EX-13 4 ex13-form10xk20121230.htm EXHIBIT 13 Ex 13 - Form 10-K 2012 1230


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
 
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
SUPPORTING SCHEDULES



                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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Management’s Discussion and Analysis of Results of Operations and Financial Condition

Organization and Business Segments
Description of the Company and Business Segments
Johnson & Johnson and its subsidiaries (the Company) have approximately 127,600 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health fields, as well as nutritional and over-the-counter pharmaceutical products and wellness and prevention platforms. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment includes products in the following areas: anti-infective, antipsychotic, contraceptive, gastrointestinal, hematology, immunology, infectious diseases, neurology, oncology, pain management, thrombosis and vaccines. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, hospitals and clinics. These include products to treat cardiovascular disease; orthopaedic and neurological products; blood glucose monitoring and insulin delivery products; general surgery, biosurgical, and energy products; professional diagnostic products; infection prevention products; and disposable contact lenses.
The Company’s structure is based upon the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the strategic operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments.
In all of its product lines, the Company competes with companies both locally and globally, throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to the Company’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and in maintaining sales forces. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.

Management’s Objectives
The Company manages within a strategic framework aimed at achieving sustainable growth. To accomplish this, the Company’s management operates the business consistent with certain strategic principles that have proven successful over time. To this end, the Company participates in growth areas in human health care and is committed to attaining leadership positions in these growth areas through the development of high quality, innovative products and services. New products introduced within the past five years accounted for approximately 25% of 2012 sales. In 2012, $7.7 billion, or 11.4% of sales, was invested in research and development. This investment reflects management’s commitment to the importance of ongoing development of new and differentiated products and services to sustain long-term growth.
With more than 275 operating companies located in 60 countries, the Company views its principle of decentralized management as an asset and fundamental to the success of a broadly based business. It also fosters an entrepreneurial spirit, combining the extensive resources of a large organization with the ability to anticipate and react quickly to local market changes and challenges.
The Company is committed to developing global business leaders who can achieve growth objectives. Businesses are managed for the long-term in order to sustain leadership positions and achieve growth that provides an enduring source of value to our shareholders.
Our Credo unifies the management team and the Company’s dedicated employees in achieving these objectives, and provides a common set of values that serve as a constant reminder of the Company’s responsibilities to its customers, employees, communities and shareholders. The Company believes that these basic principles, along with its overall mission of improving the quality of life for people everywhere, will enable Johnson & Johnson to continue to be among the leaders in the health care industry.

Results of Operations
Analysis of Consolidated Sales
In 2012, worldwide sales increased 3.4% to $67.2 billion, compared to an increase of 5.6% in 2011 and a decrease of 0.5% in 2010. These sales changes consisted of the following:

                
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Sales increase/(decrease) due to:
 
2012
 
2011
 
2010
Volume
 
5.7
%
 
3.1

 
(0.5
)
Price
 
0.4

 
(0.3
)
 
(0.8
)
Currency
 
(2.7
)
 
2.8

 
0.8

Total
 
3.4
%
 
5.6

 
(0.5
)
Sales by U.S. companies were $29.8 billion in 2012, $28.9 billion in 2011 and $29.5 billion in 2010. This represents an increase of 3.2% in 2012, and decreases of 1.8% in 2011 and 4.7% in 2010. Sales by international companies were $37.4 billion in 2012, $36.1 billion in 2011 and $32.1 billion in 2010. This represents increases of 3.5% in 2012, 12.4% in 2011 and 3.6% in 2010. The acquisition of Synthes, Inc., net of the related divestiture, increased both total worldwide sales growth and operational growth by 3.1%.
The five-year compound annual growth rates for worldwide, U.S. and international sales were 1.9%, (1.7)% and 5.5%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 6.4%, 2.9% and 10.4%, respectively.
Sales in Europe experienced a decline of 1.1% as compared to the prior year, including operational growth of 5.8% offset by a negative currency impact of 6.9%. Sales in the Western Hemisphere (excluding the U.S.) achieved growth of 12.3% as compared to the prior year, including operational growth of 19.0% and a negative currency impact of 6.7%. Sales in the Asia-Pacific, Africa region achieved growth of 5.3% as compared to the prior year, including operational growth of 6.7% and a negative currency impact of 1.4%.
In 2012, 2011 and 2010, the Company did not have a customer that represented 10% or more of total consolidated revenues.
U.S. Health Care Reform
Under the provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, beginning in 2011, companies that sold branded prescription drugs to specified U.S. Government programs pay an annual non-tax deductible fee based on an allocation of each company’s market share of total branded prescription drug sales from the prior year. The full-year impact to selling, marketing and administrative expenses was approximately $115 million in 2012 and $140 million in 2011. Under the current law, beginning in 2013, the Company will be required to pay a tax deductible 2.3% excise tax imposed on the sale of certain medical devices. The 2013 excise tax is estimated to be between $200 -$300 million and will be recorded in cost of products sold within the statement of earnings.
The net trade sales impact of the health care reform legislation was an annual reduction of approximately $450 million and $425 million in 2012 and 2011, respectively, due to an increase in sales rebates and discounts.

Analysis of Sales by Business Segments
Consumer Segment
Consumer segment sales in 2012 were $14.4 billion, a decrease of 2.9% from 2011, which included 0.5% operational growth offset by a negative currency impact of 3.4%. U.S. Consumer segment sales were $5.0 billion, a decrease of 2.0%. International sales were $9.4 billion, a decrease of 3.4%, which included 1.9% operational growth offset by a negative currency impact of 5.3%.
Major Consumer Franchise Sales:
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2012
 
2011
 
2010
 
’12 vs. ’11
 
’11 vs. ’10
OTC Pharmaceuticals & Nutritionals
 
$
4,354

 
4,402

 
4,549

 
(1.1
)%
 
(3.2
)
Skin Care
 
3,618

 
3,715

 
3,452

 
(2.6
)
 
7.6

Baby Care
 
2,254

 
2,340

 
2,209

 
(3.7
)
 
5.9

Women’s Health
 
1,625

 
1,792

 
1,844

 
(9.3
)
 
(2.8
)
Oral Care
 
1,624

 
1,624

 
1,526

 
     0.0
 
6.4

Wound Care/Other
 
972

 
1,010

 
1,010

 
(3.8
)
 
0.0

Total Consumer Sales
 
$
14,447

 
14,883

 
14,590

 
(2.9
)%
 
2.0


The Over-the-Counter (OTC) Pharmaceuticals and Nutritionals franchise sales were $4.4 billion, a decrease of 1.1% from 2011. Sales in the U.S. decreased primarily due to lower sales of analgesics as a result of supply constraints and competitive pressures in nutritional products. Strong growth of upper respiratory, digestive health and analgesics products outside the U.S. was offset by negative currency.
McNEIL-PPC, Inc. continues to operate under a consent decree signed in 2011, with the U.S. Food and Drug Administration (FDA), which governs certain McNeil Consumer Healthcare manufacturing operations. McNeil continues to

                
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operate the manufacturing facilities in Las Piedras, Puerto Rico and Lancaster, Pennsylvania; however, production volumes from these facilities continue to be impacted by additional review and approval processes required under the consent decree. The Company expects this to continue throughout most of 2013. Plants operating under the consent decree will produce a simplified portfolio focused on key brands. The Fort Washington, Pennsylvania manufacturing site is not in operation at this time. McNeil continues to work on the re-siting of the products previously produced at the Fort Washington facility to other facilities.
The Skin Care franchise sales were $3.6 billion in 2012, a decrease of 2.6% from 2011. Increased sales of NEUTROGENA® products in the U.S. were offset by competition and economic conditions outside the U.S. The Baby Care franchise sales were $2.3 billion, a decrease of 3.7% from 2011. The decline in U.S. sales and the impact of negative currency was partially offset by increased sales of haircare and wipes outside the U.S. The Women’s Health franchise sales were $1.6 billion, a decrease of 9.3% primarily due to the impact of the divestiture of certain brands. The Oral Care franchise sales were flat as compared to the prior year. Increased sales of LISTERINE® products outside the U.S. were partially offset by competitive pressures in the U.S. The Wound Care/Other franchise sales were $1.0 billion in 2012, a decrease of 3.8% from 2011 due to divestitures and competitive pressures. Negative currency impacted all of the franchises.
Consumer segment sales in 2011 were $14.9 billion, an increase of 2.0% from 2010, a 0.7% operational decline was offset by a positive currency impact of 2.7%. U.S. Consumer segment sales were $5.2 billion, a decrease of 6.7%. International sales were $9.7 billion, an increase of 7.3%, which included 2.9% operational growth and a positive currency impact of 4.4%.

                
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Pharmaceutical Segment
The Pharmaceutical segment achieved sales of $25.4 billion in 2012, representing an increase of 4.0% over the prior year, with operational growth of 6.8% and a negative currency impact of 2.8%. U.S. sales were $12.4 billion, an increase of 0.3%. International sales were $12.9 billion, an increase of 7.9%, which included 13.6% operational growth and a negative currency impact of 5.7%.

