EX-13 6 d281803dex13.htm PAGES 25 THROUGH 71 OF THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS Pages 25 through 71 of the Company's Annual Report to Shareholders

Table of Contents

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

  26      Organization and Business Segments
  26      Results of Operations
  27      Analysis of Sales by Business Segments
  29      Analysis of Consolidated Earnings Before Provision for Taxes on Income
  32      Liquidity and Capital Resources
  33      Other Information
  36      Cautionary Factors That May Affect Future Results

 

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

  37      Consolidated Balance Sheets
  38      Consolidated Statements of Earnings
  39      Consolidated Statements of Equity
  40      Consolidated Statements of Cash Flows
  41      Notes to Consolidated Financial Statements
  68      Report of Independent Registered Public Accounting Firm
  69      Management’s Report on Internal Control Over Financial Reporting

 

SUPPORTING SCHEDULES

  70      Summary of Operations and Statistical Data 2001 — 2011
  71      Shareholder Return Performance Graphs

 

JOHNSON & JOHNSON 2011 ANNUAL REPORT

     25   


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 117,900 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, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, thrombosis, vaccines and infectious diseases. 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, therapists, hospitals, diagnostic laboratories and clinics. These products include Cardiovascular Care’s electrophysiology and circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care, neurological and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products and advanced sterilization products; Diabetes Care’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vision Care’s 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 2011 sales. In 2011, $7.5 billion, or 11.6% 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 250 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 2011, worldwide sales increased 5.6% to $65.0 billion, compared to decreases of 0.5% in 2010 and 2.9% in 2009. These sales changes consisted of the following:

 

Sales (decrease)/increase due to:

  2011     2010     2009  

Volume

    3.1     (0.5     (0.2

Price

    (0.3     (0.8     (0.1

Currency

    2.8        0.8        (2.6
 

 

 

   

 

 

   

 

 

 

Total

    5.6     (0.5     (2.9
 

 

 

   

 

 

   

 

 

 

Sales by U.S. companies were $28.9 billion in 2011, $29.5 billion in 2010 and $30.9 billion in 2009. This represents decreases of 1.8% in 2011, 4.7% in 2010 and 4.4% in 2009. Sales by international companies were $36.1 billion in 2011, $32.1 billion in 2010 and $31.0 billion in 2009. This represents an increase of 12.4% in 2011, an increase of 3.6% in 2010 and a decrease of 1.4% in 2009.

 

26    JOHNSON & JOHNSON 2011 ANNUAL REPORT


LOGO

The five-year compound annual growth rates for worldwide, U.S. and international sales were 4.0%, (0.6)% and 8.9%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 7.2%, 3.8% and 11.2%, respectively.

LOGO

Sales in Europe achieved growth of 10.4% as compared to the prior year, including operational growth of 5.3% and a positive impact from currency of 5.1%. Sales in the Western Hemisphere (excluding the U.S.) achieved growth of 15.6% as compared to the prior year, including operational growth of 12.2% and a positive impact from currency of 3.4%. Sales in the Asia-Pacific, Africa region achieved growth of 13.5% as compared to the prior year, including operational growth of 6.6% and a positive impact from currency of 6.9%.

In 2011, 2010 and 2009, the Company did not have a customer that represented 10% or more of total consolidated revenues.

The 2009 results benefited from the inclusion of a 53rd week. (See Note 1 to the Consolidated Financial Statements for Annual Closing Date details). The Company estimated that the fiscal year 2009 growth rate was enhanced by approximately 0.5% due to the 53rd week.

U.S. Health Care Reform

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in March 2010. The health care reform legislation included an increase in the minimum Medicaid rebate rate from 15.1% to 23.1% and also extended the rebate to drugs provided through Medicaid managed care organizations. Additionally, in 2011, discounts were provided on the Company’s brand-name drugs to patients who fall within the Medicare Part D coverage gap “donut hole”. The impact was an increase in sales rebates reducing sales revenue by approximately $425 million and $400 million in 2011 and 2010, respectively.

In 2011, companies that sell branded prescription drugs to specified U.S. Government programs paid an annual non-tax deductible fee based on an allocation of the company’s market share of total branded prescription drug sales from the prior year. The 2011 full year impact to selling, marketing and administrative expenses was $140 million. 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 tax is estimated to be between $200-$250 million and will be recorded in selling, marketing and administrative expenses.

LOGO

Analysis of Sales by Business Segments

Consumer Segment

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%.

 

Major Consumer Franchise Sales:

 

                       % Change  

(Dollars in Millions)

   2011     2010     2009     ’11 vs. ’10     ’10 vs. ’09  

OTC Pharmaceuticals & Nutritionals

   $ 4,402        4,549        5,630        (3.2 )%      (19.2

Skin Care

     3,715        3,452        3,467        7.6        (0.4

Baby Care

     2,340        2,209        2,115        5.9        4.4   

Women’s Health

     1,792        1,844        1,895        (2.8     (2.7

Oral Care

     1,624        1,526        1,569        6.4        (2.7

Wound Care/Other

     1,010        1,010        1,127        0.0        (10.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 14,883        14,590        15,803        2.0     (7.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Over-the-Counter (OTC) Pharmaceuticals and Nutritionals franchise sales were $4.4 billion, a decrease of 3.2% from 2010. Sales in the U.S. were negatively impacted by the suspension of production at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility as well as the impact on production volumes related to ongoing efforts to enhance quality and manufacturing systems at its other manufacturing sites.

During the fiscal first quarter of 2011, a consent decree was signed with the U.S. Food and Drug Administration (FDA), which governs certain McNeil Consumer Healthcare manufacturing operations. The consent decree identifies procedures that will help provide additional assurance of product quality to the FDA. McNeil continues to

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     27   


operate the manufacturing facilities in Las Piedras, Puerto Rico and Lancaster, Pennsylvania, however production volumes from these facilities have been impacted due to the additional review and approval processes required. Regarding the products previously produced at the Fort Washington facility, McNeil continues to work on the re-siting of these products to other facilities. McNeil is making progress on the validations at these alternative sites and a modest amount of products returned to the market in the fourth quarter of 2011. Products will continue to be reintroduced throughout 2012 and 2013.

The Skin Care franchise achieved sales of $3.7 billion in 2011, a 7.6% increase as compared to the prior year primarily due growth in the NEUTROGENA®, DABAO®, JOHNSON’S® Adult and LE PETIT MARSEILLAIS® product lines. The Baby Care franchise sales grew by 5.9% to $2.3 billion in 2011, primarily due to growth in cleansers, wipes and haircare. The Women’s Health franchise sales were $1.8 billion, a decrease of 2.8% primarily impacted by the divestiture of certain brands. The Oral Care franchise sales grew by 6.4% to $1.6 billion in 2011, primarily due to increased sales of LISTERINE® products. The Wound Care/Other franchise sales were $1.0 billion in 2011, flat as compared to the prior year.

Consumer segment sales in 2010 were $14.6 billion, a decrease of 7.7% from 2009, with 8.9% of this change due to an operational decline partially offset by positive currency impact of 1.2%. U.S. Consumer segment sales were $5.5 billion, a decrease of 19.3%. International sales were $9.1 billion, an increase of 1.2%, with an operational decline of 1.0% offset by positive currency impact of 2.2%.

Pharmaceutical Segment

The Pharmaceutical segment achieved sales of $24.4 billion in 2011, representing an increase of 8.8% over the prior year, 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%.

Major Pharmaceutical Product Sales*:

 

                      % Change  

(Dollars in Millions)

  2011     2010     2009     ’11 vs. ’10     ’10 vs. ’09  

REMICADE® (infliximab)

  $ 5,492        4,610        4,304        19.1     7.1   

PROCRIT®/EPREX ® (Epoetin alfa)

    1,623        1,934        2,245        (16.1     (13.9

RISPERDAL® CONSTA® (risperidone)

    1,583        1,500        1,425        5.5        5.3   

VELCADE® (bortezomib)

    1,274        1,080        933        18.0        15.8   

CONCERTA® (methylphenidate HCl)

    1,268        1,319        1,326        (3.9     (0.5

PREZISTA® (darunavir)

    1,211        857        592        41.3        44.8   

ACIPHEX®/PARIET ® (rabeprazole sodium)

    975        1,006        1,096        (3.1     (8.2

LEVAQUIN®/FLOXIN ® (levofloxacin/ofloxacin)

    623        1,357        1,550        (54.1     (12.5

Other Pharmaceuticals

    10,319        8,733        9,049        18.2        (3.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 24,368        22,396        22,520        8.8     (0.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

REMICADE® (infliximab), a biologic approved for the treatment of a number of immune mediated inflammatory diseases, achieved sales of $5.5 billion in 2011, with growth of 19.1% over the prior year. On a combined basis, U.S. export and international sales of REMICADE® increased nearly 50% due to the impact of the agreement with Merck & Co., Inc. (Merck), complemented by international market growth. On April 15, 2011, the Company announced it reached an agreement with Merck which included distribution rights to REMICADE® and SIMPONI® (golimumab) whereby, effective July 1, 2011, certain territories were relinquished to the Company. On July 1, 2011, the Company began to record sales of product, previously recorded by Merck, from certain territories, including Canada, Brazil, Australia and Mexico, which were previously supplied by Merck.

