Johnson & Johnson
JOHNSON & JOHNSON (Form: 10-Q, Received: 11/09/2012 06:01:38)

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 September 30, 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 October 26, 2012 2,771,261,581 s hares of Common Stock, $1.00 par value, were outstanding.



JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page
 
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.1
 EX-10.2
 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

Table of Contents

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)

 
 
September 30, 2012
 
January 1, 2012
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
15,486

 
$
24,542

Marketable securities
 
4,285

 
7,719

Accounts receivable, trade, less allowances for doubtful accounts $451 (2011, $361)
 
11,175

 
10,581

Inventories (Note 2)
 
7,809

 
6,285

Deferred taxes on income
 
3,247

 
2,556

Prepaid expenses and other receivables
 
2,789

 
2,633

Total current assets
 
44,791

 
54,316

Property, plant and equipment at cost
 
34,082

 
31,829

Less: accumulated depreciation
 
(18,237
)
 
(17,090
)
Property, plant and equipment, net
 
15,845

 
14,739

Intangible assets, net (Note 3)
 
28,790

 
18,138

Goodwill, net (Note 3)
 
21,777

 
16,138

Deferred taxes on income
 
4,227

 
6,540

Other assets
 
3,521

 
3,773

Total assets
 
$
118,951

 
$
113,644

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Loans and notes payable
 
$
5,423

 
$
6,658

Accounts payable
 
5,344

 
5,725

Accrued liabilities
 
6,498

 
4,608

Accrued rebates, returns and promotions
 
3,040

 
2,637

Accrued compensation and employee related obligations
 
2,128

 
2,329

Accrued taxes on income
 
1,502

 
854

Total current liabilities
 
23,935

 
22,811

Long-term debt (Note 4)
 
11,428

 
12,969

Deferred taxes on income
 
2,716

 
1,800

Employee related obligations
 
7,904

 
8,353

Other liabilities
 
9,207

 
10,631

Total liabilities
 
55,190

 
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)
 
(4,925
)
 
(5,632
)
Retained earnings
 
84,880

 
81,251

Less: common stock held in treasury, at cost (357,285,000 and 395,480,000 shares)
 
19,314

 
21,659

Total shareholders’ equity
 
63,761

 
57,080

Total liabilities and shareholders' equity
 
$
118,951

 
$
113,644

See Notes to Consolidated Financial Statements

3

Table of Contents


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal Third Quarters Ended
 
 
September 30,
2012
 
Percent
to Sales
 
October 2,
2011
 
Percent
to Sales
Sales to customers (Note 9)
 
$
17,052

 
100.0
 %
 
$
16,005

 
100.0
 %
Cost of products sold
 
5,597

 
32.8

 
5,072

 
31.7

Gross profit
 
11,455

 
67.2

 
10,933

 
68.3

Selling, marketing and administrative expenses
 
5,228

 
30.6

 
5,240

 
32.7

Research and development expense
 
1,923

 
11.3

 
1,773

 
11.1

In-process research and development
 
679

 
4.0

 

 

Interest income
 
(15
)
 
(0.1
)
 
(17
)
 
(0.1
)
Interest expense, net of portion capitalized
 
135

 
0.8

 
134

 
0.8

Other (income) expense, net
 
(90
)
 
(0.5
)
 
(308
)
 
(1.9
)
Earnings before provision for taxes on income
 
3,595

 
21.1

 
4,111

 
25.7

Provision for taxes on income (Note 5)
 
966

 
5.7

 
909

 
5.7

NET EARNINGS
 
2,629

 
15.4

 
3,202

 
20.0

Add: Net loss attributable to noncontrolling interest, net of tax
 
339

 
2.0

 

 

NET EARNINGS ATTRIBUTABLE TO JOHNSON & JOHNSON
 
$
2,968

 
17.4
 %
 
$
3,202

 
20.0
 %
NET EARNINGS PER SHARE ATTRIBUTABLE TO JOHNSON & JOHNSON (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
1.08

 
 
 
$
1.17

 
 
Diluted
 
$
1.05

 
 
 
$
1.15

 
 
CASH DIVIDENDS PER SHARE
 
$
0.61

 
 
 
$
0.57

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,757.4

 
 
 
2,737.0

 
 
Diluted
 
2,818.1

 
 
 
2,778.2

 
 
See Notes to Consolidated Financial Statements

4

Table of Contents

 
 
 
 
 
 
 
 