Major Pharmaceutical Therapeutic Area Sales:*
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2012
 
2011
 
2010
 
’12 vs. ’11
 
’11 vs. ’10
Total Immunology
 
$
7,874

 
6,798

 
5,398

 
15.8
 %
 
25.9

     REMICADE®
 
6,139

 
5,492

 
4,610

 
11.8

 
19.1

     SIMPONI®
 
607

 
410

 
226

 
48.0

 
81.4

     STELARA®
 
1,025

 
738

 
393

 
38.9

 
87.8

     Other Immunology
 
103

 
158

 
169

 
(34.8
)
 
(6.5
)
Total Infectious Diseases
 
3,194

 
3,189

 
3,033

 
0.2

 
5.1

     INTELENCE®
 
349

 
314

 
243

 
11.1

 
29.2

     LEVAQUIN®/FLOXIN®
 
75

 
623

 
1,357

 
(88.0
)
 
(54.1
)
     PREZISTA®
 
1,414

 
1,211

 
857

 
16.8

 
41.3

     Other Infectious Diseases
 
1,356

 
1,041

 
576

 
30.3

 
80.7

Total Neuroscience
 
6,718

 
6,948

 
6,644

 
(3.3
)
 
4.6

     CONCERTA®/methylphenidate
 
1,073

 
1,268

 
1,319

 
(15.4
)
 
(3.9
)
     INVEGA®
 
550

 
499

 
424

 
10.2

 
17.7

     INVEGA® SUSTENNA®/XEPLION®
 
796

 
378

 
152

 
**
 
**
     RISPERDAL® CONSTA®
 
1,425

 
1,583

 
1,500

 
(10.0
)
 
5.5

     Other Neuroscience
 
2,874

 
3,220

 
3,249

 
(10.7
)
 
(0.9
)
Total Oncology
 
2,629

 
2,048

 
1,465

 
28.4

 
39.8

     DOXIL®/CAELYX®
 
83

 
402

 
320

 
(79.4
)
 
25.6

     VELCADE®
 
1,500

 
1,274

 
1,080

 
17.7

 
18.0

     ZYTIGA®
 
961

 
301

 

 
**
 
100.0

     Other Oncology
 
85

 
71

 
65

 
19.7

 
9.2

Total Other
 
4,936

 
5,385

 
5,856

 
(8.3
)
 
(8.0
)
     ACIPHEX®/PARIET®
 
835

 
975

 
1,006

 
(14.4
)
 
(3.1
)
     PROCRIT®/EPREX®
 
1,462

 
1,623

 
1,934

 
(9.9
)
 
(16.1
)
     Other
 
2,639

 
2,787

 
2,916

 
(5.3
)
 
(4.4
)
Total Pharmaceutical Sales
 
$
25,351

 
24,368

 
22,396

 
4.0
 %
 
8.8


* Prior year amounts have been reclassified to conform to current year presentation.
** Percentage greater than 100%

Immunology products achieved sales of $7.9 billion in 2012, representing an increase of 15.8% as compared to the prior year. The increased sales of SIMPONI® (golimumab) and REMICADE® (infliximab) were primarily due to market growth and the impact of the agreement with Merck & Co. Inc. (Merck). Effective July 1, 2011, distribution rights to REMICADE® and SIMPONI® in certain territories were relinquished to the Company by Merck. Additional contributors to the increase were sales of STELARA® (ustekinumab).
Infectious disease products achieved sales of $3.2 billion in 2012, representing an increase of 0.2% as compared to the prior year. Major contributors were INCIVO® (telaprevir), the continued momentum in market share growth of PREZISTA® (darunavir), EDURANT® (rilpivirine) and INTELENCE® (etravirine) partially offset by lower sales of LEVAQUIN® (levofloxacin)/FLOXIN® (ofloxacin), due to the loss of market exclusivity in the U.S. in June 2011.
Neuroscience products sales were $6.7 billion, a decline of 3.3% as compared to the prior year. Growth was impacted by generic competition for CONCERTA®/methylphenidate, RAZADYNE® (galantamine), RISPERDAL®(risperidone) and DURAGESIC®/Fentanyl Transdermal (fentanyl transdermal system). A decline in the Company's long-acting injectable

                
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antipsychotic, RISPERDAL® CONSTA®(risperidone), was offset by strong sales of INVEGA® SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA® (paliperidone palmitate). The Company's U.S. Supply and Distribution Agreement with Watson Laboratories, Inc. to distribute an authorized generic version of CONCERTA® became effective May 1, 2011. The original CONCERTA® patent expired in 2004, and the parties have received approval from the FDA to manufacture and market a generic version of CONCERTA®. Another generic version of CONCERTA® was launched on December 31, 2012. This will result in a further reduction in CONCERTA® sales.
Oncology products achieved sales of $2.6 billion in 2012, representing an increase of 28.4% as compared to the prior year. This growth was primarily due to sales of ZYTIGA®(abiraterone acetate) and VELCADE® (bortezomib). This growth was partially offset by lower sales of DOXIL®(doxorubicin HCI liposome injection)/CAELYX®(pegylated liposomal doxorubicin hydrochloride), due to supply constraints from the Company's third-party manufacturer. The Company has been working to restore a reliable supply of DOXIL®/CAELYX®. Full access in the U.S. has been restored. An alternate manufacturing approach was approved in the European Union (EU) and Japan late in 2012 and in Canada in January of 2013. In the European Union, the CAELYX® managed access program was put in place to ensure patients can complete their full course of treatment. It will remain in place until a full supply of CAELYX® has been restored. In February 2013, the FDA approved a generic version of DOXIL®.
Other Pharmaceutical sales were $4.9 billion, a decline of 8.3% as compared to the prior year primarily due to divestitures and lower sales of ACIPHEX®/PARIET®(rabeprazole sodium) and EPREX® (Epoetin alfa), primarily due to the impact of generic competition. These results were partially offset by sales growth of XARELTO®(rivaroxaban).
During 2012, the Company received several regulatory approvals including: U.S. approval of a new 800mg tablet of PREZISTA® (darunavir) for once daily oral administration for the treatment of human immunodeficiency virus (HIV-1) in treatment-naive and treatment-experienced adult patients with no darunavir resistance-associated mutations; FDA approval for the expanded use of XARELTO®(rivaroxaban) to treat deep-vein thrombosis, or DVT, and pulmonary embolism, or PE and to reduce the risk of recurrent DVT and PE following initial treatment; and the FDA granted accelerated approval for SIRTURO™ (bedaquiline) tablets for the treatment of pulmonary multi-drug resistant tuberculosis as part of combination therapy in adults. The FDA approved the supplemental New Drug Application (NDA) for NUCYNTA® ER (tapentadol) extended-release tablets, an oral analgesic taken twice daily, for the management of neuropathic pain associated with diabetic peripheral neuropathy in adults. The FDA and the European Commission also approved an expanded indication for ZYTIGA® (abiraterone acetate), in combination with prednisone, allowing for the use before chemotherapy in the treatment of metastatic castration-resistant prostate cancer. In addition, the European Commission approved the marketing authorizations for DACOGEN® (decitabine) for the treatment of adult patients (age 65 years and above) with newly diagnosed de novo or secondary acute myeloid leukemia who are not candidates for standard induction chemotherapy, and for the subcutaneous administration of VELCADE® (bortezomib) for the treatment of multiple myeloma.
The Company submitted several New Drug Applications, including an NDA to the FDA and Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) seeking approval for the use of canagliflozin, an oral, once-daily, selective sodium glucose co-transporter 2 (SGLT2) inhibitor, for the treatment of adult patients with type 2 diabetes, and an NDA seeking approval for a fixed-dose therapy combining canagliflozin and immediate release metformin to treat patients with type 2 diabetes. Additional submissions included a supplemental Biologics License Application to the FDA and a Type II Variation to the EMA requesting approval of STELARA® (ustekinumab) for the treatment of adult patients with active psoriatic arthritis, and a Biologics License Application to the FDA requesting approval of an investigational intravenous formulation of the anti-tumor necrosis factor (TNF)-alpha SIMPONI® (golimumab) for the treatment of adults with moderately to severely active rheumatoid arthritis. In addition, a supplemental Biologics License Application was submitted to the FDA and a Type II Variation was submitted to the EMA requesting approval of SIMPONI® (golimumab) for the treatment of moderately to severely active ulcerative colitis in adult patients who have had an inadequate response to conventional therapy including corticosteroids and 6‑mercaptopurine (6‑MP) or azathioprine (AZA), or who are intolerant to or have medical contraindications for such therapies. Finally, an MAA was submitted to the EMA seeking conditional approval for the use of bedaquiline (TMC207) as an oral treatment, to be used as part of combination therapy for pulmonary, multi-drug resistant tuberculosis in adults.
Pharmaceutical segment sales in 2011 were $24.4 billion, an increase of 8.8% from 2010, with operational growth of 6.2% and a positive currency impact of 2.6%. U.S. sales were $12.4 billion, a decrease of 1.1%. International sales were $12.0 billion, an increase of 21.3%, which included 15.5% operational growth and a positive currency impact of 5.8%.
Medical Devices and Diagnostics Segment
The Medical Devices and Diagnostics segment achieved sales of $27.4 billion in 2012, representing an increase of 6.4% over the prior year, with operational growth of 8.7% and a negative currency impact of 2.3%. U.S. sales were $12.4 billion, an increase of 8.7% as compared to the prior year. International sales were $15.1 billion, an increase of 4.5% over the prior year, with operational growth of 8.6% and a negative currency impact of 4.1%. The acquisition of Synthes, Inc., net of the related divestiture, increased both total sales growth and operational growth for the Medical Devices and Diagnostics segment by 7.9%.


