XML 32 R15.htm IDEA: XBRL DOCUMENT v3.8.0.1
Financial Instruments
 9 Months Ended
Oct. 01, 2017
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)
 
October 1,
2017

 
December 31,
2016

Selected financial assets measured at fair value on a recurring basis(a)
 
 
 
 
Trading funds and securities(b)
 
$
347

 
$
325

Available-for-sale debt securities(c)
 
16,598

 
18,632

Money market funds
 
1,824

 
1,445

Available-for-sale equity securities(c)
 
1,032

 
540

Derivative financial instruments in a receivable position(d):
 
 

 
 

Interest rate swaps
 
630

 
625

Foreign currency swaps
 
92

 
79

Foreign currency forward-exchange contracts
 
110

 
551

 
 
20,631

 
22,198

Other selected financial assets
 
 

 
 

Held-to-maturity debt securities, carried at amortized cost(c), (e)
 
1,464

 
1,242

Restricted stock and private equity securities, carried at cost or at equity-method(e)
 
719

 
735

 
 
2,183

 
1,977

Total selected financial assets
 
$
22,815

 
$
24,175

Selected financial liabilities measured at fair value on a recurring basis(a)
 
 

 
 

Derivative financial instruments in a liability position(f):
 
 

 
 

Interest rate swaps
 
$
154

 
$
148

Foreign currency swaps
 
710

 
1,374

Foreign currency forward-exchange contracts
 
309

 
143

 
 
1,173

 
1,665

Other selected financial liabilities
 
 

 
 

Short-term borrowings:
 
 
 
 
Principal amount
 
9,460

 
10,674

Net fair value adjustments related to hedging and purchase accounting
 
2

 
24

Net unamortized discounts, premiums and debt issuance costs
 
(15
)
 
(11
)
Total short-term borrowings, carried at historical proceeds, as adjusted(e)
 
9,448

 
10,688

Long-term debt:
 
 
 
 
Principal amount
 
33,671

 
30,529

Net fair value adjustments related to hedging and purchase accounting
 
981

 
998

Net unamortized discounts, premiums and debt issuance costs
 
(149
)
 
(130
)
Total long-term debt, carried at historical proceeds, as adjusted(g)
 
34,503

 
31,398

 
 
43,951

 
42,085

Total selected financial liabilities
 
$
45,124

 
$
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 5% that use Level 1 inputs.
(b) 
As of October 1, 2017, trading funds and securities are composed of $274 million of trading equity funds and $74 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 October 1, 2017 and December 31, 2016, trading equity funds of $63 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, except as of October 1, 2017, available-for-sale equity securities’ unrealized gains are $406 million and unrealized losses are $119 million.
(d) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $40 million as of October 1, 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, restricted stock and private equity securities at cost, and short-term borrowings not measured at fair value on a recurring basis were not significant as of October 1, 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) 
Designated as hedging instruments, except for certain contracts used as offsets; namely, foreign currency forward-exchange contracts with fair values of $60 million as of October 1, 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.
(g) 
The fair value of our long-term debt (not including the current portion of long-term debt) was $39.0 billion as of October 1, 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 $4.7 billion as of October 1, 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)
 
October 1,
2017

 
December 31,
2016

Assets
 
 
 
 
Cash and cash equivalents
 
$
526

 
$
547

Short-term investments
 
14,146

 
15,255

Other current assets(a)
 
288

 
567

Long-term investments
 
7,311

 
7,116

Other noncurrent assets(b)
 
543

 
689

 
 
$
22,815

 
$
24,175

Liabilities
 
 

 
 

Short-term borrowings, including current portion of long-term debt
 
$
9,448

 
$
10,688

Other current liabilities(c)
 
277

 
443

Long-term debt
 
34,503

 
31,398

Other noncurrent liabilities(d)
 
896

 
1,222

 
 
$
45,124

 
$
43,750


(a) 
As of October 1, 2017, derivative instruments at fair value include interest rate swaps ($97 million), foreign currency swaps ($86 million) and foreign currency forward-exchange contracts ($105 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 October 1, 2017, derivative instruments at fair value include interest rate swaps ($532 million), foreign currency swaps ($6 million) and foreign currency forward-exchange contracts ($5 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 October 1, 2017, derivative instruments at fair value include foreign currency forward-exchange contracts ($276 million) and interest rate swaps ($1 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 October 1, 2017, derivative instruments at fair value include interest rate swaps ($153 million), foreign currency swaps ($710 million) and foreign currency forward-exchange contracts ($33 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
 
October 1,
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)
 
$
2,741

 
$
2,591

 
$
1,525

 
$
17

 
$
6,874

Western European, Asian, and other government debt(b)
 
6,071

 
268

 
—

 
—

 
6,339

Western European, Scandinavian and other government agency debt(b)
 
1,955

 
42

 
—

 
—

 
1,998

Supranational debt(b)
 
387

 
195

 
—

 
—

 
582

Government National Mortgage Association and other U.S. government guaranteed asset-backed securities
 
42

 
424

 
—

 
—

 
466

Other asset-backed debt(c)
 
161

 
61

 
3

 
—

 
226

U.S. government debt
 
—

 
112

 
—

 
—

 
112

Held-to-maturity debt securities
 
 
 
 
 
 

 
 
 
 

Time deposits and other
 
1,133

 
—

 
3

 
—

 
1,137

Western European government debt(b)
 
326

 
—

 
—

 
—

 
326

Total debt securities
 
$
12,818

 
$
3,694

 
$
1,532

 
$
18

 
$
18,061

(a) 
Issued by a diverse group of corporations, with a significant concentration in the technology sector, virtually 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 $6.1 billion as of October 1, 2017 and $5.8 billion as of December 31, 2016.

D. Long-Term Debt
The following table provides the amounts of senior unsecured long-term debt issued in the first quarter of 2017:
 
 
 
 
Principal
 
 
 
 
As of October 1, 2017
(MILLIONS)
 
Maturity Date
 
Euro

 
U.S. Dollar

3-month EURIBOR + 0.20% floating rate notes (0% floor)
 
March 6, 2019
 
€
1,250

 
$
1,479

0.00% euro notes(a)
 
March 6, 2020
 
1,000

 
1,183

0.25% euro notes(a)
 
March 6, 2022
 
1,000

 
1,183

1.00% euro notes(a)
 
March 6, 2027
 
750

 
887

Total euro long-term debt issued in the first quarter of 2017(b)
 
 
 
€
4,000

 
$
4,732

4.20% notes(c)
 
March 17, 2047
 
 
 
1,065

Total long-term debt issued in the first quarter of 2017(d)
 
 
 
 
 
$
5,797

(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.
(d) 
The aggregate amount at issuance date was $5,279 million. The increase in the amount since the date of issuance is due to foreign currency exchange.
The following table provides the maturity schedule of our Long-term debt outstanding as of October 1, 2017:
(MILLIONS OF DOLLARS)
 
2018
 
2019
 
2020
 
2021
 
After 2021
 
Total
Maturities
 
$
481

 
$
4,825

 
$
1,534

 
$
4,502

 
$
23,162

 
$
34,503



E. Other Noncurrent Liabilities

In August 2017, the U.S. approved Besponsa (inotuzumab ozogamicin) and in June 2017, the EU approved Besponsa as monotherapy for the treatment of adults with relapsed or refractory CD22-positive B-cell precursor acute lymphoblastic leukemia. In connection with the U.S. approval, we incurred an obligation to make guaranteed fixed annual payments over a nine-year period aggregating $296 million related to a research and development arrangement. As a result, we have recorded the estimated net present value of $248 million as an intangible asset in Developed technology rights, and we have recorded $233 million in Other noncurrent liabilities and $15 million in Other current liabilities as of October 1, 2017. In connection with the EU approval, we incurred an obligation to make guaranteed fixed annual payments over a nine-year period aggregating $148 million related to a research and development arrangement. As a result, we recorded the estimated net present value of $123 million as an intangible asset in Developed technology rights, and we have recorded $117 million in Other noncurrent liabilities and $6 million in Other current liabilities as of October 1, 2017. 

F. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk

As of October 1, 2017, the aggregate notional amount of foreign exchange derivative financial instruments hedging or offsetting foreign currency exposures was $31.5 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 $2.0 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, Canadian dollar, and Australian dollar-denominated intercompany inventory sales expected to occur no more than two years from the date of each hedge. As of October 1, 2017, the notional amount of outstanding foreign currency forward-exchange contracts hedging our intercompany forecasted sales was $3.9 billion, with a pre-tax loss of $97 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 loss of $63 million within the next 12 months into Cost of sales. We recognized a $4 million loss in the third quarter of 2017 and a $67 million gain in the first nine months of 2017 as an offset to Cost of sales.

Interest Rate Risk

As of October 1, 2017, the aggregate notional amount of interest rate derivative financial instruments designated as fair value hedges was $12.4 billion. The derivative financial instruments primarily hedge U.S. dollar 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)
 
October 1,
2017

 
October 2,
2016

 
October 1,
2017

 
October 2,
2016

 
October 1,
2017

 
October 2,
2016

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

 
$
—

 
$
218

 
$
87

 
$
148

 
$
(39
)
Foreign currency forward-exchange contracts
 
1

 
2

 
(269
)
 
(212
)
 
(204
)
 
(111
)
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
33

 
20

 
—

 
—

 
—

 
—

Foreign currency swaps
 
—

 
(4
)
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency long-term debt
 
—

 
—

 
(166
)
 
—

 
—

 
—

All other net
 
—

 
—

 
1

 
—

 
—

 
—

 
 
$
34

 
$
18

 
$
(216
)
 
$
(126
)
 
$
(55
)
 
$
(150
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine 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)
 
October 1,
2017

 
October 2,
2016

 
October 1,
2017

 
October 2,
2016

 
October 1,
2017

 
October 2,
2016

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

 
$
—

 
$
455

 
$
(204
)
 
$
419

 
$
(165
)
Foreign currency forward-exchange contracts
 
(5
)
 
1

 
(604
)
 
(770
)
 
(26
)
 
(118
)
Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
—

 
1

 
—

 
(15
)
 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Financial Instruments Not Designated as Hedges:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward-exchange contracts
 
(111
)
 
(49
)
 
—

 
—

 
—

 
—

Foreign currency swaps
 
(1
)
 
(9
)
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency short-term borrowings
 
—

 
—

 
—

 
(26
)
 
—

 
—

Foreign currency long-term debt
 
—

 
—

 
(518
)
 
—

 
—

 
—

All other net
 
—

 
—

 
1

 
1

 
—

 
—

 
 
$
(117
)
 
$
(56
)
 
$
(666
)
 
$
(1,014
)
 
$
394

 
$
(283
)
(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––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––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 October 1, 2017, the aggregate fair value of these derivative instruments that are in a net liability position was $491 million, for which we have posted collateral of $505 million in the normal course of business. If there had been a ratings downgrade, we would not have been required to post any additional collateral to our counterparties.

G. 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 October 1, 2017, we had $946 million due from a well-diversified, high quality group of technology 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 October 1, 2017, we received cash collateral of $232 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.