 
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal Nine Months Ended
 
 
September 30,
2012
 
Percent
to Sales
 
October 2,
2011
 
Percent
to Sales
Sales to customers (Note 9)
 
$
49,666

 
100.0
 %
 
$
48,775

 
100.0
 %
Cost of products sold
 
15,655

 
31.5

 
15,022

 
30.8

Gross profit
 
34,011

 
68.5

 
33,753

 
69.2

Selling, marketing and administrative expenses
 
15,208

 
30.6

 
15,511

 
31.8

Research and development expense
 
5,334

 
10.7

 
5,393

 
11.0

In-process research and development
 
1,108

 
2.2

 

 

Interest income
 
(46
)
 
(0.1
)
 
(56
)
 
(0.1
)
Interest expense, net of portion capitalized
 
425

 
0.9

 
388

 
0.8

Other (income) expense, net
 
1,307

 
2.7

 
(115
)
 
(0.2
)
Restructuring expense
 

 

 
589

 
1.2

Earnings before provision for taxes on income
 
10,675

 
21.5

 
12,043

 
24.7

Provision for taxes on income (Note 5)
 
2,728

 
5.5

 
2,589

 
5.3

NET EARNINGS
 
7,947

 
16.0

 
9,454

 
19.4

Add: Net loss attributable to noncontrolling interest, net of tax
 
339

 
0.7

 

 

NET EARNINGS ATTRIBUTABLE TO JOHNSON & JOHNSON
 
$
8,286

 
16.7
 %
 
$
9,454

 
19.4
 %
NET EARNINGS PER SHARE ATTRIBUTABLE TO JOHNSON & JOHNSON (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
3.02

 
 
 
$
3.45

 
 
Diluted
 
$
2.96

 
 
 
$
3.40

 
 
CASH DIVIDENDS PER SHARE
 
$
1.79

 
 
 
$
1.68

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,747.1

 
 
 
2,738.5

 
 
Diluted
 
2,805.0

 
 
 
2,777.6

 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements



5

Table of Contents

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

 
Fiscal Third Quarters Ended
Fiscal Nine Months Ended
 
September 30, 2012
 
October 2, 2011
September 30, 2012
 
October 2, 2011
 
 
 
 
 
 
 
Net Earnings
$
2,629

 
3,202

7,947

 
9,454

 
 
 
 
 
 
 
Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
 
      Foreign currency translation
1,485

 
(1,790
)
689

 
(3
)
 
 
 
 
 
 
 
      Securities:
 
 
 
 
 
 
          Unrealized holding gain (loss) arising during period
(263
)
 
(108
)
(194
)
 
327

          Reclassifications to earnings
(3
)
 
(3
)
(4
)
 
(142
)
          Net change
(266
)
 
(111
)
(198
)
 
185

 
 
 
 
 
 
 
      Employee benefit plans:
 
 
 
 
 
 
          Prior service cost amortization during period

 
1

1

 
3

          Gain (loss) amortization during period
94

 
72

282

 
198

          Net change
94

 
73

283

 
201

 
 
 
 
 
 
 
      Derivatives & hedges:
 
 
 
 
 
 
          Unrealized gain (loss) arising during period
(5
)
 
(117
)
(90
)
 
(105
)
          Reclassifications to earnings
(29
)
 
67

23

 
185

          Net change
(34
)
 
(50
)
(67
)
 
80

 
 
 
 
 
 
 
Other Comprehensive Income (Loss)
1,279

 
(1,878
)
707

 
463

 
 
 
 
 
 
 
Comprehensive Income
3,908

 
1,324

$
8,654

 
9,917

 
 
 
 
 
 
 
Comprehensive Loss Attributable To Noncontrolling Interest, net of tax
339

 

339

 

 
 
 
 
 
 
 
Comprehensive Income Attributable To Johnson & Johnson
$
4,247

 
1,324

8,993

 
9,917

 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements

The tax effects in other comprehensive income for the fiscal third quarters were as follows for 2012 and 2011 respectively: Securities; $144 million and $59 million, Employee Benefits; $49 million and $39 million, Derivatives & Hedges; $18 million and $26 million.
 
The tax effects in other comprehensive income for the fiscal nine months were as follows for 2012 and 2011 respectively: Securities; $107 million and $100 million, Employee Benefits; $147 million and $108 million, Derivatives & Hedges; $36 million and $44 million.
 
Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries.