PROCRIT® (Epoetin alfa) and EPREX® (Epoetin alfa) had combined sales of $1.6 billion in 2011, a decline of 16.1% compared to the prior year. Lower sales of PROCRIT® and EPREX® were primarily due to a declining market for Erythropoiesis Stimulating Agents (ESAs) and increased competition for EPREX®.

RISPERDAL® CONSTA® (risperidone), a long-acting injectable antipsychotic, achieved sales of $1.6 billion in 2011, representing an increase of 5.5% as compared to the prior year due to international growth. Total U.S. sales of the Company’s long-acting injectables, including RISPERDAL® CONSTA® and INVEGA® SUSTENNA® (paliperidone palmitate), increased by strong double digits versus a year ago due to an increase in the Company’s combined market share in the antipsychotic market.

VELCADE® (bortezomib), a product for the treatment for multiple myeloma, for which the Company has commercial rights in markets outside the U.S., achieved sales of $1.3 billion in 2011, representing an increase of 18.0% primarily due to strong growth in Asia and Latin America.

CONCERTA® (methylphenidate HCl) sales were $1.3 billion, a decline of 3.9% compared to the prior year. The U.S. supply and distribution agreement with Watson Laboratories, Inc. to distribute an authorized generic version of CONCERTA® became effective May 1, 2011. All regions outside the U.S. achieved sales growth.

        PREZISTA® (darunavir), a protease inhibitor for the treatment of HIV, achieved sales of $1.2 billion in 2011, representing an increase of 41.3% as compared to the prior year primarily due to market share growth.

ACIPHEX®/PARIET® (rabeprazole sodium) sales were $1.0 billion, a decline of 3.1% versus the prior year due to increased competition from generics in the category.

LEVAQUIN® (levofloxacin)/FLOXIN® (ofloxacin) sales were $0.6 billion, a decline of 54.1% versus the prior year due to the loss of market exclusivity in the U.S. in June 2011. LEVAQUIN® sales will continue to decline in the first half of 2012 versus the first half of 2011.

In 2011, Other Pharmaceutical sales were $10.3 billion, representing a growth of 18.2% over the prior year. Contributors to the increase were sales of newly acquired products from Crucell N.V. (Crucell) and newly approved products including ZYTIGA® (abiraterone acetate) and INCIVO® (telaprevir). Additional contributors to the growth were STELARA® (ustekinumab), INVEGA® SUSTENNA® (paliperidone palmitate), SIMPONI® (golimumab), NUCYNTA® (tapentadol), and INTELENCE® (etravirine). This growth was partially offset by lower sales of DURAGESIC®/Fentanyl Transdermal (fentanyl transdermal system), and TOPAMAX® (topiramate) due to continued generic competition.

 

28    JOHNSON & JOHNSON 2011 ANNUAL REPORT


During 2011, the Company received several regulatory approvals including: U.S. approval for two indications for XARELTO® (rivaroxaban), an anti-coagulant co-developed with Bayer HealthCare, the first one for the prevention (prophylaxis) of deep vein thrombosis (DVT) which may lead to a pulmonary embolism (PE) in people undergoing knee or hip replacement surgery, and the second one to reduce the risk of stroke and systemic embolism in patients with non-valvular atrial fibrulation; EDURANT® (rilpivirine), in both the U.S. and the European Union (EU), for HIV in treatment-naïve patients; INCIVO® (telaprevir), in the EU for the treatment of hepatitis C virus; and ZYTIGA® (abiraterone acetate), in the U.S. and EU, for the treatment of metastic castration-resistant prostate cancer. In addition, the FDA approved additional indications for REMICADE® (infliximab), for the treatment of moderately to severely active ulcerative colitis in pediatric patients, and NUCYNTA® ER (tapentadol) extended-release tablets, an oral analgesic for the management of moderate to severe chronic pain in adults.

The Company submitted New Drug Applications (NDAs) to the FDA seeking approval for the use of XARELTO® (rivaroxaban), an oral anticoagulant, to reduce the risk of thrombotic cardiovascular events in patients with Acute Coronary Syndrome, and for NUCYNTA® ER (tapentadol) extended-release tablets, an oral analgesic for the management of neuropathic pain associated with diabetic peripheral neuropathy in adults.

Pharmaceutical segment sales in 2010 were $22.4 billion, a decrease of 0.6% from 2009, with an operational decline of 1.0% and a positive currency impact of 0.4%. U.S. sales were $12.5 billion, a decrease of 4.0%. International sales were $9.9 billion, an increase of 4.2%, which included 3.4% operational growth and a positive currency impact of 0.8%.

Medical Devices and Diagnostics Segment

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%.

Major Medical Devices and Diagnostics Franchise Sales:

 

                       % Change  

(Dollars in Millions)

   2011     2010     2009     ’11 vs. ’10     ’10 vs. ’09  

DEPUY®

   $ 5,809        5,585        5,372        4.0     4.0   

ETHICON ENDO-SURGERY®

     5,080        4,758        4,492        6.8        5.9   

ETHICON®

     4,870        4,503        4,122        8.2        9.2   

Vision Care

     2,916        2,680        2,506        8.8        6.9   

Diabetes Care

     2,652        2,470        2,440        7.4        1.2   

Cardiovascular Care*

     2,288        2,552        2,679        (10.3     (4.7

ORTHO-CLINICAL DIAGNOSTICS®

     2,164        2,053        1,963        5.4        4.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 25,779        24,601        23,574        4.8     4.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

* Previously referred to as CORDIS®

The DePuy franchise achieved sales of $5.8 billion in 2011, a 4.0% increase over the prior year. This growth was primarily due to sales of Mitek sports medicine and trauma product lines, and newly acquired products from Micrus. The growth was partially offset by lower sales of knees and hips in the U.S. due to increased competition, continued pricing pressure, a softer market and the impact of the DePuy ASR™ Hip recall.

The Ethicon Endo-Surgery franchise achieved sales of $5.1 billion in 2011, a 6.8% increase over the prior year. Growth was attributable to increased sales of Advanced Sterilization and HARMONIC® product lines, and outside the U.S., the Endo Mechanical product line. Additionally, sales of newly acquired products from SterilMed contributed to the growth. Total growth was negatively impacted by the divestiture of the Breast Care business in the third quarter of 2010.

The Ethicon franchise achieved sales of $4.9 billion in 2011, an 8.2% increase over the prior year. Emerging market growth in sutures, newly launched products ETHICON PHYSIOMESH® and ETHICON SECURESTRAP™, and growth in the biosurgical, Women’s Health and Urology and Acclarent product lines contributed to the increase in sales.

The Vision Care franchise achieved sales of $2.9 billion in 2011, an 8.8% increase over the prior year. Contributors to the growth were 1-DAY ACUVUE® and astigmatism lenses.

The Diabetes Care franchise achieved sales of $2.7 billion in 2011, a 7.4% increase over the prior year. The growth was primarily due to sales in the OneTouch® product line.

Sales in the Cardiovascular Care franchise were $2.3 billion, a decline of 10.3% versus the prior year. Sales were impacted by the Company’s decision to exit the drug-eluting stent market and lower sales of endovascular products due to increased competition. Sales for drug-eluting stents were approximately 11% and 25% of the total Cardiovascular Care franchise sales in 2011 and 2010, respectively. The decline in sales was partially offset by strong growth in Biosense Webster, the Company’s electrophysiology business.

The Ortho-Clinical Diagnostics franchise achieved sales of $2.2 billion in 2011, a 5.4% increase over the prior year. The growth was primarily attributable to the strength of the VITROS® 5600 and 3600 Analyzers, partially offset by lower sales in donor screening.

The Medical Devices and Diagnostics segment achieved sales of $24.6 billion in 2010, representing an increase of 4.4% over the prior year, with operational growth of 3.4% and a positive currency impact of 1.0%. U.S. sales were $11.4 billion, an increase of 3.6% over the prior year. International sales were $13.2 billion, an increase of 5.0% over the prior year, with growth of 3.0% from operations and a positive currency impact of 2.0%.

Analysis of Consolidated Earnings Before Provision for Taxes on Income

Consolidated earnings before provision for taxes on income decreased by $4.5 billion to $12.4 billion in 2011 as compared to $16.9 billion in 2010, a decrease of 27.1%. The decrease was primarily due to costs associated with product liability and litigation expenses, 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

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     29   


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.

The 2010 increase of 7.6% as compared to 2009 was primarily related to lower selling, marketing and administrative expenses due to cost containment actions resulting from the restructuring plan initiated and implemented in 2009, income from litigation settlements and the gain on the divestiture of the Breast Care business of Ethicon Endo-Surgery, Inc. This was partially offset by costs associated with product liability expense and the impact of the OTC and DePuy ASR™ Hip recalls. Additional offsets were lower net selling prices in the Pharmaceutical business due to U.S. health care reform legislation and price reductions in certain Medical Devices and Diagnostics businesses. The 2009 decrease of 6.9% as compared to 2008 was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of $1.2 billion. This was partially offset by lower selling, marketing and administrative expenses due to cost containment efforts across all the businesses. As a percent to sales, consolidated earnings before provision for taxes on income in 2011 was 19.0% versus 27.5% in 2010.

