XML 40 R29.htm IDEA: XBRL DOCUMENT

Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Effect of Net Investment Hedges on OCI and the Consolidated Statement of Income

The effects of the Company’s net investment hedges on OCI and the Consolidated Statement of Income are shown below:



	Amount of Pretax (Gain) Loss Recognized in Other Comprehensive Income⁽¹⁾									Amount of Pretax (Gain) Loss Recognized in Other (income) expense, net for Amounts Excluded from Effectiveness Testing
	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2020		2019		2020		2019			2020			2019			2020			2019
Net Investment Hedging Relationships
Foreign exchange contracts	$	8	$	17	$	5	$	7		$	(4	)	$	(8	)	$	(11	)	$	(15	)
Euro-denominated notes	72		28		21		(2		)	—			—			—			—

⁽¹⁾ No amounts were reclassified from AOCI into income related to the sale of a subsidiary.

Summary of Interest Rate Swaps Held

At June 30, 2020, the Company was a party to 14 pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes as detailed in the table below.



	June 30, 2020
($ in millions)	Par Value of Debt		Number of Interest Rate Swaps Held	Total Swap Notional Amount
3.875% notes due 2021	$	1,150	5	$	1,150
2.40% notes due 2022	1,000		4	1,000
2.35% notes due 2022	1,250		5	1,250

Amounts Recorded on Balance Sheet Related to Fair Value Hedges

The table below presents the location of amounts recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:



	Carrying Amount of Hedged Liabilities				Cumulative Amount of Fair Value Hedging Adjustment Increase (Decrease) Included in the Carrying Amount
($ in millions)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Balance Sheet Line Item in which Hedged Item is Included
Loans payable and current portion of long-term debt	$	1,160	$	1,249	$	10	$	(1	)
Long-Term Debt	2,318		3,409		71		14

Fair Value of Derivatives on a Gross Basis Segregated between those Derivatives that are Designated as Hedging Instruments and those that are Not Designated as Hedging Instruments

Presented in the table below is the fair value of derivatives on a gross basis segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments:



		June 30, 2020						December 31, 2019
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
($ in millions)	Balance Sheet Caption	Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Other current assets	$	10	$	—	$	1,150	$	—	$	—	$	—
Interest rate swap contracts	Other Assets	72		—		2,250		15		—		3,400
Interest rate swap contracts	Accrued and other current liabilities	—		—		—		—		1		1,250
Foreign exchange contracts	Other current assets	83		—		4,959		152		—		6,117
Foreign exchange contracts	Other Assets	70		—		1,993		55		—		2,160
Foreign exchange contracts	Accrued and other current liabilities	—		27		1,884		—		22		1,748
Foreign exchange contracts	Other Noncurrent Liabilities	—		1		11		—		1		53
		$	235	$	28	$	12,247	$	222	$	24	$	14,728
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Other current assets	$	93	$	—	$	5,324	$	66	$	—	$	7,245
Foreign exchange contracts	Accrued and other current liabilities	—		103		5,865		—		73		8,693
		$	93	$	103	$	11,189	$	66	$	73	$	15,938
		$	328	$	131	$	23,436	$	288	$	97	$	30,666

Information on Derivative Positions Subject to Master Netting Arrangements as if they were Presented on a Net Basis

The following table provides information on the Company’s derivative positions subject to these master netting arrangements as if they were presented on a net basis, allowing for the right of offset by counterparty and cash collateral exchanged per the master agreements and related credit support annexes:



	June 30, 2020						December 31, 2019
($ in millions)	Asset			Liability			Asset			Liability
Gross amounts recognized in the condensed consolidated balance sheet	$	328		$	131		$	288		$	97
Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(115		)	(115		)	(84		)	(84		)
Cash collateral received	(38		)	—			(34		)	—
Net amounts	$	175		$	16		$	170		$	13

Location and Amount of Pretax (Gains) Losses of Derivatives

The table below provides information regarding the location and amount of pretax (gains) losses of derivatives designated in fair value or cash flow hedging relationships:



	Sales				Other (income) expense, net ⁽¹⁾						Other comprehensive income (loss)						Sales				Other (income) expense, net⁽¹⁾						Other comprehensive income (loss)
	Three Months Ended June 30,				Three Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,				Six Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2020		2019		2020			2019			2020			2019			2020		2019		2020			2019			2020			2019
Financial Statement Line Items in which Effects of Fair Value or Cash Flow Hedges are Recorded	$	10,872	$	11,760	$	(390	)	$	140		$	(2	)	$	(16	)	$	22,929	$	22,575	$	(318	)	$	327		$	(200	)	$	183
(Gain) loss on fair value hedging relationships
Interest rate swap contracts
Hedged items	—		—		1			55			—			—			—		—		68			88			—			—
Derivatives designated as hedging instruments	—		—		(8		)	(45		)	—			—			—		—		(76		)	(68		)	—			—
Impact of cash flow hedging relationships
Foreign exchange contracts
Amount of (loss) gain recognized in OCI on derivatives	—		—		—			—			(109		)	10			—		—		—			—			69			(2		)
Increase (decrease) in Sales as a result of AOCI reclassifications	42		75		—			—			(42		)	(75		)	88		119		—			—			(88		)	(119		)
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	—		—		(1		)	(1		)	—			—			—		—		(2		)	(2		)	—			—
Amount of loss recognized in OCI on derivatives	—		—		—			—			(1		)	(1		)	—		—		—			—			(2		)	(5		)

⁽¹⁾ Interest expense is a component of Other (income) expense, net.

Income Statement Effects of Derivatives Not Designated as Hedging Instruments

The table below provides information regarding the income statement effects of derivatives not designated as hedging instruments:



		Amount of Derivative Pretax (Gain) Loss Recognized in Income
		Three Months Ended June 30,					Six Months Ended June 30,
($ in millions)	Income Statement Caption	2020		2019			2020			2019
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts⁽¹⁾	Other (income) expense, net	$	49	$	2		$	(131	)	$	120
Foreign exchange contracts ⁽²⁾	Sales	4		(6		)	(3		)	4
Interest rate contracts ⁽³⁾	Other (income) expense, net	9		—			9			—

⁽¹⁾ These derivative contracts mitigate changes in the value of remeasured foreign currency denominated monetary assets and liabilities attributable to changes in foreign currency exchange rates.

⁽²⁾ These derivative contracts serve as economic hedges of forecasted transactions.

Information on Investments in Debt and Equity Securities

Information on investments in debt and equity securities is as follows:



	June 30, 2020								December 31, 2019
	Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value
($ in millions)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
U.S. government and agency securities	$	74	$	—	$	—	$	74	$	266	$	3	$	—	$	269
Foreign government bonds	2		—		—		2		—		—		—		—
Commercial paper	—		—		—		—		668		—		—		668
Corporate notes and bonds	—		—		—		—		608		13		—		621
Asset-backed securities	—		—		—		—		226		1		—		227
Total debt securities	$	76	$	—	$	—	$	76	$	1,768	$	17	$	—	$	1,785
Publicly traded equity securities ⁽¹⁾							1,307								838
Total debt and publicly traded equity securities							$	1,383							$	2,623

⁽¹⁾Unrealized net (gains) losses recognized in Other (income) expense, net on equity securities still held at June 30, 2020 were $(464) million and $(469) million in the second quarter and first six months of 2020, respectively. Unrealized net losses (gains) recognized in Other (income) expense, net on equity securities still held at June 30, 2019 were $39 million and $(75) million in the second quarter and first six months of 2019, respectively.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:



	Fair Value Measurements Using								Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
($ in millions)	June 30, 2020								December 31, 2019
Assets
Investments
Foreign government bonds	$	—	$	2	$	—	$	2	$	—	$	—	$	—	$	—
Commercial paper	—		—		—		—		—		668		—		668
Corporate notes and bonds	—		—		—		—		—		621		—		621
Asset-backed securities⁽¹⁾	—		—		—		—		—		227		—		227
U.S. government and agency securities	—		—		—		—		—		209		—		209
Publicly traded equity securities	1,249		—		—		1,249		518		—		—		518
	1,249		2		—		1,251		518		1,725		—		2,243
Other assets ⁽²⁾
U.S. government and agency securities	74		—		—		74		60		—		—		60
Publicly traded equity securities	58		—		—		58		320		—		—		320
	132		—		—		132		380		—		—		380
Derivative assets ⁽³⁾
Forward exchange contracts	—		142		—		142		—		169		—		169
Purchased currency options	—		104		—		104		—		104		—		104
Interest rate swaps	—		82		—		82		—		15		—		15
	—		328		—		328		—		288		—		288
Total assets	$	1,381	$	330	$	—	$	1,711	$	898	$	2,013	$	—	$	2,911
Liabilities
Other liabilities
Contingent consideration	$	—	$	—	$	798	$	798	$	—	$	—	$	767	$	767
Derivative liabilities ⁽³⁾
Forward exchange contracts	—		128		—		128		—		95		—		95
Written currency options	—		3		—		3		—		1		—		1
Interest rate swaps	—		—		—		—		—		1		—		1
	—		131		—		131		—		97		—		97
Total liabilities	$	—	$	131	$	798	$	929	$	—	$	97	$	767	$	864


⁽¹⁾	Primarily all of the asset-backed securities were highly rated (Standard & Poor’s rating of AAA and Moody’s Investors Service rating of Aaa), secured primarily by auto loan, credit card and student loan receivables, with weighted-average lives of primarily 5 years or less.


⁽²⁾	Investments included in other assets are restricted as to use, including for the payment of benefits under employee benefit plans.

⁽³⁾

The fair value determination of derivatives includes the impact of the credit risk of counterparties to the derivatives and the Company’s own credit risk, the effects of which were not significant.

Information About the Changes in Liabilities for Contingent Consideration

Summarized information about the changes in liabilities for contingent consideration associated with business acquisitions is as follows:



	Six Months Ended June 30,
($ in millions)	2020			2019
Fair value January 1	$	767		$	788
Additions	97			—
Changes in estimated fair value⁽¹⁾	40			50
Payments	(106		)	(85		)
Fair value June 30 ⁽²⁾⁽³⁾	$	798		$	753

⁽¹⁾ Recorded in Cost of sales, Research and development expenses, and Other (income) expense, net. Includes cumulative translation adjustments.

⁽²⁾ Balance at June 30, 2020 includes $138 million recorded as a current liability for amounts expected to be paid within the next 12 months.

⁽³⁾ At June 30, 2020 and December 31, 2019, $608 million and $625 million, respectively, of the liabilities relate to the termination of the Sanofi-Pasteur MSD joint venture in 2016. As part of the termination, Merck recorded a liability for contingent future royalty payments of 11.5% on net sales of all Merck products that were previously sold by the joint venture through December 31, 2024. The fair value of this liability is determined utilizing the estimated amount and timing of projected cash flows using a risk-adjusted discount rate of 8% to present value the cash flows.