XMEX:JNJ Johnson & Johnson Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

XMEX:JNJ (Johnson & Johnson): Fair Value Estimate
Premium
XMEX:JNJ (Johnson & Johnson): Consider Buying
Premium
XMEX:JNJ (Johnson & Johnson): Consider Selling
Premium
XMEX:JNJ (Johnson & Johnson): Fair Value Uncertainty
Premium
XMEX:JNJ (Johnson & Johnson): Economic Moat
Premium
XMEX:JNJ (Johnson & Johnson): Stewardship
Premium
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
 
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended July 1, 2012
or
 
 
 
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from            to
Commission file number 1-3215
(Exact name of registrant as specified in its charter)
NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
 
22-1024240
(I.R.S. Employer
Identification No.)

One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant’s telephone number, including area code (732) 524-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On July 27, 2012 2,757,041,143 shares of Common Stock, $1.00 par value, were outstanding.



JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page
 
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT



2


Part I — FINANCIAL INFORMATION

Item 1 — FINANCIAL STATEMENTS

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions Except Share and Per Share Data)

 
 
July 1, 2012
 
January 1, 2012
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
14,042

 
$
24,542

Marketable securities
 
2,873

 
7,719

Accounts receivable, trade, less allowances for doubtful accounts $434 (2011, $361)
 
10,992

 
10,581

Inventories (Note 2)
 
7,697

 
6,285

Deferred taxes on income
 
3,117

 
2,556

Prepaid expenses and other receivables
 
2,894

 
2,633

Total current assets
 
41,615

 
54,316

Property, plant and equipment at cost
 
33,297

 
31,829

Less: accumulated depreciation
 
(17,675
)
 
(17,090
)
Property, plant and equipment, net
 
15,622

 
14,739

Intangible assets, net (Note 3)
 
29,199

 
18,138

Goodwill, net (Note 3)
 
21,412

 
16,138

Deferred taxes on income
 
4,011

 
6,540

Other assets
 
3,891

 
3,773

Total assets
 
$
115,750

 
$
113,644

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Loans and notes payable
 
$
6,040

 
$
6,658

Accounts payable
 
5,145

 
5,725

Accrued liabilities
 
6,533

 
4,608

Accrued rebates, returns and promotions
 
2,960

 
2,637

Accrued compensation and employee related obligations
 
1,911

 
2,329

Accrued taxes on income
 
1,259

 
854

Total current liabilities
 
23,848

 
22,811

Long-term debt (Note 4)
 
11,525

 
12,969

Deferred taxes on income
 
2,276

 
1,800

Employee related obligations
 
8,180

 
8,353

Other liabilities
 
9,487

 
10,631

Total liabilities
 
55,316

 
56,564

Shareholders’ equity:
 
 
 
 
Common stock — par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
 
$
3,120

 
$
3,120

Accumulated other comprehensive income (loss) (Note 7)
 
(6,204
)
 
(5,632
)
Retained earnings
 
83,530

 
81,251

Less: common stock held in treasury, at cost (369,284,000 and 395,480,000 shares)
 
20,012

 
21,659

Total shareholders’ equity
 
60,434

 
57,080

Total liabilities and shareholders' equity
 
$
115,750

 
$
113,644

See Notes to Consolidated Financial Statements

3



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal Second Quarters Ended
 
 
July 1,
2012
 
Percent
to Sales
 
July 3,
2011
 
Percent
to Sales
Sales to customers (Note 9)
 
$
16,475

 
100.0
 %
 
$
16,597

 
100.0
 %
Cost of products sold
 
5,143

 
31.2

 
5,172

 
31.2

Gross profit
 
11,332

 
68.8

 
11,425

 
68.8

Selling, marketing and administrative expenses
 
4,965

 
30.1

 
5,215

 
31.4

Research and development expense
 
1,766

 
10.7

 
1,882

 
11.3

In-process research and development
 
429

 
2.6

 

 

Interest income
 
(14
)
 
(0.1
)
 
(18
)
 
(0.1
)
Interest expense, net of portion capitalized
 
143

 
0.9

 
129

 
0.8

Other (income) expense, net
 
2,008

 
12.2

 
206

 
1.3

Restructuring expense
 

 

 
589

 
3.5

Earnings before provision for taxes on income
 
2,035

 
12.4

 
3,422

 
20.6

Provision for taxes on income (Note 5)
 
627

 
3.9

 
646

 
3.9

NET EARNINGS
 
$
1,408

 
8.5
 %
 
$
2,776

 
16.7
 %
NET EARNINGS PER SHARE (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
0.51

 
 
 
$
1.01

 
 
Diluted
 
$
0.50

 
 
 
$
1.00

 
 
CASH DIVIDENDS PER SHARE
 
$
0.61

 
 
 
$
0.57

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,747.4

 
 
 
2,740.5

 
 
Diluted
 
2,798.2

 
 
 
2,781.3

 
 
See Notes to Consolidated Financial Statements

4


 
 
 
 
 
 
 
 
 
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal Six Months Ended
 
 
July 1,
2012
 
Percent
to Sales
 
July 3,
2011
 
Percent
to Sales
Sales to customers (Note 9)
 
$
32,614

 
100.0
 %
 
$
32,770

 
100.0
 %
Cost of products sold
 
10,058

 
30.8

 
9,950

 
30.4

Gross profit
 
22,556

 
69.2

 
22,820

 
69.6

Selling, marketing and administrative expenses
 
9,980

 
30.6

 
10,271

 
31.3

Research and development expense
 
3,411

 
10.5

 
3,620

 
11.0

In-process research and development
 
429

 
1.3

 

 

Interest income
 
(31
)
 
(0.1
)
 
(39
)
 
(0.1
)
Interest expense, net of portion capitalized
 
290

 
0.9

 
254

 
0.8

Other (income) expense, net
 
1,397

 
4.3

 
193

 
0.6

Restructuring expense
 

 

 
589

 
1.8

Earnings before provision for taxes on income
 
7,080

 
21.7

 
7,932

 
24.2

Provision for taxes on income (Note 5)
 
1,762

 
5.4

 
1,680

 
5.1

NET EARNINGS
 
$
5,318

 
16.3
 %
 
$
6,252

 
19.1
 %
NET EARNINGS PER SHARE (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
1.94

 
 
 
$
2.28

 
 
Diluted
 
$
1.91

 
 
 
$
2.25

 
 
CASH DIVIDENDS PER SHARE
 
$
1.18

 
 
 
$
1.11

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,741.7

 
 
 
2,739.6

 
 
Diluted
 
2,792.4

 
 
 
2,778.1

 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements



5


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)

 
Fiscal Second Quarters Ended
Fiscal Six Months Ended
 
July 1, 2012
 
July 3, 2011
July 1, 2012
 
July 3, 2011

 
 
 
 
 
 
 
Net Earnings
$
1,408

 
$
2,776

5,318

 
6,252

 
 
 
 
 
 
 
Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
 
      Foreign currency translation
(1,619
)
 
414

(796
)
 
1,787

 
 
 
 
 
 
 
      Securities:
 
 
 
 
 
 
          Unrealized holding gain (loss) arising during period
(38
)
 
322

69

 
435

          Reclassifications adjustment for gains included in earnings

 
(4
)
(1
)
 
(139
)
          Net change
(38
)
 
318

68

 
296

 
 
 
 
 
 
 
      Employee benefit plans:
 
 
 
 
 
 
          Prior service cost amortization during period

 
1

1

 
2

          Gain (loss) amortization during period
95

 
55

188

 
126

          Net change
95

 
56

189

 
128

 
 
 
 
 
 
 
      Derivatives & hedges:
 
 
 
 
 
 
          Unrealized gain (loss) arising during period
(111
)
 
2

(85
)
 
12

          Reclassifications to earnings
9

 
40

52

 
118

          Net change
(102
)
 
42

(33
)
 
130

 
 
 
 
 
 
 
Other Comprehensive Income (Loss)
(1,664
)
 
830

(572
)
 
2,341

 
 
 
 
 
 
 
Comprehensive Income (Loss)
$
(256
)
 
$
3,606

$
4,746

 
8,593

 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements

The tax effects in other comprehensive income for the fiscal second quarters were as follows for 2012 and 2011 respectively: Securities; $20 million and $171 million, Employee Benefits; $49 million and $30 million, Derivatives & Hedges; $55 million and $22 million.
 
The tax effects in other comprehensive income for the fiscal six months were as follows for 2012 and 2011 respectively: Securities; $37 million and $159 million, Employee Benefits; $98 million and $69 million, Derivatives & Hedges; $18 million and $70 million.
 
Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries.







6


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal Six Months Ended
 
 
July 1,
2012
 
July 3,
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
5,318

 
$
6,252

Adjustments to reconcile net earnings to cash flows from operating activities:
 
 
 
 
Depreciation and amortization of property and intangibles
 
1,625

 
1,532

Stock based compensation
 
369

 
339

Intangible asset write-downs
 
1,368

 
160

Deferred tax provision
 
(511
)
 
(504
)
Accounts receivable allowances
 
83

 
(33
)
Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
Decrease/(Increase) in accounts receivable
 
155

 
(576
)
Increase in inventories
 
(618
)
 
(620
)
Increase/(Decrease) in accounts payable and accrued liabilities
 
899

 
(444
)
Increase in other current and non-current assets
 
(29
)
 
(1,080
)
(Decrease)/Increase in other current and non-current liabilities
 
(1,136
)
 
1,199

 
 
 
 
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
 
7,523

 
6,225

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Additions to property, plant and equipment
 
(1,100
)
 
(1,054
)
Proceeds from the disposal of assets
 
690

 
143

Acquisitions, net of cash acquired
 
(17,659
)
 
(2,049
)
Purchases of investments
 
(5,211
)
 
(16,820
)
Sales of investments
 
9,883

 
10,582

Other
 
(8
)
 
(62
)
 
 
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
 
(13,405
)
 
(9,260
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends to shareholders
 
(3,241
)
 
(3,043
)
Repurchase of common stock
 
(12,919
)
 
(929
)
Reissuance of common stock
 
12,852

 

Proceeds from short-term debt
 
2,518

 
3,586

Retirement of short-term debt
 
(4,780
)
 
(6,194
)
Proceeds from long-term debt
 
6

 
4,404

Retirement of long-term debt
 
(10
)
 
(5
)
Proceeds from the exercise of stock options/excess tax benefits
 
1,148

 
717

Other
 
(160
)
 

 
 
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
 
(4,586
)
 
(1,464
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(32
)
 
118

Decrease in cash and cash equivalents
 
(10,500
)
 
(4,381
)
Cash and Cash equivalents, beginning of period
 
24,542

 
19,355

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
14,042

 
$
14,974

Acquisitions
 
 
 
 
Fair value of assets acquired
 
$
18,868

 
$
2,248

Fair value of liabilities assumed and non-controlling interests
 
(1,209
)
 
(199
)
Net cash paid for acquisitions
 
$
17,659

 
$
2,049

See Notes to Consolidated Financial Statements

7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2012. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented.

In July 2012, the Financial Accounting Standards Board (FASB) issued guidance and amendments related to testing indefinite lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update will become effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. However, early adoption is permitted. This 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 first quarter of 2012, the Company adopted the FASB guidance and amendments issued related to goodwill impairment testing. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. This update became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
 
During the fiscal first quarter of 2012, the Company adopted the FASB amendment to the disclosure requirements for presentation of comprehensive income. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance became effective retrospectively for the interim periods and annual periods beginning after December 15, 2011; however, the FASB agreed to an indefinite deferral of the reclassification requirement. For the Consolidated Statements of Comprehensive Income see page 6.

During the fiscal first quarter of 2012, 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 became effective prospectively for the interim periods and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.

NOTE 2 — INVENTORIES

(Dollars in Millions)
 
July 1, 2012
 
January 1, 2012
Raw materials and supplies
 
$
1,300

 
1,206

Goods in process
 
1,934

 
1,637

Finished goods
 
4,463

 
3,442

Total inventories
 
$
7,697

 
6,285


Inventories increased by approximately $0.9 billion related to the Synthes acquisition. See Note 10 to the Consolidated Financial Statements.

NOTE 3 — INTANGIBLE ASSETS AND GOODWILL


8


Intangible assets that have finite useful lives are amortized over their estimated useful lives. The latest impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of 2011. Future impairment tests for goodwill and indefinite lived intangible assets will be performed annually in the fiscal fourth quarter, or sooner if warranted, as was the case for certain indefinite lived intangible assets in the fiscal second quarter of 2012.

(Dollars in Millions)
 
July 1, 2012
 
January 1, 2012
Intangible assets with definite lives:
 
 
 
 
Patents and trademarks — gross
 
$
8,778

 
7,947

Less accumulated amortization
 
3,196

 
2,976

Patents and trademarks — net
 
5,582

 
4,971

Customer relationships and other intangibles — gross
 
18,227

 
8,716

Less accumulated amortization
 
3,560

 
3,432

Customer relationships and other intangibles — net
 
14,667

 
5,284

Intangible assets with indefinite lives:
 
 
 
 
Trademarks
 
7,356

 
6,034

Purchased in-process research and development
 
1,594

 
1,849

Total intangible assets with indefinite lives
 
8,950

 
7,883

Total intangible assets — net
 
$
29,199

 
18,138


Goodwill as of July 1, 2012 was allocated by segment of business as follows:
(Dollars in Millions)
 
Consumer
 
Pharm
 
Med Dev & Diag
 
Total
Goodwill, net at January 1, 2012
 
$
8,298

 
1,721

 
6,119

 
16,138

Acquisitions
 

 
48

 
5,397

 
5,445

Currency translation/Other
 
(119
)
 
(27
)
 
(25
)
 
(171
)
Goodwill, net as of July 1, 2012
 
$
8,179

 
1,742

 
11,491

 
21,412


The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are 17 years and 23 years, respectively. The amortization expense of amortizable intangible assets for the fiscal six months ended July 1, 2012 was $488 million, and the estimated amortization expense for the five succeeding years approximates $1,340 million, before tax, per year. Amortization expense is included in cost of products sold.

Intangible assets and goodwill increased by $12.9 billion and $5.4 billion respectively, related to the Synthes acquisition. The increase in intangible assets was partially offset by $0.9 billion in intangible asset write-downs and a $0.4 billion impairment of purchased in-process research and development. See Note 10 to the Consolidated Financial Statements for additional details on Synthes.

NOTE 4 — 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 that 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 July 1, 2012, the Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate

9


swaps of $22.7 billion and $2.8 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 of 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.

As of July 1, 2012, the balance of deferred net losses on derivatives included in accumulated other comprehensive income was $201 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts 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 derivatives designated as hedges for the fiscal second quarters in 2012 and 2011:

 
 
 
 
 
 
 
 
 
 
 
Gain/ (Loss)
recognized in
Accumulated
OCI(1)
 
Gain/(Loss) reclassified from
Accumulated OCI
into income(1)
 
Gain/ (Loss)
recognized in
Other
income/expense(2)
 
 
Fiscal Second Quarters Ended
(Dollars in Millions)
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Cash Flow Hedges by Income Statement Caption
 
 
 
 
 
 
 
 
 
 
 
 
Sales to customers(A)
 
$
(42
)
 

 
(10
)
 

 
(1
)
 

Cost of products sold(A)
 
(97
)
 
12

 
(13
)
 
(44
)
 
1

 
6

Research and development expense(A)
 
30

 
28

 
11

 
18

 

 
(2
)
Interest (income)/Interest expense, net(B)
 
(41
)
 
(31
)
 
(6
)
 
(16
)
 

 

Other (income)expense, net(A)
 
39

 
(7
)
 
9

 
2

 
(1
)
 

Total
 
$
(111
)
 
2

 
(9
)
 
(40
)
 
(1
)
 
4


The following table is a summary of the activity related to derivatives designated as hedges for the first fiscal six months in 2012 and 2011:


10


 
 
 
 
 
 
 
 
 
 
 
Gain/ (Loss)
recognized in
Accumulated
OCI(1)
 
Gain/ (Loss) reclassified from
Accumulated OCI
into income(1)
 
Gain/ (Loss)
recognized in
other
income/expense(2)
 
 
Fiscal Six Months Ended
(Dollars in Millions)
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Cash Flow Hedges by Income Statement Caption
 
 
 
 
 
 
 
 
 
 
 
 
Sales to customers(A)
 
$
(14
)
 
27

 
(30
)
 
(10
)
 

 
(2
)
Cost of products sold(A)
 
(39
)
 
92

 
(34
)
 
(106
)
 

 
3

Research and development expense(A)
 
11

 
(8
)
 
13

 
19

 

 
(2
)
Interest (income)/Interest expense, net(B)
 
(42
)
 
(40
)
 
(9
)
 
(18
)
 

 

Other (income)expense, net(A)
 
(1
)
 
(59
)
 
8

 
(3
)
 
(1
)
 
2

Total
 
$
(85
)
 
12

 
(52
)
 
(118
)
 
(1
)
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 

All amounts shown in the tables above are net of tax.
(1) Effective portion
(2) Ineffective portion
(A) Foreign exchange contracts
(B) Cross currency interest rate swaps

For the fiscal second quarters ended July 1, 2012 and July 3, 2011, a loss of $17 million and a loss of $7 million, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.

For the first fiscal six months ended July 1, 2012 and July 3, 2011, a loss of $26 million and a gain of $8 million, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.

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 is 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., foreign exchange contract or cross currency interest rate 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 which are classified as Level 1 because they are traded in an active exchange market. The Company did not have any other significant financial assets or liabilities which would require revised valuations under this standard that are recognized at fair value.


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 July 1, 2012 and January 1, 2012 were as follows:

11


 
 
July 1, 2012
 
 
 
January 1, 2012
(Dollars in Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total(1)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
449

 

 
449

 
442

Cross currency interest rate swaps(2)
 

 
17

 

 
17

 
15

Total
 

 
466

 

 
466

 
457

Liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
403

 

 
403

 
452

Cross currency interest rate swaps(3)
 

 
699

 

 
699

 
594

Total
 

 
1,102

 

 
1,102

 
1,046

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
22

 

 
22

 
29

Swiss Franc Option*
 

 

 

 

 
17

Total
 

 
22

 

 
22

 
46

Liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
41

 

 
41

 
34

Other Investments(4)
 
$
1,675

 

 

 
1,675

 
1,563


*    Currency option related to the acquisition of Synthes, Inc., which expired in January 2012.
(1)
As of January 1, 2012, these assets and liabilities are classified as Level 2 with the exception of Other Investments of $1,563 million which are classified as Level 1.
(2)
Includes $14 million and $15 million of non-current assets for July 1, 2012 and January 1, 2012, respectively.
(3)
Includes $699 million and $594 million of non-current liabilities for July 1, 2012 and January 1, 2012, respectively.
(4)
Classified as non-current other assets.


Financial Instruments not measured at Fair Value:

The following financial assets and liabilities are held at carrying amount on the consolidated balance sheet as of July 1, 2012:

12


(Dollars in Millions)
 
Carrying Amount

 
Estimated Fair Value

Financial Assets
 
 
 
 
Current Investments
 
 
 
 
Cash
 
$
3,459

 
3,459

Government securities and obligations
 
10,857

 
10,857

Corporate debt securities
 
529

 
529

Money market funds
 
1,620

 
1,620

Time deposits
 
450

 
450

Total cash, cash equivalents and current marketable securities
 
$
16,915

 
16,915

 
 
 
 
 
Fair value of government securities and obligations and corporate debt securities was estimated using quoted broker prices and significant other observable inputs.
Financial Liabilities
 
 
 
 
 
 
 
 
 
Current Debt
 
$
6,040

 
6,040

Non-Current Debt
 
 
 
 
3 month LIBOR+0.09% FRN due 2014
 
750

 
750

1.20% Notes due 2014
 
999

 
1,014

2.15% Notes due 2016
 
898

 
950

5.55% Debentures due 2017
 
1,000

 
1,223

5.15% Debentures due 2018
 
898

 
1,091

4.75% Notes due 2019 (1B Euro 1.2434)
 
1,237

 
1,475

3% Zero Coupon Convertible Subordinated Debentures due in 2020
 
203

 
194

2.95% Debentures due 2020
 
541

 
576

3.55% Notes due 2021
 
446

 
503

6.73% Debentures due 2023
 
250

 
345

5.50% Notes due 2024 (500 GBP 1.5539)
 
772

 
993

6.95% Notes due 2029
 
294

 
436

4.95% Debentures due 2033
 
500

 
597

5.95% Notes due 2037
 
995

 
1,391

5.85% Debentures due 2038
 
700

 
958

4.50% Debentures due 2040
 
539

 
631

4.85% Notes due 2041
 
298

 
370

Other
 
205

 
202

Total Non-Current Debt
 
$
11,525

 
13,699


The weighted average effective rate on non-current debt is 4.33%.

Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.

NOTE 5 — INCOME TAXES

The worldwide effective income tax rates for the fiscal six months of 2012 and 2011 were 24.9% and 21.2%, respectively. The higher effective tax rate in 2012 as compared to 2011 was primarily due to lower tax rates associated with the Synthes integration and transaction costs and litigation accruals which added 2.8 points to the effective tax rate. The expiration of the Research and Development tax credit at year end 2011 increased the 2012 tax rate by 0.6 points.

NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS


13


Components of Net Periodic Benefit Cost

Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal second quarters of 2012 and 2011 include the following components:

 
 
Retirement Plans
 
Other Benefit Plans
 
 
Fiscal Second Quarters Ended
(Dollars in Millions)
 
July 1, 2012
 
July 3, 2011
 
July 1, 2012
 
July 3, 2011
Service cost
 
$
168

 
144

 
45

 
37

Interest cost
 
219

 
214

 
41

 
46

Expected return on plan assets
 
(308
)
 
(277
)
 
(1
)
 
(1
)
Amortization of prior service cost/(credit)
 

 
1

 
(1
)
 

Amortization of net transition obligation
 

 
1

 

 

Recognized actuarial losses
 
124

 
98

 
20

 
12

Curtailments and settlements
 

 

 

 

Net periodic benefit cost
 
$
203

 
181

 
104

 
94


Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the first fiscal six months of 2012 and 2011 include the following components:


 
 
Retirement Plans
 
Other Benefit Plans
 
 
Fiscal Six Months Ended
(Dollars in Millions)
 
July 1, 2012
 
July 3, 2011
 
July 1, 2012
 
July 3, 2011
Service cost
 
$
329

 
287

 
89

 
74

Interest cost
 
441

 
427

 
82

 
94

Expected return on plan assets
 
(620
)
 
(555
)
 
(2
)
 
(1
)
Amortization of prior service cost/(credit)
 
2

 
4

 
(2
)
 
(1
)
Amortization of net transition obligation
 

 
1

 

 

Recognized actuarial losses
 
248

 
194

 
38

 
23

Curtailments and settlements
 
(1
)
 

 

 

Net periodic benefit cost
 
$
399

 
358

 
205

 
189


Company Contributions

For the fiscal six months ended July 1, 2012, the Company contributed $142 million and $17 million to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.

NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth the components of accumulated other comprehensive income:

14


 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign
 
Securities
 
Employee
 
Derivatives
 
Total Accumulated
Gains/(Losses)
 
Currency
 
Available
 
Benefit
 
&
 
Other Comprehensive
(Dollars in Millions)
 
Translation
 
For Sale
 
Plans
 
Hedges
 
Income/(Loss)
January 1, 2012
 
$
(1,526
)
 
448

 
(4,386
)
 
(168
)
 
(5,632
)
Net change
 
(796
)
 
68

 
189

 
(33
)
 
(572
)
July 1, 2012
 
$
(2,322
)
 
516

 
(4,197
)
 
(201
)
 
(6,204
)

Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries. For additional details on comprehensive income see the Consolidated Statements of Comprehensive Income.

NOTE 8 — EARNINGS PER SHARE

The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal second quarters ended July 1, 2012 and July 3, 2011:

 
 
Fiscal Second Quarters Ended
(Shares in Millions)
 
July 1, 2012
 
July 3, 2011
Basic net earnings per share
 
$
0.51

 
$
1.01

Average shares outstanding — basic
 
2,747.4

 
2,740.5

Potential shares exercisable under stock option plans
 
138.1

 
168.9

Less: shares which could be repurchased under treasury stock method
 
(104.1
)
 
(131.7
)
Convertible debt shares
 
3.6

 
3.6

Accelerated share repurchase program
 
13.2

 

Average shares outstanding — diluted
 
2,798.2

 
2,781.3

Diluted earnings per share
 
$
0.50

 
$
1.00


The diluted earnings per share calculation for both fiscal second quarters ended July 1, 2012 and July 3, 2011 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.

The diluted earnings per share calculation for the fiscal second quarter ended July 1, 2012 included the dilutive effect of 13.2 million shares related to the accelerated share repurchase program, associated with the Synthes, Inc. acquisition. See Note10 to the Consolidated Financial Statements for additional details. A $1 increase/decrease in the volume weighted average share price would impact this estimate by approximately 2.8 million shares.

The diluted earnings per share calculation for the fiscal second quarters ended July 1, 2012 and July 3, 2011, excluded 57 million and 51 million shares, respectively, related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.

The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the first fiscal six months ended July 1, 2012 and July 3, 2011:


15


 
 
Fiscal Six Months Ended
(Shares in Millions)
 
July 1, 2012
 
July 3, 2011
Basic net earnings per share
 
$
1.94

 
$
2.28

Average shares outstanding — basic
 
2,741.7

 
2,739.6

Potential shares exercisable under stock option plans
 
138.0

 
168.8

Less: shares which could be repurchased under treasury stock method
 
(104.1
)
 
(133.9
)
Convertible debt shares
 
3.6

 
3.6

Accelerated share repurchase program
 
13.2

 

Average shares outstanding — diluted
 
2,792.4

 
2,778.1

Diluted earnings per share
 
$
1.91

 
$
2.25


The diluted earnings per share calculation for both the first fiscal six months ended July 1, 2012 and July 3, 2011 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.

The diluted earnings per share calculation for the first fiscal six months ended July 1, 2012 included the dilutive effect of 13.2 million shares related to the accelerated share repurchase program, associated with the Synthes, Inc. acquisition. See Note10 to the Consolidated Financial Statements for additional details. A $1 increase/decrease in the volume weighted average share price would impact this estimate by approximately 2.8 million shares.
  
The diluted earnings per share calculation for the first fiscal six months ended July 1, 2012 and July 3, 2011, excluded 57 million and 52 million shares, respectively, related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.

NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS

SALES BY SEGMENT OF BUSINESS

 
 
Fiscal Second Quarters Ended
(Dollars in Millions)
 
July 1,
2012
 
July 3,
2011
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
1,313

 
$
1,339

 
(1.9
)%
International
 
2,306

 
2,454

 
(6.0
)
Total
 
3,619

 
3,793

 
(4.6
)
Pharmaceutical
 
 
 
 
 
 
United States
 
3,094

 
3,239

 
(4.5
)
International
 
3,197

 
2,994

 
6.8

Total
 
6,291

 
6,233

 
0.9

Medical Devices & Diagnostics
 
 
 
 
 
 
United States
 
2,953

 
2,869

 
2.9

International
 
3,612

 
3,702

 
(2.4
)
Total
 
6,565

 
6,571

 
(0.1
)
Worldwide
 
 
 
 
 
 
United States
 
7,360

 
7,447

 
(1.2
)
International
 
9,115

 
9,150

 
(0.4
)
Total
 
$
16,475

 
$
16,597

 
(0.7
)%


16


 
 
 
 
 
 
 
 
 
Fiscal Six Months Ended
(Dollars in Millions)
 
July 1,
2012
 
July 3,
2011
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
2,629

 
$
2,684

 
(2.0
)%
International
 
4,585

 
4,791

 
(4.3
)
Total
 
7,214

 
7,475

 
(3.5
)
Pharmaceutical
 
 
 
 
 
 
United States
 
6,120

 
6,630

 
(7.7
)
International
 
6,304

 
5,662

 
11.3

Total
 
12,424

 
12,292

 
1.1

Medical Devices & Diagnostics
 
 
 
 
 
 
United States
 
5,830

 
5,741

 
1.6

International
 
7,146

 
7,262

 
(1.6
)
Total
 
12,976

 
13,003

 
(0.2
)
Worldwide
 
 
 
 
 
 
United States
 
14,579

 
15,055

 
(3.2
)
International
 
18,035

 
17,715

 
1.8

Total
 
$
32,614

 
$
32,770

 
(0.5
)%


OPERATING PROFIT BY SEGMENT OF BUSINESS
 
 
Fiscal Second Quarters Ended
(Dollars in Millions)
 
July 1,
2012
 
July 3,
2011
 
Percent
Change
Consumer (1)
 
$
267

 
$
549

 
(51.4
)%
Pharmaceutical (2)
 
515

 
1,714

 
(70.0
)
Medical Devices & Diagnostics(3)
 
1,875

 
1,275

 
47.1

Segments operating profit
 
2,657

 
3,538

 
(24.9
)
Expense not allocated to segments(4)
 
(622
)
 
(116
)
 
 
Worldwide income before taxes
 
$
2,035

 
$
3,422

 
(40.5
)%

 
 
 
 
 
 
 
 
 
Fiscal Six Months Ended
(Dollars in Millions)
 
July 1, 2012
 
July 3, 2011
 
Percent
Change
Consumer (1)
 
$
729

 
$
1,122

 
(35.0
)%
Pharmaceutical (2)
 
3,106

 
3,923

 
(20.8
)
Medical Devices & Diagnostics (3)
 
3,953

 
3,219

 
22.8

Segments operating profit
 
7,788

 
8,264

 
(5.8
)
Expense not allocated to segments (4)
 
(708
)
 
(332
)
 
 
Worldwide income before taxes
 
$
7,080

 
$
7,932

 
(10.7
)%

(1) Includes intangible asset write-downs of $294 million recorded in the fiscal second quarter and the first fiscal six months of 2012.
(2) Includes litigation expense of $658 million, intangible asset write-downs of $499 million and in-process research and development charges of $429 million recorded in the fiscal second quarter and the first fiscal six months of 2012. Includes litigation expense of $290 million and $540 million recorded in the fiscal second quarter and the first fiscal six months of 2011,

17


respectively.
(3) Includes Synthes integration/transaction costs of $192 million and $223 million recorded in the fiscal second quarter and the first fiscal six months of 2012, respectively. Includes intangible asset write-downs of $146 million recorded in the fiscal second quarter and the first fiscal six months of 2012. Includes restructuring expense of $676 million recorded in the fiscal second quarter and the first fiscal six months of 2011. Includes litigation expense of $25 million and ASRTM Hip related costs of $102 million recorded in the fiscal second quarter of 2011. Includes litigation expense of $36 million and ASRTM Hip related costs of $187 million recorded in the first fiscal six months of 2011.
(4) Amounts not allocated to segments include interest income/(expense), non-controlling interests and general corporate income/expense. Includes currency losses related to the Synthes acquisition of $382 million and $234 million recorded in the fiscal second quarter and the first fiscal six months of 2012, respectively, and litigation expense of $11 million recorded in the fiscal second quarter and the first fiscal six months of 2012, respectively. Includes a currency gain of $102 million related to the Synthes acquisition recorded in the fiscal second quarter and the first fiscal six months of 2011.

SALES BY GEOGRAPHIC AREA
 
 
Fiscal Second Quarters Ended
(Dollars in Millions)
 
July 1, 2012
 
July 3, 2011
 
Percent
Change
United States
 
$
7,360

 
$
7,447

 
(1.2
)%
Europe
 
4,165

 
4,543

 
(8.3
)
Western Hemisphere, excluding U.S.
 
1,728

 
1,543

 
12.0

Asia-Pacific, Africa
 
3,222

 
3,064

 
5.2

Total
 
$
16,475

 
$
16,597

 
(0.7
)%

 
 
 
 
 
 
 
 
 
Fiscal Six Months Ended
(Dollars in Millions)
 
July 1, 2012
 
July 3, 2011
 
Percent
Change
United States
 
$
14,579

 
$
15,055

 
(3.2
)%
Europe
 
8,359

 
8,726

 
(4.2
)
Western Hemisphere, excluding U.S.
 
3,442

 
2,979

 
15.5

Asia-Pacific, Africa
 
6,234

 
6,010

 
3.7

Total
 
$
32,614

 
$
32,770

 
(0.5
)%

NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES

On June 14, 2012, the Company completed the acquisition of Synthes, Inc., a global developer and manufacturer of orthopaedics devices, for a purchase price of $20.2 billion in cash and stock. The net acquisition cost of the transaction is $17.5 billion based on cash on hand at closing of $2.7 billion.

Under the terms of the agreement, each share of Synthes common stock was exchanged for CHF 55.65 in cash and 1.717 shares of Johnson & Johnson common stock, based on the calculated exchange ratio. The exchange ratio was calculated on June 12, 2012 and based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of consideration transferred was $19.7 billion. When the acquisition was completed on June 14, 2012, based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of the consideration transferred was $20.2 billion. Janssen Pharmaceutical, a company organized under the laws of Ireland and
a wholly owned subsidiary of Johnson & Johnson, used cash on hand to satisfy the cash portion of the merger consideration.

The stock portion of the merger consideration consisted of shares of Johnson & Johnson common stock purchased by Janssen Pharmaceutical, from two banks, pursuant to two accelerated share repurchase (ASR) agreements dated June 12, 2012. On June 13, 2012, Janssen Pharmaceutical purchased an aggregate of approximately 203.7 million shares of Johnson & Johnson common stock at an initial purchase price of $12.9 billion under the ASR agreements, with all of the shares delivered to Janssen Pharmaceutical on June 13, 2012.  Final settlement of the transactions under each ASR agreement is expected to occur in the second quarter of 2013, and may occur earlier at the option of the two banks, as applicable, or later under certain

18


circumstances. Based on the theoretical settlement of the ASR agreements an additional 13.2 million shares would be issued to settle the ASR agreements as of July 1, 2012.

In addition, while the Company believes that the transactions under each ASR agreement and a series of related internal transactions were consummated in a tax efficient manner in accordance with applicable law, it is possible that the Internal Revenue Service could assert one or more contrary positions to challenge the transactions from a tax perspective. If challenged, an amount up to the total purchase price for the Synthes shares could be treated as subject to applicable U.S. tax at approximately the statutory rate to the Company, plus interest.

The following table summarizes the consideration transferred to acquire Synthes, valued on the acquisition date of June 14th, 2012:

(Dollars in Millions)
 
 
Cash (multiply 55.65CHF by shares of Synthes common stock outstanding by the exchange rate)(A)
 
$
6,902

Common Stock (multiply 1.717 by shares of Synthes common stock outstanding by J&J stock price)(B)
 
$
13,335

Total fair value of consideration transferred
 
$
20,237


(A) Synthes common stock outstanding of 118.7 million shares as of the acquisition date and CHF/USD exchange rate of .95674

(B) Johnson & Johnson closing stock price on the New York Stock Exchange as of acquisition date of $65.45 per share.

The Company is in the process of finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The preliminary allocation of the purchase price included in the current period balance sheet is based on the best estimates of management and is preliminary and subject to change. To assist management in the allocation, the Company engaged valuation specialists to prepare independent appraisals. The completion of the purchase price allocation may result in adjustments to the carrying value of Synthes, Inc.'s recorded assets and liabilities, revisions of the useful lives of intangible assets, the determination of any residual amount that will be allocated to goodwill and related tax effects. The related depreciation and amortization from the acquired assets are also subject to revision based on the final allocation.

The following table presents the preliminary allocation of the purchase price related to Synthes, Inc. as of the date of acquisition:

(Dollars in Millions)
 
Cash & Cash equivalents
$
2,749

Inventory(1)
889

Accounts Receivable, net
738

Other current assets
249

Property, plant and equipment
1,253

Goodwill
5,371

Intangible assets
12,929

Other non-current assets
46

Total Assets Acquired
24,224

 
 
Current liabilities
825

Deferred Taxes
2,731

Other non-current liabilities
431

Total Liabilities Assumed
3,987

 
 
Net Assets Acquired
$
20,237


(1) Includes $0.4 billion related to inventory step-up.

19



The acquisition of Synthes, Inc. resulted in $5.4 billion of goodwill, which is allocated to the Medical Devices and Diagnostics segment. The goodwill is primarily attributable to synergies expected to arise from the business acquisition of Synthes, Inc. The goodwill is not expected to be deductible for tax purposes.

The preliminary purchase price allocation to the identifiable intangible assets included in the current period balance sheet is as follows:

(Dollars in Millions)
 
 
Intangible assets with definite lives:
 
 
Customer relationships
 
$
9,950

Patents and technology
 
1,495

Total amortizable intangibles
 
11,445

Trademark and Trade name
 
1,420

In-process research and development
 
64

Total intangible assets
 
$
12,929



The weighted average life for the $11,445 million of total amortizable intangibles is approximately 21 years.

The trade name asset values were determined to have an indefinite life based on a number of factors, including trade name history, the competitive environment, market share and future operating plans. The intangible assets with definite lives were assigned asset lives ranging from 7 to 22 years.

The majority of the intangible asset valuation relates to customer relationships, patents and technology and tradename intangible assets in the Company's trauma, cranio maxillofacial, spine and power tools business lines. Additionally, in-process research and development intangible assets were valued for technology programs for unapproved products.

The value of the IPR&D was calculated using cash flow projections discounted for the risk inherent in such projects. The discount rate applied was 14%.

The Company is in the process of executing the integration plans to combine businesses, sales organizations, systems and locations as a result of which the Company is and will continue to incur integration costs.

The operating results of Synthes, Inc. were reported in the Company's financial statements beginning on June 14, 2012. Total sales and net earnings for Synthes, Inc. for the second quarter ended July 1, 2012 were $193 million and $28 million, respectively.

The following table provides pro forma results of operations for the fiscal second quarters and the fiscal six months ended July 1, 2012 and July 3, 2011, as if Synthes, Inc. had been acquired as of January 3, 2011. The pro forma results include the effect of divestitures and certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Synthes, Inc. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.
 
Unaudited Pro forma consolidated results
 
Fiscal Six Months Ended
 
Fiscal Second Quarters Ended
(Dollars in Millions Except Per Share Data)
July 1, 2012
July 3, 2011
 
July 1, 2012
July 3, 2011
 
 
 
 
 
 
Net Sales
$
34,481

34,609

 
17,410

17,524

Net Earnings
$
5,641

6,108

 
1,631

2,772

Diluted Net Earnings per Common Share
$
2.02

2.20

 
0.58

1.00


In 2012, the Company recorded acquisition related costs of $457 million, before tax, which were recorded in Other income and

20


expense.

In connection with the Synthes acquisition, DePuy Orthopaedics, Inc. agreed to divest certain rights and assets related to its trauma business, to Biomet, Inc. and completed the initial closing for this transaction in the fiscal second quarter of 2012, including those countries that represented the majority of sales.

Additionally, during the fiscal second quarter of 2012, the Company acquired Guangzhou Bioseal Biotech Co., Ltd., a privately held biopharmaceutical company specializing in the design, development and commercialization of a porcine plasma-derived biologic product for controlling bleeding during surgery; CorImmun GmbH, a privately held drug development company in Germany, whose lead compound, COR-1, is a small cyclic peptide currently in early clinical development for the treatment of heart failure; and certain assets of the Angiotech Pharmaceuticals, Inc. barbed suture business.

During the fiscal first quarter of 2012, the Company completed the divestiture of its U.S. patents and other U.S. and Canadian intellectual property for BYSTOLIC® (nebivolol), which is currently approved in the U.S. for the treatment of hypertension, to Forest Laboratories Holdings Limited. Proceeds received from the divestiture were $357 million.

During the fiscal first quarter of 2011, the Company acquired substantially all of the outstanding equity of Crucell N.V. that it did not already own. Crucell is a global biopharmaceutical company focused on the research and development, production and marketing of vaccines and antibodies against infectious disease worldwide. The net purchase price of $2.0 billion was primarily recorded as non-amortizable intangible assets for $1.0 billion, amortizable intangible assets for $0.7 billion and goodwill for $0.5 billion. During the fiscal second quarter of 2012, the Company recorded a charge of $0.5 billion for the intangible asset write-down and $0.4 billion for the impairment of the in-process research and development related to the Crucell business.

NOTE 11 — 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 their 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. As of July 1, 2012, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated. The Company has accrued for these matters and will continue 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.
PRODUCT LIABILITY

Certain of Johnson & Johnson's subsidiaries are involved in numerous product liability cases. The damages claimed are substantial, and while these subsidiaries are confident of the adequacy of the warnings and instructions for use that accompany the products at issue, it is not feasible to predict the ultimate outcome of litigation. The Company has established product liability accruals in compliance with ASC 450-20 based on currently available information, which in some cases may be limited. Changes to the accruals may be required in the future as additional information becomes available.

Multiple products of Johnson & Johnson's subsidiaries are subject to product liability claims and lawsuits in which claimants seek substantial compensatory and, where available, punitive damages, including LEVAQUIN®, the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, the PINNACLE® Acetabular Cup System, RISPERDAL®, pelvic meshes, DURAGESIC®/fentanyl patches and TOPAMAX®. As of July 1, 2012, in the U.S. there were approximately 3,400 plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to LEVAQUIN®, 7,200 with respect to the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, 1,700 with respect to the PINNACLE® Acetabular Cup

21


System, 420 with respect to RISPERDAL®, 1,400 with respect to pelvic meshes, 35 with respect to DURAGESIC®/fentanyl patches and 60 with respect to TOPAMAX®.

In August 2010, DePuy Orthopaedics, Inc. (DePuy) announced a worldwide voluntary recall of its ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System used in hip replacement surgery. Claims for personal injury have been made against DePuy and Johnson & Johnson, and the number of pending lawsuits continues to increase. The Company continues to receive information with respect to potential costs associated with this recall. The Company has established a product liability accrual in anticipation of product liability litigation and costs associated with the DePuy ASR™ Hip Recall program. Changes to these accruals may be required in the future as additional information becomes available.

Claims for personal injury have been made against Ethicon, Inc. (Ethicon) and Johnson & Johnson arising out of Ethicon's pelvic mesh devices used to treat stress urinary incontinence and pelvic organ prolapse. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. In addition, a class action and several individual personal injury cases have been commenced in Canada seeking damages for alleged injury resulting from Ethicon's pelvic mesh devices. The Company has established a product liability accrual in anticipation of product liability litigation associated with Ethicon's pelvic mesh products. Changes to these accruals may be required in the future as additional information becomes available.

The Company believes that the ultimate resolution of these matters based on historical and reasonably likely future trends is not expected to have a material adverse effect on the Company's financial position, annual results of operations and cash flows. The resolution in any interim reporting period could have a material impact on the Company's results of operations and cash flows for that period.

INTELLECTUAL PROPERTY

Certain of Johnson & Johnson's subsidiaries are subject, from time to time, to legal proceedings and claims related to patent, trademark and other intellectual property matters arising out of their business. The most significant of these matters are described below.

PATENT INFRINGEMENT

Certain of Johnson & Johnson's subsidiaries are involved in lawsuits challenging the coverage and/or validity of the patents on their products. Although these subsidiaries believe that they have substantial defenses to these challenges with respect to all material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could potentially adversely affect the ability of these subsidiaries to sell their products, or require the payment of past damages and future royalties.

Medical Devices and Diagnostics

In October 2004, Tyco Healthcare Group, LP (Tyco) and U.S. Surgical Corporation filed a lawsuit against Ethicon Endo-Surgery, Inc. (EES) in the United States District Court for the District of Connecticut alleging that several features of EES's HARMONIC® Scalpel infringed four Tyco patents. In October 2007, on motions for summary judgment prior to the initial trial, a number of claims were found invalid and a number were found infringed. However, no claim was found both valid and infringed. Trial commenced in December 2007, and the court dismissed the case without prejudice on grounds that Tyco did not own the patents in suit. The dismissal without prejudice was affirmed on appeal. In January 2010, Tyco filed another complaint in the United States District Court for the District of Connecticut asserting infringement of three of the four patents from the previous lawsuit and adding new products. Tyco is seeking monetary damages and injunctive relief. The case was tried in July 2012, and the parties are awaiting a decision from the court.

In October 2007, Bruce Saffran (Saffran) filed a patent infringement lawsuit against Johnson & Johnson and Cordis Corporation (Cordis) in the United States District Court for the Eastern District of Texas alleging infringement on U.S. Patent No. 5,653,760. In January 2011, a jury returned a verdict finding that Cordis's sales of its CYPHER® Stent willfully infringed a patent issued to Saffran. The jury awarded Saffran $482 million. In March 2011, the Court entered judgment against Cordis in the amount of $593 million, representing the jury verdict, plus $111 million in pre-judgment interest. Cordis has appealed the judgment. Because the Company believes that the potential for an unfavorable outcome is not probable, it has not established an accrual with respect to the case.

In November 2007, Roche Diagnostics Operations, Inc., et al. (Roche) filed a patent infringement lawsuit against LifeScan, Inc. (LifeScan) in the United States District Court for the District of Delaware, accusing LifeScan's entire OneTouch® line of blood

22


glucose monitoring systems of infringement of two patents related to the use of microelectrode sensors. In September 2009, LifeScan obtained a favorable ruling on claim construction that precluded a finding of infringement. The Court entered judgment against Roche in July 2010 and Roche appealed.  The Court of Appeals reversed the District Court's ruling on claim construction and remanded the case to the District Court for new findings on the issue. Roche is seeking monetary damages and injunctive relief.

In June 2009, Rembrandt Vision Technologies, L.P. (Rembrandt) filed a patent infringement lawsuit against Johnson & Johnson Vision Care, Inc. (JJVC) in the United States District Court for the Eastern District of Texas alleging that JJVC's manufacture and sale of its ACUVUE®ADVANCE® and ACUVUE® OASYS® Hydrogel Contact Lenses infringe their U.S. Patent No. 5,712,327 (the Chang patent). Rembrandt is seeking monetary relief. The case was transferred to the United States District Court for the Middle District of Florida, and the case was tried in May 2012. The jury returned a verdict holding that neither of the accused lenses infringe the '327 patent. Rembrandt has filed an appeal with the United States Court of Appeals for the Federal Circuit.

In November 2011, Howmedica Osteonics Corp. (Howmedica) and Stryker Ireland Ltd. (Stryker) filed a patent infringement lawsuit against DePuy Orthopaedics, Inc. (DePuy) in the United States District Court for the District of New Jersey alleging infringement by DePuy's PINNACLE® Acetabular Cup System and DURALOC® Acetabular Cup System of a patent relating to a dual-locking mechanism feature in an acetabular cup system. Howmedica and Stryker are seeking monetary damages and injunctive relief. DePuy filed its answer in February 2012 and filed a counterclaim asserting that Stryker's Trident Acetabular Hip System infringes DePuy's U.S. Patent No. 6,610,097. DePuy is seeking damages and injunctive relief from Howmedica and Stryker. No trial date has been set.

In May 2012, Medtronic Minimed, Inc., Medtronic Puerto Rico Operations Co. and MiniMed Distribution Corp. (collectively, Medtronic Minimed) filed a patent infringement lawsuit against Animas Corporation in the United States District Court for the Central District of California alleging that Animas' One®Touch® Ping® Glucose Management System infringes nine of their patents.  Medtronic Minimed is seeking monetary damages and injunctive relief.

In June 2012, DePuy filed a declaratory judgment action against Orthopaedic Hospital (OH) in the United States District Court for the Northern District of Indiana seeking a declaration of the parties' rights and obligations under a Patent Rights and License Agreement between the parties related to development of a polyethylene material. OH has claimed that DePuy owes royalties on products made with anti-oxidant polyethylene. DePuy disputes that it owes such royalties to OH and is thus seeking a declaration from the Court on disputed contractual provisions. No trial date has been set.

Pharmaceutical

In May 2009, Abbott Biotechnology Ltd. (Abbott) filed a patent infringement lawsuit against Centocor (now JBI) in the United States District Court for the District of Massachusetts alleging that SIMPONI® infringes Abbott's U.S. Patent Nos. 7,223,394 and 7,541,031 (the Salfeld patents). Abbott is seeking monetary damages and injunctive relief. In April 2012, the parties participated in an arbitration on the issue of JBI's defense that Abbott is equitably estopped from asserting the patents. In May 2012, the arbitrator rejected JBI's defense. The case has been reinstated in the District Court and fact discovery is ongoing. No trial date has been set.

In August 2009, Abbott GmbH & Co. (Abbott GmbH) and Abbott Bioresearch Center filed a patent infringement lawsuit against Centocor (now JBI) in the United States District Court for the District of Massachusetts alleging that STELARA® infringes two United States patents assigned to Abbott GmbH. JBI filed a complaint in the United States District Court for the District of Columbia for a declaratory judgment of non-infringement and invalidity of the Abbott GmbH patents, as well as a Complaint for Review of a Patent Interference Decision that granted priority of invention on one of the two asserted patents to Abbott GmbH. The cases have been transferred from the District of Columbia to the District of Massachusetts. Trial has been set for September 2012. Also in August 2009, Abbott GmbH and Abbott Laboratories Limited brought a patent infringement lawsuit in The Federal Court of Canada alleging that STELARA® infringes Abbott GmbH's Canadian patent. No trial date has been set in the Canadian Case. In each of these cases, Abbott is seeking monetary damages and injunctive relief.

LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG APPLICATIONS (ANDAs)

The following summarizes lawsuits pending against generic companies that filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of products sold by various subsidiaries of Johnson & Johnson prior to expiration of the applicable patents covering those products. These ANDAs typically include allegations of non-infringement, invalidity and unenforceability of these patents. In the event the subsidiaries are not successful in these actions, or the statutory 30-month

23


stays expire before the United States District Court rulings are obtained, the third-party companies involved will have the ability, upon approval of the United States Food and Drug Administration (FDA), to introduce generic versions of the products at issue, resulting in very substantial market share and revenue losses for those products.
CONCERTA® 

A number of generic companies have filed ANDAs seeking approval to market generic versions of CONCERTA®. In September 2011, a settlement agreement was entered into with Kremers-Urban, LLC and KUDCO Ireland, Ltd. (collectively, KUDCO) pursuant to which KUDCO was granted a license under the patent-in-suit to market its generic version of CONCERTA® starting on July 1, 2012, when and if KUDCO obtains FDA approval.

In November 2010, ALZA Corporation (ALZA) and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) (now Janssen Pharmaceuticals, Inc. (JPI)) filed a patent infringement lawsuit in the United States District Court for the District of Delaware against Impax Laboratories, Inc. (Impax), Teva Pharmaceuticals USA, Inc., and Teva Pharmaceutical Industries Ltd. (collectively, Teva) in response to Impax and Teva's filing of a major amendment to its ANDA seeking approval to market a generic version of CONCERTA® before the expiration of ALZA and JPI's patent relating to CONCERTA®. Impax and Teva filed counterclaims alleging non-infringement and invalidity. In May 2011, ALZA and JPI filed a second lawsuit against Teva in response to Teva's filing of a second major amendment to its ANDA seeking approval to market additional dosage strengths of its generic CONCERTA® product before the expiration of ALZA and JPI's patent relating to CONCERTA®. In each of the above cases, ALZA and JPI are seeking an Order enjoining the defendants from marketing its generic version of CONCERTA® prior to the expiration of ALZA and JPI's CONCERTA® patent.
ORTHO TRI-CYCLEN® LO

A number of generic companies have filed ANDAs seeking approval to market generic versions of ORTHO TRI-CYCLEN® LO. In February 2012, JPI and Watson Laboratories, Inc. and Watson Pharmaceuticals, Inc. (collectively, Watson) entered into a settlement agreement. Pursuant to the settlement agreement, the parties entered into a supply agreement whereby JPI will supply to Watson a combinational oral contraceptive containing certain specified compounds from December 31, 2015 (or earlier under certain circumstances) through the expiration of the '815 patent on December 6, 2019. In addition, in the event Watson does not wish to exercise its rights under the supply agreement, JPI has granted Watson a license to market Watson's ANDA product from December 31, 2015 (or earlier under certain circumstances) through December 6, 2019.

In January 2010, OMJPI (now JPI) filed a patent infringement lawsuit against Lupin Ltd. and Lupin Pharmaceuticals, Inc. (collectively, Lupin) in the United States District Court for the District of New Jersey in response to Lupin's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent. Lupin filed a counterclaim alleging invalidity of the patent. Trial concluded in June 2012, and oral argument has been scheduled for August 2012. In June 2012, the FDA approved Lupin's ANDA.

In November 2010, OMJPI (now JPI) filed a patent infringement lawsuit against Mylan Inc. and Mylan Pharmaceuticals, Inc. (collectively, Mylan), and Famy Care, Ltd. (Famy Care) in the United States District Court for the District of New Jersey in response to Famy Care's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent. Mylan and Famy Care filed counterclaims alleging invalidity of the patent.

In October 2011, JPI filed a patent infringement lawsuit against Sun Pharma Global FZE and Sun Pharmaceutical Industries (collectively, Sun) in the United States District Court for the District of New Jersey in response to Sun's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent.

In May 2012, JPI filed a patent infringement lawsuit against Haupt Pharma, Inc., Ranbaxy Laboratories Limited and Ranbaxy Inc. (collectively, Haupt) in the United States District Court for the District of New Jersey in response to Haupt's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent.

In each of the above cases, JPI is seeking an Order enjoining the defendants from marketing their generic versions of ORTHO TRI-CYLCEN® LO before the expiration of the OTCLO patent.

PREZISTA® 

A number of generic companies have filed ANDAs seeking approval to market generic versions of PREZISTA®. In November 2010, Tibotec, Inc. (now Tibotec, LLC) and Tibotec Pharmaceuticals (now Janssen R&D Ireland) (collectively, Tibotec) filed a patent infringement lawsuit against Lupin, Ltd., Lupin Pharmaceuticals, Inc. (collectively, Lupin), Mylan, Inc. and Mylan

24


Pharmaceuticals, Inc. (collectively, Mylan) in the United States District Court for the District of New Jersey in response to Lupin's and Mylan's respective ANDAs seeking approval to market generic versions of Tibotec's PREZISTA® product before the expiration of Tibotec's patent relating to PREZISTA®. Lupin and Mylan each filed counterclaims alleging non-infringement and invalidity. In July 2011, Tibotec filed another patent infringement lawsuit against Lupin in the United States District Court for the District of New Jersey in response to Lupin's supplement to its ANDA to add new dosage strengths for its proposed product. In August 2011, Tibotec and G.D. Searle & Company (G.D. Searle) filed a patent infringement lawsuit against Lupin and Mylan in response to their notice letters advising that their ANDAs are seeking approval to market generic versions of Tibotec's PREZISTA® product before the expiration of two patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle.

In March 2011, Tibotec and G.D. Searle filed a patent infringement lawsuit against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceuticals, Ltd. (collectively, Teva) in the United States District Court for the District of New Jersey in response to Teva's ANDA seeking approval to market a generic version of PREZISTA® before the expiration of certain patents relating to PREZISTA® that Tibotec either owns or exclusively licenses from G.D. Searle.

In March 2011, Tibotec filed a patent infringement lawsuit against Hetero Drugs, Ltd. Unit III and Hetero USA Inc. (collectively, Hetero) in the United States District Court for the District of New Jersey in response to Hetero's ANDA seeking approval to market a generic version of PREZISTA® before the expiration of certain patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle. In July 2011, upon agreement by the parties, the Court entered a stay of the lawsuit pending a final decision in the lawsuit against Teva with respect to the validity and/or enforceability of the patents that Tibotec licenses from G.D. Searle, with Hetero agreeing to be bound by such final decision.

In September 2011, the Court consolidated the above lawsuits, as well as lawsuits brought by the United States Government against each of the defendants for infringement of a United States Government-owned patent relating to PREZISTA®, for purposes of pre-trial discovery and trial, with the proviso that after discovery is completed, any party can move to have the cases de-consolidated for trial.

In May and June 2012, Janssen Products, LP and Janssen R&D Ireland (collectively, Janssen) and G.D. Searle filed a patent infringement lawsuit