                
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Major Medical Devices and Diagnostics Franchise Sales:*
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2012
 
2011
 
2010
 
’12 vs. ’11
 
’11 vs. ’10
Orthopaedics
 
$
7,799

 
5,809

 
5,585

 
34.3
 %
 
4.0

Surgical Care
 
6,483

 
6,637

 
6,272

 
(2.3
)
 
5.8

Vision Care
 
2,996

 
2,916

 
2,680

 
2.7

 
8.8

Diabetes Care
 
2,616

 
2,652

 
2,470

 
(1.4
)
 
7.4

Specialty Surgery
 
2,526

 
2,407

 
2,186

 
4.9

 
10.1

Diagnostics
 
2,069

 
2,164

 
2,053

 
(4.4
)
 
5.4

Cardiovascular Care
 
1,985

 
2,288

 
2,552

 
(13.2
)
 
(10.3
)
Infection Prevention/Other
 
952

 
906

 
803

 
5.1

 
12.8

Total Medical Devices and Diagnostics Sales
 
$
27,426

 
25,779

 
24,601

 
6.4
 %
 
4.8


* Prior year amounts have been reclassified to conform to current year presentation.

The Orthopaedics franchise achieved sales of $7.8 billion in 2012, a 34.3% increase over the prior year. Growth was primarily due to sales of newly acquired products from Synthes, Inc., and sales of joint reconstruction and Mitek sports medicine products. Sales were impacted by the divestitures of the surgical instruments business of Codman & Shurtleff, Inc. in the fiscal fourth quarter of 2011, and the divestiture of certain rights and assets related to the DePuy trauma business. The positive impact on the Orthopaedics franchise total sales growth and operational growth due to the newly acquired products from Synthes, Inc. net of the related trauma business divestiture was 34.7%.
The Surgical Care franchise sales were $6.5 billion in 2012, a decrease of 2.3% from the prior year. Lower sales of mechanical, breast care and pelvic floor products were partially offset by increased sales of sutures and endoscopy products with the success of the ECHELON FLEX powered ENDOPATH® Stapler.
The Vision Care franchise achieved sales of $3.0 billion in 2012, a 2.7% increase over the prior year. The growth was driven by ACUVUE® TruEye®, 1-DAY ACUVUE® MOIST® for Astigmatism and 1-DAY ACUVUE® MOIST®.
The Diabetes Care franchise sales were $2.6 billion, a decrease of 1.4% versus the prior year. Sales growth in Asia and Latin America was offset by the negative impact of currency.
The Specialty Surgery franchise achieved sales of $2.5 billion in 2012, a 4.9% increase over the prior year. Incremental sales from the acquisition of SterilMed Inc., sales of biosurgery products and international sales of energy products were the major contributors to the growth.
The Diagnostics franchise sales were $2.1 billion, a decline of 4.4% versus the prior year. The decline was primarily due to lower sales in donor screening due to competitive pressures, and the divestiture of the RhoGAM® business during the third quarter of 2012. In January 2013, the Company announced it is exploring strategic alternatives for the Ortho-Clinical Diagnostics business, including a possible divestiture.
The Cardiovascular Care franchise sales were $2.0 billion, a decline of 13.2% versus the prior year. Sales were impacted by the Company’s decision to exit the drug-eluting stent market in the second quarter of 2011, and lower sales of endovascular products, impacted by competitive launches and a disruption in supply that was resolved late in the third quarter. The decline in sales was partially offset by strong growth in Biosense Webster's electrophysiology business primarily due to the success of the THERMOCOOL® catheter launches.
The Infection Prevention/Other franchise achieved sales of $1.0 billion in 2012, a 5.1% increase over the prior year primarily due to growth in the advanced sterilization business.
The Medical Devices and Diagnostics segment achieved sales of $25.8 billion in 2011, representing an increase of 4.8% over the prior year, with operational growth of 1.7% and a positive currency impact of 3.1%. U.S. sales were $11.4 billion, a decrease of 0.4% as compared to the prior year. International sales were $14.4 billion, an increase of 9.2% over the prior year, with operational growth of 3.4% and a positive currency impact of 5.8%.

Analysis of Consolidated Earnings Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income increased by $1.4 billion to $13.8 billion in 2012 as compared to $12.4 billion in 2011, an increase of 11.4%. Earnings before provision for taxes on income were favorable due to increased gross profit of $0.9 billion, a $0.1 billion decrease in selling, marketing and administrative expenses due to cost containment initiatives across many of the businesses, lower litigation expense of $2.1 billion and lower charges of $0.4 billion related to the DePuy ASR Hip program versus the prior year. This was partially offset by $2.1 billion of charges attributable to asset write-downs and impairment of in-process research and development, primarily related to the Crucell vaccine business and the discontinuation of the Phase III clinical development of bapineuzumab IV and $0.2 billion of integration and currency costs related to the acquisition of Synthes, Inc. versus the prior year. Included in 2011 was a $0.6 billion restructuring charge, net of

                
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inventory write-offs which are included in cost of products sold, related to the Cardiovascular Care business. Additionally, 2011 included higher gains from divestitures and other items of $0.3 billion, recorded in other (income) expense, net.
The 2011 decrease of 27.1% as compared to 2010 was primarily due to costs associated with litigation, which includes product liability, the impact of the OTC and DePuy ASR Hip recalls and the restructuring expense related to the Cardiovascular Care business. Additionally, investment spending, the fee on branded pharmaceutical products incurred due to the U.S. health care reform legislation, and the integration costs, including an inventory step-up charge, associated with the acquisition of Crucell contributed to the decrease in earnings. This was partially offset by gains from divestitures.
As a percent to sales, consolidated earnings before provision for taxes on income in 2012 was 20.5% versus 19.0% in 2011.
Cost of Products Sold and Selling, Marketing and Administrative Expenses:  Cost of products sold and selling, marketing and administrative expenses as a percent to sales were as follows:
% of Sales
 
2012
 
2011
 
2010
Cost of products sold
 
32.2
%
 
31.3

 
30.5

Percent point increase over the prior year
 
0.9

 
0.8

 
0.7

Selling, marketing and administrative expenses
 
31.0

 
32.3

 
31.5

Percent point (decrease)/increase over the prior year
 
(1.3
)
 
0.8

 
(0.5
)

In 2012, cost of products sold as a percent to sales increased compared to the prior year. This was primarily the result of the amortization of the inventory step-up charge of $0.4 billion and amortization of intangibles related to the Synthes, Inc. acquisition of $0.3 billion and ongoing remediation costs in the McNeil OTC business. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2012 compared to the prior year primarily due to cost containment initiatives across many of the businesses. The prior year period included higher investment spending in the Pharmaceutical business for new products.
In 2011, cost of products sold as a percent to sales increased compared to the prior year. This was primarily attributable to ongoing remediation costs in the McNeil OTC business and inventory write-offs due to the restructuring of the Cardiovascular Care business. In addition, lower margins and integration costs, including an inventory step-up charge, associated with the acquisition of Crucell negatively impacted cost of products sold. Percent to sales of selling, marketing and administrative expenses increased in 2011 compared to the prior year primarily due to investment spending, as well as the fee on branded pharmaceutical products incurred due to the U.S. health care reform legislation.

Research and Development Expense: Research and development expense by segment of business was as follows:
 
 
2012
 
2011
 
2010
(Dollars in Millions)
 
Amount
 
% of Sales*
 
Amount
 
% of Sales*
 
Amount
 
% of Sales*
Consumer
 
$
622

 
4.3
%
 
659

 
4.4

 
609

 
4.2

Pharmaceutical
 
5,362

 
21.2

 
5,138

 
21.1

 
4,432

 
19.8

Medical Devices and Diagnostics
 
1,681

 
6.1

 
1,751

 
6.8

 
1,803

 
7.3

Total research and development expense
 
$
7,665

 
11.4
%
 
7,548

 
11.6

 
6,844

 
11.1

Percent increase/(decrease) over the prior year
 
1.6
%
 
 

 
10.3

 
 

 
(2.0
)
 
 

As a percent to segment sales
Research and development activities represent a significant part of the Company's business. These expenditures relate to the processes of discovering, testing and developing new products, improving existing products, as well as ensuring product efficacy and regulatory compliance prior to launch. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products. In 2012, worldwide costs of research and development activities increased by 1.6% compared to 2011. The decrease in the Medical Devices and Diagnostics segment was primarily due to the discontinuation of the clinical development program for the NEVO™ Sirolimus-Eluting Coronary Stent.

In-Process Research and Development (IPR&D): In 2012, the Company recorded a charge of $1.2 billion, which included $0.7 billion for the impairment of the IPR&D related to the discontinuation of the Phase III clinical development of bapineuzumab IV and the partial impairment of the IPR&D related to the Crucell vaccine business in the amount of $0.4 billion. Of the $0.7 billion impairment of the IPR&D related to the discontinuation of the Phase III clinical development of bapineuzumab IV, $0.3 billion

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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is attributable to noncontrolling interest. These charges relate to development projects which have been recently discontinued or delayed.