The sections that follow highlight the significant components of the changes in consolidated earnings before provision for taxes on income.

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

   2011     2010     2009  

Cost of products sold

     31.3     30.5        29.8   

Percent point increase over the prior year

     0.8        0.7        0.7   

Selling, marketing and administrative expenses

     32.3        31.5        32.0   

Percent point increase/(decrease) over the prior year

     0.8        (0.5     (1.7

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 Consumer 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.

In 2010, cost of products sold as a percent to sales increased compared to the prior year primarily due to costs associated with the impact of the OTC recall and remediation efforts in the Consumer business, lower net selling prices in the Pharmaceutical business due to U.S. health care reform legislation and price reductions in certain Medical Devices and Diagnostics businesses. Additionally, unfavorable product mix attributable to the loss of market exclusivity for TOPAMAX® contributed to the increase. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2010 compared to the prior year primarily due to cost containment initiatives principally resulting from the restructuring plan implemented in 2009. The decrease was partially offset by lower net selling prices in the Pharmaceutical business due to U.S. health care reform legislation and price reductions in certain Medical Devices and Diagnostics businesses.

In 2009, cost of products sold as a percent to sales increased compared to the prior year primarily due to the continued negative impact of product mix and inventory write-offs associated with the restructuring activity. Additionally, 2008 included certain non-recurring positive items. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2009 compared to the prior year primarily due to cost containment efforts across all the businesses and the annualized savings recognized from the 2007 restructuring program. In addition, in 2008 the Company utilized the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. to fund increased investment spending.

Research and Development expense by segment of business was as follows:

 

    2011     2010     2009  

(Dollars in Millions)

  Amount     % of Sales*     Amount     % of Sales*     Amount     % of Sales*  

Consumer

  $ 659        4.4     609        4.2        632        4.0   

Pharmaceutical

    5,138        21.1        4,432        19.8        4,591        20.4   

Medical Devices and Diagnostics

    1,751        6.8        1,803        7.3        1,763        7.5   
 

 

 

     

 

 

     

 

 

   

Total research and development expense

  $ 7,548        11.6     6,844        11.1        6,986        11.3   

Percent increase/(decrease) over the prior year

    10.3       (2.0       (7.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

* As a percent to segment sales

Research and Development Expense: 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 2011, worldwide costs of research and development activities increased by 10.3% compared to 2010. The increase in the Pharmaceutical segment was primarily due to higher levels of spending to advance the Company’s Pharmaceutical pipeline. The decrease in the Medical Devices and Diagnostics segment was due to the discontinuation of its clinical development program for the NEVO™ Sirolimus-Eluting Coronary Stent.

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 will focus on other cardiovascular therapies where significant patient needs exist. In the fiscal second quarter of 2011, the Company recorded a pre-tax charge of $676 million, of which $87 million is included in cost of products sold.

In 2009, the Company announced global restructuring initiatives expected to generate pre-tax, annual cost savings of approximately $1.5 billion when fully implemented. The associated savings has provided additional resources to invest in new growth platforms, ensure the successful launch of the Company’s many new products and

 

30    JOHNSON & JOHNSON 2011 ANNUAL REPORT


continued growth of the core businesses, and provide flexibility to adjust to the changed and evolving global environment. In the fiscal fourth quarter of 2009, the Company recorded a pre-tax charge of $1.2 billion, of which $113 million was included in cost of products sold.

See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring.

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; non-controlling interests and litigation settlements. In 2011, the unfavorable change of $3.5 billion in other (income) expense, net, was primarily due to litigation expenses of $1.7 billion in 2011 as compared to a $1.0 billion net gain from litigation settlements in 2010. Additionally, 2011 as compared to 2010 included higher expenses of $1.0 billion related to product liability, $0.2 billion for costs related to the DePuy ASR™ Hip recall program and an adjustment of $0.5 billion to the value of the currency option and deal costs related to the planned acquisition of Synthes, Inc. Included in 2011 were higher gains on the divestitures of businesses of $0.6 billion as compared to 2010.

In 2010, the favorable change of $0.2 billion in other (income) expense, net as compared to 2009, was primarily due to a net gain from litigation settlements and gains on the divestiture of businesses partially offset by product liability expense. In 2009, other (income) expense, net included net litigation settlements of $0.4 billion.

Operating Profit by Segment

Operating profits by segment of business were as follows:

 

                 Percent of
Segment  Sales
 

(Dollars in Millions)

   2011     2010     2011     2010  

Consumer

   $ 2,096        2,342        14.1     16.1   

Pharmaceutical

     6,406        7,086        26.3        31.6   

Medical Devices and Diagnostics

     5,263        8,272        20.4        33.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total(1)

     13,765        17,700        21.2        28.7   

Less: Expenses not allocated to segments(2)

     1,404        753       
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before provision for taxes on income

   $ 12,361        16,947        19.0     27.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See Note 18 to the Consolidated Financial Statements for more details.

 

(2) 

Amounts not allocated to segments include interest (income) expense, non-controlling interests, and general corporate (income) expense. Included in 2011, was a $0.5 billion expense for the adjustment to the value of the currency option related to the planned acquisition of Synthes, Inc.

LOGO

Consumer Segment: In 2011, Consumer segment operating 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®. In 2010, Consumer segment operating profit decreased 5.4% from 2009. The primary reasons for the decrease in the operating profit were lower sales and higher costs associated with the recall of certain OTC products and the suspension of production at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility.

Pharmaceutical Segment: In 2011, Pharmaceutical segment operating profit decreased 9.6% from 2010. The primary drivers of the decrease in the operating 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. In 2010, Pharmaceutical segment operating profit increased 10.5% from 2009. The primary reasons for the increase in operating profit were lower manufacturing costs, the gain on a divestiture, and benefits from cost improvement initiatives related to the restructuring plan implemented in 2009, partially offset by $333 million of expense related to litigation matters, increased product liability expense and the impact of the newly enacted U.S. health care reform legislation.

        Medical Devices and Diagnostics Segment: In 2011, Medical Devices and Diagnostics segment operating profit decreased 36.4% from 2010. The primary drivers of the decline in the operating profit margin in the Medical Devices and Diagnostics segment were product liability and litigation expenses, costs associated with the DePuy ASR™ Hip recall program, restructuring expense, costs incurred related to the planned acquisition of Synthes, Inc. and increased investment spending. In 2010, Medical Devices and Diagnostics segment operating profit increased 7.5% from 2009. The improved operating profit was due to a gain of $1.3 billion from net litigation matters and the gain on the divestiture of the Breast Care business recorded in 2010. This was partially offset by increased product liability expense, $280 million of costs associated with the DePuy ASR™ Hip recall program and price reductions in certain Medical Devices and Diagnostics businesses.

Interest (Income) Expense: 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.

Interest income in 2010 increased by $17 million over the prior year due to higher average cash balances. Cash, cash equivalents and marketable securities totaled $27.7 billion at the end of 2010, and averaged $23.6 billion as compared to the $15.6 billion average cash balance in 2009. The increase in the average cash balance was primarily due to cash generated from operating activities and net cash proceeds from litigation matters and divestitures.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     31   


Interest expense in 2010 was relatively flat as compared to 2009 due to a lower average rate despite a higher debt balance. The total debt balance at the end of 2010 was $16.8 billion as compared to $14.5 billion at the end of 2009. The higher average debt balance of $15.7 billion in 2010 versus $13.5 billion in 2009 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.

Interest income in 2009 decreased by $271 million as compared to 2008 due to lower rates of interest earned despite higher average cash balances. The cash balance, including marketable securities, was $19.4 billion at the end of 2009, and averaged $15.6 billion as compared to the $12.2 billion average cash balance in 2008. The increase in the average cash balance was primarily due to cash generated from operating activities.

Interest expense in 2009 increased by $16 million as compared to 2008 due to a higher debt balance. The net debt balance at the end of 2009 was $14.5 billion as compared to $11.9 billion at the end of 2008. The higher average debt balance of $13.5 billion in 2009 versus $12.9 billion in 2008 was primarily related to funding acquisitions and investments and the purchase of the Company’s Common Stock under the Common Stock repurchase program announced on July 9, 2007.

Provision for Taxes on Income: The worldwide effective income tax rate was 21.8% in 2011, 21.3% in 2010 and 22.1% in 2009. 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. The 2010 tax rate decreased as compared to 2009 due to decreases in taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions and certain U.S. tax adjustments.

Liquidity and Capital Resources

Liquidity & Cash Flows

Cash and cash equivalents were $24.5 billion at the end of 2011 as compared with $19.4 billion at the end of 2010. The primary sources of cash that contributed to the $5.1 billion increase versus the prior year were $14.3 billion of cash generated from operating activities, $3.0 billion net proceeds from long and short-term debt, $1.3 billion proceeds from the disposal of assets and proceeds from net investment sales of $0.5 billion. The major uses of cash were dividends to shareholders of $6.2 billion, capital spending of $2.9 billion, acquisitions of $2.8 billion, the repurchase of Common Stock, net of proceeds from the exercise of options of $1.3 billion and other of $0.8 billion primarily related to intangible assets.

Cash flows from operations were $14.3 billion in 2011. The major sources of cash flow were net income of $9.7 billion, adjusted for non-cash charges for depreciation and amortization, stock based compensation and deferred tax provision of $2.9 billion. The remaining change to operating cash flow of $1.7 billion was primarily due to an increase in other current and non-current liabilities related to accruals recorded for litigation matters, product liability and employee benefit plans.

In 2011, 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 2012.

LOGO

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 $2.4 billion as of January 1, 2012 and approximately $2.3 billion as of January 2, 2011. Approximately $1.4 billion as of January 1, 2012 and approximately $1.3 billion as of January 2, 2011 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 healthcare 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 $1.0 billion at January 1, 2012 and January 2, 2011. 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, 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 January 1, 2012 market rates would increase the unrealized value of the Company’s forward contracts by $235 million. Conversely, a 10% depreciation of the U.S. Dollar from the January 1, 2012 market rates would decrease the unrealized value of the Company’s forward contracts by $287 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

 

32    JOHNSON & JOHNSON 2011 ANNUAL REPORT


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 $232 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 2011, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires September 20, 2012. 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 2011 and 2010 were $19.6 billion and $16.8 billion, respectively. The increase in borrowings between 2011 and 2010 was a result of financing for general corporate purposes. In 2011, net cash (cash and current marketable securities, net of debt) was $12.6 billion compared to net cash of $10.9 billion in 2010. Total debt represented 25.6% of total capital (shareholders’ equity and total debt) in 2011 and 22.9% of total capital in 2010. Shareholders’ equity per share at the end of 2011 was $20.95 compared with $20.66 at year-end 2010, an increase of 1.4%.

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, with 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 January 1, 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  

2012

   $ 616        560        61        188        1,425   

2013

     1,545        527        62        162        2,296   

2014

     1,816        508        64        131        2,519   

2015

            501        69        104        674   

2016

     898        496        77        82        1,553   

After 2016

     8,710        4,765        455        65        13,995   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 13,585        7,357        788        732        22,462   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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. In addition, the Company has an annual program to repurchase shares for use in employee stock and incentive plans.

The Company increased its dividend in 2011 for the 49th consecutive year. Cash dividends paid were $2.25 per share in 2011 compared with dividends of $2.11 per share in 2010, and $1.93 per share in 2009. The dividends were distributed as follows:

 

     2011     2010     2009  

First quarter

   $ 0.54        0.49        0.46   

Second quarter

     0.57        0.54        0.49   

Third quarter

     0.57        0.54        0.49   

Fourth quarter

     0.57        0.54        0.49   
  

 

 

   

 

 

   

 

 

 

Total

   $ 2.25        2.11        1.93   
  

 

 

   

 

 

   

 

 

 

On January 3, 2012, the Board of Directors declared a regular quarterly cash dividend of $0.57 per share, payable on March 13, 2012, to shareholders of record as of February 28, 2012. 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 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

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     33   


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 prior three fiscal reporting years 2011, 2010 and 2009.

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. The revenue for these arrangements is 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 as revenue earned over the obligation 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 January 1, 2012 and January 2, 2011.

Consumer Segment

 

(Dollars in Millions)

   Balance at
Beginning
of Period
    Accruals     Payments/Credits     Balance at
End of

Period
 

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   
  

 

 

   

 

 

   

 

 

   

 

 

 

2010

        

Accrued rebates(1)

   $ 121        361        (351     131   

Accrued returns

     127        156        (138     145   

Accrued promotions

     272        2,418        (2,396     294   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $ 520        2,935        (2,885     570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for doubtful accounts

     107        6        (56     57   

Reserve for cash discounts

     21        249        (249     21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 648        3,190        (3,190     648   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes reserve for customer rebates of $34 million at January 1, 2012 and $50 million at January 2, 2011, recorded as a contra asset.

Pharmaceutical Segment

 

(Dollars in Millions)

   Balance at
Beginning
of Period
    Accruals     Payments/Credits     Balance at
End of
Period
 

2011

        

Accrued rebates (1)(2)

   $ 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   
  

 

 

   

 

 

   

 

 

   

 

 

 

2010

        

Accrued rebates (1)(2)

   $ 1,064        4,768        (4,312     1,520   

Accrued returns

     342        27        (75     294   

Accrued promotions

     84        135        (136     83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $ 1,490        4,930        (4,523     1,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for doubtful accounts

     83        91        (29     145   

Reserve for cash discounts

     48        379        (373     54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,621        5,400        (4,925     2,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes reserve for customer rebates of $298 million at January 1, 2012 and $320 million at January 2, 2011, recorded as a contra asset.

 

(2) 

Includes additional sales rebates to Medicaid managed care organizations as a result of the U.S. health care reform legislation.

 

34    JOHNSON & JOHNSON 2011 ANNUAL REPORT


Medical Devices and Diagnostics Segment

 

(Dollars in Millions)

   Balance at
Beginning of
Period
    Accruals     Payments/Credits     Balance at
End of
Period
 

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   
  

 

 

   

 

 

   

 

 

   

 

 

 

2010

        

Accrued rebates(1)(2)

   $ 454        3,271        (3,230     495   

Accrued returns

     220        334        (353     201   

Accrued promotions

     73        111        (134     50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $ 747        3,716        (3,717     746   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for doubtful accounts

     143        33        (38     138   

Reserve for cash discounts

     32        484        (481     35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 922        4,233        (4,236     919   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes reserve for customer rebates of $324 million at January 1, 2012 and $331 million at January 2, 2011, recorded as a contra asset.

(2) 

Accruals and Payments/Credits for 2010 have been revised by $908 million to appropriately reflect non-cash credits/adjustments, consistent with current year presentation related to the Ethicon franchise, previously reported net in the Accruals column.

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. 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 January 1, 2012 and January 2, 2011, the cumulative amounts of undistributed international earnings were approximately $41.6 billion and $37.0 billion, respectively. At January 1, 2012 and January 2, 2011, the Company’s foreign subsidiaries held balances of cash and cash equivalents in the amounts of $24.5 billion and $18.7 billion, respectively. The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation.

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. 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.

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 January 1, 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 2001 - 2011, 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 and 2011, 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.

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 2011 would have increased or decreased the translation of foreign sales by approximately $350 million and income by $75 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)

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     35   


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 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 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. The composite market price ranges for Johnson & Johnson Common Stock during 2011 and 2010 were:

 

    2011     2010  
    High     Low     High      Low  

First quarter

  $ 63.54        57.50        65.95         61.89   

Second quarter

    67.37        59.25        66.20         57.55   

Third quarter

    68.05        59.08        62.70         56.86   

Fourth quarter

    66.32        60.83        64.92         61.25   

Year-end close

    $65.58        61.85   

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 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 healthcare cost containment; increased scrutiny of the healthcare industry by government agencies; changes in behavior and spending patterns of purchasers of healthcare products and services; financial instability of international economies and sovereign risk; disruptions due to natural disasters; manufacturing difficulties or delays; product efficacy or safety concerns resulting in product recalls or regulatory action.

The Company’s report on Form 10-K for the year ended January 1, 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.

 

36    JOHNSON & JOHNSON 2011 ANNUAL REPORT


JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

At January 1, 2012 and January 2, 2011

(Dollars in Millions Except Share and Per Share Data) (Note 1)

 

      2011     2010  

Assets

    

Current assets

    

Cash and cash equivalents (Notes 1 and 2)

   $ 24,542        19,355   

Marketable securities (Notes 1 and 2)

     7,719        8,303   

Accounts receivable trade, less allowances for doubtful accounts $361 (2010, $340)

     10,581        9,774   

Inventories (Notes 1 and 3)

     6,285        5,378   

Deferred taxes on income (Note 8)

     2,556        2,224   

Prepaid expenses and other receivables

     2,633        2,273   
  

 

 

   

 

 

 

Total current assets

     54,316        47,307   
  

 

 

   

 

 

 

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

     14,739        14,553   

Intangible assets, net (Notes 1 and 5)

     18,138        16,716   

Goodwill (Notes 1 and 5)

     16,138        15,294   

Deferred taxes on income (Note 8)

     6,540        5,096   

Other assets

     3,773        3,942   
  

 

 

   

 

 

 

Total assets

   $ 113,644        102,908   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Loans and notes payable (Note 7)

   $ 6,658        7,617   

Accounts payable

     5,725        5,623   

Accrued liabilities

     4,608        4,100   

Accrued rebates, returns and promotions

     2,637        2,512   

Accrued compensation and employee related obligations

     2,329        2,642   

Accrued taxes on income

     854        578   
  

 

 

   

 

 

 

Total current liabilities

     22,811        23,072   
  

 

 

   

 

 

 

Long-term debt (Note 7)

     12,969        9,156   

Deferred taxes on income (Note 8)

     1,800        1,447   

Employee related obligations (Notes 9 and 10)

     8,353        6,087   

Other liabilities

     10,631        6,567   
  

 

