Loss) Recognized In Income on Derivative		Gain/(Loss) Recognized In Income on Derivative
(Dollars in Millions)	Location of Gain /(Loss) Recognized in Income on Derivative	Fiscal Third Quarter Ended		Fiscal Nine Months Ended
Derivatives Not Designated as Hedging Instruments		September 29, 2024	October 1, 2023	September 29, 2024	October 1, 2023
Foreign Exchange Contracts	Other (income) expense	$(21)	—	24	2

The following table is the effect of net investment hedges for the fiscal third quarters ended in 2024 and 2023:

	Gain/(Loss) Recognized In Accumulated OCI		Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income	Gain/(Loss) Reclassified From Accumulated OCI Into Income
(Dollars in Millions)	September 29, 2024	October 1, 2023		September 29, 2024	October 1, 2023
Debt	$(199)	101	Interest (income) expense	—	—
Cross Currency interest rate swaps	$(251)	214	Interest (income) expense	—	—

The following table is the effect of net investment hedges for the fiscal nine months ended in 2024 and 2023:

	Gain/(Loss) Recognized In Accumulated OCI		Location of Gain or (Loss) Reclassified from Accumulated OCI Into Income	Gain/(Loss) Reclassified From Accumulated OCI Into Income
(Dollars in Millions)	September 29, 2024	October 1, 2023		September 29, 2024	October 1, 2023
Debt	$(69)	35	Interest (income) expense	—	—
Cross Currency interest rate swaps	$569	880	Interest (income) expense	—	—

The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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

	December 31, 2023			September 29, 2024
(Dollars in Millions)	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*	$4,473	36	(4,004)	505	505
Equity Investments without readily determinable value	$696	2	74	772	772

(1)Recorded in Other (income)/expense, net

(2)Other includes impact of currency

* The December 31, 2023 balance includes the 9.5% remaining stake in Kenvue. A debt-for-equity exchange was completed in the fiscal second quarter of 2024.

On May 15, 2024, the Company issued $3.6 billion aggregate principal amount of commercial paper and received $3.6 billion of net cash proceeds to be used for general corporate purposes. On May 17, 2024, the Company completed a Debt-for-Equity Exchange of its remaining 182,329,550 shares of Kenvue Common Stock for the outstanding Commercial Paper. Upon completion of the Debt-for-Equity Exchange, the Commercial Paper was satisfied and discharged, and the Company no longer owns any shares of Kenvue Common Stock. This exchange resulted in a loss of approximately $0.4 billion recorded in Other (income) expense.

Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. In accordance with ASC 820, a three-level hierarchy was established to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 inputs having the highest priority and Level 3 inputs having the lowest.

The fair value of a derivative financial instrument (i.e., forward foreign exchange contracts, interest rate contracts) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. Dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 and debt securities which are classified as Level 2. The Company holds acquisition related contingent liabilities based upon certain regulatory and commercial events, which are classified as Level 3, whose values are determined using discounted cash flow methodologies or similar techniques for which the determination of fair value requires significant judgment or estimations.

The following three levels of inputs are used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Significant other observable inputs.

Level 3 — Significant unobservable inputs.

The Company’s significant financial assets and liabilities measured at fair value as of September 29, 2024 and December 31, 2023 were as follows:

	September 29, 2024				December 31, 2023
(Dollars in Millions)	Level 1	Level 2	Level 3	Total	Total(1)
Derivatives designated as hedging instruments:
Assets:
Forward foreign exchange contracts	$—	472	—	472	539
Interest rate contracts(2)	—	985	—	985	988
Total	—	1,457	—	1,457	1,527
Liabilities:
Forward foreign exchange contracts	—	461	—	461	624
Interest rate contracts(2)	—	4,487	—	4,487	5,338
Total	—	4,948	—	4,948	5,962
Derivatives not designated as hedging instruments:
Assets:
Forward foreign exchange contracts	—	34	—	34	64
Liabilities:
Forward foreign exchange contracts	—	32	—	32	75
Other Investments:
Equity investments(3)	505	—	—	505	4,473
Debt securities(4)	—	3,818	—	3,818	8,874
Other Liabilities
Contingent consideration(5)	$—	—	1,222	1,222	1,092

Gross to Net Derivative Reconciliation	September 29, 2024	December 31, 2023
(Dollars in Millions)
Total Gross Assets	$1,491	1,591
Credit Support Agreement (CSA)	(1,482)	(1,575)
Total Net Asset	9	16
Total Gross Liabilities	4,980	6,037
Credit Support Agreement (CSA)	(4,808)	(5,604)
Total Net Liabilities	$172	433

Summarized information about changes in liabilities for contingent consideration for the fiscal third quarters ended September 29, 2024 and October 1, 2023 is as follows:

	September 29, 2024	October 1, 2023
(Dollars in Millions)
Beginning Balance	$1,092	1,120
Changes in estimated fair value(6)	93	62
Additions	112	—
Payments	(75)	(4)
Ending Balance	$1,222	1,178

(1)2023 assets and liabilities are all classified as Level 2 with the exception of equity investments of $4,473 million, which are classified as Level 1 and contingent consideration of $1,092 million, classified as Level 3.