6

Table of Contents

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal Nine Months Ended
 
 
September 30,
2012
 
October 2,
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
7,947

 
$
9,454

Adjustments to reconcile net earnings to cash flows from operating activities:
 
 
 
 
Depreciation and amortization of property and intangibles
 
2,630

 
2,315

Stock based compensation
 
515

 
484

Noncontrolling interest
 
339

 

Intangible asset write-downs
 
2,047

 
160

Deferred tax provision
 
(324
)
 
(849
)
Accounts receivable allowances
 
86

 
(21
)
Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
Decrease/(Increase) in accounts receivable
 
94

 
(489
)
Increase in inventories
 
(593
)
 
(787
)
Increase/(Decrease) in accounts payable and accrued liabilities
 
1,220

 
(100
)
Increase in other current and non-current assets
 
(790
)
 
(1,066
)
(Decrease)/Increase in other current and non-current liabilities
 
(1,151
)
 
1,746

 
 
 
 
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
 
12,020

 
10,847

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Additions to property, plant and equipment
 
(1,782
)
 
(1,765
)
Proceeds from the disposal of assets
 
905

 
721

Acquisitions, net of cash acquired
 
(4,423
)
 
(2,469
)
Purchases of investments
 
(8,837
)
 
(25,444
)
Sales of investments
 
12,134

 
18,438

Other
 
(4
)
 
(331
)
 
 
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
 
(2,007
)
 
(10,850
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends to shareholders
 
(4,924
)
 
(4,601
)
Repurchase of common stock
 
(12,919
)
 
(1,672
)
Proceeds from short-term debt
 
3,606

 
7,216

Retirement of short-term debt
 
(5,780
)
 
(10,044
)
Proceeds from long-term debt
 
16

 
4,471

Retirement of long-term debt
 
(796
)
 
(12
)
Proceeds from the exercise of stock options/excess tax benefits
 
1,817

 
946

Other
 
(111
)
 

 
 
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
 
(19,091
)
 
(3,696
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
22

 
(39
)
Decrease in cash and cash equivalents
 
(9,056
)
 
(3,738
)
Cash and Cash equivalents, beginning of period
 
24,542

 
19,355

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
15,486

 
$
15,617

 
 
 
 
 
 
 
 
 
 

7

Table of Contents

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal Nine Months Ended
 
 
September 30,
2012
 
October 2,
2011
Supplemental schedule of non-cash investing and financing activities
 
 
 
 
Issuance of common stock associated with the acquisition of Synthes, Inc.
 
13,335

 

 
 
 
 
 
Acquisitions
 
 
 
 
Fair value of assets acquired
 
$
18,984

 
$
2,689

Fair value of liabilities assumed and noncontrolling interests
 
(1,226
)
 
(220
)
Net fair value of acquisitions
 
$
17,758

 
$
2,469

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

 
$

Net cash paid for acquisitions
 
$
(4,423
)
 
$
(2,469
)
See Notes to Consolidated Financial Statements





8

Table of Contents

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.

During the fiscal third quarter of 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. 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 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.

Revision to previously issued financial statements

In connection with the preparation of the consolidated financial statements for the third quarter of 2012, a misclassification was identified with respect to the manner in which the Company presented the shares of common stock issued in connection with the acquisition of Synthes, Inc. in the Consolidated Statement of Cash Flow for the six months ended July 1, 2012. The Company has now determined that the issuance of these shares, including appreciation between June 13, 2012 and June 14, 2012, should have been reported as supplemental non-cash information.  The effect of the misclassification in the Statement of Cash Flows for the six months ended July 1, 2012 resulted in net cash used by investing activities to be overstated by $ 13.3 billion , net cash used by financing activities to be understated by $ 12.8 billion and net cash flows from operating activities to be overstated by $ 0.5 billion . The Company assessed this misclassification and concluded that it was not material to the Company's previously issued financial statements. The Company has properly presented the issuance of these shares in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2012. The revision of the six month period ended July 1, 2012 will be reflected in the Company's second quarter filing of fiscal 2013. The Company's Consolidated Statements of Earnings for the fiscal second quarter and fiscal six months ended July 1, 2012 and the Consolidated Balance Sheet as of July 1, 2012 remain unchanged.