 

   

 

 

 

Total liabilities

     56,564        46,329   
  

 

 

   

 

 

 

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)

     (5,632     (3,531

Retained earnings

     81,251        77,773   
  

 

 

   

 

 

 
     78,739        77,362   

Less: common stock held in treasury, at cost (Note 12) (395,480,000 shares and 381,746,000 shares)

     21,659        20,783   
  

 

 

   

 

 

 

Total shareholders’ equity

     57,080        56,579   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 113,644        102,908   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

CONSOLIDATED FINANCIAL STATEMENTS

     37   


JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in Millions Except Per Share Figures) (Note 1)

 

     2011     2010     2009  

Sales to customers

   $ 65,030        61,587        61,897   
      

Cost of products sold

     20,360        18,792        18,447   
  

 

 

   

 

 

   

 

 

 

Gross profit

     44,670        42,795        43,450   

Selling, marketing and administrative expenses

     20,969        19,424        19,801   

Research and development expense

     7,548        6,844        6,986   

Interest income

     (91     (107     (90

Interest expense, net of portion capitalized (Note 4)

     571        455        451   

Other (income) expense, net

     2,743        (768     (526

Restructuring (Note 22)

     569        —         1,073   
  

 

 

   

 

 

   

 

 

 

Earnings before provision for taxes on income

     12,361        16,947        15,755   

Provision for taxes on income (Note 8)

     2,689        3,613        3,489   
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 9,672        13,334        12,266   
  

 

 

   

 

 

   

 

 

 

Basic net earnings per share (Notes 1 and 15)

   $ 3.54        4.85        4.45   

Diluted net earnings per share (Notes 1 and 15)

   $ 3.49        4.78        4.40   

Cash dividends per share

   $ 2.25        2.11        1.93   

Basic average shares outstanding (Notes 1 and 15)

     2,736.0        2,751.4        2,759.5   

Diluted average shares outstanding (Notes 1 and 15)

     2,775.3        2,788.8        2,789.1   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

 

38    JOHNSON & JOHNSON 2011 ANNUAL REPORT


JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in Millions) (Note 1)

 

     Total     Comprehensive
Income
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Common Stock
Issued Amount
     Treasury
Stock
Amount
 

Balance, December 28, 2008

   $ 42,511          63,379        (4,955     3,120         (19,033
  

 

 

     

 

 

   

 

 

   

 

 

    

 

 

 

Net earnings

     12,266        12,266        12,266          

Cash dividends paid

     (5,327       (5,327       

Employee compensation and stock option plans

     1,404          21             1,383   

Repurchase of common stock

     (2,130              (2,130

Other

     (33       (33       

Other comprehensive income, net of tax:

             

Currency translation adjustment

     1,363        1,363          1,363        

Unrealized losses on securities

     (55     (55       (55     

Employee benefit plans

     565        565          565        

Gains on derivatives & hedges

     24        24          24        
    

 

 

          

Total comprehensive income

       14,163            
    

 

 

          
  

 

 

     

 

 

 

Balance, January 3, 2010

   $ 50,588          70,306        (3,058     3,120         (19,780
  

 

 

     

 

 

   

 

 

   

 

 

    

 

 

 

Net earnings

     13,334        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:

             

Currency translation adjustment

     (461     (461       (461     

Unrealized gains on securities

     54        54          54        

Employee benefit plans

     (21     (21       (21     

Losses on derivatives & hedges

     (45     (45       (45     
    

 

 

          

Total comprehensive income

       12,861            
    

 

 

          
             
  

 

 

     

 

 

 

Balance, January 2, 2011

   $ 56,579          77,773        (3,531     3,120         (20,783
  

 

 

     

 

 

   

 

 

   

 

 

    

 

 

 

Net earnings

     9,672        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:

             

Currency translation adjustment

     (557     (557       (557     

Unrealized gains on securities

     424        424          424        

Employee benefit plans

     (1,700     (1,700       (1,700     

Losses on derivatives & hedges

     (268     (268       (268     
    

 

 

          

Total comprehensive income

       7,571            
    

 

 

          
  

 

 

     

 

 

 

Balance, January 1, 2012

   $ 57,080          81,251        (5,632     3,120         (21,659
  

 

 

     

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Consolidated Financial Statements

 

CONSOLIDATED FINANCIAL STATEMENTS

     39   


JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Millions) (Note 1)

 

     2011     2010     2009  

Cash flows from operating activities

      

Net earnings

   $ 9,672        13,334        12,266   

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

      

Depreciation and amortization of property and intangibles

     3,158        2,939        2,774   

Stock based compensation

     621        614        628   

Deferred tax provision

     (836     356        (436

Accounts receivable allowances

     32        12        58   

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

      

(Increase)/decrease in accounts receivable

     (915     (207     453   

(Increase)/decrease in inventories

     (715     (196     95   

Increase/(decrease) in accounts payable and accrued liabilities

     493        20        (507

(Increase)/decrease in other current and non-current assets

     (1,625     (574     1,209   

Increase in other current and non-current liabilities

     4,413        87        31   
  

 

 

   

 

 

   

 

 

 

Net cash flows from operating activities

     14,298        16,385        16,571   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Additions to property, plant and equipment

     (2,893     (2,384     (2,365

Proceeds from the disposal of assets

     1,342        524        154   

Acquisitions, net of cash acquired (Note 20)

     (2,797     (1,269     (2,470

Purchases of investments

     (29,882     (15,788     (10,040

Sales of investments

     30,396        11,101        7,232   

Other (primarily intangibles)

     (778     (38     (109
  

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

     (4,612     (7,854     (7,598
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Dividends to shareholders

     (6,156     (5,804     (5,327

Repurchase of common stock

     (2,525     (2,797     (2,130

Proceeds from short-term debt

     9,729        7,874        9,484   

Retirement of short-term debt

     (11,200     (6,565     (6,791

Proceeds from long-term debt

     4,470        1,118        9   

Retirement of long-term debt

     (16     (32     (219

Proceeds from the exercise of stock options/excess tax benefits

     1,246        1,226        882   
  

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     (4,452     (4,980     (4,092
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (47     (6     161   
  

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

     5,187        3,545        5,042   

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

     19,355        15,810        10,768   
  

 

 

   

 

 

   

 

 

 

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

   $ 24,542        19,355        15,810   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow data

      

Cash paid during the year for:

      

Interest

   $ 576        491        533   

Income taxes

     2,970        2,442        2,363   

Supplemental schedule of non-cash investing and financing activities

      

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

   $ 433        673        541   

Conversion of debt

     1        1        2   

Acquisitions

      

Fair value of assets acquired

   $ 3,025        1,321        3,345   

Fair value of liabilities assumed and non-controlling interests

     (228     (52     (875
  

 

 

   

 

 

   

 

 

 

Net cash paid for acquisitions

   $ 2,797        1,269        2,470   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

40    JOHNSON & JOHNSON 2011 ANNUAL REPORT


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 117,900 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, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, thrombosis, vaccines and infectious diseases. 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, therapists, hospitals, diagnostic laboratories and clinics. These products include Cardiovascular Care’s electrophysiology and circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care, neurological and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products and advanced sterilization products; Diabetes Care’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vision Care’s disposable contact lenses.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

During the fiscal first quarter of 2011, the Company adopted the Financial Accounting Standards Board (FASB) guidance and amendments issued related to revenue recognition under the milestone method. The objective of the accounting standard update is to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This update became effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. 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 2011, the Company adopted the FASB guidance on how pharmaceutical companies should recognize and classify in the Company’s financial statements, the non-deductible annual fee paid to the Government in accordance with the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. This fee is based on an allocation of a company’s market share of total branded prescription drug sales to U.S. government programs from the prior year. The estimated fee was recorded as a selling, marketing and administrative expense in the Company’s financial statement and will be amortized on a straight-line basis for the year as per the FASB guidance. 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 January 1, 2012

During the fiscal third quarter of 2011, the FASB issued amendments 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 guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. 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.

During the fiscal second quarter of 2011, the FASB issued an 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 is effective retrospectively for the interim periods and annual periods beginning after December 15, 2011; however, the FASB agreed to an indefinite deferral of the reclassification requirement. 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.

During the fiscal second quarter of 2011, the FASB issued amendments to disclosure requirements for common 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 is effective prospectively for the interim periods and annual periods beginning after December 15, 2011. Early adoption is prohibited. 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.

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

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     41   


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 - 40 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 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 prior three fiscal reporting years 2011, 2010 and 2009.

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 $1,022 million, $945 million and $964 million in 2011, 2010 and 2009, 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 2011 in the fiscal fourth quarter and no impairment was determined. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if a triggering event occurs. 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.

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. 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

 

42    JOHNSON & JOHNSON 2011 ANNUAL REPORT


ceased purchasing third-party product liability insurance. 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.

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 $2.4 billion as of January 1, 2012 and approximately $2.3 billion as of January 2, 2011. Approximately $1.4 billion as of January 1, 2012 and approximately $1.3 billion as of January 2, 2011 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 Pharmaceuticals 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 healthcare 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 $1.0 billion at January 1, 2012 and January 2, 2011. 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, 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.