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

(3)Classified as non-current other assets.

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

(5)Classified as non-current other liabilities as of September 29, 2024 and December 31, 2023, respectively.

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

The Company's cash, cash equivalents and current marketable securities as of September 29, 2024 comprised:

(Dollars in Millions)	Carrying Amount	Unrealized Gain	Estimated Fair Value	Cash & Cash Equivalents	Current Marketable Securities
Cash	$3,328	—	3,328	3,328	—
U.S. Gov't securities	—	—	—	—	—
Non-U.S. sovereign securities	267	—	267	149	118
U.S. reverse repurchase agreements	6,853	—	6,853	6,853	—
Corporate debt securities(1)	—	—	—	—	—
Money market funds	4,848	—	4,848	4,848	—
Time deposits(1)	1,183	—	1,183	1,183	—
Subtotal	16,479	—	16,479	16,361	118
U.S. Gov’t securities	3,596	—	3,596	3,581	15
U.S. Gov’t Agencies	6	—	6	—	6
Other sovereign securities	2	—	2	—	2
Corporate debt securities	214	—	214	38	176
Subtotal available for sale debt(2)	$3,818	—	3,818	3,619	199
Total cash, cash equivalents and current marketable securities	$20,297	—	20,297	19,980	317

(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.

As of the fiscal year ended December 31, 2023, the carrying amount was approximately the same as the estimated fair value.

Fair value of government securities and obligations and corporate debt securities was estimated using quoted broker prices and significant other observable inputs.

The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. Available for sale securities with stated maturities of greater than one year from the date of purchase are available to fund current operations and are classified as either cash equivalents or current marketable securities.

The contractual maturities of the available for sale securities as of September 29, 2024 are as follows:

(Dollars in Millions)	Cost Basis	Fair Value
Due within one year	$3,805	3,805
Due after one year through five years	13	13
Due after five years through ten years	—	—
Total debt securities	$3,818	3,818

Financial instruments not measured at fair value

The following financial liabilities are held at carrying amount on the consolidated balance sheet as of September 29, 2024:

(Dollars in Millions)	Carrying Amount	Estimated Fair Value
Financial Liabilities
Current Debt	$4,462	4,429
Non-Current Debt
2.46% Notes due 2026	1,998	1,962
2.95% Notes due 2027	943	984
0.95% Notes due 2027	1,463	1,389
2.90% Notes due 2028	1,497	1,465
1.150% Notes due 2028 (750MM Euro 1.1141)	832	797
4.80% Notes due 2029 (1)	1,146	1,198
6.95% Notes due 2029	298	344
1.30% Notes due 2030	1,671	1,522
4.90% Notes due 2031(1)	1,146	1,215
3.20% Notes due 2032 (700MM Euro 1.1141)(1)	776	805
4.95% Notes due 2033	499	536
4.375% Notes due 2033	854	879
4.95% Notes due 2034(1)	846	904
1.650% Notes due 2035 (1.5B Euro 1.1141)	1,660	1,492
3.35% Notes due 2036 (800MM Euro 1.1141)(1)	886	914
3.587% Notes due 2036	902	936
5.95% Notes due 2037	994	1,157
3.625% Notes due 2037	1,395	1,393
3.40% Notes due 2038	993	897
5.85% Notes due 2038	697	804
4.50% Notes due 2040	541	553
2.10% Notes due 2040	885	726
4.85% Notes due 2041	297	313
4.50% Notes due 2043	496	501
3.55% Notes due 2044 (1.0B Euro 1.1141)(1)	1,104	1,140
3.73% Notes due 2046	1,978	1,747
3.75% Notes due 2047	868	873
3.50% Notes due 2048	744	628
2.25% Notes due 2050	859	648
5.25% Notes due 2054(1)	843	921
2.45% Notes due 2060	1,107	782
Other	71	71
Total Non-Current Debt	$31,289	30,496

(1) In the fiscal second quarter of 2024, the Company issued senior unsecured notes for a total of $6.7 billion. The net proceeds from this offering were used to fund the Shockwave acquisition which closed on May 31, 2024, and for general corporate purposes.

The weighted average effective interest rate on non-current debt is 3.35%.

The excess of the carrying value over the estimated fair value of debt was $1.0 billion at December 31, 2023.

Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.

The current debt balance as of September 29, 2024, includes $2.0 billion of commercial paper which has a weighted average interest rate of 5.10% and a weighted average maturity of approximately two months.