Financial Instruments

12 Months Ended

Dec. 31, 2020

A. Fair Value Measurements

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


	As of December 31, 2020						As of December 31, 2019
(MILLIONS OF DOLLARS)	Total		Level 1		Level 2		Total		Level 1		Level 2
Financial assets:
Short-term investments
Classified as equity securities with readily determinable fair values:
Money market funds	$	567	$	—	$	567	$	705	$	—	$	705

Classified as available-for-sale debt securities:
Government and agency—non-U.S.	7,719		—		7,719		4,863		—		4,863
Government and agency—U.S.	982		—		982		811		—		811
Corporate and other	1,008		—		1,008		1,013		—		1,013
	9,709		—		9,709		6,687		—		6,687
Total short-term investments	10,276		—		10,276		7,392		—		7,392
Other current assets
Derivative assets:
Interest rate contracts	18		—		18		53		—		53
Foreign exchange contracts	234		—		234		413		—		413
Total other current assets	251		—		251		465		—		465
Long-term investments
Classified as equity securities with readily determinable fair values(a)	2,809		2,776		32		1,902		1,863		39

Classified as available-for-sale debt securities:
Government and agency—non-U.S.	6		—		6		—		—		—
Government and agency—U.S.	121		—		121		303		—		303
Corporate and other	—		—		—		11		—		11
	128		—		128		315		—		315
Total long-term investments	2,936		2,776		160		2,216		1,863		354
Other noncurrent assets
Derivative assets:
Interest rate contracts	117		—		117		266		—		266
Foreign exchange contracts	5		—		5		261		—		261
Total derivative assets	122		—		122		526		—		526
Insurance contracts(b)	693		—		693		575		—		575
Total other noncurrent assets	814		—		814		1,102		—		1,102
Total assets	$	14,278	$	2,776	$	11,501	$	11,176	$	1,863	$	9,313

Financial liabilities:
Other current liabilities
Derivative liabilities:

Foreign exchange contracts	$	501	$	—	$	501	$	114	$	—	$	114
Total other current liabilities	501		—		501		114		—		114
Other noncurrent liabilities
Derivative liabilities:

Foreign exchange contracts	599		—		599		604		—		604
Total other noncurrent liabilities	599		—		599		604		—		604
Total liabilities	$	1,100	$	—	$	1,100	$	718	$	—	$	718

(a)Long-term equity securities of $190 million as of December 31, 2020 and $176 million as of December 31, 2019 were held in restricted trusts for 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


Carrying values and estimated fair values using a market approach:
	As of December 31, 2020						As of December 31, 2019
	Carrying Value		Estimated Fair Value				Carrying Value		Estimated Fair Value
(MILLIONS OF DOLLARS)			Total		Level 2				Total		Level 2
Financial Liabilities
Long-term debt, excluding the current portion	$	37,133	$	45,533	$	45,533	$	35,955	$	40,842	$	40,842

The differences between the estimated fair values and carrying values for 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 December 31, 2020 and 2019. 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 using a market approach.

B. Investments

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


The following summarizes our investments by classification type:
	As of December 31,
(MILLIONS OF DOLLARS)	2020		2019
Short-term investments
Equity securities with readily determinable fair values(a)	$	567	$	705
Available-for-sale debt securities	9,709		6,687
Held-to-maturity debt securities	161		1,133
Total Short-term investments	$	10,437	$	8,525

Long-term investments
Equity securities with readily determinable fair values	$	2,809	$	1,902
Available-for-sale debt securities	128		315
Held-to-maturity debt securities	37		42
Private equity securities at cost(b)	432		756
Total Long-term investments	$	3,406	$	3,014
Equity-method investments	16,856		17,133
Total long-term investments and equity-method investments	$	20,262	$	20,147
Held-to-maturity cash equivalents	$	89	$	163

(a)As of December 31, 2020 and 2019, includes money market funds primarily invested in U.S. Treasury and government debt.

(b)Represent investments in the life sciences sector.