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 $2.6 billion, $2.5 billion and $2.4 billion in 2011, 2010 and 2009, 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. 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 January 1, 2012 and January 2, 2011, the cumulative amounts of undistributed international earnings were approximately $41.6 billion and $37.0 billion, respectively. At January 1, 2012 and January 2, 2011, the Company’s foreign subsidiaries held balances of cash and cash equivalents in the amounts of $24.5 billion and $18.7 billion, respectively. The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation.

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,

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     43   


contingencies and intangible asset and liability valuations. For instance, in determining annual pension and post-employment benefit costs, the Company estimates the rate of return on plan assets, and the cost of future health care benefits. 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 2014.

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 2011 and 2010, cash, cash equivalents and current marketable securities were comprised of:

 

 

September September

(Dollars in Millions)

   2011      2010  

Cash

   $ 2,709         2,293   

Government securities and obligations

     27,017         22,349   

Corporate debt securities

     489         225   

Money market funds

     1,590         2,135   

Time deposits

     456         656   
  

 

 

    

 

 

 

Total cash, cash equivalents and current marketable securities

   $ 32,261         27,658   
  

 

 

    

 

 

 

The estimated fair value was $32,262 million as of January 1, 2012 reflecting a $1 million unrealized gain in government securities and obligations. The estimated fair value was the same as the carrying value as of January 2, 2011.

As of January 1, 2012, current marketable securities consisted of $7,545 million and $174 million of government securities and obligations, and corporate debt securities, respectively.

As of January 2, 2011, current marketable securities consisted of $8,153 million and $150 million of government securities and obligations, and corporate debt securities, respectively.

Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices in active markets.

The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an A (or equivalent) credit rating.

3.    Inventories

At the end of 2011 and 2010, inventories were comprised of:

 

 

(Dollars in Millions)

   2011      2010  

Raw materials and supplies

   $ 1,206         1,073   

Goods in process

     1,637         1,460   

Finished goods

     3,442         2,845   
  

 

 

    

 

 

 

Total inventories

   $ 6,285         5,378   
  

 

 

    

 

 

 

4.    Property, Plant and Equipment

At the end of 2011 and 2010, property, plant and equipment at cost and accumulated depreciation were:

 

 

(Dollars in Millions)

   2011      2010  

Land and land improvements

   $ 754         738   

Buildings and building equipment

     9,389         9,079   

Machinery and equipment

     19,182         18,032   

Construction in progress

     2,504         2,577   
  

 

 

    

 

 

 

Total property, plant and equipment, gross

   $ 31,829         30,426   

Less accumulated depreciation

     17,090         15,873   
  

 

 

    

 

 

 

Total property, plant and equipment, net

   $ 14,739         14,553   
  

 

 

    

 

 

 

The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2011, 2010 and 2009 was $84 million, $73 million and $101 million, respectively.

Depreciation expense, including the amortization of capitalized interest in 2011, 2010 and 2009, was $2.3 billion, $2.2 billion and $2.1 billion, respectively.

Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings.

5.    Intangible Assets and Goodwill

At the end of 2011 and 2010, the gross and net amounts of intangible assets were:

 

 

(Dollars in Millions)

   2011      2010  

Intangible assets with definite lives:

     

Patents and trademarks — gross

   $ 7,947         6,660   

Less accumulated amortization

     2,976         2,629   
  

 

 

    

 

 

 

Patents and trademarks — net

   $ 4,971         4,031   
  

 

 

    

 

 

 

Other intangibles — gross

   $ 8,716         7,674   

Less accumulated amortization

     3,432         2,880   
  

 

 

    

 

 

 

Other intangibles — net

   $ 5,284         4,794   
  

 

 

    

 

 

 

Intangible assets with indefinite lives:

     

Trademarks

   $ 6,034         5,954   

Purchased in-process research and development

     1,849         1,937   
  

 

 

    

 

 

 

Total intangible assets with indefinite lives

   $ 7,883         7,891   
  

 

 

    

 

 

 

Total intangible assets — net

   $ 18,138         16,716   
  

 

 

    

 

 

 

The acquisition of Crucell N.V. during the fiscal first quarter of 2011 increased purchased in-process research and development by approximately $1.0 billion and patents and trademarks by approximately $0.7 billion. During the fiscal second quarter of 2011, the Company reclassified approximately $1.0 billion from purchased in-process research and development to amortizable other intangibles to reflect the commercialization of ZYTIGA®.

 

44    JOHNSON & JOHNSON 2011 ANNUAL REPORT


Goodwill as of January 1, 2012 and January 2, 2011, as allocated by segment of business, was as follows:

 

 

(Dollars in Millions)

   Consumer     Pharmaceuticals     Med Devices
and
Diagnostics
    Total  

Goodwill at January 3, 2010

   $ 8,074        1,244        5,544        14,862   
  

 

 

   

 

 

   

 

 

   

 

 

 

Acquisitions

                   397        397   

Currency translation/other*

     70        (19     (16     35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at January 2, 2011

   $ 8,144        1,225        5,925        15,294   
  

 

 

   

 

 

   

 

 

   

 

 

 

Acquisitions

     251        538        198        987   

Currency translation/other

     (97     (42     (4     (143
  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at January 1, 2012

   $ 8,298        1,721        6,119        16,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes reclassification between segments.

The weighted average amortization periods for patents and trademarks and other intangible assets are 17 years and 26 years, respectively. The amortization expense of amortizable assets was $852 million, $748 million and $675 million before tax, for the fiscal years ended January 1, 2012, January 2, 2011 and January 3, 2010, respectively, which includes the write downs of certain patents and intangible assets. These write downs did not have a material impact on the Company’s results of operations, cash flows or financial position.

The estimated amortization expense for the five succeeding years approximates $840 million before tax, per year. Substantially all of the amortization expense is included in cost of products sold.

6.    Fair Value Measurements

The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of raw materials denominated in foreign currency. The Company also uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges. The Company also uses forward exchange contracts to manage its exposure to the variability of cash flows for repatriation of foreign dividends. These contracts are designated as net investment hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward exchange contracts are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The Company does not enter into derivative financial instruments for trading or speculative purposes, or contain credit risk related contingent features or requirements to post collateral. On an ongoing basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company enters into agreements with commercial institutions that have at least an A (or equivalent) credit rating. As of January 1, 2012, the Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate swaps of $22 billion and $3 billion, respectively.

All derivative instruments are recorded on the balance sheet at fair value. 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 designation as a cash flow hedge is made at the entrance date into the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains/losses on net investment hedges are accounted for through the currency translation account and are insignificant. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings in Other (income) expense, net. Refer to Note 13 for disclosures of movements in Accumulated Other Comprehensive Income.

As of January 1, 2012, the balance of deferred net losses on derivatives included in accumulated other comprehensive income was $168 million after-tax. For additional information, see Note 13. The Company expects that substantially all of the amount related to foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding interest rate swaps. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.

The following table is a summary of the activity related to designated derivatives for the fiscal years ended January 1, 2012 and January 2, 2011:

 

 

Cash Flow Hedges    Gain/(Loss)
Recognized in
Accumulated OCI(1)
    Gain/(Loss)
Reclassified  from
Accumulated OCI
into Income(1)
    Gain/(Loss)
Recognized  in

Other
Income/Expense(2)
 

(Dollars in Millions)

           2011             2010             2011             2010             2011             2010  

Foreign exchange contracts

   $ (60     (66     (9 )(A)      (52 )(A)      (1     (2

Foreign exchange contracts

     (103     (296     (154 )(B)      (300 )(B)      2        (38

Foreign exchange contracts

     24        51        (22 )(C)      57 (C)      (1     5   

Cross currency interest rate swaps

     (406     (40     (45 )(D)      6 (D)               

Foreign exchange contracts

     45        18        (2 )(E)      1 (E)      1        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (500     (333     (232     (288     1        (32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All amounts shown in the table above are net of tax.

 

(1) 

Effective portion

 

(2) 

Ineffective portion

 

(A) 

Included in Sales to customers

 

(B) 

Included in Cost of products sold

 

(C) 

Included in Research and development expense

 

(D) 

Included in Interest (income)/Interest expense, net

 

(E) 

Included in Other (income)/expense, net

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     45   


For the fiscal years ended January 1, 2012 and January 2, 2011, a loss of $23 million and $31 million, respectively, was recognized in Other (income)/expense, net, relating to foreign exchange contracts not designated as hedging instruments.

In addition, during the fiscal second quarter of 2011, the Company entered into an option to hedge the currency risk associated with the cash portion of the payment for the planned acquisition of Synthes, Inc. The option was not designated as a hedge, and therefore, changes in the fair value of the option are recognized in Other (income)/expense, net. During the fiscal year ended January 1, 2012, the mark to market adjustment to reduce the value of the currency option was $450 million which expired in January 2012. The cost basis of the option was $467 million.

During the fiscal fourth quarter of 2011, the Company reclassified foreign currency bond mark to market adjustments from foreign currency translation to gain/(loss) on derivatives and hedges. There was no net impact within other comprehensive income as a result of this reclassification.

