Financial Instruments

3 Months Ended

Apr. 02, 2017

A. Selected Financial Assets and Liabilities



The following table provides additional information about certain of our financial assets and liabilities:
(MILLIONS OF DOLLARS)	April 2, 2017			December 31, 2016
Selected financial assets measured at fair value on a recurring basis^(a)
Trading funds and securities^(b)	$	297		$	325
Available-for-sale debt securities^(c)	13,236			18,632
Money market funds	1,706			1,445
Available-for-sale equity securities^(c)	553			540
Derivative financial instruments in a receivable position^(d):
Interest rate swaps	648			625
Foreign currency swaps	232			79
Foreign currency forward-exchange contracts	179			551
	16,852			22,198
Other selected financial assets
Held-to-maturity debt securities, carried at amortized cost^{(c), (e)}	1,857			1,242
Restricted stock and private equity securities, carried at cost or at equity-method^(e), ^(f)	1,187			735
	3,044			1,977
Total selected financial assets	$	19,896		$	24,175
Selected financial liabilities measured at fair value on a recurring basis^(a)
Derivative financial instruments in a liability position^(g):
Interest rate swaps	$	227		$	148
Foreign currency swaps	1,396			1,374
Foreign currency forward-exchange contracts	143			143
	1,765			1,665
Other selected financial liabilities
Short-term borrowings:
Principal amount	7,678			10,674
Net fair value adjustments related to hedging and purchase accounting	10			24
Net unamortized discounts, premiums and debt issuance costs	(8		)	(11		)
Total short-term borrowings, carried at historical proceeds, as adjusted^(e)	7,680			10,688
Long-term debt:
Principal amount	35,590			30,529
Net fair value adjustments related to hedging and purchase accounting	896			998
Net unamortized discounts, premiums and debt issuance costs	(156		)	(130		)
Total long-term debt, carried at historical proceeds, as adjusted^(h)	36,330			31,398
	44,010			42,085
Total selected financial liabilities	$	45,775		$	43,750


^(a)	We use a market approach in valuing financial instruments on a recurring basis. 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 2% that use Level 1 inputs and money market funds measured at net asset value.

^(b)

As of April 2, 2017, trading funds and securities are composed of $238 million of trading equity funds and $59 million of trading debt funds. As of December 31, 2016, trading funds and securities are composed of $236 million of trading equity funds and $89 million of trading debt funds. As of April 2, 2017 and December 31, 2016, trading equity funds of $53 million and $71 million, respectively, are held in trust for benefits attributable to the former Pharmacia Savings Plus Plan.


^(c)	Gross unrealized gains and losses are not significant.


^(d)	Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $36 million as of April 2, 2017; and foreign currency forward-exchange contracts with fair values of $162 million as of December 31, 2016.

^(e)

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 April 2, 2017 or December 31, 2016. 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 carried at cost are based on Level 3 inputs.


^(f)	Restricted stock as of April 2, 2017 is primarily composed of $428 million representing the value of 3.2 million shares of ICU Medical common stock received on February 3, 2017. See Note 2B for additional information. Our private equity securities represent investments in the life sciences sector.

^(g)

Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency swaps with fair values of $261 million and foreign currency forward-exchange contracts with fair values of $106 million as of April 2, 2017; and foreign currency swaps with fair values of $269 million and foreign currency forward-exchange contracts with fair values of $113 million as of December 31, 2016.

^(h)

The fair value of our long-term debt (not including the current portion of long-term debt) was $40.4 billion as of April 2, 2017 and $34.9 billion as of December 31, 2016. The fair value measurements for our long-term debt are based on Level 2 inputs, using a market approach. Long-term debt includes foreign currency long-term borrowings with fair values of $4.3 billion as of April 2, 2017, which are used as hedging instruments.



The following table provides the classification of these selected financial assets and liabilities in our condensed consolidated balance sheets:
(MILLIONS OF DOLLARS)	April 2, 2017		December 31, 2016
Assets
Cash and cash equivalents	$	986	$	547
Short-term investments	10,503		15,255
Other current assets^(a)	511		567
Long-term investments	7,346		7,116
Other noncurrent assets^(b)	549		689
	$	19,896	$	24,175
Liabilities
Short-term borrowings, including current portion of long-term debt	$	7,680	$	10,688
Other current liabilities^(c)	434		443
Long-term debt	36,330		31,398
Other noncurrent liabilities^(d)	1,331		1,222
	$	45,775	$	43,750


^(a)	As of April 2, 2017, derivative instruments at fair value include interest rate swaps ($159 million), foreign currency swaps ($195 million) and foreign currency forward-exchange contracts ($156 million) and, as of December 31, 2016, include interest rate swaps ($26 million), foreign currency swaps ($43 million) and foreign currency forward-exchange contracts ($497 million).