Other (Income) Expense, Net:  Other (income) expense, net includes royalty income; gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Development Corporation; gains and losses on the disposal of property, plant and equipment; currency gains and losses; and litigation settlements. In 2012, the favorable change of $1.1 billion in other (income) expense, net, was primarily due to lower expenses of $2.1 billion related to litigation, including product liability, and $0.4 billion for costs related to the DePuy ASR Hip program. This was partially offset by $0.9 billion attributed to asset write-downs, primarily related to the Crucell vaccine business, and $0.2 billion of higher integration/transaction and currency costs related to the acquisition of Synthes, Inc.
In 2011, the unfavorable change of $3.5 billion in other (income) expense, net, was primarily due to net litigation, which includes product liability of $3.3 billion in 2011 as compared to a $0.4 billion net gain from litigation in 2010. Additionally, 2011 as compared to 2010 included higher expenses of $0.2 billion for costs related to the DePuy ASR Hip program and an adjustment of $0.5 billion to the value of the currency option and deal costs related to the acquisition of Synthes, Inc. Included in 2011 were higher gains on the divestitures of businesses of $0.6 billion as compared to 2010.
Restructuring:  In 2011, Cordis Corporation, a subsidiary of Johnson & Johnson, announced the discontinuation of its clinical development program for the NEVO™ Sirolimus-Eluting Coronary Stent and cessation of the manufacture and marketing of CYPHER® and CYPHER SELECT® Plus Sirolimus-Eluting Coronary Stents by the end of 2011. The Company recorded a pre-tax charge of $0.7 billion, of which $0.1 billion was included in the cost of products sold. There was no restructuring charge in 2012. See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring.
Interest (Income) Expense:  Interest income in 2012 decreased by $27 million as compared to the prior year due to lower rates of interest earned and lower average cash balances. Cash, cash equivalents and marketable securities totaled $21.1 billion at the end of 2012, and averaged $26.7 billion as compared to the $30.0 billion average cash balance in 2011. The decline in the average cash balance was due to the acquisition of Synthes, Inc. partially offset by cash generated from operating activities.
Interest expense in 2012 decreased by $39 million as compared to 2011 due to a lower average debt balance. The average debt balance was $17.9 billion in 2012 versus $18.2 billion in 2011. The total debt balance at the end of 2012 was $16.2 billion as compared to $19.6 billion at the end of 2011. The reduction in debt of approximately $3.4 billion was primarily due to a reduction in commercial paper.
Interest income in 2011 decreased by $16 million as compared to the prior year due to lower rates of interest earned despite higher average cash balances. Cash, cash equivalents and marketable securities totaled $32.3 billion at the end of 2011, and averaged $30.0 billion as compared to the $23.6 billion average cash balance in 2010. The increase in the average cash balance was primarily due to cash generated from operating activities and net cash proceeds from divestitures.
Interest expense in 2011 increased by $116 million as compared to 2010 due to a higher average debt balance. The total debt balance at the end of 2011 was $19.6 billion as compared to $16.8 billion at the end of 2010. The higher average debt balance of $18.2 billion in 2011 versus $15.7 billion in 2010 was due to increased borrowings. The Company increased borrowings, capitalizing on favorable terms in the capital markets. The proceeds of the borrowings were used for general corporate purposes.
Segment Pre-Tax Profit
Pre-tax profits by segment of business were as follows:
 
 
 
 
 
 
Percent of Segment Sales
(Dollars in Millions)
 
2012
 
2011
 
2012
 
2011
Consumer
 
$
1,693

 
2,096

 
11.7
%
 
14.1
Pharmaceutical
 
6,075

 
6,406

 
24.0

 
26.3
Medical Devices and Diagnostics
 
7,187

 
5,263

 
26.2

 
20.4
Total (1)
 
14,955

 
13,765

 
22.2

 
21.2
Less: Expenses not allocated to segments (2)
 
1,180

 
1,404

 
 

 
 
Earnings before provision for taxes on income
 
$
13,775

 
12,361

 
20.5
%
 
19.0


(1) 
See Note 18 to the Consolidated Financial Statements for more details.
(2) 
Amounts not allocated to segments include interest (income) expense, noncontrolling interests, and general corporate (income) expense. A $0.2 billion and $0.5 billion currency related expense for the acquisition of Synthes, Inc. was included in 2012 and 2011, respectively.

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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Consumer Segment:  In 2012, Consumer segment pre-tax profit as a percent to sales was 11.7% versus 14.1%, in 2011. Pre-tax profit was unfavorably impacted by $0.3 billion attributed to intangible asset write-downs and approximately $0.3 billion due to unfavorable product mix and remediation costs associated with the McNEIL-PPC, Inc. consent decree. This was partially offset by cost containment initiatives realized in selling, marketing and administrative expenses. In addition, 2011 included higher gains on divestitures. In 2011, Consumer segment pre-tax profit decreased 10.5% from 2010. The primary drivers of the decline in operating profit were unfavorable product mix and remediation costs associated with the recall of certain OTC products, partially offset by the gain on the divestiture of MONISTAT®.
Pharmaceutical Segment:  In 2012, Pharmaceutical segment pre-tax profit as a percent to sales was 24.0% versus 26.3%, in 2011. Pre-tax profit was unfavorably impacted by charges of $1.6 billion attributed to the write-down of assets and impairment of in-process research and development assets, related to the Crucell vaccine business, and to the discontinuation of the Phase III clinical development of bapineuzumab IV. This was partially offset by lower litigation expense of $1.1 billion versus the prior year and favorable operating expenses of $0.3 billion. Additionally, 2012 included the gain on the divestiture of BYSTOLIC®(nebivolol) IP rights. In 2011, Pharmaceutical segment pre-tax profit decreased 9.6% from 2010. The primary drivers of the decrease in the pre-tax profit margin were higher litigation expenses recorded in 2011, the impact of the U.S. health care reform fee, and lower margins and integration costs, including an inventory step-up charge, associated with the Crucell acquisition. This was partially offset by gains on the divestitures of the Animal Health Business and Ortho Dermatologics, the gain related to the Company’s earlier investment in Crucell, and lower manufacturing costs.
Medical Devices and Diagnostics Segment:  In 2012, Medical Devices and Diagnostics segment pre-tax profit as a percent to sales was 26.2% versus 20.4%, in 2011. The Medical Devices and Diagnostics segment pre-tax profit was favorably impacted by profits from Synthes sales, lower expenses of $1.4 billion for litigation, including product liability, and the DePuy ASR™ Hip program and $0.1 billion for research & development primarily due to the discontinuation of its clinical development program for the NEVO™ Sirolimus-Eluting Coronary Stent. This was partially offset by an increase in integration costs and amortization of the inventory step-up of $0.8 billion associated with the acquisition of Synthes, Inc. and $0.1 billion attributed to the write-down of intangible assets. In addition, 2012 included higher gains on divestitures versus the prior year due to the divestitures of the Therakos business and RhoGAM®. Additionally, 2011 included a $0.7 billion restructuring charge related to the discontinuation of the clinical development program for the NEVO™ Sirolimus-Eluting Coronary Stent. In 2011, Medical Devices and Diagnostics segment pre-tax profit decreased 36.4% from 2010. The primary drivers of the decline in the pre-tax profit margin in the Medical Devices and Diagnostics segment were litigation expenses, including product liability, costs associated with the DePuy ASR™ Hip program, restructuring expense, costs incurred related to the acquisition of Synthes, Inc. and increased investment spending.

Provision for Taxes on Income:  The worldwide effective income tax rate was 23.7% in 2012, 21.8% in 2011 and 21.3% in 2010. The increase in the 2012 effective tax rate of 1.9% as compared to 2011 was due to lower tax benefits on the impairment of in-process research and development intangible assets in low tax jurisdictions, increases in taxable income in higher tax jurisdictions relative to lower tax jurisdictions and the exclusion of the benefit of the U.S. Research & Development (R&D) tax credit and the CFC look-through provisions from the 2012 fiscal year financial results. The R&D tax credit and the CFC look-through provisions were enacted into law in 2013 and were retroactive to January 1, 2012. The entire benefit of the R&D tax credit and the CFC look-through provisions will be reflected in the 2013 fiscal year financial results.
The 2011 tax rate increased as compared to 2010 due to certain U.S. expenses which are not fully tax deductible and higher U.S. state taxes partially offset by increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions.

Noncontrolling Interest: A charge of $0.7 billion for the impairment of the IPR&D related to the discontinuation of the Phase III clinical development of bapineuzumab IV was recorded in 2012. Of the $0.7 billion impairment, $0.3 billion is attributable to noncontrolling interest.