9


NOTE 2 — INVENTORIES

(Dollars in Millions)
 
September 30, 2012
 
January 1, 2012
Raw materials and supplies
 
$
1,408

 
1,206

Goods in process
 
2,480

 
1,637

Finished goods
 
3,921

 
3,442

Total inventories
 
$
7,809

 
6,285


As of September 30, 2012 the remaining inventory step-up related to the Synthes acquisition is approximately $ 0.2 billion .

NOTE 3 — INTANGIBLE ASSETS AND GOODWILL

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 2012.

(Dollars in Millions)
 
September 30, 2012
 
January 1, 2012
Intangible assets with definite lives:
 
 
 
 
Patents and trademarks — gross
 
$
8,874

 
7,947

Less accumulated amortization
 
3,317

 
2,976

Patents and trademarks — net
 
5,557

 
4,971

Customer relationships and other intangibles — gross
 
18,646

 
8,716

Less accumulated amortization
 
3,891

 
3,432

Customer relationships and other intangibles — net
 
14,755

 
5,284

Intangible assets with indefinite lives:
 
 
 
 
Trademarks
 
7,521

 
6,034

Purchased in-process research and development
 
957

 
1,849

Total intangible assets with indefinite lives
 
8,478

 
7,883

Total intangible assets — net
 
$
28,790

 
18,138


Goodwill as of September 30, 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

 
5,451

 
5,499

Currency translation/Other
 
161

 
(1
)
 
(20
)
 
140

Goodwill, net as of September 30, 2012
 
$
8,459

 
1,768

 
11,550

 
21,777


The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are 17 years and 24 years, respectively. The amortization expense of amortizable intangible assets was $866 million and $ 611 million for the fiscal nine months ended September 30, 2012 and October 2, 2011 , respectively, 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 Intangible assets and goodwill related to the Synthes acquisition were based on the preliminary purchase price allocation. See Note 10 to the Consolidated Financial Statements for additional details on Synthes.The increase in intangible assets was partially offset by $ 0.9 billion in intangible asset write-downs and a $ 1.1 billion impairment of purchased in-process research

10


and development, primarily related to the discontinuation of the Phase III clinical development of bapineuzumab IV and the partial impairment related to the Crucell vaccine business.

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 September 30, 2012 , the Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate swaps of $24.9 billion and $2.7 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 September 30, 2012 , the balance of deferred net losses on derivatives included in accumulated other comprehensive income was $235 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 third quarters in 2012 and 2011 :


11


 
 
 
 
 
 
 
 
 
 
 
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 Third Quarters Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Cash Flow Hedges by Income Statement Caption
 
 
 
 
 
 
 
 
 
 
 
 
Sales to customers (3)
 
$
30

 
(57
)
 
(12
)
 
4

 
(1
)
 
1

Cost of products sold (3)
 
(61
)
 
(58
)
 
(19
)
 
(21
)
 
(1
)
 
(1
)
Research and development expense (3)
 
22

 
6

 
43

 
(40
)
 

 
1

Interest (income)/Interest expense, net (4)
 
28

 
(67
)
 
(2
)
 
(6
)
 

 

Other (income)expense, net (3)
 
(24
)
 
59

 
19

 
(4
)
 
1

 
(1
)
Total
 
$
(5
)
 
(117
)
 
29

 
(67
)
 
(1
)
 


The following table is a summary of the activity related to derivatives designated as hedges for the fiscal nine months 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 Nine Months Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Cash Flow Hedges by Income Statement Caption
 
 
 
 
 
 
 
 
 
 
 
 
Sales to customers (3)
 
$
16

 
(30
)
 
(42
)
 
(6
)
 
(1
)
 
(1
)
Cost of products sold (3)
 
(100
)
 
34

 
(53
)
 
(127
)
 
(1
)
 
2

Research and development expense (3)
 
33

 
(2
)
 
56

 
(21
)
 

 
(1
)
Interest (income)/Interest expense, net (4)
 
(14
)
 
(107
)
 
(11
)
 
(24
)
 

 

Other (income)expense, net (3)
 
(25
)
 

 
27

 
(7
)
 

 
1

Total
 
$
(90
)
 
(105
)
 
(23
)
 
(185
)
 
(2
)
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 

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

For the fiscal third quarters ended September 30, 2012 and October 2, 2011 , a gain of $35 million and a loss of $10 million , respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.

