Fair Value Measurements and Fair Value of Financial Instruments

9 Months Ended

Sep. 26, 2020

Fair Value Measurements and Fair Value of Financial Instruments [Text Block]

Note 10. Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of September 26, 2020 and December 31, 2019:


	September 26,		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	2020		(Level 1)		(Level 2)		(Level 3)

Assets
Cash equivalents	$	6,021	$	6,021	$	—	$	—

Investments in common stock, mutual funds and other similar instruments	22		22		—		—
Warrants	9		—		9		—
Insurance contracts	140		—		140		—
Derivative contracts	49		—		49		—

Total Assets	$	6,241	$	6,043	$	198	$	—

Liabilities
Derivative contracts	$	68	$	—	$	68	$	—
Contingent consideration	44		—		—		44

Total Liabilities	$	112	$	—	$	68	$	44


	December 31,		Quoted Prices in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In millions)	2019		(Level 1)		(Level 2)		(Level 3)

Assets
Cash equivalents	$	1,280	$	1,280	$	—	$	—

Investments in common stock, mutual funds and other similar instruments	19		19		—		—
Warrants	6		—		6		—
Insurance contracts	131		—		131		—
Derivative contracts	37		—		37		—

Total Assets	$	1,473	$	1,299	$	174	$	—

Liabilities
Derivative contracts	$	24	$	—	$	24	$	—
Contingent consideration	55		—		—		55

Total Liabilities	$	79	$	—	$	24	$	55

The company uses the Black-Scholes model to value its warrants. The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The company determines the fair value of acquisition-related contingent consideration based on the probability-weighted discounted cash flows associated with such future payments. Changes to the

fair value of contingent consideration are recorded in selling, general and administrative expense. The following table provides a rollforward of the fair value, as determined by level 3 inputs, of the contingent consideration.


	Three Months Ended				Nine Months Ended
	September 26,		September 28,		September 26,		September 28,
(In millions)	2020		2019		2020		2019

Contingent Consideration
Beginning Balance	$	53	$	58	$	55	$	37
Acquisitions (including assumed balances)	—		—		—		24
Payments	(1)		(3)		(3)		(3)
Change in fair value included in earnings	(8)		—		(8)		(3)

Ending Balance	$	44	$	55	$	44	$	55

Derivative Contracts

The following table provides the aggregate notional value of outstanding derivative contracts.


	September 26,		December 31,
(In millions)	2020		2019

Notional Amount
Interest rate swaps - fair value hedges (described in Note 7)	$	1,000	$	1,000

Cross-currency interest rate swaps - designated as net investment hedges	900		900
Cross-currency interest rate swaps	1,000		—
Currency exchange contracts	3,893		2,846

While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheet. The following tables present the fair value of derivative instruments in the consolidated balance sheet and statement of income.


	Fair Value – Assets				Fair Value – Liabilities
	September 26,		December 31,		September 26,		December 31,
(In millions)	2020		2019		2020		2019

Derivatives Designated as Hedging Instruments
Interest rate swaps (a)	$	30	$	—	$	—	$	13
Cross-currency interest rate swaps (a)	9		33		5		—
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts (b)	10		4		54		11
Cross-currency interest rate swaps (a)	—		—		9		—

Total Derivatives	$	49	$	37	$	68	$	24

(a) The fair values of the interest rate swaps and cross-currency interest rate swaps are included in the consolidated balance sheet under the caption other assets or other long-term liabilities.

(b) The fair value of the currency exchange contracts is included in the consolidated balance sheet under the captions other current assets or other accrued expenses.

The following amounts related to cumulative basis adjustments for fair value hedges were included in the consolidated balance sheet under the caption long-term obligations:


	Carrying Amount of the Hedged Liability				Cumulative Amount of Fair Value Hedging Adjustment - Increase (Decrease) Included in Carrying Amount of Liability
	September 26,		December 31,		September 26,		December 31,
(In millions)	2020		2019		2020		2019

Long-term Obligations	$	1,024	$	980	$	30	$	(13)


	Gain (Loss) Recognized
	Three Months Ended				Nine Months Ended
	September 26,		September 28,		September 26,		September 28,
(In millions)	2020		2019		2020		2019

Fair Value Hedging Relationships
Interest rate swaps
Hedged long-term obligations - included in other expense, net	$	—	$	(14)	$	(43)	$	(95)
Derivatives designated as hedging instruments - included in other expense, net	—		15		43		98
Derivatives Designated as Cash Flow Hedges
Interest rate swaps
Included in unrealized losses on hedging instruments within other comprehensive items	—		(50)		(85)		(50)
Amount reclassified from accumulated other comprehensive items to other expense, net	(8)		(3)		(14)		(10)
Financial Instruments Designated as Net Investment Hedges
Foreign currency-denominated debt
Included in currency translation adjustment within other comprehensive items	(295)		261		(276)		320
Cross-currency interest rate swaps
Included in currency translation adjustment within other comprehensive items	(30)		72		(30)		79
Included in other expense, net	2		13		9		41
Derivatives Not Designated as Hedging Instruments
Currency exchange contracts
Included in cost of product revenues	(2)		1		(2)		—
Included in other expense, net	51		43		7		49
Cross-currency interest rate swaps
Included in other expense, net	1		—		(9)		—

Gains and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the consolidated statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.

The company also uses foreign currency-denominated debt and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The majority of the company’s euro-denominated senior notes and certain of its cross-currency interest rate swaps have been designated as, and are effective as, economic hedges of part of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments and contract fair value changes on the cross-currency

interest rate swaps, excluding interest accruals, are included in currency translation adjustment within other comprehensive items and shareholders’ equity.

The company also had $1 billion notional value of cross currency swaps which the company terminated in October 2020. These swaps were entered into in anticipation of using U.S. dollars to partially finance the euro purchase price of the terminated QIAGEN acquisition (Note 2). Gains and losses associated with these swaps were recorded in other expense, net.

See Note 1 to the consolidated financial statements for 2019 included in the company's Annual Report on Form 10-K and Note 7 herein for additional information on the company's risk management objectives and strategies.

Cash Flow Hedge Arrangements

In March 2020, the company entered into interest rate swap arrangements to mitigate the risk of interest rates rising prior to completion of future debt offerings. Based on the company's conclusion that the debt offerings are probable, the swaps hedge the cash flow risk for each of the interest payments on the planned fixed-rate debt issues. One of these hedges was terminated in March 2020, in connection with the debt offering completed in that month. The remaining hedges were terminated in July 2020. The aggregate fair value of the terminated hedges, net of tax, has been classified as a reduction to accumulated other comprehensive items and will be amortized to interest expense over the term of the related debt issuances. The company had cash outlays aggregating $85 million in 2020 associated with termination of the arrangements, included in other financing activities, net, in the accompanying statement of cash flows.

Fair Value of Other Financial Instruments

The carrying value and fair value of the company’s debt obligations are as follows:


	September 26, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
(In millions)	Value		Value		Value		Value

Debt Obligations:
Senior notes	$	21,085	$	23,415	$	17,736	$	18,650


Other	8		8		16		16

	$	21,093	$	23,423	$	17,752	$	18,666

The fair value of debt obligations was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends which represent level 2 measurements.