Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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

The effects of the Company’s net investment hedges on OCI and the Condensed Consolidated Statement of Operations 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 September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2023		2022		2023		2022		2023		2022		2023		2022
Net Investment Hedging Relationships
Foreign exchange contracts	$	(1)	$	(1)	$	—	$	(47)	$	—	$	—	$	1	$	(2)
Euro-denominated notes	(100)		(250)		(26)		(431)		—		—		—		—

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

Summary of Interest Rate Swaps Held

At September 30, 2023, the Company was a party to three pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of a portion of fixed-rate notes as detailed in the table below.

	September 30, 2023
($ in millions)	Par Value of Debt		Number of Interest Rate Swaps Held	Total Swap Notional Amount
4.50% notes due 2033	$	1,500	3	$	750

Amounts Recorded on Balance Sheet Related to Fair Value Hedges

The table below presents the location of amounts recorded on the Condensed 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)	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Balance Sheet Line Item in which Hedged Item is Included
Long-Term Debt	$	743	$	—	$	(7)	$	—

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:

		September 30, 2023						December 31, 2022
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
($ in millions)		Asset		Liability				Asset		Liability
Derivatives Designated as Hedging Instruments	Balance Sheet Caption
Interest rate swap contracts	Other Noncurrent Liabilities	$	—	$	8	$	750	$	—	$	—	$	—
Foreign exchange contracts	Other current assets	321		—		8,059		220		—		4,824
Foreign exchange contracts	Other Assets	51		—		1,746		27		—		1,609
Foreign exchange contracts	Accrued and other current liabilities	—		4		680		—		101		2,691
Foreign exchange contracts	Other Noncurrent Liabilities	—		1		178		—		1		91
		$	372	$	13	$	11,413	$	247	$	102	$	9,215
Derivatives Not Designated as Hedging Instruments	Balance Sheet Caption
Foreign exchange contracts	Other current assets	$	229	$	—	$	8,485	$	186	$	—	$	8,540
Foreign exchange contracts	Accrued and other current liabilities	—		163		9,910		—		307		10,926
		$	229	$	163	$	18,395	$	186	$	307	$	19,466
		$	601	$	176	$	29,808	$	433	$	409	$	28,681

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:

	September 30, 2023				December 31, 2022
($ in millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the condensed consolidated balance sheet	$	601	$	176	$	433	$	409
Gross amounts subject to offset in master netting arrangements not offset in the condensed consolidated balance sheet	(138)		(138)		(220)		(220)
Cash collateral received/posted	(143)		—		(66)		(19)
Net amounts	$	320	$	38	$	147	$	170

Location and Amount of Pretax Gains and Losses of Derivatives

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

	Three Months Ended September 30,												Nine Months Ended September 30,
($ in millions)	2023		2022		2023		2022		2023		2022		2023		2022		2023		2022		2023		2022
Financial Statement Caption in which Effects of Fair Value or Cash Flow Hedges are Recorded	Sales				Other (income) expense, net (1)				Other comprehensive income (loss)				Sales				Other (income) expense, net (1)				Other comprehensive income (loss)
	$	15,962	$	14,959	$	126	$	429	$	(16)	$	(416)	$	45,485	$	45,453	$	388	$	1,576	$	(148)	$	(314)
(Gain) loss on fair value hedging relationships:
Interest rate swap contracts
Hedged items	—		—		(7)		1		—		—		—		—		(7)		(13)		—		—
Derivatives designated as hedging instruments	—		—		8		—		—		—		—		—		8		4		—		—
Impact of cash flow hedging relationships:
Foreign exchange contracts
Amount of gain recognized in OCI on derivatives	—		—		—		—		247		682		—		—		—		—		375		1,233
Increase in Sales as a result of AOCL reclassifications	45		253		—		—		(45)		(253)		170		491		—		—		(170)		(491)
Interest rate contracts
Amount of gain recognized in Other (income) expense, net on derivatives	—		—		—		(1)		—		—		—		—		(1)		(2)		—		—
Amount of (loss) gain recognized in OCI on derivatives	—		—		—		—		—		(1)		—		—		—		—		13		(2)

(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 September 30,				Nine Months Ended September 30,
($ in millions)		2023		2022		2023		2022
Derivatives Not Designated as Hedging Instruments	Income Statement Caption
Foreign exchange contracts (1)	Other (income) expense, net	$	60	$	(41)	$	32	$	(77)
Foreign exchange contracts (2)	Sales	—		(4)		(3)		(42)

(1)    These derivative contracts primarily 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:

	September 30, 2023								December 31, 2022
	Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value
($ in millions)			Gains		Losses						Gains		Losses
Commercial paper	$	168	$	—	$	—	$	168	$	498	$	—	$	—	$	498
U.S. government and agency securities	67		—		—		67		68		—		—		68
Corporate notes and bonds	12		—		—		12		3		—		—		3
Total debt securities	$	247	$	—	$	—	$	247	$	569	$	—	$	—	$	569
Publicly traded equity securities (1)							1,746								1,284
Total debt and publicly traded equity securities							$	1,993							$	1,853

(1)    Unrealized net gains of $61 million and $327 million were recorded in Other (income) expense, net in the third quarter and first nine months of 2023, respectively, on equity securities still held at September 30, 2023. Unrealized net losses of $221 million and $415 million were recorded in Other (income) expense, net in the third quarter and first nine months of 2022, respectively, on equity securities still held at September 30, 2022.

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)	September 30, 2023								December 31, 2022
Assets
Investments
Commercial paper	$	—	$	168	$	—	$	168	$	—	$	498	$	—	$	498
Publicly traded equity securities	1,306		—		—		1,306		1,015		—		—		1,015
	1,306		168		—		1,474		1,015		498		—		1,513
Other assets (1)
U.S. government and agency securities	67		—		—		67		68		—		—		68
Corporate notes and bonds	12		—		—		12		3		—		—		3
Publicly traded equity securities (2)	440		—		—		440		269		—		—		269
	519		—		—		519		340		—		—		340
Derivative assets (3)
Forward exchange contracts	—		431		—		431		—		218		—		218
Purchased currency options	—		170		—		170		—		215		—		215
	—		601		—		601		—		433		—		433
Total assets	$	1,825	$	769	$	—	$	2,594	$	1,355	$	931	$	—	$	2,286
Liabilities
Other liabilities
Contingent consideration	$	—	$	—	$	345	$	345	$	—	$	—	$	456	$	456
Derivative liabilities (3)
Forward exchange contracts	—		160		—		160		—		402		—		402
Written currency options	—		8		—		8		—		7		—		7
Interest rate swaps	—		8		—		8		—		—		—		—
	—		176		—		176		—		409		—		409
Total liabilities	$	—	$	176	$	345	$	521	$	—	$	409	$	456	$	865

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

(2)    Balance at September 30, 2023 includes securities with a total fair value of $132 million, which are subject to a contractual sale restriction that expires in July 2024.

(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 the fair value of liabilities for contingent consideration associated with business combinations is as follows:

($ in millions)	2023		2022
Fair value January 1	$	456	$	777
Changes in estimated fair value (1)	6		(156)
Payments	(117)		(119)
Other	—		(3)
Fair value September 30 (2)	$	345	$	499

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

(2)    At September 30, 2023, $255 million 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 to present value the cash flows. Balance at September 30, 2023 includes $126 million recorded as a current liability for amounts expected to be paid within the next 12 months.