For the fiscal nine months ended September 30, 2012 and October 2, 2011 , a gain of $9 million and a loss of $2 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

12


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 September 30, 2012 and January 1, 2012 were as follows:
 
 
September 30, 2012
 
 
 
January 1, 2012
(Dollars in Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total (2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
213

 

 
213

 
442

Cross currency interest rate swaps (3)
 

 
9

 

 
9

 
15

Total
 

 
222

 

 
222

 
457

Liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
315

 

 
315

 
452

Cross currency interest rate swaps (4)
 

 
583

 

 
583

 
594

Total
 

 
898

 

 
898

 
1,046

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

 
18

 

 
18

 
29

Swiss Franc Option (5)
 

 

 

 

 
17

Total
 

 
18

 

 
18

 
46

Liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
27

 

 
27

 
34

Other Investments (1)
 
$
1,258

 

 

 
1,258

 
1,563


(1)
Classified as non-current other assets.
(2)
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.
(3)
Includes $6 million and $15 million of non-current assets for September 30, 2012 and January 1, 2012, respectively.
(4)
Includes $576 million and $594 million of non-current liabilities for September 30, 2012 and January 1, 2012, respectively.
(5)    Currency option related to the acquisition of Synthes, Inc., which expired in January 2012.


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 September 30, 2012 :

13


(Dollars in Millions)
 
Carrying Amount

 
Estimated Fair Value

Financial Assets
 
 
 
 
Current Investments
 
 
 
 
Cash
 
$
3,204

 
3,204

Government securities and obligations
 
13,906

 
13,906

Corporate debt securities
 
617

 
617

Money market funds
 
1,554

 
1,554

Time deposits
 
490

 
490

Total cash, cash equivalents and current marketable securities
 
$
19,771

 
19,771

 
 
 
 
 
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
 
$
5,423

 
5,423

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

 
750

1.20% Notes due 2014
 
999

 
1,015

2.15% Notes due 2016
 
898

 
950

5.55% Debentures due 2017
 
1,000

 
1,217

5.15% Debentures due 2018
 
898

 
1,099

4.75% Notes due 2019 (1B Euro 1.2874)
 
1,281

 
1,562

3% Zero Coupon Convertible Subordinated Debentures due in 2020
 
205

 
193

2.95% Debentures due 2020
 
542

 
591

3.55% Notes due 2021
 
446

 
508

6.73% Debentures due 2023
 
250

 
363

5.50% Notes due 2024 (500 GBP 1.6227)
 
806

 
1,056

6.95% Notes due 2029
 
296

 
429

4.95% Debentures due 2033
 
500

 
638

5.95% Notes due 2037
 
995

 
1,409

5.85% Debentures due 2038
 
700

 
987

4.50% Debentures due 2040
 
539

 
669

4.85% Notes due 2041
 
298

 
388

Other
 
25

 
22

Total Non-Current Debt
 
$
11,428

 
13,846


The weighted average effective rate on non-current debt is 4.34% .

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 nine months of 2012 and 2011 were 25.6% and 21.5% , respectively. The higher effective tax rate in 2012 as compared to 2011 was primarily due to lower tax rates associated with in-process research and development write downs; integration, transaction and currency related costs associated with the Synthes acquisition and litigation accruals which added 3.4 points to the effective tax rate. These items are located in low tax jurisdictions which reduced the tax benefit associated with the expense therefore increasing the worldwide 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.


14




NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS

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 third quarters of 2012 and 2011 include the following components:

 
 
Retirement Plans
 
Other Benefit Plans
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Service cost
 
$
163

 
146

 
42

 
38

Interest cost
 
218

 
214

 
41

 
47

Expected return on plan assets
 
(307
)
 
(279
)
 
(1
)
 

Amortization of prior service cost/(credit)
 
2

 
3

 
(1
)
 
(1
)
Amortization of net transition obligation
 
1

 

 

 

Recognized actuarial losses
 
123

 
97

 
21

 
11

Curtailments and settlements
 

 

 

 

Net periodic benefit cost
 
$
200

 
181

 
102

 
95


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


 
 
Retirement Plans
 
Other Benefit Plans
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
September 30, 2012
 
October 2, 2011
Service cost
 
$
492

 
433

 
131

 
112

Interest cost
 
659

 
641

 
123

 
141

Expected return on plan assets
 
(927
)
 
(834
)
 
(3
)
 
(1
)
Amortization of prior service cost/(credit)
 
4

 
7

 
(3
)
 
(2
)
Amortization of net transition obligation
 
1

 
1

 

 

Recognized actuarial losses
 
371

 
291

 
59

 
34

Curtailments and settlements
 
(1
)
 