Liquidity and Capital Resources
Liquidity & Cash Flows
Cash and cash equivalents were $14.9 billion at the end of 2012 as compared with $24.5 billion at the end of 2011. The primary uses of cash that contributed to the $9.6 billion decrease versus the prior year were approximately $4.5 billion net cash used by investing activities and $20.6 billion net cash used by financing activities partially offset by $15.4 billion of cash generated from operating activities.
Cash flow from operations of $15.4 billion was the result of $10.5 billion of net earnings and $6.9 billion of non-cash charges primarily related to depreciation and amortization, asset write-downs (primarily in-process research and development), stock-based compensation, noncontrolling interest and deferred tax provision reduced by $2.0 billion related to changes in assets and liabilities, net of effects from acquisitions.
Investing activities use of $4.5 billion was primarily for $2.9 billion for additions to property, plant and equipment and acquisitions, net of cash acquired of $4.5 billion partially offset by net sales of investments in marketable securities of

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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$1.4 billion and $1.5 billion of proceeds from the disposal of assets.
Financing activities use of $20.6 billion was for the repurchase of common stock of $12.9 billion primarily for the acquisition of Synthes, Inc., dividends to shareholders of $6.6 billion and net retirement of short and long-term debt of $3.7 billion, partially offset by $2.7 billion of net proceeds from stock options exercised/excess tax benefits.
In 2012, the Company continued to have access to liquidity through the commercial paper market. For additional details on borrowings, see Note 7 to the Consolidated Financial Statements.
The Company anticipates that operating cash flows, existing credit facilities and access to the commercial paper markets will provide sufficient resources to fund operating needs in 2013.
Concentration of Credit Risk
Global concentration of credit risk with respect to trade accounts receivables continues to be limited due to the large number of customers globally and adherence to internal credit policies and credit limits. Recent economic challenges in Italy, Spain, Greece and Portugal (the Southern European Region) have impacted certain payment patterns, which have historically been longer than those experienced in the U.S. and other international markets. The total net trade accounts receivable balance in the Southern European Region was approximately $2.1 billion as of December 30, 2012 and approximately $2.4 billion as of January 1, 2012. Approximately $1.2 billion as of December 30, 2012 and approximately $1.4 billion as of January 1, 2012 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices and Diagnostics customers which are in line with historical collection patterns.
The remaining balance of net trade accounts receivable in the Southern European Region has been negatively impacted by the timing of payments from certain government owned or supported health care customers as well as certain distributors of the Pharmaceutical and Medical Devices and Diagnostics local affiliates. The total net trade accounts receivable balance for these customers were approximately $0.9 billion at December 30, 2012 and $1.0 billion at January 1, 2012. The Company continues to receive payments from these customers and in some cases late payment premiums. For customers where payment is expected over periods of time longer than one year, revenue and trade receivables have been discounted over the estimated period of time for collection. Allowances for doubtful accounts have been increased for these customers, but have been immaterial to date. The Company will continue to work closely with these customers on payment plans, monitor the economic situation and take appropriate actions as necessary.
Financing and Market Risk
The Company uses financial instruments to manage the impact of foreign exchange rate changes on cash flows. Accordingly, the Company enters into forward foreign exchange contracts to protect the value of certain foreign currency assets and liabilities and to hedge future foreign currency transactions primarily related to product costs. Gains or losses on these contracts are offset by the gains or losses on the underlying transactions. A 10% appreciation of the U.S. Dollar from the December 30, 2012 market rates would increase the unrealized value of the Company’s forward contracts by $91 million. Conversely, a 10% depreciation of the U.S. Dollar from the December 30, 2012 market rates would decrease the unrealized value of the Company’s forward contracts by $112 million. In either scenario, the gain or loss on the forward contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated earnings and cash flows.
The Company hedges the exposure to fluctuations in currency exchange rates, and the effect on certain assets and liabilities in foreign currency, by entering into currency swap contracts. A 1% change in the spread between U.S. and foreign interest rates on the Company’s interest rate sensitive financial instruments would either increase or decrease the unrealized value of the Company’s swap contracts by approximately $190 million. In either scenario, at maturity, the gain or loss on the swap contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated cash flows.
The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an “A” (or equivalent) credit rating. The counter-parties to these contracts are major financial institutions and there is no significant concentration of exposure with any one counter-party. Management believes the risk of loss is remote.
The Company has access to substantial sources of funds at numerous banks worldwide. In September 2012, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 19, 2013. Interest charged on borrowings under the credit line agreement is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreement are not material.
Total borrowings at the end of 2012 and 2011 were $16.2 billion and $19.6 billion, respectively. The reduction in debt in 2012 of approximately $3.4 billion was primarily due to a reduction in commercial paper.
In 2012, net cash (cash and current marketable securities, net of debt) was $4.9 billion compared to net cash of $12.6 billion in 2011. Total debt represented 20.0% of total capital (shareholders’ equity and total debt) in 2012 and 25.6% of total capital in 2011. Shareholders’ equity per share at the end of 2012 was $23.33 compared to $20.95 at year-end 2011, an

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
11
                                



increase of 11.4%.
A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements.
Contractual Obligations and Commitments
The Company’s contractual obligations are primarily for leases, debt and unfunded retirement plans. There are no other significant obligations. To satisfy these obligations, the Company will use cash from operations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as of December 30, 2012 (see Notes 7, 10 and 16 to the Consolidated Financial Statements for further details):

(Dollars in Millions)
 
Long-Term
Debt Obligations
 
Interest on
Debt Obligations
 
Unfunded
Retirement Plans
 
Operating Leases
 
Total
2013
 
$
1,512

 
497

 
68

 
251

 
2,328

2014
 
1,789

 
483

 
66

 
192

 
2,530

2015
 

 
477

 
71

 
149

 
697

2016
 
898

 
471

 
76

 
115

 
1,560

2017
 
1,000

 
436

 
80

 
90

 
1,606

After 2017
 
7,802

 
4,232

 
502

 
128

 
12,664

Total
 
$
13,001

 
6,596

 
863

 
925

 
21,385


For tax matters, see Note 8 to the Consolidated Financial Statements.
Share Repurchase and Dividends
On July 9, 2007, the Company announced that its Board of Directors approved a stock repurchase program authorizing the Company to buy back up to $10.0 billion of the Company’s Common Stock. As of January 2, 2011, the Company repurchased an aggregate of 158.3 million shares of Johnson & Johnson Common Stock at a cost of $10.0 billion and the stock repurchase program was completed. The Company funded the share repurchase program through a combination of available cash and debt.
Pursuant to the accelerated stock repurchase agreements in connection with the acquisition of Synthes, Inc., the Company has not made any purchases of Common Stock on the open market during the fiscal third and fourth quarters of 2012.

The Company increased its dividend in 2012 for the 50th consecutive year. Cash dividends paid were $2.40 per share in 2012 compared with dividends of $2.25 per share in 2011, and $2.11 per share in 2010. The dividends were distributed as follows:
 
2012
 
2011
 
2010
First quarter
$
0.57

 
0.54

 
0.49

Second quarter
0.61

 
0.57

 
0.54

Third quarter
0.61

 
0.57

 
0.54

Fourth quarter
0.61

 
0.57

 
0.54

Total
$
2.40

 
2.25

 
2.11

On January 2, 2013, the Board of Directors declared a regular quarterly cash dividend of $0.61 per share, payable on March 12, 2013, to shareholders of record as of February 26, 2013. The Company expects to continue the practice of paying regular cash dividends.

Other Information
Critical Accounting Policies and Estimates
Management’s discussion and analysis of results of operations and financial condition are based on the Company’s consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The preparation of these financial statements requires that management make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. The Company believes that the understanding of certain key accounting policies and estimates are essential in achieving more insight into the Company’s operating results and financial condition. These key accounting policies include revenue recognition, income taxes, legal and self-insurance contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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options.

Revenue Recognition:  The Company recognizes revenue from product sales when goods are shipped or delivered, and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals.
Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales returns reserves are accounted for in accordance with the U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices and Diagnostics segment are typically resalable but are not material. The Company rarely exchanges products from inventory for returned products. The sales returns reserve for the total Company has ranged between 1.0% and 1.2% of annual net trade sales during the fiscal reporting years 2012, 2011 and 2010.
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products. For all years presented, service revenues were less than 2% of total revenues and are included in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred.
In addition, the Company enters into collaboration arrangements that contain multiple revenue generating activities. Amounts due from collaborative partners for these arrangements are recognized as each activity is performed or delivered, based on the relative fair value. Upfront fees received as part of these arrangements are deferred and recognized over the performance period. See Note 1 to the Consolidated Financial Statements for additional disclosures on collaborations.
Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
Below are tables that show the progression of accrued rebates, returns, promotions, reserve for doubtful accounts and reserve for cash discounts by segment of business for the fiscal years ended December 30, 2012 and January 1, 2012.


