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 that should be 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. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.

The fair value of a derivative financial instrument (i.e. forward exchange contract, currency swap) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. Dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments that are classified as Level 1 as they are traded in an active exchange market.

The following three levels of inputs are used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Significant other observable inputs.

Level 3 — Significant unobservable inputs.

The Company’s significant financial assets and liabilities measured at fair value as of January 1, 2012 and January 2, 2011 were as follows:

 

 

     2011      2010  

(Dollars in Millions)

   Level 1      Level 2      Level 3      Total      Total (1)  

Derivatives designated as hedging instruments:

              

Assets:

              

Foreign exchange contracts

   $         442                 442         321   

Cross currency interest rate swaps (2)

             15                 15         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

             457                 457         338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Foreign exchange contracts

             452                 452         586   

Cross currency interest rate swaps (3)

             594                 594         502   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

             1,046                 1,046         1,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

              

Assets:

              

Foreign exchange contracts

             29                 29         19   

Swiss Franc Option*

             17                 17           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

             46                 46         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Foreign exchange contracts

             34                 34         39   

Other investments (4)

   $ 1,563                         1,563         1,165   

 

* Currency option related to the planned acquisition of Synthes, Inc.

 

(1) 

2010 assets and liabilities are all classified as Level 2 with the exception of other investments of $1,165 million which are classified as Level 1.

 

(2) 

Includes $15 million and $14 million of non-current assets for the fiscal years ending January 1, 2012 and January 2, 2011, respectively.

 

(3) 

Includes $594 million and $502 million of non-current liabilities for the fiscal years ending January 1, 2012 and January 2, 2011, respectively.

 

(4) 

Classified as non-current other assets.

 

See Notes 2 and 7 for financial assets and liabilities held at carrying amount on the Consolidated Balance Sheet.

 

46    JOHNSON & JOHNSON 2011 ANNUAL REPORT


7.    Borrowings

The components of long-term debt are as follows:

 

 

(Dollars in Millions)

   2011     Effective
Rate %
    2010     Effective
Rate %
 

5.15% Debentures due 2012

   $ 599        5.18     599        5.18   

0.70% Notes due 2013

     500        0.75                 

3.80% Debentures due 2013

     500        3.82        500        3.82   

3 month LIBOR+0% FRN due 2013

     500        0.46                 

3 month LIBOR+0.09% FRN due 2014

     750        0.55                 

1.20% Notes due 2014

     999        1.24                 

2.15% Notes due 2016

     898        2.22                 

5.55% Debentures due 2017

     1,000        5.55        1,000        5.55   

5.15% Debentures due 2018

     898        5.15        898        5.15   

4.75% Notes due 2019 (1B Euro 1.2892) (2)/(1B Euro 1.3268) (3)

     1,282 (2)      5.35        1,319 (3)      5.35   

3% Zero Coupon Convertible Subordinated Debentures due 2020

     199        3.00        194        3.00   

2.95% Debentures due 2020

     541        3.15        541        3.15   

3.55% Notes due 2021

     446        3.67                 

6.73% Debentures due 2023

     250        6.73        250        6.73   

5.50% Notes due 2024 (500MM GBP 1.5421)(2)/ (500MM GBP 1.5403) (3)

     765 (2)      5.71        764 (3)      5.71   

6.95% Notes due 2029

     294        7.14        294        7.14   

4.95% Debentures due 2033

     500        4.95        500        4.95   

5.95% Notes due 2037

     995        5.99        995        5.99   

5.85% Debentures due 2038

     700        5.86        700        5.86   

4.50% Debentures due 2040

     539        4.63        539        4.63   

4.85% Notes due 2041

     298        4.89                 

Other

     132          76     
  

 

 

   

 

 

   

 

 

   

 

 

 
     13,585 (4)      4.08 (1)      9,169 (4)      5.25 (1) 

Less current portion

     616          13     
  

 

 

     

 

 

   
   $ 12,969          9,156     
  

 

 

     

 

 

   

 

(1)

Weighted average effective rate.

(2) 

Translation rate at January 1, 2012.

(3) 

Translation rate at January 2, 2011.

(4) 

The excess of the fair value over the carrying value of debt was $2.0 billion in 2011 and $1.0 billion in 2010.

Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices in active markets.

The Company has access to substantial sources of funds at numerous banks worldwide. In September 2011, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires September 20, 2012. Interest charged on borrowings under the credit line agreements is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreements are not material.

Throughout 2011, the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately $6.7 billion at the end of 2011, of which $5.3 billion was borrowed under the Commercial Paper Program. The remainder represents principally local borrowing by international subsidiaries.

The Company has a shelf registration with the U.S. Securities and Exchange Commission that enables the Company to issue debt securities and warrants to purchase debt securities on a timely basis. The Company issued bonds in May 2011 for a total of $4.4 billion for general corporate purposes.

Aggregate maturities of long-term obligations commencing in 2011 are:

 

 

(Dollars in Millions)                              

2012

  2013     2014     2015     2016     After
2016
 
$616     1,545        1,816               898        8,710   

8.    Income Taxes

The provision for taxes on income consists of:

 

 

(Dollars in Millions)

   2011     2010     2009  

Currently payable:

      

U.S. taxes

   $ 2,392        2,063        2,410   

International taxes

     1,133        1,194        1,515   
  

 

 

   

 

 

   

 

 

 

Total currently payable

     3,525        3,257        3,925   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

U.S. taxes

     (690     (4     187   

International taxes

     (146     360        (623
  

 

 

   

 

 

   

 

 

 

Total deferred

     (836     356        (436
  

 

 

   

 

 

   

 

 

 

Provision for taxes on income

   $ 2,689        3,613        3,489   
  

 

 

   

 

 

   

 

 

 

A comparison of income tax expense at the U.S. statutory rate of 35% in 2011, 2010 and 2009, to the Company’s effective tax rate is as follows:

 

 

(Dollars in Millions)

   2011     2010     2009  

U.S.

   $ 3,634        6,392        7,141   

International

     8,727        10,555        8,614   
  

 

 

   

 

 

   

 

 

 

Earnings before taxes on income:

   $ 12,361        16,947        15,755   
  

 

 

   

 

 

   

 

 

 

Tax rates:

      

U.S. statutory rate

     35.0     35.0        35.0   

International operations excluding Ireland

     (14.0     (7.5     (6.7

Ireland and Puerto Rico operations

     (1.8     (5.1     (5.1

Research and orphan drug tax credits

     (0.8     (0.6     (0.6

U.S. state and local

     2.1        1.0        1.8   

U.S. manufacturing deduction

     (0.8     (0.5     (0.4

U.S. tax on international income

     (0.4     (0.6     (1.6

All other (1)

     2.5        (0.4     (0.3
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     21.8     21.3        22.1   
  

 

 

   

 

 

   

 

 

 

 

(1) 

Includes U.S. expenses not fully tax deductible primarily related to litigation expense.

The Company has subsidiaries operating in Puerto Rico under various tax incentive grants. The increase in the 2011 tax rate was primarily 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. The decrease in the 2010 tax rate as compared to 2009 was primarily due to decreases in taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions and certain U.S. tax adjustments.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     47   


Temporary differences and carryforwards for 2011 and 2010 were as follows:

 

 

     2011
Deferred Tax
    2010
Deferred Tax
 

(Dollars in Millions)

   Asset      Liability     Asset      Liability  

Employee related obligations

   $ 3,028           2,211      

Stock based compensation

     1,358           1,225      

Depreciation

        (865        (769

Non-deductible intangibles

        (2,997        (2,725

International R&D capitalized for tax

     1,509           1,461      

Reserves & liabilities

     1,527           948      

Income reported for tax purposes

     903           691      

Net operating loss carryforward international

     1,183           1,134      

Miscellaneous international

     1,261         (422     1,326         (106

Miscellaneous U.S.

     817           470      
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deferred income taxes

   $ 11,586         (4,284     9,466         (3,600
  

 

 

    

 

 

   

 

 

    

 

 

 

The difference between the net deferred tax on income per the balance sheet and the net deferred tax above is included in taxes on income on the balance sheet. The Company has wholly-owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will realize future taxable income sufficient to utilize these deferred tax assets.

The following table summarizes the activity related to unrecognized tax benefits:

 

 

(Dollars in Millions)

   2011     2010     2009  

Beginning of year

   $ 2,307        2,403        1,978   

Increases related to current year tax positions

     402        465        555   

Increases related to prior period tax positions

     87        68        203   

Decreases related to prior period tax positions

     (77     (431     (163

Settlements

     (16     (186     (87

Lapse of statute of limitations

     (4     (12     (83
  

 

 

   

 

 

   

 

 

 

End of year

   $ 2,699        2,307        2,403   
  

 

 

   

 

 

   

 

 

 

The unrecognized tax benefits of $2.7 billion at January 1, 2012, if recognized, would affect the Company’s annual effective tax rate. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress with a number of tax authorities. The U.S. Internal Revenue Service (IRS) has completed its audit for the tax years through 2005; however, there are a limited number of issues remaining open for prior tax years going back to 1999. In other major jurisdictions where the Company conducts business, the years remain open generally back to the year 2003. The Company does not expect that the total amount of unrecognized tax benefits will significantly change over the next twelve months. The Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.

