Johnson & Johnson
JOHNSON & JOHNSON (Form: 10-K, Received: 02/25/2011 06:04:36)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended January 2, 2011 Commission file number 1-3215
 
JOHNSON & JOHNSON
 
(Exact name of registrant as specified in its charter)
 
     
New Jersey
  22-1024240
(State of incorporation)   (I.R.S. Employer Identification No.)
     
One Johnson & Johnson Plaza
New Brunswick, New Jersey
  08933
(Address of principal executive offices)   (Zip Code)
 
Registrant’s telephone number, including area code: (732) 524-0400
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
 
     
Title of each class   Name of each exchange on which registered
 
Common Stock, Par Value $1.00   New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  o      No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.  Yes  þ      No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).  Yes  þ      No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
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 the 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).  Yes  o      No  þ
 
The aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $163 billion.
 
On February 15, 2011 there were 2,735,213,719 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
     
Parts I, II and III:
  Portions of registrant’s annual report to shareholders for fiscal year 2010 (the “Annual Report”).
Parts I and III:
  Portions of registrant’s proxy statement for its 2011 annual meeting of shareholders filed within 120 days after the close of the registrant’s fiscal year (the “Proxy Statement”).
 


 

             
Item       Page
 
PART I
1.
  Business     1  
      General     1  
      Segments of Business     1  
      Geographic Areas     2  
      Raw Materials     2  
      Patents and Trademarks     2  
      Seasonality     3  
      Competition     3  
      Research and Development     3  
      Environment     3  
      Regulation     3  
      Available Information     4  
1A.
  Risk Factors     4  
1B.
  Unresolved Staff Comments     4  
2.
  Properties     4  
3.
  Legal Proceedings     5  
4.
  (Removed and Reserved)     5  
    Executive Officers of the Registrant     5  
 
PART II
5.
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     7  
6.
  Selected Financial Data     7  
7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operation     8  
7A.
  Quantitative and Qualitative Disclosures About Market Risk     8  
8.
  Financial Statements and Supplementary Data     8  
9.
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     8  
9A.
  Controls and Procedures     8  
9B.
  Other Information     9  
 
PART III
10.
  Directors, Executive Officers and Corporate Governance     9  
11.
  Executive Compensation     9  
12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     10  
13.
  Certain Relationships and Related Transactions, and Director Independence     10  
14.
  Principal Accountant Fees and Services     11  
 
PART IV
15.
  Exhibits and Financial Statement Schedules     11  
    Schedule II — Valuation and Qualifying Accounts     12  
    Signatures     13  
    Report of Independent Registered Public Accounting Firm on Financial Statement Schedule     15  
    Exhibit Index     16  


 

 
PART I
 
Item 1.   BUSINESS
 
General
 
Johnson & Johnson and its subsidiaries have approximately 114,000 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. Johnson & Johnson is a holding company, which has more than 250 operating companies conducting business in virtually all countries of the world. Johnson & Johnson’s primary focus has been on products related to human health and well-being. Johnson & Johnson was incorporated in the State of New Jersey in 1887.
 
The Company’s structure is based on the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments. Each subsidiary within the business segments is, with some exceptions, managed by citizens of the country where it is located.
 
Segments of Business
 
Johnson & Johnson’s operating companies are organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. Additional information required by this item is incorporated herein by reference to the narrative and tabular (but not the graphic) descriptions of segments and operating results under the captions “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 30 through 40 and Note 18 “Segments of Business and Geographic Areas” under “Notes to Consolidated Financial Statements” on page 61 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Consumer
 
The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products, and wellness and prevention platforms. The Baby Care franchise includes the JOHNSON’S ® Baby line of products. Major brands in the Skin Care franchise include the AVEENO ® ; CLEAN & CLEAR ® ; JOHNSON’S ® Adult; NEUTROGENA ® ; RoC ® ; LUBRIDERM ® ; DABAO tm ; and Vendôme product lines. The Oral Care franchise includes the LISTERINE ® and REACH ® oral care lines of products. The Wound Care franchise includes BAND-AID ® brand adhesive bandages and Neosporin ® First Aid products. Major brands in the Women’s Health franchise are the CAREFREE ® Pantiliners; o.b. ® tampons and STAYFREE ® sanitary protection products. The nutritional and over-the-counter lines include SPLENDA ® , No Calorie Sweetener; the broad family of TYLENOL ® acetaminophen products; SUDAFED ® cold, flu and allergy products; ZYRTEC ® allergy products; MOTRIN ® IB ibuprofen products; and PEPCID ® AC Acid Controller from Johnson & Johnson • Merck Consumer Pharmaceuticals Co. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world.
 