                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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Consumer Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2012
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
127

 
438

 
(433
)
 
132

Accrued returns
 
114

 
131

 
(137
)
 
108

Accrued promotions
 
240

 
1,392

 
(1,351
)
 
281

Subtotal
 
$
481

 
1,961

 
(1,921
)
 
521

Reserve for doubtful accounts
 
43

 
6

 
(11
)
 
38

Reserve for cash discounts
 
22

 
214

 
(215
)
 
21

Total
 
$
546

 
2,181

 
(2,147
)
 
580

 
 
 
 
 
 
 
 
 
2011
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
131

 
346

 
(350
)
 
127

Accrued returns
 
145

 
103

 
(134
)
 
114

Accrued promotions
 
294

 
1,520

 
(1,574
)
 
240

Subtotal
 
$
570

 
1,969

 
(2,058
)
 
481

Reserve for doubtful accounts
 
57

 
3

 
(17
)
 
43

Reserve for cash discounts
 
21

 
226

 
(225
)
 
22

Total
 
$
648

 
2,198

 
(2,300
)
 
546


(1) 
Includes reserve for customer rebates of $33 million at December 30, 2012 and $34 million at January 1, 2012, recorded as a contra asset.
Pharmaceutical Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2012
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
1,591

 
4,732

 
(4,556
)
 
1,767

Accrued returns
 
384

 
49

 
(36
)
 
397

Accrued promotions
 
83

 
142

 
(131
)
 
94

Subtotal
 
$
2,058

 
4,923

 
(4,723
)
 
2,258

Reserve for doubtful accounts
 
157

 
47

 
(13
)
 
191

Reserve for cash discounts
 
45

 
425

 
(408
)
 
62

Total
 
$
2,260

 
5,395

 
(5,144
)
 
2,511

 
 
 
 
 
 
 
 
 
2011
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
1,520

 
4,732

 
(4,661
)
 
1,591

Accrued returns
 
294

 
105

 
(15
)
 
384

Accrued promotions
 
83

 
187

 
(187
)
 
83

Subtotal
 
$
1,897

 
5,024

 
(4,863
)
 
2,058

Reserve for doubtful accounts
 
145

 
20

 
(8
)
 
157

Reserve for cash discounts
 
54

 
392

 
(401
)
 
45

Total
 
$
2,096

 
5,436

 
(5,272
)
 
2,260

(1) 
Includes reserve for customer rebates of $269 million at December 30, 2012 and $298 million at January 1, 2012, recorded as a contra asset.



                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
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Medical Devices and Diagnostics Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2012
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
497

 
3,803

 
(3,733
)
 
567

Accrued returns
 
184

 
369

 
(348
)
 
205

Accrued promotions
 
73

 
49

 
(62
)
 
60

Subtotal
 
$
754

 
4,221

 
(4,143
)
 
832

Reserve for doubtful accounts
 
161

 
74

 
2

 
237

Reserve for cash discounts
 
32

 
371

 
(381
)
 
22

Total
 
$
947

 
4,666

 
(4,522
)
 
1,091

 
 
 
 
 
 
 
 
 
2011
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
495

 
3,253

 
(3,251
)
 
497

Accrued returns
 
201

 
352

 
(369
)
 
184

Accrued promotions
 
50

 
67

 
(44
)
 
73

Subtotal
 
$
746

 
3,672

 
(3,664
)
 
754

Reserve for doubtful accounts
 
138

 
54

 
(31
)
 
161

Reserve for cash discounts
 
35

 
342

 
(345
)
 
32

Total
 
$
919

 
4,068

 
(4,040
)
 
947


(1) 
Includes reserve for customer rebates of $340 million at December 30, 2012 and $324 million at January 1, 2012, recorded as a contra asset.

Income Taxes:  Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on current tax regulations and rates. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future.
The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.
At December 30, 2012 and January 1, 2012, the cumulative amounts of undistributed international earnings were approximately $49.0 billion and $41.6 billion, respectively. At December 30, 2012 and January 1, 2012, the Company's foreign subsidiaries held balances of cash and cash equivalents in the amounts of $14.8 billion and $24.5 billion, respectively. The Company has not provided deferred taxes on the undistributed earnings from certain international subsidiaries where the earnings are considered to be permanently reinvested. The Company intends to continue to reinvest these earnings in international operations. If the Company decided at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company does not determine the deferred tax liability associated with these undistributed earnings, as such determination is not practical.
See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
Legal and Self Insurance Contingencies:  The Company records accruals for various contingencies including legal proceedings and product liability claims as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. The Company has self insurance through a wholly-owned captive insurance company and is insured up to certain limits. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated. Additionally, the Company records insurance receivable amounts from third-party insurers when recovery is probable. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from third-party insurers.
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
15
                                



Long-Lived and Intangible Assets:  The Company assesses changes in economic conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges.
Employee Benefit Plans:  The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on assumptions for the discount rate, expected return on plan assets, expected salary increases and health care cost trend rates. See Note 10 to the Consolidated Financial Statements for further details on these rates and the effect a rate change would have on the Company’s results of operations.
Stock Based Compensation:  The Company recognizes compensation expense associated with the issuance of equity instruments to employees for their services. The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model and is expensed in the financial statements over the vesting period. The input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and the dividend yield. See Note 17 to the Consolidated Financial Statements for additional information.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 30, 2012.
Economic and Market Factors
The Company is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concerns about the rising cost of health care. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 2002 - 2012, in the United States, the weighted average compound annual growth rate of the Company’s net price increases for health care products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI).
Inflation rates continue to have an effect on worldwide economies and, consequently, on the way companies operate. The Company accounted for operations in Venezuela as highly inflationary in 2010, 2011 and 2012, as the prior three-year cumulative inflation rate surpassed 100%. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.
On February 8, 2013, the Venezuelan government announced a 32% devaluation of its currency. The effect of the devaluation  is not expected to have a material impact on the Company's 2013 full year results.
The Company is exposed to fluctuations in currency exchange rates. A 1% change in the value of the U.S. Dollar as compared to all foreign currencies in which the Company had sales, income or expense in 2012 would have increased or decreased the translation of foreign sales by approximately $375 million and income by $80 million.
The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement of health care products.
Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn, may continue to impact the Company’s businesses.
The Company also operates in an environment which has become increasingly hostile to intellectual property rights. Generic drug firms have filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of most of the Company’s key pharmaceutical products, prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in ANDA filings, the generic firms will then introduce generic versions of the product at issue, resulting in the potential for substantial market share and revenue losses for that product. For further information, see the discussion on “Litigation Against Filers of Abbreviated New Drug Applications” in Note 21 to the Consolidated Financial Statements.
Legal Proceedings
Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of business.
The Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. The Company has accrued for certain litigation matters and continues to monitor each related legal issue and adjust accruals for new information and further developments in accordance with Accounting Standards Codification (ASC) 450-20-25. For these and other litigation and regulatory matters currently disclosed for which a loss is probable or reasonably possible, the Company is unable to determine an estimate of the possible loss or range of loss beyond the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
16
                                



proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.
In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution in any reporting period of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on the Company's results of operations and cash flows for that period.

See Note 21 to the Consolidated Financial Statements for further information regarding legal proceedings.

Common Stock Market Prices
The Company’s Common Stock is listed on the New York Stock Exchange under the symbol JNJ. As of February 19, 2013, there were 169,820 record holders of Common Stock of the Company. The composite market price ranges for Johnson & Johnson Common Stock during 2012 and 2011 were:
 
2012
 
2011
 
High
 
Low
 
High
 
Low
First quarter
$
66.32

 
64.02

 
63.54

 
57.50

Second quarter
67.70

 
61.71

 
67.37

 
59.25

Third quarter
69.75

 
66.85

 
68.05

 
59.08

Fourth quarter
72.74

 
67.80

 
66.32

 
60.83

Year-end close
$69.48
 
65.58


                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
17
                                



Cautionary Factors That May Affect Future Results
This Annual Report contains forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management’s plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words such as “plans,” “expects,” “will,” “anticipates,” “estimates” and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company’s strategy for growth, product development, regulatory approval, market position and expenditures.
Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that unknown risks or uncertainties materialize, actual results could vary materially from the Company’s expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.
Risks and uncertainties include, but are not limited to, general industry conditions and competition; economic factors, such as interest rate and currency exchange rate fluctuations; technological advances, new products and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approvals; challenges to patents; significant litigation or government action adverse to the Company; impact of business combinations; financial distress and bankruptcies experienced by significant customers and suppliers; changes to governmental laws and regulations and U.S. and foreign health care reforms; trends toward health care cost containment; increased scrutiny of the health care industry by government agencies; changes in behavior and spending patterns of purchasers of health care products and services; financial instability of international economies and sovereign risk; disruptions due to natural disasters; manufacturing difficulties or delays; complex global supply chains with increasing regulatory requirements; and product efficacy or safety concerns resulting in product recalls or regulatory action.
The Company’s report on Form 10-K for the year ended December 30, 2012 includes, in Exhibit 99, a discussion of additional factors that could cause actual results to differ from expectations. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995.




                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
18
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 30, 2012 and January 1, 2012
(Dollars in Millions Except Share and Per Share Amounts) (Note 1)
 
2012
 
2011
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents (Notes 1 and 2)
$
14,911

 
24,542

Marketable securities (Notes 1 and 2)
6,178

 
7,719

Accounts receivable trade, less allowances for doubtful accounts $466 (2011, $361)
11,309

 
10,581

Inventories (Notes 1 and 3)
7,495

 
6,285

Deferred taxes on income (Note 8)
3,139

 
2,556

Prepaid expenses and other receivables
3,084

 
2,633

Total current assets
46,116

 
54,316

Property, plant and equipment, net (Notes 1 and 4)
16,097

 
14,739

Intangible assets, net (Notes 1 and 5)
28,752

 
18,138

Goodwill (Notes 1 and 5)
22,424

 
16,138

Deferred taxes on income (Note 8)
4,541

 
6,540

Other assets
3,417

 
3,773

Total assets
$
121,347

 
113,644

Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 

 
 

Loans and notes payable (Note 7)
$
4,676

 
6,658

Accounts payable
5,831

 
5,725

Accrued liabilities
7,299

 
4,608

Accrued rebates, returns and promotions
2,969

 
2,637

Accrued compensation and employee related obligations
2,423

 
2,329

Accrued taxes on income
1,064

 
854

Total current liabilities
24,262

 
22,811

Long-term debt (Note 7)
11,489

 
12,969

Deferred taxes on income (Note 8)
3,136

 
1,800

Employee related obligations (Notes 9 and 10)
9,082

 
8,353

Other liabilities
8,552

 
10,631

Total liabilities
56,521

 
56,564

Shareholders’ equity
 

 
 

Preferred stock — without par value (authorized and unissued 2,000,000 shares)

 

Common stock — par value $1.00 per share (Note 12) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
3,120

 
3,120

Accumulated other comprehensive income (Note 13)
(5,810
)
 
(5,632
)
Retained earnings
85,992

 
81,251

 
83,302

 
78,739

Less: common stock held in treasury, at cost (Note 12) (341,354,000 shares and 395,480,000 shares)
18,476

 
21,659

Total shareholders’ equity
64,826

 
57,080

Total liabilities and shareholders’ equity
$
121,347

 
113,644

See Notes to Consolidated Financial Statements

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
19
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars and Shares in Millions Except Per Share Amounts) (Note 1)
 
2012
 
2011
 
2010
Sales to customers
$
67,224

 
65,030

 
61,587

Cost of products sold
21,658

 
20,360

 
18,792

Gross profit
45,566

 
44,670

 
42,795

Selling, marketing and administrative expenses
20,869

 
20,969

 
19,424

Research and development expense
7,665

 
7,548

 
6,844

In-process research and development (Note 5)
1,163

 

 

Interest income
(64
)
 
(91
)
 
(107
)
Interest expense, net of portion capitalized (Note 4)
532

 
571

 
455

Other (income) expense, net
1,626

 
2,743

 
(768
)
Restructuring (Note 22)

 
569

 

Earnings before provision for taxes on income
13,775

 
12,361

 
16,947

Provision for taxes on income (Note 8)
3,261

 
2,689

 
3,613

Net earnings
10,514

 
9,672

 
13,334

Add: Net loss attributable to noncontrolling interest
339

 

 

Net earnings attributable to Johnson & Johnson
$
10,853

 
9,672

 
13,334

 
 
 
 
 
 
Net earnings per share attributable to Johnson & Johnson (Notes 1 and 15)
 
 
 
 
 
    Basic
$
3.94

 
3.54

 
4.85

    Diluted
$
3.86

 
3.49

 
4.78

Cash dividends per share
$
2.40

 
2.25

 
2.11

Average shares outstanding (Notes 1 and 15)
 
 
 
 
 
   Basic
2,753.3

 
2,736.0

 
2,751.4

   Diluted
2,812.6

 
2,775.3

 
2,788.8


See Notes to Consolidated Financial Statements



                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
20
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions) (Note 1)

 
2012
 
2011
 
2010
Net Earnings
$
10,514

 
9,672

 
13,334

 
 
 
 
 
 
Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
      Foreign currency translation
1,230

 
(557
)
 
(461
)
 
 
 
 
 
 
      Securities:
 
 
 
 
 
          Unrealized holding gain (loss) arising during period
(248
)
 
565

 
99

          Reclassifications to earnings
(5
)
 
(141
)
 
(45
)
          Net change
(253
)
 
424

 
54

 
 
 
 
 
 
      Employee benefit plans:
 
 
 
 
 
          Prior service cost amortization during period
2

 
5

 
4

          Prior service cost - current year
(8
)
 
15

 

          Gain (loss) amortization during period
370

 
246

 
188

          Gain (loss) - current year
(1,643
)
 
(1,984
)
 
(203
)
          Effect of exchange rates
(52
)
 
18

 
(10
)
          Net change
(1,331
)
 
(1,700
)
 
(21
)
 
 
 
 
 
 
      Derivatives & hedges:
 
 
 
 
 
          Unrealized gain (loss) arising during period
52

 
(500
)
 
(333
)
          Reclassifications to earnings
124

 
232

 
288

          Net change
176

 
(268
)
 
(45
)
 
 
 
 
 
 
Other Comprehensive Income (Loss)
(178
)
 
(2,101
)
 
(473
)
 
 
 
 
 
 
Comprehensive Income
$
10,336

 
7,571

 
12,861

 
 
 
 
 
 
Comprehensive Loss Attributable To Noncontrolling Interest, net of tax
339

 

 

 
 
 
 
 
 
Comprehensive Income Attributable To Johnson & Johnson
$
10,675

 
7,571

 
12,861

 
 
 
 
 
 
 
The tax effects in other comprehensive income for the fiscal years ended 2012, 2011 and 2010 respectively: Securities; $136 million, $228 million and $29 million, Employee Benefit Plans; $653 million $915 million and $11 million, Derivatives & Hedges; $95 million, $144 million and $25 million.
 
Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries.
See Notes to Consolidated Financial Statements


                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
21
                                





JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Millions) (Note 1)
 
Total
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Common Stock
Issued Amount
 
Treasury
Stock
Amount
Balance, January 3, 2010
$
50,588

 
70,306

 
(3,058
)
 
3,120

 
(19,780
)
Net earnings attributable to Johnson & Johnson
13,334

 
13,334

 
 

 
 

 
 

Cash dividends paid
(5,804
)
 
(5,804
)
 
 

 
 

 
 

Employee compensation and stock option plans
1,731

 
(63
)
 
 

 
 

 
1,794

Repurchase of common stock
(2,797
)
 
 

 
 

 
 

 
(2,797
)
Other comprehensive income, net of tax:
(473
)
 
 
 
(473
)
 
 

 
 

Balance, January 2, 2011
$
56,579

 
77,773

 
(3,531
)
 
3,120

 
(20,783
)
Net earnings attributable to Johnson & Johnson
9,672

 
9,672

 
 

 
 

 
 

Cash dividends paid
(6,156
)
 
(6,156
)
 
 

 
 

 
 

Employee compensation and stock option plans
1,760

 
111

 
 

 
 

 
1,649

Repurchase of common stock
(2,525
)
 
 

 
 

 
 

 
(2,525
)
Other
(149
)
 
(149
)
 
 
 
 
 
 
Other comprehensive income, net of tax:
(2,101
)
 
 

 
(2,101
)
 
 

 
 

Balance, January 1, 2012
$
57,080

 
81,251

 
(5,632
)
 
3,120

 
(21,659
)
Net earnings attributable to Johnson & Johnson
10,853

 
10,853

 
 

 
 

 
 

Cash dividends paid
(6,614
)
 
(6,614
)
 
 

 
 

 
 

Employee compensation and stock option plans
3,269

 
19

 
 

 
 

 
3,250

Issuance of common stock associated with the acquisition of Synthes, Inc.
13,335

 
483

 
 
 
 
 
12,852

Repurchase of common stock(1)
(12,919
)
 
 

 
 

 
 

 
(12,919
)
Other comprehensive income, net of tax:
(178
)
 
 

 
(178
)
 
 

 
 

Balance, December 30, 2012
$
64,826

 
85,992

 
(5,810
)
 
3,120

 
(18,476
)
(1) 
Includes repurchase of common stock associated with the acquisition of Synthes, Inc.


See Notes to Consolidated Financial Statements


                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
22
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions) (Note 1)
 
2012
 
2011
 
2010
Cash flows from operating activities
 

 
 

 
 
Net earnings
$
10,514

 
9,672

 
13,334

Adjustments to reconcile net earnings to cash flows from operating activities:
 

 
 

 
 
Depreciation and amortization of property and intangibles
3,666

 
3,158

 
2,939

Stock based compensation
662

 
621

 
614

Noncontrolling interest
339

 

 

Asset write-downs and impairments
2,131

 
160

 

Deferred tax provision
(39
)
 
(836
)
 
356

Accounts receivable allowances
92

 
32

 
12

Changes in assets and liabilities, net of effects from acquisitions:
 

 
 

 
 
Increase in accounts receivable
(9
)
 
(915
)
 
(207
)
Increase in inventories
(1
)
 
(715
)
 
(196
)
Increase in accounts payable and accrued liabilities
2,768

 
493

 
20

Increase in other current and non-current assets
(2,172
)
 
(1,785
)
 
(574
)
(Decrease)/increase in other current and non-current liabilities
(2,555
)
 
4,413

 
87

Net cash flows from operating activities
15,396

 
14,298

 
16,385

Cash flows from investing activities
 

 
 

 
 
Additions to property, plant and equipment
(2,934
)
 
(2,893
)
 
(2,384
)
Proceeds from the disposal of assets
1,509

 
1,342

 
524

Acquisitions, net of cash acquired (Note 20)
(4,486
)
 
(2,797
)
 
(1,269
)
Purchases of investments
(13,434
)
 
(29,882
)
 
(15,788
)
Sales of investments
14,797

 
30,396

 
11,101

Other (primarily intangibles)
38

 
(778
)
 
(38
)
Net cash used by investing activities
(4,510
)
 
(4,612
)
 
(7,854
)
Cash flows from financing activities
 
 
 

 
 
Dividends to shareholders
(6,614
)
 
(6,156
)
 
(5,804
)
Repurchase of common stock
(12,919
)
 
(2,525
)
 
(2,797
)
Proceeds from short-term debt
3,268

 
9,729

 
7,874

Retirement of short-term debt
(6,175
)
 
(11,200
)
 
(6,565
)
Proceeds from long-term debt
45

 
4,470

 
1,118

Retirement of long-term debt
(804
)
 
(16
)
 
(32
)
Proceeds from the exercise of stock options/excess tax benefits
2,720

 
1,246

 
1,226

Other
(83
)
 

 

Net cash used by financing activities
(20,562
)
 
(4,452
)
 
(4,980
)
Effect of exchange rate changes on cash and cash equivalents
45

 
(47
)
 
(6
)
(Decrease)/increase in cash and cash equivalents
(9,631
)
 
5,187

 
3,545

Cash and cash equivalents, beginning of year (Note 1)
24,542

 
19,355

 
15,810

Cash and cash equivalents, end of year (Note 1)
$
14,911

 
24,542

 
19,355

 
 
 
 
 
 
Supplemental cash flow data
 

 
 

 
 

Cash paid during the year for:
 

 
 

 
 

Interest
$
616

 
576

 
491

Income taxes
2,507

 
2,970

 
2,442

 
 
 
 
 
 
Supplemental schedule of non-cash investing and financing activities
 

 
 

 
 

Issuance of common stock associated with the acquisition of Synthes, Inc.
13,335

 

 

Treasury stock issued for employee compensation and stock option plans, net of cash proceeds
615

 
433

 
673

Conversion of debt

 
1

 
1


                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
23
                                



 
 
 
 
 
 
Acquisitions
 

 
 

 
 

Fair value of assets acquired
$
19,025

 
3,025

 
1,321

Fair value of liabilities assumed and noncontrolling interests
(1,204
)
 
(228
)
 
(52
)
Net fair value of acquisitions
$
17,821

 
2,797

 
1,269

Less: Issuance of common stock associated with the acquisition of Synthes, Inc.
13,335

 

 

Net cash paid for acquisitions
$
4,486

 
2,797

 
1,269


See Notes to Consolidated Financial Statements

                
JOHNSON & JOHNSON 2012 ANNUAL REPORT
24
                                




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson & Johnson and its subsidiaries (the Company). Intercompany accounts and transactions are eliminated.
Description of the Company And Business Segments
The Company has approximately 127,600 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being.
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health fields, as well as nutritional and over-the-counter pharmaceutical products and wellness and prevention platforms. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment includes products in the following areas: anti-infective, antipsychotic, contraceptive, gastrointestinal, hematology, immunology, infectious diseases, neurology, oncology, pain management, thrombosis and vaccines. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, hospitals and clinics. These include products to treat cardiovascular disease; orthopaedic and neurological products; blood glucose monitoring and insulin delivery products; general surgery, biosurgical, and energy products; professional diagnostic products; infection prevention products; and disposable contact lenses.

New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
During the fiscal first quarter of 2012, the Company adopted the Financial Accounting Standards Board (FASB) guidance and amendments issued related to goodwill impairment testing. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. This update became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
During the fiscal first quarter of 2012, the Company adopted the FASB amendment to the disclosure requirements for presentation of comprehensive income. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance became effective retrospectively for the interim periods and annual periods beginning after December 15, 2011.
During the fiscal first quarter of 2012, the Company adopted the FASB amendments to disclosure requirements for fair value measurement. These amendments result in convergence of fair value measurement and disclosure requirements between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). This guidance became effective prospectively for the interim periods and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
Recently Issued Accounting Standards
Not Adopted as of December 30, 2012
During the fiscal third quarter of 2012, the FASB issued guidance and amendments related to testing indefinite lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.

                
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However, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s results of operations, cash flows or financial position.
In February 2013, the FASB issued guidance related to additional reporting and disclosure of amounts reclassified out of accumulated other comprehensive income (OCI). Under this new guidance, companies will be required to disclose the amount of income (or loss) reclassified out of OCI to each respective line item on the income statement of where net income is presented. The guidance allows companies to elect whether to disclose the reclassification either in the notes to the financial statements, or on the face of the income statement. This update is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2012. The adoption of this standard is not expected have a material impact on the Company’s results of operations, cash flows or financial position.
Cash Equivalents
The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents.
Investments
Short-term marketable securities are carried at cost, which approximates fair value. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Long-term debt securities that the Company has the ability and intent to hold until maturity are carried at amortized cost. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in equity securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. If losses on these securities are considered to be other than temporary, the loss is recognized in earnings.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:
Building and building equipment
20 - 30 years
Land and leasehold improvements
10 - 20 years
Machinery and equipment
2 - 13 years

The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 8 years.
The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales returns accruals.
Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales returns reserves are accounted for in accordance with U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices and Diagnostics segment are typically resalable but are not material. The Company rarely exchanges products from inventory

                
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for returned products. The sales returns reserve for the total Company has ranged between 1.0% and 1.2% of annual sales to customers during the fiscal reporting years 2012, 2011 and 2010.
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred.
Shipping and Handling
Shipping and handling costs incurred were $1,051 million, $1,022 million and $945 million in 2012, 2011 and 2010, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than 0.5% of sales to customers for all periods presented.
Inventories
Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
Intangible Assets and Goodwill
The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed annually for impairment. The Company completed the annual impairment test for 2012 in the fiscal fourth quarter. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted, as was the case for certain indefinite lived intangible assets in the fiscal second and third quarters of 2012. Purchased in-process research and development is accounted for as an indefinite lived intangible asset until the underlying project is completed, at which point the intangible asset will be accounted for as a definite lived intangible asset, or abandoned, at which point the intangible asset will be written off or partially impaired.
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill.
Financial Instruments
As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value, with Level 1 having the highest priority and Level 3 having the lowest. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments.
Product Liability
Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available.
As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. The Company has self insurance through a wholly-owned captive insurance company and is insured up to certain limits. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated. Based on the availability of prior coverage, receivables for insurance recoveries related to product liability claims are recorded on an undiscounted basis, when it is probable that a recovery will be realized. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from third-party insurers.
Concentration of Credit Risk
Global concentration of credit risk with respect to trade accounts receivables continues to be limited due to the large number of customers globally and adherence to internal credit policies and credit limits. Recent economic challenges in Italy, Spain, Greece and Portugal (the Southern European Region) have impacted certain payment patterns, which have historically been longer than those experienced in the U.S. and other international markets. The total net trade accounts receivable balance in the

                
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Southern European Region was approximately $2.1 billion as of December 30, 2012 and approximately $2.4 billion as of January 1, 2012. Approximately $1.2 billion as of December 30, 2012 and approximately $1.4 billion as of January 1, 2012 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices and Diagnostics customers which are in line with historical collection patterns.
The remaining balance of net trade accounts receivable in the Southern European Region has been negatively impacted by the timing of payments from certain government owned or supported health care customers as well as certain distributors of the Pharmaceutical and Medical Devices and Diagnostics local affiliates. The total net trade accounts receivable balance for these customers were approximately $0.9 billion at December 30, 2012 and $1.0 billion at January 1, 2012. The Company continues to receive payments from these customers and in some cases late payment premiums. For customers where payment is expected over periods of time longer than one year, revenue and trade receivables have been discounted over the estimated period of time for collection. Allowances for doubtful accounts have been increased for these customers, but have been immaterial to date. The Company will continue to work closely with these customers on payment plans, monitor the economic situation and take appropriate actions as necessary.
Research and Development
Research and development expenses are expensed as incurred. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.
The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. In general, the income statement presentation for these collaborations is as follows:

Nature/Type of Collaboration
 
Statement of Earnings Presentation
Third-party sale of product
 
Sales to customers
Royalties/milestones paid to collaborative partner (post-regulatory approval)*
 
Cost of goods sold
Royalties received from collaborative partner
 
Other income (expense), net
Upfront payments & milestones paid to collaborative partner (pre-regulatory approval)
 
Research and development expense
Research and development payments to collaborative partner
 
Research and development expense
Research and development payments received from collaborative partner
 
Reduction of Research and development expense
Milestones are capitalized as intangible assets and amortized to cost of goods sold over the useful life.

For all years presented, there was no individual project that represented greater than 5% of the total annual consolidated research and development expense.
Advertising
Costs associated with advertising are expensed in the year incurred and are included in selling, marketing and administrative expenses. Advertising expenses worldwide, which comprised television, radio, print media and Internet advertising, were $2.3 billion, $2.6 billion and $2.5 billion in 2012, 2011 and 2010, respectively.
Income Taxes
Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on current tax regulations and rates. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future.

                
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The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.
At December 30, 2012 and January 1, 2012, the cumulative amounts of undistributed international earnings were approximately $49.0 billion and $41.6 billion, respectively. At December 30, 2012 and January 1, 2012, the Company's foreign subsidiaries held balances of cash and cash equivalents in the amounts of $14.8 billion and $24.5 billion, respectively. The Company has not provided deferred taxes on the undistributed earnings from certain international subsidiaries where the earnings are considered to be permanently reinvested. The Company intends to continue to reinvest these earnings in international operations. If the Company decided at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company does not determine the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.
See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
Net Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock using the treasury stock method.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, income taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. Actual results may or may not differ from those estimates.
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.
Annual Closing Date
The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, as was the case in 2009, and will be the case again in 2015.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation.

2.
Cash, Cash Equivalents and Current Marketable Securities
At the end of 2012 and 2011, cash, cash equivalents and current marketable securities were comprised of:
(Dollars in Millions)
 
2012
 
2011
Cash
 
$
3,032

 
2,709

Government securities and obligations
 
15,323

 
27,017

Corporate debt securities