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Financial Instruments
 9 Months Ended
Sep. 29, 2013
Financial Instruments [Abstract]  
Financial Instruments
Financial Instruments

A. Selected Financial Assets and Liabilities

The following table provides additional information about certain of our financial assets and liabilities:
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
December 31,
2012

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading securities(b)
 
$
122

 
$
142

Available-for-sale debt securities(c)
 
42,534

 
32,584

Available-for-sale money market funds(d)
 
1,533

 
1,727

Available-for-sale equity securities, excluding money market funds(c)
 
379

 
263

Derivative financial instruments in receivable positions(e):
 
 

 
 

Interest rate swaps
 
495

 
1,036

Foreign currency swaps
 
524

 
194

Foreign currency forward-exchange contracts
 
143

 
152

 
 
45,730

 
36,098

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (f)
 
1,465

 
1,459

Private equity securities, carried at equity-method or at cost(f), (g)
 
2,250

 
1,239

 
 
3,715

 
2,698

Total selected financial assets
 
$
49,445

 
$
38,796

Financial liabilities measured at fair value on a recurring basis(a)
 
 
 
 
Derivative financial instruments in a liability position(h):
 
 
 
 
Interest rate swaps
 
$
200

 
$
33

Foreign currency swaps
 
188

 
428

Foreign currency forward-exchange contracts
 
208

 
243

 
 
596

 
704

Other financial liabilities(i)
 
 

 
 

Short-term borrowings, carried at historical proceeds, as adjusted(f)
 
4,738

 
6,424

Long-term debt, carried at historical proceeds, as adjusted(j), (k)
 
31,812

 
31,036

 
 
36,550

 
37,460

Total selected financial liabilities
 
$
37,146

 
$
38,164

(a) 
We use a market approach in valuing financial instruments on a recurring basis. For additional information, see Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value. All of our financial assets and liabilities measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value, except less than 1% that use Level 1 or Level 3 inputs.
(b) 
Trading securities are held in trust for legacy business acquisition severance benefits.
(c) 
Gross unrealized gains and losses are not significant.
(d) 
Includes $447 million as of September 29, 2013 and $408 million as of December 31, 2012 of money market funds held in trust in connection with the asbestos litigation involving Quigley Company, Inc., a wholly owned subsidiary.
(e) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $14 million and foreign currency forward-exchange contracts with fair values of $65 million as of September 29, 2013; and, foreign currency forward-exchange contracts with fair values of $102 million as of December 31, 2012.
(f) 
The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities at cost and short-term borrowings not measured at fair value on a recurring basis were not significant as of September 29, 2013 or December 31, 2012. The fair value measurements of our held-to-maturity debt securities and our short-term borrowings are based on Level 2 inputs, using a market approach. The fair value measurements of our private equity securities at cost are based on Level 3 inputs, using a market approach.
(g) 
Our private equity securities represent investments in the life sciences sector. The increase in 2013 primarily reflects an increased investment in our equity-method investment in China. For additional information, see Note 2D. Acquisitions, Divestitures, Collaborative Arrangement and Equity-Method Investments: Equity-Method Investments.
(h) 
Designated as hedging instruments, except for certain foreign currency contracts used as offsets; namely, foreign currency swaps with fair values of $97 million and foreign currency forward-exchange contracts with fair values of $83 million as of September 29, 2013; and, foreign currency swaps with fair values of $129 million and foreign currency forward-exchange contracts with fair values of $141 million as of December 31, 2012.
(i) 
Some carrying amounts include adjustments for discount or premium amortization or for the effect of interest rate swaps designated as hedges.
(j) 
Includes foreign currency debt with fair values of $697 million as of September 29, 2013 and $809 million as of December 31, 2012, which are used as hedging instruments.
(k) 
The fair value of our long-term debt (not including the current portion of long-term debt) is $36.4 billion as of September 29, 2013 and $37.5 billion as of December 31, 2012. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach.

The following table provides the classification of these selected financial assets and liabilities in the condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)
 
September 29,
2013

 
December 31,
2012

Assets
 
 
 
 
Cash and cash equivalents
 
$
925

 
$
947

Short-term investments
 
31,627

 
22,318

Long-term investments
 
15,731

 
14,149

Taxes and other current assets(a)
 
200

 
296

Taxes and other noncurrent assets(b)
 
962

 
1,086

 
 
$
49,445

 
$
38,796

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
4,738

 
$
6,424

Other current liabilities(c)
 
222

 
330

Long-term debt
 
31,812

 
31,036

Other noncurrent liabilities(d)
 
374

 
374

 
 