The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized after tax interest of $47 million expense, $34 million income and $36 million expense in 2011, 2010 and 2009, respectively. The total amount of accrued interest was $350 million and $264 million in 2011 and 2010, respectively.

9.    Employee Related Obligations

At the end of 2011 and 2010, employee related obligations recorded on the Consolidated Balance Sheet were:

 

 

(Dollars in Millions)

   2011      2010  

Pension benefits

   $ 3,937         2,175   

Postretirement benefits

     2,843         2,359   

Postemployment benefits

     1,129         1,379   

Deferred compensation

     863         820   
  

 

 

    

 

 

 

Total employee obligations

     8,772         6,733   

Less current benefits payable

     419         646   
  

 

 

    

 

 

 

Employee related obligations — non-current

   $ 8,353         6,087   
  

 

 

    

 

 

 

Prepaid employee related obligations of $249 million and $615 million for 2011 and 2010, respectively, are included in other assets on the Consolidated Balance Sheet.

10.    Pensions and Other Benefit Plans

The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides post-retirement benefits, primarily health care, to all U.S. retired employees and their dependents.

Many international employees are covered by government-sponsored programs and the cost to the Company is not significant.

Retirement plan benefits are primarily based on the employee’s compensation during the last three to five years before retirement and the number of years of service. International subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided.

The Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future.

The Company uses the date of its consolidated financial statements (January 1, 2012 and January 2, 2011, respectively) as the measurement date for all U.S. and international retirement and other benefit plans.

 

48    JOHNSON & JOHNSON 2011 ANNUAL REPORT


Net periodic benefit costs for the Company’s defined benefit retirement plans and other benefit plans for 2011, 2010 and 2009 include the following components:

 

 

     Retirement Plans     Other Benefit Plans  

(Dollars in Millions)

   2011     2010     2009     2011     2010     2009  

Service cost

   $ 638        550        511      $ 149        134        137   

Interest cost

     853        791        746        188        202        174   

Expected return on plan assets

     (1,108     (1,005     (934     (1     (1     (1

Amortization of prior service cost

     9        10        13        (3     (4     (5

Amortization of net transition asset

     1        1        1                        

Recognized actuarial losses

     388        236        155        45        48        55   

Curtailments and settlements

            1        (11                   (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 781        584        481      $ 378        379        359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The net periodic benefit cost attributable to U.S. retirement plans was $414 million, $294 million and $286 million in 2011, 2010 and 2009, respectively.

Amounts expected to be recognized in net periodic benefit cost in the coming year for the Company’s defined benefit retirement plans and other post-retirement plans:

 

 

(Dollars in Millions)        

Amortization of net transition obligation

   $ 1   

Amortization of net actuarial losses

     553   

Amortization of prior service cost

     4   

Unrecognized gains and losses for the U.S. pension plans are amortized over the average remaining future service for each plan. For plans with no active employees, they are amortized over the average life expectancy. The amortization of gains and losses for the other U.S. benefit plans is determined by using a 10% corridor of the greater of the market value of assets or the projected benefit obligation. Total unamortized gains and losses in excess of the corridor are amortized over the average remaining future service.

Prior service costs/benefits for the U.S. pension plans are amortized over the remaining future service of plan participants at the time of the plan amendment. Prior service cost/benefit for the other U.S. benefit plans is amortized over the average remaining service to full eligibility age of plan participants at the time of the plan amendment.

The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.

 

 

     Retirement Plans      Other Benefit Plans  
     2011     2010      2009      2011     2010      2009  

U.S. Benefit Plans

               

Discount rate

     5.22     5.98         6.50         5.22     5.98         6.50   

Expected long-term rate of return on plan assets

     9.00     9.00         9.00         9.00     9.00         9.00   

Rate of increase in compensation levels

     4.25     4.25         4.50         4.25     4.25         4.50   

International Benefit Plans

               

Discount rate

     4.94     5.26         5.75         5.64     6.32         6.75   

Expected long-term rate of return on plan assets

     7.87     8.00         8.00                          

Rate of increase in compensation levels

     4.05     4.00         4.00         4.70     4.75         4.75   

 

The Company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities.

The expected long-term rate of return on plan assets assumption is determined using a building block approach, considering historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration is given to local market expectations of long-term returns.

The following table displays the assumed health care cost trend rates, for all individuals:

 

 

Health Care Plans

   2011     2010  

Health care cost trend rate assumed for next year

     7.50     7.50   

Rate to which the cost trend rate is assumed to decline (ultimate trend)

     5.00     5.00   

Year the rate reaches the ultimate trend rate

     2018        2018   
  

 

 

   

 

 

 

A one-percentage-point change in assumed health care cost trend rates would have the following effect:

 

 

     One-Percentage-      One-Percentage-  
(Dollars in Millions)    Point Increase      Point Decrease  

Health Care Plans

     

Total interest and service cost

   $ 42       $ (33

Post-retirement benefit obligation

     422         (337

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     49   


The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2011 and 2010 for the Company’s defined benefit retirement plans and other post-retirement plans:

 

 

     Retirement Plans     Other Benefit
Plans
 

(Dollars in Millions)

   2011     2010     2011     2010  

Change in Benefit Obligation

      

Projected benefit obligation — beginning of year

   $ 14,993        13,449      $ 3,572        3,590   

Service cost

     638        550        149        134   

Interest cost

     853        791        188        202   

Plan participant contributions

     54        42                 

Amendments

     (24                     

Actuarial losses

     1,698        815        213        115   

Divestitures & acquisitions

     14                        

Curtailments & settlements & restructuring

     (6     (10              

Benefits paid from plan

     (659     (627     (320     (476

Effect of exchange rates

     (137     (17     (12     7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Projected benefit obligation — end of year

   $ 17,424        14,993      $ 3,790        3,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in Plan Assets

      

Plan assets at fair value — beginning of year

   $ 13,433        10,923      $ 14        16   

Actual return on plan assets

     (102     1,466        (1     2   

Company contributions

     1,135        1,611        315        472   

Plan participant contributions

     54        42                 

Settlements

     (2     (7              

Divestitures & acquisitions

     (2                     

Benefits paid from plan assets

     (659     (627     (320     (476

Effect of exchange rates

     (121     25                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Plan assets at fair value — end of year

   $ 13,736        13,433      $ 8        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status — end of year

   $ (3,688     (1,560   $ (3,782     (3,558
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts Recognized in the Company’s Balance Sheet consist of the following:

      

Non-current assets

   $ 249        615      $          

Current liabilities

     (59     (54     (346     (576

Non-current liabilities

     (3,878     (2,121     (3,436     (2,982
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in the consolidated balance sheet — end of year

   $ (3,688     (1,560   $ (3,782     (3,558
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts Recognized in Accumulated Other Comprehensive Income consist of the following:

      

Net actuarial loss

   $ 6,030        3,539      $ 1,218        1,017   

Prior service cost (credit)

     6        39        (18     (21

Unrecognized net transition obligation

     3        4        1          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total before tax effects

   $ 6,039        3,582      $ 1,201        996   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated Benefit Obligations — end of year

   $ 15,452        13,134       

Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income

      

Net periodic benefit cost

   $ 781        584      $ 378        379   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net actuarial loss

     2,903        354        197        134   

Amortization of net actuarial (loss) gain

     (388     (242     8        (46

Prior service cost

     (24                     

Amortization of prior service (cost) credit

     (9     (10     3        4   

Effect of exchange rates

     (25     13        (3     3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in other comprehensive income, before tax

   $ 2,457        115      $ 205        95   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recognized in net periodic benefit cost and other comprehensive income

   $ 3,238        699      $ 583        474   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company plans to continue to fund its U.S. Qualified Plans to comply with the Pension Protection Act of 2006. International Plans are funded in accordance with local regulations. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the plans. For certain plans, funding is not a common practice, as funding provides no economic benefit. Consequently the Company has several pension plans that are not funded.

In 2011, the Company contributed $689 million and $446 million to its U.S. and international pension plans, respectively.

 

50    JOHNSON & JOHNSON 2011 ANNUAL REPORT


The following table displays the funded status of the Company’s U.S. Qualified & Non-Qualified pension plans and international funded and unfunded pension plans at January 1, 2012 and January 2, 2011, respectively:

 

 

     U.S. Plans     International Plans  
     Qualified Plans      Non-Qualified Plans     Funded Plans     Unfunded Plans  

(Dollars in Millions)

   2011     2010      2011     2010     2011     2010     2011     2010  

Plan Assets

   $ 9,132        8,815                       4,604        4,618                 

Projected Benefit Obligation

     10,283        8,460         1,155        955        5,626        5,215        360        363   

Accumulated Benefit Obligation

     9,147        7,561         903        761        5,078        4,489        324        323   

Over (Under) Funded Status

                 

Projected Benefit Obligation

     (1,151     355         (1,155     (955     (1,022     (597     (360     (363

Accumulated Benefit Obligation

   $ (15     1,254         (903     (761   &n