^(b)	As of April 2, 2017, derivative instruments at fair value include interest rate swaps ($489 million), foreign currency swaps ($37 million) and foreign currency forward-exchange contracts ($23 million) and, as of December 31, 2016, include interest rate swaps ($599 million), foreign currency swaps ($36 million) and foreign currency forward-exchange contracts ($54 million).


^(c)	As of April 2, 2017, derivative instruments at fair value include foreign currency swaps ($296 million) and foreign currency forward-exchange contracts ($138 million) and, as of December 31, 2016, include interest rate swaps ($1 million), foreign currency swaps ($300 million) and foreign currency forward-exchange contracts ($143 million).


^(d)	As of April 2, 2017, derivative instruments at fair value include interest rate swaps ($226 million), foreign currency swaps ($1.1 billion) and foreign currency forward-exchange contracts ($5 million) and, as of December 31, 2016, include interest rate swaps ($147 million) and foreign currency swaps ($1.1 billion).

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, or as necessary, the estimated maturities, of the available-for-sale and held-to-maturity debt securities:
	Years								April 2, 2017
(MILLIONS OF DOLLARS)	Within 1		Over 1 to 5		Over 5 to 10		Over 10		Total
Available-for-sale debt securities
Corporate debt^(a)	$	2,418	$	2,709	$	1,567	$	14	$	6,708
Western European, Scandinavian and other government debt^(b)	3,090		422		—		—		3,512
Western European, Scandinavian and other government agency debt^(b)	875		137		—		—		1,012
Government National Mortgage Association and other U.S. government guaranteed asset-backed securities	556		—		—		—		556
Other asset-backed debt^(c)	355		120		17		3		495
U.S. government debt	427		60		—		—		487
Supranational debt^(b)	220		245		—		—		465
Held-to-maturity debt securities
Time deposits and other	1,505		—		3		—		1,509
Western European government debt^(b)	348		—		—		—		348
Total debt securities	$	9,795	$	3,693	$	1,587	$	17	$	15,092


^(a)	Issued by a diverse group of corporations, with a significant concentration in the technology sector, all of which are investment-grade.


^(b)	Issued by governments, government agencies or supranational entities, as applicable, all of which are high quality.

^(c)

Includes receivable-backed,loan-backed, and mortgage-backed securities, all of which are high quality and in senior positions in the capital structure of the security. Receivable-backed securities are collateralized by credit cards receivables, loan-backed securities are collateralized by senior secured obligations of a diverse pool of companies or student loans, and mortgage-backed securities are collateralized by diversified pools of residential and commercial mortgages.

C. Short-Term Borrowings

Short-term borrowings include amounts for commercial paper of $4.1 billion as of April 2, 2017 and $5.8 billion as of December 31, 2016.

D. Long-Term Debt



The following table provides the principal amounts of senior unsecured long-term debt issued in the first quarter of 2017:
		As of April 2, 2017
(MILLIONS)	Maturity Date	Euro		U.S. Dollar
3-month EURIBOR + 0.20% floating rate notes (0% floor)	March 6, 2019	€	1,250	$	1,335
0.00% euro notes^(a)	March 6, 2020	1,000		1,068
0.25% euro notes^(a)	March 6, 2022	1,000		1,068
1.00% euro notes^(a)	March 6, 2027	750		801
Total euro long-term debt issued in the first quarter of 2017^(b)		€	4,000	$	4,271
4.20% notes^(c)	March 17, 2047			1,065
Total long-term debt issued in the first quarter of 2017				$	5,336


^(a)	Redeemable at any time, in whole, or in part, at our option prior to 30 to 90 days of maturity date at the comparable German government bond rate, plus 0.15%; plus, in each case, accrued and unpaid interest. The fixed rate euro notes are also redeemable at our option, in whole, or in part, within 30 to 90 days of maturity date.