Debt Securities


At December 31, 2020, our investment securities portfolio consisted of diverse, primarily investment-grade, debt securities. The contractual maturities, or estimated maturities, of the debt securities are as follows:
	As of December 31, 2020														As of December 31, 2019
			Gross Unrealized						Maturities (in Years)								Gross Unrealized
(MILLIONS OF DOLLARS)	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.	$	7,593	$	136	$	(4)	$	7,725	$	7,719	$	6	$	—	$	4,895	$	6	$	(38)	$	4,863
Government and agency––U.S.	1,104		—		(1)		1,103		982		121		—		1,120		—		(6)		1,114
Corporate and other(a)	1,006		2		—		1,008		1,008		—		—		1,027		—		(2)		1,025
Held-to-maturity debt securities
Time deposits and other	283		—		—		283		251		9		24		535		—		—		535
Government and agency––non-U.S.	5		—		—		5		—		—		5		803		—		—		803
Total debt securities	$	9,991	$	138	$	(5)	$	10,124	$	9,959	$	136	$	29	$	8,380	$	6	$	(47)	$	8,340

(a)Primarily issued by a diverse group of corporations.

For our portfolio of available-for-sale and held-to-maturity debt securities, any expected credit losses would be immaterial to the financial statements.

Equity Securities


The following presents the calculation of the portion of unrealized (gains)/losses that relate to equity securities, excluding equity method investments, held at the reporting date:
	Year Ended December 31,
(MILLIONS OF DOLLARS)	2020		2019		2018
Net (gains)/losses recognized during the period on equity securities(a)	$	(540)	$	(454)	$	(586)
Less: Net (gains)/losses recognized during the period on equity securities sold during the period	(24)		(25)		(109)
Net unrealized (gains)/losses during the reporting period on equity securities still held at the reporting date(b)	$	(515)	$	(429)	$	(477)

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

(b)Included in net unrealized gains are observable price changes on equity securities without readily determinable fair values. Since January 1, 2018, there were cumulative impairments and downward adjustments of $81 million and upward adjustments of $61 million. Impairments, downward and upward adjustments were not significant in 2020, 2019 and 2018.

C. Short-Term Borrowings


Short-term borrowings include:
	As of December 31,
(MILLIONS OF DOLLARS)	2020		2019
Commercial paper(a)	$	556	$	13,915
Current portion of long-term debt, principal amount(b)	2,004		1,458
Other short-term borrowings, principal amount(c)	145		860
Total short-term borrowings, principal amount	2,705		16,233
Net fair value adjustments related to hedging and purchase accounting	—		5
Net unamortized discounts, premiums and debt issuance costs	(2)		(43)
Total Short-term borrowings, including current portion of long-term debt, carried at historical proceeds, as adjusted	$	2,703	$	16,195

(a)See Note 2B.

(b)See Note 7D.

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

The weighted-average effective interest rate on commercial paper outstanding was approximately 0.13% as of December 31, 2020 and 1.92% as of December 31, 2019.

As of December 31, 2020, we had access to a total of $11 billion in U.S. revolving credit facilities consisting of a $7 billion facility expiring in 2025 and a $4 billion facility expiring in September 2021, which may be used to support our commercial paper borrowings. In January 2021, the $4 billion facility was terminated at our request. In addition to the U.S. revolving credit facilities, our lenders have provided us an additional $332 million in lines of credit, of which $300 million expire within one year. Of these total lines of credit, $11.3 billion were unused as of December 31, 2020.

D. Long-Term Debt


The following outlines our senior unsecured long-term debt and the weighted-average stated interest rate by maturity:
	As of December 31,
(MILLIONS OF DOLLARS)	2020		2019
Notes due 2021 (2.4% for 2019)(a)	$	—	$	3,153
Notes due 2022 (1.0% for 2020 and 2019)	1,728		1,624
Notes due 2023 (3.2% for 2020 and 3.7% for 2019)	2,550		2,892
Notes due 2024 (3.9% for 2020 and 2019)	2,250		2,250
Notes due 2025 (0.8% for 2020)	750		—
Notes due 2026 (2.9% for 2020 and 2019)	3,000		3,000
Notes due 2027-2030 (3.1% for 2020 and 3.6% for 2019)	6,781		4,453
Notes due 2034-2036 (5.3% for 2020 and 2019)	2,250		2,250
Notes due 2037-2040 (5.6% for 2020 and 6.0% for 2019)	8,086		7,066
Notes due 2043-2046 (3.7% for 2020 and 2019)	4,878		4,818
Notes due 2047-2050 (3.6% for 2020 and 4.1% for 2019)	3,500		3,315
Total long-term debt, principal amount	35,774		34,820
Net fair value adjustments related to hedging and purchase accounting	1,562		1,305
Net unamortized discounts, premiums and debt issuance costs	(207)		(176)
Other long-term debt	4		5
Total long-term debt, carried at historical proceeds, as adjusted	$	37,133	$	35,955
Current portion of long-term debt, carried at historical proceeds, as adjusted (not included above (2.6% and 1.2%))	$	2,002	$	1,462

(a) Reclassified to the current portion of long-term debt.