$
37,146

 
$
38,164

(a) 
As of September 29, 2013, derivative instruments at fair value include interest rate swaps ($35 million), foreign currency swaps ($22 million) and foreign currency forward-exchange contracts ($143 million) and, as of December 31, 2012, include foreign currency swaps ($144 million) and foreign currency forward-exchange contracts ($152 million).
(b) 
As of September 29, 2013, derivative instruments at fair value include interest rate swaps ($460 million) and foreign currency swaps ($502 million) and, as of December 31, 2012, include interest rate swaps ($1.0 billion) and foreign currency swaps ($50 million).
(c) 
As of September 29, 2013, derivative instruments at fair value include foreign currency swaps ($14 million) and foreign currency forward-exchange contracts ($208 million) and, as of December 31, 2012, include foreign currency swaps ($87 million) and foreign currency forward-exchange contracts ($243 million).
(d) 
As of September 29, 2013, derivative instruments at fair value include interest rate swaps ($200 million) and foreign currency swaps ($174 million) and, as of December 31, 2012, include interest rate swaps ($33 million) and foreign currency swaps ($341 million).

In addition, we have long-term receivables where the determination of fair value employs discounted future cash flows, using current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The differences between the estimated fair values and carrying values of these receivables were not significant as of September 29, 2013 or December 31, 2012.

There were no significant impairments of financial assets recognized in any period presented.

B. Investments in Debt Securities

The following table provides the contractual maturities of the available-for-sale and held-to-maturity debt securities:
 
 
Years
 
 
 
 
 
 
Over 1

 
Over 5

 
 
 
September 29,
2013

(MILLIONS OF DOLLARS)
 
Within 1

 
to 5

 
to 10

 
Over 10

 
Total

Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
Western European, Scandinavian and other government debt(a)
 
$
20,409

 
$
2,225

 
$
—

 
$
—

 
$
22,634

Corporate debt(b)
 
2,152

 
4,479

 
1,097

 
348

 
8,076

Western European, Scandinavian and other government agency debt(a)
 
2,955

 
440

 
—

 
—

 
3,395

Reverse repurchase agreements(c)
 
2,270

 
—

 
—

 
—

 
2,270

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
663

 
873

 
11

 
524

 
2,071

Supranational debt(a)
 
1,086

 
919

 
—

 
—

 
2,005

Federal Home Loan Mortgage Corporation and Federal National Mortgage Association asset-backed securities
 
—

 
1,668

 
—

 
16

 
1,684

U.S. government debt
 
77

 
273

 
49

 
—

 
399

Held-to-maturity debt securities
 
 

 
 

 
 
 
 

 
 

Certificates of deposit and other
 
1,398

 
67

 
—

 
—

 
1,465

Total debt securities
 
$
31,010

 
$
10,944

 
$
1,157

 
$
888

 
$
43,999

(a) 
All issued by above-investment-grade governments, government agencies or supranational entities, as applicable.
(b) 
Largely issued by above-investment-grade institutions in the financial services sector.
(c) 
Involving U.S. and U.K. government securities.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $1.3 billion and $2.7 billion as of September 29, 2013 and December 31, 2012, respectively.

D. Long-Term Debt

On June 3, 2013, we completed a public offering of $4.0 billion aggregate principal amount of senior unsecured notes. In addition, we repaid at maturity our 3.625% senior unsecured notes that were due June 2013, which had a balance of $2.4 billion at December 31, 2012.

The following table provides the components of the senior unsecured long-term debt issued in the second quarter of 2013:
 
 
 
 
As of
September 29,

(MILLIONS OF DOLLARS)
 
Maturity Date
 
2013

1.50%(a)
 
June 2018
 
$
1,000

3.00%(b)
 
June 2023
 
1,000

0.90%(a)
 
January 2017
 
750

4.30%(b)
 
June 2043
 
750

Three-month London Interbank Offering Rate (LIBOR) plus 0.30%
 
June 2018
 
500

Total long-term debt issued in the second quarter of 2013
 
 
 
$
4,000


(a) 
Instrument is callable by us at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate, plus 0.10% plus, in each case, accrued and unpaid interest.
(b) 
Instrument is callable by us at any time at the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest discounted at the U.S. Treasury rate, plus 0.15% plus, in each case, accrued and unpaid interest.

The following table provides the maturity schedule of our Long-term debt outstanding as of September 29, 2013:
(MILLIONS OF DOLLARS)
 
2014

 
2015

 
2016

 
2017

 
After 2017

 
Total

Maturities
 
$
1,259

 
$
3,026

 
$
4,439

 
$
2,653

 
$
20,435

 
$
31,812



E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of September 29, 2013, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures is $41.7 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen, U.K. pound and Swiss franc. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $2.4 billion U.K. pound debt maturing in 2038.
 