^(b)The weighted average effective interest rate for the euro notes at issuance was 0.23%.


^(c)	The notes, issued in U.S. dollars in Taiwan, are redeemable, at our option, in whole but not in part, on each March 17 on or after March 17, 2020.



The following table provides the maturity schedule of our Long-term debt outstanding as of April 2, 2017:
(MILLIONS OF DOLLARS)	2018		2019		2020		2021		After 2021		Total
Maturities	$	3,235	$	4,682	$	1,422	$	4,270	$	22,721	$	36,330

E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of April 2, 2017, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures was $26.3 billion. The derivative financial instruments primarily hedge or offset exposures in the euro, Japanese yen and U.K. pound. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $1.9 billion U.K. pound debt maturing in 2038.

We designate foreign currency forward-exchange contracts as cash flow hedges of a portion of our forecasted euro, Japanese yen, U.K. pound, Australian dollar, and Canadian dollar-denominated intercompany inventory sales expected to occur no more than two years from the date of each hedge. As of April 2, 2017, the notional amount of outstanding foreign currency forward-exchange contracts hedging our intercompany forecasted sales was $3.2 billion, with a pre-tax gain of $112 million deferred in Accumulated other comprehensive loss. Based on quarter-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax gain of $96 million within the next 12 months into Cost of sales. In the first quarter of 2017, we recognized a $45 million gain as an offset to Cost of sales.

Interest Rate Risk

As of April 2, 2017, the aggregate notional amount of interest rate derivative financial instruments designated as fair value hedges was $14.9 billion. The derivative financial instruments primarily hedge U.S. dollar and euro fixed-rate debt.



The following table provides information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk:
	Three Months Ended
	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 and COS (Effective Portion)^{(a), (d)}
(MILLIONS OF DOLLARS)	April 2, 2017			April 3, 2016			April 2, 2017			April 3, 2016			April 2, 2017		April 3, 2016
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign currency swaps	$	—		$	—		$	88		$	55		$	46	$	118
Foreign currency forward-exchange contracts	(3		)	1			(96		)	(328		)	195		221
Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign currency forward-exchange contracts	—			(2		)	—			(12		)	—		—

Derivative Financial Instruments Not Designated as Hedges:
Foreign currency forward-exchange contracts	(141		)	(1		)	—			—			—		—
Foreign currency swaps	1			(23		)	—			—			—		—

Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign currency short-term borrowings	—			—			—			(26		)	—		—
Foreign currency long-term debt	—			—			(57		)	—			—		—
	$	(143	)	$	(25	)	$	(66	)	$	(311	)	$	242	$	339


^(a)	OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the condensed consolidated statements of income. COS = Cost of sales, included in Cost of sales in the condensed consolidated statements of income.

OCI = Other comprehensive income/(loss), included in the condensed consolidated statements of comprehensive income.


^(b)	Includes gains and losses attributable to derivative instruments designated and qualifying as fair value hedges (primarily interest rate swaps), as well as the offsetting gains and losses attributable to the hedged items in such hedging relationships.


^(c)	There was no significant ineffectiveness for any period presented.

^(d)

For derivative financial instruments in cash flow hedge relationships, the effective portion is included in Other comprehensive income/(loss)––Unrealized holding losses on derivative financial instruments, net. 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, net.

For information about the fair value of our derivative financial instruments, and the impact on our condensed consolidated balance sheets, see Note 7A 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 April 2, 2017, the aggregate fair value of these derivative instruments that are in a net liability position was $837 million, for which we have posted collateral of $882 million in the normal course of business. If there had been a ratings downgrade, we would not have been required to post any collateral to our counterparties.

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, except for certain significant customers. As of April 2, 2017, we had $890 million due from a well-diversified, high quality group of technology sector companies around the world. For details about our investments, see Note 7B above.

In general, there is no requirement for collateral from customers. However, derivative financial instruments are executed under credit-support agreements that provide for the ability to request collateral payments depending on levels of exposure, our credit rating and the credit rating of the counterparty. As of April 2, 2017, we received cash collateral of $242 million from various counterparties. The collateral primarily supports the approximate fair value of our derivative contracts. With respect to the collateral received, the obligations are reported in Short-term borrowings, including current portion of long-term debt.