 

 

Net periodic benefit cost
 
$
599

 
539

 
307

 
284


Company Contributions

For the fiscal nine months ended September 30, 2012 , the Company contributed $388 million and $26 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:

15


 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
689

 
(198
)
 
283

 
(67
)
 
707

September 30, 2012
 
$
(837
)
 
250

 
(4,103
)
 
(235
)
 
(4,925
)

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 third quarters ended September 30, 2012 and October 2, 2011 :

 
 
Fiscal Third Quarters Ended
(Shares in Millions)
 
September 30, 2012
 
October 2, 2011
Basic net earnings per share attributable to Johnson & Johnson
 
$
1.08

 
$
1.17

Average shares outstanding — basic
 
2,757.4

 
2,737.0

Potential shares exercisable under stock option plans
 
181.6

 
165.0

Less: shares which could be repurchased under treasury stock method
 
(141.5
)
 
(127.4
)
Convertible debt shares
 
3.6

 
3.6

Accelerated share repurchase program
 
17.0

 

Average shares outstanding — diluted
 
2,818.1

 
2,778.2

Diluted earnings per share attributable to Johnson & Johnson
 
$
1.05

 
$
1.15


The diluted earnings per share calculation for both fiscal third quarters ended September 30, 2012 and October 2, 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 third quarter ended September 30, 2012 included the dilutive effect of 17.0 million shares related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 10 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 2.7 million shares.

The diluted earnings per share calculation for the fiscal third quarter ended September 30, 2012 included all shares related to stock options, as the exercise price of all options was less than the average market value of the Company's stock during the quarter. The diluted earnings per share calculation for the fiscal third quarter ended October 2, 2011, excluded 51 million shares 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.












16


The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal nine months ended September 30, 2012 and October 2, 2011 :

 
 
Fiscal Nine Months Ended
(Shares in Millions)
 
September 30, 2012
 
October 2, 2011
Basic net earnings per share attributable to Johnson & Johnson
 
$
3.02

 
$
3.45

Average shares outstanding — basic
 
2,747.1

 
2,738.5

Potential shares exercisable under stock option plans
 
181.5

 
164.7

Less: shares which could be repurchased under treasury stock method
 
(144.2
)
 
(129.2
)
Convertible debt shares
 
3.6

 
3.6

Accelerated share repurchase program
 
17.0

 

Average shares outstanding — diluted
 
2,805.0

 
2,777.6

Diluted earnings per share attributable to Johnson & Johnson
 
$
2.96

 
$
3.40


The diluted earnings per share calculation for both the fiscal nine months ended September 30, 2012 and October 2, 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 nine months ended September 30, 2012 included the dilutive effect of 17.0 million shares related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 10 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 2.7 million shares.
  
The diluted earnings per share calculation for the fiscal nine months ended September 30, 2012 and October 2, 2011 , excluded 1 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.

NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS

SALES BY SEGMENT OF BUSINESS

 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 30,
2012
 
October 2,
2011
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
1,214

 
$
1,219

 
(0.4
)%
International
 
2,367

 
2,521

 
(6.1
)
Total
 
3,581

 
3,740

 
(4.3
)
Pharmaceutical
 
 
 
 
 
 
United States
 
3,288

 
2,869

 
14.6

International
 
3,114

 
3,113

 
0.0

Total
 
6,402

 
5,982

 
7.0

Medical Devices & Diagnostics
 
 
 
 
 
 
United States
 
3,289

 
2,780

 
18.3

International
 
3,780

 
3,503

 
7.9

Total
 
7,069

 
6,283

 
12.5

Worldwide
 
 
 
 
 
 
United States
 
7,791

 
6,868

 
13.4

International
 
9,261

 
9,137

 
1.4

Total
 
$
17,052

 
$
16,005

 
6.5
 %

17



 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 30,
2012
 
October 2,
2011
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
3,843

 
$
3,903

 
(1.5
)%
International
 
6,952

 
7,312

 
(4.9
)
Total
 
10,795

 
11,215

 
(3.7
)
Pharmaceutical
 
 
 
 
 
 
United States
 
9,408

 
9,499

 
(1.0
)
International
 
9,418

 
8,775

 
7.3

Total
 
18,826

 
18,274

 
3.0

Medical Devices & Diagnostics
 
 
 
 
 
 
United States
 
9,119

 
8,521

 
7.0

International
 
10,926

 
10,765

 
1.5

Total
 
20,045

 
19,286

 
3.9

Worldwide
 
 
 