Interest Rate Risk
 
As of September 29, 2013, the aggregate notional amount of interest rate derivative financial instruments is $16.5 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.

The following table provides information about the gains/(losses) recognized to hedge or offset operational foreign exchange or interest rate risk:
 
 
Amount of
Gains/(Losses)
Recognized in OID(a), (b), (c)
 
Amount of
Gains/(Losses)
Recognized in OCI
(Effective Portion)(a), (d)
 
Amount of
Gains/(Losses)
Reclassified from
OCI into OID
(Effective Portion)(a), (d)
(MILLIONS OF DOLLARS)
 
Sep 29,
2013

 
Sep 30,
2012

 
Sep 29,
2013

 
Sep 30,
2012

 
Sep 29,
2013

 
Sep 30,
2012

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Cash Flow Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
$
—

 
$
—

 
$
489

 
$
455

 
$
313

 
$
221

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
—

 
—

 
(2
)
 
(40
)
 
—

 
—

Foreign currency forward-exchange contracts
 
(4
)
 
—

 
(1
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(81
)
 
(201
)
 
—

 
—

 
—

 
—

Foreign currency swaps
 
(15
)
 
10

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency long-term debt
 
—

 
—

 
(4
)
 
(20
)
 
—

 
—

All other net
 
—

 
—

 
1

 
—

 
—

 
—

 
 
$
(100
)
 
$
(191
)
 
$
483

 
$
395

 
$
313

 
$
221

Nine Months Ended
 
 

 
 

 
 

 
 

 
 

 
 

Derivative Financial Instruments in Cash Flow Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
$
—

 
$
—

 
$
334

 
$
237

 
$
64

 
$
89

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps
 
(3
)
 
(2
)
 
137

 
32

 
—

 
—

Foreign currency forward-exchange contracts
 
(4
)
 
—

 
(1
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 
 
 
 
 
 
 
 
 
Foreign currency forward-exchange contracts
 
47

 
(138
)
 
—

 
—

 
—

 
—

Foreign currency swaps
 
(14
)
 
(7
)
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency long-term debt
 
—

 
—

 
93

 
3

 
—

 
—

All other net
 
—

 
2

 
2

 
5

 
—

 
5

 
 
$
26

 
$
(145
)
 
$
565

 
$
277

 
$
64

 
$
94

(a) 
OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.
(b) 
Also includes gains and losses attributable to the hedged risk in fair value hedge relationships.
(c) 
There was no significant ineffectiveness for any period presented.
(d) 
Amounts presented represent the effective portion of the gain or loss. For derivative financial instruments in cash flow hedge relationships, the effective portion is included in Other comprehensive income/(loss)––Unrealized holding gains on derivative financial instruments. For derivative financial instruments in net investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other comprehensive income/(loss)––Foreign currency translation adjustments.

For information about the fair value of our derivative financial instruments, and the impact on our condensed consolidated balance sheets, see Note 7A. Financial Instruments: Selected Financial Assets and Liabilities above. Certain of our derivative instruments are covered by associated credit-support agreements that have credit-risk-related contingent features designed to reduce our counterparties’ exposure to our risk of defaulting on amounts owed. As of September 29, 2013, the aggregate fair value of these derivative instruments that are in a net liability position is $250 million, for which we have posted collateral of $221 million in the normal course of business. These features include the requirement to pay additional collateral in the event of a downgrade in our debt ratings. If there had been a downgrade to below an A rating by S&P or the equivalent rating by Moody’s Investors Service, on September 29, 2013, we would have been required to post an additional $46 million of collateral to our counterparties. The collateral advanced receivables are reported in Cash and cash equivalents.

F. Credit Risk

On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do not expect to incur a significant loss from failure of any counterparties to perform under the agreements. There are no significant concentrations of credit risk related to our financial instruments with any individual counterparty. As of September 29, 2013, we had $2.5 billion due from a well-diversified, highly rated group (S&P ratings of mostly A+ or better) of bank counterparties around the world. For details about our investments, see Note 7B. Financial Instruments: Investments in Debt Securities.

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under master netting agreements with financial institutions and these agreements contain provisions that provide for collateral payments, depending on levels of exposure, our credit rating and the credit rating of the counterparty. For information about our financial instruments (excluding the impact of collateral), see Note 7A. Financial Instruments: Selected Financial Assets and Liabilities and Note 7B. Financial Instruments: Investments in Debt Securities above. For information about the collateral posted on our derivative instruments, see Note 7E. Financial Instruments: Derivative Financial Instruments and Hedging Activities above. As of September 29, 2013, we received cash collateral of $526 million from various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, which is included in Cash and cash equivalents, the obligations are reported in Short-term borrowings, including current portion of long-term debt.