Our long-term debt outlined in the above table is generally redeemable by us at any time at varying redemption prices plus accrued and unpaid interest.

Issuances

In 2020, we issued the following:

(MILLIONS OF DOLLARS)

Principal

Interest Rate

Maturity Date

As of
December 31, 2020

0.800%(a)

May 28, 2025

750

1.700%(a)

May 28, 2030

1,000

2.550%(a)

May 28, 2040

1,000

2.700%(a)

May 28, 2050

1,250

4,000

2.625%(b)

April 1, 2030

1,250

(a)May be redeemed by us at any time, in whole, or in part, at varying redemption prices plus accrued and unpaid interest. The weighted-average effective interest rate for the notes at issuance was 2.11%.

(b)May be redeemed by us at any time, in whole, or in part, at a redemption price plus accrued and unpaid interest. The weighted average effective interest rate for the notes at issuance was 2.67%.

In March 2019, we completed a public offering of $5.0 billion aggregate principal amount of senior unsecured notes with a weighted-average effective interest rate of 3.57%.

In September 2018, we completed a public offering of $5.0 billion aggregate principal amount of senior unsecured notes with a weighted-average effective interest rate of 3.56%.

Retirements

In November 2020, we repurchased all $1.15 billion and $342 million principal amount outstanding of the 1.95% senior unsecured notes due June 2021 and 5.80% senior unsecured notes due August 2023 and recorded a total net loss of $36 million, in Other (income)/deductions––net. See Note 2B.

In March 2020, we repurchased at par all $1.065 billion principal amount outstanding of our senior unsecured notes due in 2047.

In January 2019, we repurchased all €1.1 billion ($1.3 billion) principal amount outstanding of the 5.75% euro-denominated debt due June 2021 at a redemption value of €1.3 billion ($1.5 billion). We recorded a net loss of $138 million in Other (income)/deductions––net, which included the related termination of cross currency swaps.

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. We manage our foreign exchange risk predominately 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, Swedish krona and Canadian dollar. Additionally, we hedge a portion of our forecasted intercompany inventory sales denominated in euro, Japanese yen, Chinese renminbi, Canadian dollar, U.K. pound and Australian dollar for up to two years.

Changes in fair value are reported in earnings or in Other comprehensive income/(loss), depending on the nature and purpose of the financial instrument (hedge or offset relationship). For certain foreign exchange contracts, we exclude an amount from the assessment of hedge effectiveness and recognize the excluded amount through an amortization approach in earnings. The hedge relationships are as follows:

Generally, we recognize the gains and losses on foreign exchange contracts that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged item. We also recognize the offsetting foreign exchange impact attributable to the hedged item in earnings.

•Generally, we record in Other comprehensive income/(loss) gains or losses on foreign exchange contracts that are designated as cash flow hedges and reclassify those amounts into earnings in the same period or periods during which the hedged transaction affects earnings.

•We record in Other comprehensive income/(loss) ––Foreign currency translation adjustments, net the foreign exchange gains and losses related to foreign exchange-denominated debt and foreign exchange contracts designated as a hedge of our net investments in foreign subsidiaries and reclassify those amounts into earnings upon the sale or substantial liquidation of our net investments.

•For certain foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on contracts that are used to offset foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement.

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.

We recognize the gains and losses on interest rate contracts that are designated as fair value hedges in earnings upon the recognition of the change in fair value of the hedged risk. We also recognize the offsetting earnings impact attributable to the hedged item.


The following summarizes the fair value of the derivative financial instruments and the related notional amounts (including those reported as part of discontinued operations):
(MILLIONS OF DOLLARS)	As of December 31, 2020						As of December 31, 2019
			Fair Value						Fair Value
	Notional		Asset		Liability		Notional		Asset		Liability
Derivatives designated as hedging instruments:
Foreign exchange contracts(a)	$	24,369	$	145	$	1,005	$	25,193	$	591	$	662
Interest rate contracts	1,950		135		—		6,645		318		—
			280		1,005				909		662

Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	15,063	94		95		$	19,623	82		55

Total			$	373	$	1,100			$	992	$	718

(a)The notional amount of outstanding foreign exchange contracts hedging our intercompany forecasted inventory sales was $5.0 billion as of December 31, 2020 and $5.9 billion as of December 31, 2019.