 
 
 
United States
 
22,370

 
21,923

 
2.0

International
 
27,296

 
26,852

 
1.7

Total
 
$
49,666

 
$
48,775

 
1.8
 %


OPERATING PROFIT BY SEGMENT OF BUSINESS
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 30,
2012
 
October 2,
2011
 
Percent
Change
Consumer
 
$
510

 
$
644

 
(20.8
)%
Pharmaceutical (2)
 
1,388

 
2,078

 
(33.2
)
Medical Devices & Diagnostics (3)
 
1,927

 
1,927

 

Segments operating profit
 
3,825

 
4,649

 
(17.7
)
Expense not allocated to segments (4)
 
(230
)
 
(538
)
 
 
Worldwide income before taxes
 
$
3,595

 
$
4,111

 
(12.6
)%

 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
Percent
Change
Consumer (1)
 
$
1,239

 
$
1,766

 
(29.8
)%
Pharmaceutical (2)
 
4,494

 
6,001

 
(25.1
)
Medical Devices & Diagnostics  (3)
 
5,880

 
5,146

 
14.3

Segments operating profit
 
11,613

 
12,913

 
(10.1
)
Expense not allocated to segments  (4)
 
(938
)
 
(870
)
 
 
Worldwide income before taxes
 
$
10,675

 
$
12,043

 
(11.4
)%

(1) Includes intangible asset write-downs of $ 294 million recorded in the fiscal nine months of 2012.

(2) Includes in-process research and development charges of $ 679 million and $ 1,108 million recorded in the fiscal third quarter and fiscal nine months of 2012, respectively. Includes litigation expense of $ 658 million and intangible asset write-

18


downs of $ 499 million included in the fiscal nine months of 2012. Includes litigation expense of $ 540 million recorded in the fiscal nine months of 2011.
(3) Includes Synthes integration/transaction costs of $ 165 million and $ 388 million recorded in the fiscal third quarter and the fiscal nine months of 2012, respectively. Includes intangible asset write-downs of $ 146 million recorded in the fiscal nine months of 2012. Includes ASR TM Hip related costs of $ 116 million recorded in the fiscal third quarter and the fiscal nine months of 2012. Includes restructuring expense of $ 676 million , ASR TM Hip related costs of $ 187 million and litigation expense of $ 36 million recorded in the fiscal nine months of 2011.
(4) Amounts not allocated to segments include interest income/(expense), noncontrolling interests and general corporate income/expense. Includes currency losses related to the Synthes acquisition of $ 234 million and litigation expense of $ 11 million recorded in the fiscal nine months of 2012. Includes a currency loss of $ 316 million and $ 214 million related to the Synthes acquisition recorded in the fiscal third quarter and fiscal nine months of 2011, respectively.

SALES BY GEOGRAPHIC AREA
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
Percent
Change
United States
 
$
7,791

 
$
6,868

 
13.4
 %
Europe
 
3,983

 
4,124

 
(3.4
)
Western Hemisphere, excluding U.S.
 
1,824

 
1,751

 
4.2

Asia-Pacific, Africa
 
3,454

 
3,262

 
5.9

Total
 
$
17,052

 
$
16,005

 
6.5
 %

 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 30, 2012
 
October 2, 2011
 
Percent
Change
United States
 
$
22,370

 
$
21,923

 
2.0
 %
Europe
 
12,342

 
12,850

 
(4.0
)
Western Hemisphere, excluding U.S.
 
5,266

 
4,730

 
11.3

Asia-Pacific, Africa
 
9,688

 
9,272

 
4.5

Total
 
$
49,666

 
$
48,775

 
1.8
 %

NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES

On October 11, 2012, the Company announced that Ortho-Clinical Diagnostics (OCD) has received a binding offer from The Gores Group, an investment firm, to acquire the Therakos business. The transaction is expected to close at the end of 2012, subject to satisfaction of customary closing conditions.

During the fiscal second quarter, 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

19


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 first half of 2013, and may occur earlier at the option of the two banks, as applicable, or later under certain circumstances. Based on the theoretical settlement of the ASR agreements an additional 17.0 million shares would be issued to settle the ASR agreements as of September 30, 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:


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(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.

The assets acquired are recorded in the Medical Devices and Diagnostics segment. The acquisition of Synthes, Inc. resulted in $5.4 billion of goodwill. 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: