Financial Instruments

3 Months Ended

Apr. 02, 2023

A. Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis and Fair Value Hierarchy, using a Market Approach:


	April 2, 2023						December 31, 2022
(MILLIONS)	Total		Level 1		Level 2		Total		Level 1		Level 2
Financial assets:
Short-term investments
Equity securities with readily determinable fair values:
Money market funds	$	1,165	$	—	$	1,165	$	1,588	$	—	$	1,588

Available-for-sale debt securities:
Government and agency—non-U.S.	13,278		—		13,278		15,915		—		15,915
Government and agency—U.S.	927		—		927		1,313		—		1,313
Corporate and other	1,914		—		1,914		1,514		—		1,514
	16,118		—		16,118		18,743		—		18,743
Total short-term investments	17,283		—		17,283		20,331		—		20,331
Other current assets
Derivative assets:

Foreign exchange contracts	734		—		734		714		—		714
Total other current assets	734		—		734		714		—		714
Long-term investments
Equity securities with readily determinable fair values(a)	2,355		2,348		7		2,836		2,823		13

Available-for-sale debt securities:
Government and agency—non-U.S.	261		—		261		280		—		280

Corporate and other	72		—		72		72		—		72
	333		—		333		352		—		352
Total long-term investments	2,688		2,348		340		3,188		2,823		365
Other noncurrent assets
Derivative assets:

Foreign exchange contracts	295		—		295		364		—		364
Total derivative assets	295		—		295		364		—		364
Insurance contracts(b)	700		—		700		665		—		665
Total other noncurrent assets	995		—		995		1,028		—		1,028
Total assets	$	21,699	$	2,348	$	19,352	$	25,261	$	2,823	$	22,439

Financial liabilities:
Other current liabilities
Derivative liabilities:
Interest rate contracts	$	—	$	—	$	—	$	10	$	—	$	10
Foreign exchange contracts	382		—		382		694		—		694
Total other current liabilities	383		—		383		704		—		704
Other noncurrent liabilities
Derivative liabilities:
Interest rate contracts	274		—		274		321		—		321
Foreign exchange contracts	832		—		832		864		—		864
Total other noncurrent liabilities	1,105		—		1,105		1,185		—		1,185
Total liabilities	$	1,488	$	—	$	1,488	$	1,889	$	—	$	1,889

(a)Long-term equity securities of $115 million as of April 2, 2023 and $143 million as of December 31, 2022 were held in restricted trusts for U.S. non-qualified employee benefit plans.

(b)Includes life insurance policies held in restricted trusts for U.S. non-qualified employee benefit plans. The underlying invested assets in these contracts are marketable securities, which are carried at fair value, with changes in fair value recognized in Other (income)/deductions—net (see Note 4).

Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis––The carrying value of Long-term debt, excluding the current portion was $32 billion as of April 2, 2023 and $33 billion as of December 31, 2022. The estimated fair value of such debt, using a market approach and Level 2 inputs, was $30 billion as of April 2, 2023 and $30 billion as of December 31, 2022.

The differences between the estimated fair values and carrying values of held-to-maturity debt securities, private equity securities, long-term receivables and short-term borrowings not measured at fair value on a recurring basis were not significant

as of April 2, 2023 and December 31, 2022. The fair value measurements of our held-to-maturity debt securities and short-term borrowings are based on Level 2 inputs. The fair value measurements of our long-term receivables and private equity securities are based on Level 3 inputs.

B. Investments

Total Short-Term, Long-Term and Equity-Method Investments


The following summarizes our investments by classification type:
(MILLIONS)	April 2, 2023		December 31, 2022
Short-term investments
Equity securities with readily determinable fair values(a)	$	1,165	$	1,588
Available-for-sale debt securities	16,118		18,743
Held-to-maturity debt securities	523		1,985
Total Short-term investments	$	17,806	$	22,316

Long-term investments
Equity securities with readily determinable fair values(b)	$	2,355	$	2,836

Available-for-sale debt securities	333		352
Held-to-maturity debt securities	52		48
Private equity securities at cost(b)	828		800
Total Long-term investments	$	3,568	$	4,036
Equity-method investments	11,175		11,033
Total long-term investments and equity-method investments	$	14,743	$	15,069
Held-to-maturity cash equivalents	$	436	$	679

(a)Includes money market funds primarily invested in U.S. Treasury and government debt.

(b)Represent investments in the life sciences sector.

Debt Securities


Our investment portfolio consists of investment-grade debt securities issued across diverse governments, corporate and financial institutions:
	April 2, 2023														December 31, 2022
			Gross Unrealized						Contractual or Estimated Maturities (in Years)								Gross Unrealized
(MILLIONS)	Amortized Cost		Gains		Losses		Fair Value		Within 1		Over 1 to 5		Over 5		Amortized Cost		Gains		Losses		Fair Value
Available-for-sale debt securities
Government and agency––non-U.S.	$	13,702	$	51	$	(214)	$	13,539	$	13,278	$	261	$	—	$	15,946	$	297	$	(48)	$	16,195
Government and agency––U.S.	927		—		—		927		927		—		—		1,313		—		—		1,313
Corporate and other	1,992		—		(7)		1,985		1,914		72		—		1,584		7		(4)		1,586
Held-to-maturity debt securities
Time deposits and other	936		—		—		936		888		34		14		1,171		—		—		1,171
Government and agency––non-U.S.	75		—		—		75		71		3		1		1,542		—		—		1,542
Total debt securities	$	17,632	$	51	$	(221)	$	17,462	$	17,077	$	371	$	15	$	21,556	$	304	$	(53)	$	21,807

Any expected credit losses to these portfolios would be immaterial to our financial statements.

Equity Securities


The following presents the calculation of the portion of unrealized (gains)/losses that relates to equity securities, excluding equity-method investments, held at the reporting date:
	Three Months Ended
(MILLIONS)		April 2, 2023		April 3, 2022
Net (gains)/losses recognized during the period on equity securities(a)		$	451	$	699
Less: Net (gains)/losses recognized during the period on equity securities sold during the period		(33)		(11)
Net unrealized (gains)/losses during the reporting period on equity securities still held at the reporting date(b)		$	485	$	710

(a)Reported in Other (income)/deductions––net. See Note 4.

(b)Included in net unrealized (gains)/losses are observable price changes on equity securities without readily determinable fair values. As of April 2, 2023, there were cumulative impairments and downward adjustments of $171 million and upward adjustments of $203 million. Impairments, downward and upward adjustments were not significant in the first quarters of 2023 and 2022.

C. Short-Term Borrowings


Short-term borrowings include:
(MILLIONS)	April 2, 2023		December 31, 2022

Current portion of long-term debt, principal amount	$	3,550	$	2,550
Other short-term borrowings, principal amount(a)	622		385
Total short-term borrowings, principal amount	4,172		2,935
Net fair value adjustments	17		10

Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted	$	4,188	$	2,945

(a)Primarily includes cash collateral. See Note 7F.

D. Long-Term Debt


The following summarizes the aggregate principal amount of our senior unsecured long-term debt, and adjustments to report our aggregate long-term debt:
(MILLIONS)	April 2, 2023		December 31, 2022
Total long-term debt, principal amount	$	30,909	$	32,080
Net fair value adjustments related to hedging and purchase accounting	966		959
Net unamortized discounts, premiums and debt issuance costs	(171)		(175)
Other long-term debt	—		20
Total long-term debt, carried at historical proceeds, as adjusted	$	31,704	$	32,884

E. Derivative Financial Instruments and Hedging Activities

Foreign Exchange Risk––A significant portion of our revenues, earnings and net investments in foreign affiliates is exposed to changes in foreign exchange rates. Where foreign exchange risk is not offset by other exposures, we manage our foreign exchange risk principally through the use of derivative financial instruments and foreign currency debt. These financial instruments serve to mitigate the impact on net income as a result of remeasurement into another currency, or against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.

The derivative financial instruments primarily hedge or offset exposures in the euro, U.K. pound, Japanese yen, Chinese renminbi, Canadian dollar and Singapore dollar, and include a portion of our forecasted foreign exchange-denominated intercompany inventory sales hedged up to two years. We may seek to protect against possible declines in the reported net investments of our foreign business entities.

Interest Rate Risk––Our interest-bearing investments and borrowings are subject to interest rate risk. Depending on market conditions, we may change the profile of our outstanding debt or investments by entering into derivative financial instruments like interest rate swaps, either to hedge or offset the exposure to changes in the fair value of hedged items with fixed interest rates, or to convert variable rate debt or investments to fixed rates. The derivative financial instruments primarily hedge U.S. dollar fixed-rate debt.


The following summarizes the fair value of the derivative financial instruments and notional amounts:
	April 2, 2023						December 31, 2022
			Fair Value						Fair Value
(MILLIONS)	Notional		Asset		Liability		Notional		Asset		Liability
Derivatives designated as hedging instruments:
Foreign exchange contracts(a)	$	26,179	$	809	$	1,038	$	26,603	$	838	$	1,196
Interest rate contracts	2,250		—		274		2,250		—		331
			809		1,311				838		1,527
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	21,870	220		177		$	29,814	240		362

Total			$	1,029	$	1,488			$	1,078	$	1,889

(a)The notional amount of outstanding foreign exchange contracts hedging our intercompany forecasted inventory sales was $4.5 billion as of April 2, 2023 and $4.4 billion as of December 31, 2022.


The following summarizes information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk exposures:
	Gains/(Losses) Recognized in OID(a)				Gains/(Losses) Recognized in OCI(a)				Gains/(Losses) Reclassified from OCI into OID and COS(a)
	Three Months Ended
(MILLIONS)	April 2, 2023		April 3, 2022		April 2, 2023		April 3, 2022		April 2, 2023		April 3, 2022
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(b)	$	—	$	—	$	(53)	$	187	$	(356)	$	195
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		55		16		53		18
Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	48		(156)		—		—		—		—
Hedged item	(48)		156		—		—		—		—


Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		(213)		259		—		—
Amount excluded from effectiveness testing and amortized into earnings(c)	—		—		67		(74)		34		30
Non-Derivative Financial Instruments in Net Investment Hedge Relationships:(d)
Foreign currency short-term borrowings	—		—		—		26		—		—
Foreign currency long-term debt	—		—		(16)		23		—		—
Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	17		(19)		—		—		—		—

	$	17	$	(19)	$	(160)	$	436	$	(269)	$	243

(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)The amounts reclassified from OCI into COS were a net gain of $91 million in the first quarter of 2023 and a net gain of $34 million in the first quarter of 2022. The remaining amounts were reclassified from OCI into OID. Based on quarter-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax gain of $235 million within the next 12 months into income. The maximum length of time over which we are hedging our exposure to the variability in future foreign exchange cash flows is approximately 20 years and relates to foreign currency debt.

(c)The amounts reclassified from OCI were reclassified into OID.

(d)Short-term borrowings and long-term debt include foreign currency borrowings, which are used in net investment hedges. The related long-term debt carrying values as of April 2, 2023 and December 31, 2022 were $811 million and $795 million, respectively.


The following summarizes cumulative basis adjustments to our debt in fair value hedges:
	April 2, 2023						December 31, 2022
			Cumulative Amount of Fair Value Hedging Adjustment Increase/(Decrease) to Carrying Amount						Cumulative Amount of Fair Value Hedging Adjustment Increase/(Decrease) to Carrying Amount
(MILLIONS)	Carrying Amount of Hedged Assets/Liabilities(a)		Active Hedging Relationships		Discontinued Hedging Relationships		Carrying Amount of Hedged Assets/Liabilities(a)		Active Hedging Relationships		Discontinued Hedging Relationships


Short-term borrowings, including current portion of long-term debt	$	—	$	—	$	12	$	—	$	—	$	10
Long-term debt	$	2,236	$	(274)	$	1,014	$	2,235	$	(321)	$	1,042

(a)Carrying amounts exclude the cumulative amount of fair value hedging adjustments.

F. Credit Risk

A significant portion of our trade accounts receivable balances are due from wholesalers and governments. For additional information on our trade accounts receivables with significant customers, see Note 13C below and Note 17C in our 2022 Form 10-K.

As of April 2, 2023, the largest investment exposures in our portfolio represent primarily sovereign debt instruments issued by Canada, Japan, Germany, France, the U.S., and the U.K.

With respect to our derivative financial instrument agreements with financial institutions, we do not expect to incur a significant loss from failure of any counterparty. Derivative financial instruments are executed under International Swaps and Derivatives Association master agreements with credit-support annexes that contain zero threshold provisions requiring collateral to be exchanged daily depending on levels of exposure. As a result, there are no significant concentrations of credit risk with any individual financial institution. As of April 2, 2023, the aggregate fair value of these derivative financial instruments that are in a net payable position was $763 million, for which we have posted collateral of $831 million with a corresponding amount reported in Short-term investments. As of April 2, 2023, the aggregate fair value of our derivative financial instruments that are in a net receivable position was $715 million, for which we have received collateral of $530 million with a corresponding amount reported in Short-term borrowings, including current portion of long-term debt.