The following summarizes information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk (including gains/(losses) reported as part of discontinued operations).
	Amount of Gains/(Losses) Recognized in OID(a)				Amount of Gains/(Losses) Recognized in OCI(a)				Amount of Gains/(Losses) Reclassified from OCI into OID and COS(a)
	As of December 31,
(MILLIONS OF DOLLARS)	2020		2019		2020		2019		2020		2019
Derivative Financial Instruments in Cash Flow Hedge Relationships:
Foreign exchange contracts(b)	$	—	$	—	$	(649)	$	339	$	(77)	$	525
Amount excluded from effectiveness testing recognized in earnings based on an amortization approach(c)	—		—		55		136		57		140

Derivative Financial Instruments in Fair Value Hedge Relationships:
Interest rate contracts	369		900		—		—		—		—
Hedged item	(369)		(900)		—		—		—		—



Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign exchange contracts	—		—		(501)		(313)		—		—
The portion on foreign exchange contracts excluded from the assessment of hedge effectiveness(c)	—		—		181		188		154		144

Non-Derivative Financial Instruments in Net Investment Hedge Relationships:
Foreign currency short-term borrowings	—		—		8		34		—		—
Foreign currency long-term debt(d)	—		—		(183)		36		—		—

Derivative Financial Instruments Not Designated as Hedges:
Foreign exchange contracts	178		(172)		—		—		—		—
All other net(c)	—		—		12		—		(1)		(1)
	$	178	$	(172)	$	(1,077)	$	421	$	133	$	808

(a)OID = Other (income)/deductions—net, included in Other (income)/deductions—net in the consolidated statements of income. COS = Cost of Sales, included in Cost of sales in the consolidated statements of income. OCI = Other comprehensive income/(loss), included in the consolidated statements of comprehensive income.

(b)The amounts reclassified from OCI into COS were:

•a net gain of $172 million in 2020 (including a gain of $22 million reported in Income from discontinued operations––net of tax); and

•a net gain of $247 million in 2019 (including a gain of $46 million reported in Income from discontinued operations––net of tax).

The remaining amounts were reclassified from OCI into OID. Based on year-end foreign exchange rates that are subject to change, we expect to reclassify a pre-tax loss of $341 million within the next 12 months into income. The maximum length of time over which we are hedging future foreign exchange cash flow relates to our $1.8 billion U.K. pound debt maturing in 2043.

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

(d)Long-term debt includes foreign currency borrowings with carrying values of $2.1 billion as of December 31, 2020, which are used as hedging instruments in net investment hedge relationships.


The following summarizes the amounts recorded in our consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
	As of December 31, 2020						As of December 31, 2019
			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 OF DOLLARS)	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


Long-term debt	$	2,016	$	117	$	1,149	$	7,092	$	266	$	690

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

F. Credit Risk

On an ongoing basis, we monitor and review the credit risk of our customers, financial institutions and exposures in our investment portfolio.

With respect to our trade accounts receivable, we monitor the creditworthiness of our customers to which we grant credit in the normal course of business. In general, there is no requirement for collateral from customers. For additional information on our trade accounts receivable and allowance for credit losses, see Note 1G. A significant portion of our trade accounts receivable balances are due from drug wholesalers. For additional information on our trade accounts receivables with significant customers, see Note 17B.

With respect to our investments, we monitor concentrations of credit risk associated with government, government agency, and corporate issuers of securities. Investments are placed in instruments that are investment grade and are primarily short in duration. Exposure limits are established to limit a concentration with any single credit counterparty. As of December 31, 2020, the largest investment exposures in our portfolio represent primarily sovereign debt instruments issued by the U.S., France, Canada, Japan, Sweden and Germany.

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 (ISDA) 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 December 31, 2020, the aggregate fair value of these derivative financial instruments that are in a net payable position was $946 million, for which we have posted collateral of $821 million with a corresponding amount reported in Short-term investments. As of December 31, 2020, the aggregate fair value of our derivative financial instruments that are in a net receivable position was $137 million, for which we have received collateral of $142 million with a corresponding amount reported in Short-term borrowings, including current portion of long-term debt.