Pharmaceutical
 
The Pharmaceutical segment includes products in the following areas: anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. Key products in the Pharmaceutical segment include: REMICADE ® (infliximab), a treatment for a number of immune mediated inflammatory diseases; STELARA ® (ustekinumab), a treatment for moderate to severe plaque psoriasis; SIMPONI ® (golimumab), a treatment for adults with moderate to severe rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis; VELCADE ® (bortezomib), a treatment for multiple myeloma; PREZISTA ® (darunavir) and INTELENCE ® (etravirine), treatments for HIV/AIDS; NUCYNTA ® (tapentadol), a treatment for moderate to severe acute pain; INVEGA ® SUSTENNA tm (paliperidone palmitate), for the acute and maintenance treatment of schizophrenia in adults; RISPERDAL ® CONSTA ® (risperidone), a treatment for the management of Bipolar I Disorder and schizophrenia; PROCRIT ® (Epoetin alfa, sold outside the U.S. as EPREX ® ), to stimulate red blood cell production; LEVAQUIN ® (levofloxacin) for the treatment of bacterial infections; CONCERTA ® (methylphenidate HCl), a treatment for attention deficit hyperactivity disorder;


 

ACIPHEX ® /PARIET ® , a proton pump inhibitor co-marketed with Eisai Inc.; DURAGESIC ® /Fentanyl Transdermal (fentanyl transdermal system, sold outside the U.S. as DUROGESIC ® ), a treatment for chronic pain that offers a novel delivery system.
 
Medical Devices and Diagnostics
 
The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Biosense Webster’s electrophysiology products; Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care, neurological and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products and advanced sterilization products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products; and Vistakon’s disposable contact lenses. Distribution to these health care professional markets is done both directly and through surgical supply and other dealers.
 
Geographic Areas
 
The business of Johnson & Johnson is conducted by more than 250 operating companies located in 60 countries, including the United States, which are selling products in virtually all countries throughout the world. The products made and sold in the international business include many of those described above under “— Segments of Business — Consumer,” “— Pharmaceutical” and “— Medical Devices and Diagnostics.” However, the principal markets, products and methods of distribution in the international business vary with the country and the culture. The products sold in international business include not only those developed in the United States, but also those developed by subsidiaries abroad.
 
Investments and activities in some countries outside the United States are subject to higher risks than comparable U.S. activities because the investment and commercial climate is influenced by restrictive economic policies and political uncertainties.
 
Raw Materials
 
Raw materials essential to Johnson & Johnson’s operating companies’ businesses are generally readily available from multiple sources.
 
Patents and Trademarks
 
Johnson & Johnson and its subsidiaries have made a practice of obtaining patent protection on their products and processes where possible. They own or are licensed under a number of patents relating to their products and manufacturing processes, which in the aggregate are believed to be of material importance to Johnson & Johnson in the operation of its businesses. Sales of the Company’s largest product, REMICADE ® (infliximab), accounted for approximately 7% of Johnson & Johnson’s total revenues for fiscal 2010. Accordingly, the patents related to this product are believed to be material to Johnson & Johnson.
 
In March of 2009, TOPAMAX ® (topiramate) lost basic patent protection and market exclusivity and became subject to generic competition in the United States and later in the year in international markets. Sales of TOPAMAX ® declined by 53.3% and 57.9% in 2010 and 2009, respectively. The next significant patent that will expire is for LEVAQUIN ® (levofloxacin), which accounted for approximately 2% of the Company’s 2010 sales. A pediatric extension for LEVAQUIN ® was granted by the U.S. Food and Drug Administration (“FDA”), which extends market exclusivity in the United States through June 20, 2011.
 
Johnson & Johnson’s operating companies have made a practice of selling their products under trademarks and of obtaining protection for these trademarks by all available means. These trademarks are protected by registration in the United States and other countries where such products are marketed. Johnson & Johnson considers these trademarks in the aggregate to be of material importance in the operation of its businesses.


2


 

 
Seasonality
 
Worldwide sales do not reflect any significant degree of seasonality; however, spending has been heavier in the fourth quarter of each year than in other quarters. This reflects increased spending decisions, principally for advertising and research and development activity.
 
Competition
 
In all of their product lines, Johnson & Johnson’s operating companies compete with companies both local and global, located throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to Johnson & Johnson’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and in maintaining sales forces. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.
 
Research and Development
 
Research activities represent a significant part of Johnson & Johnson’s subsidiaries’ businesses. Major research facilities are located not only in the United States, but also in Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore and the United Kingdom. The costs of worldwide Company-sponsored research activities relating to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients (excluding purchased in-process research and development charges for fiscal 2008), amounted to $6.8 billion, $7.0 billion and $7.6 billion for fiscal years 2010, 2009 and 2008, respectively. These costs are charged directly to expense, or directly against income, in the year in which incurred.
 
Environment
 
Johnson & Johnson’s operating companies are subject to a variety of U.S. and international environmental protection measures. Johnson & Johnson believes that its operations comply in all material respects with applicable environmental laws and regulations. Johnson & Johnson’s compliance with these requirements did not during the past year, and is not expected to, have a material effect upon its capital expenditures, cash flows, earnings or competitive position.
 
Regulation
 
Most of Johnson & Johnson’s businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward increasingly stringent regulation. In the United States, the drug, device, diagnostics and cosmetic industries have long been subject to regulation by various federal and state agencies, primarily as to product safety, efficacy, manufacturing, advertising, labeling and safety reporting. The exercise of broad regulatory powers by the FDA continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends are also evident in major markets outside of the United States.
 
The costs of human health care have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world. In the United States, attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend, use or purchase particular medical devices. Payers have become a more potent force in the market place and increased attention is being paid to drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of health care.
 
The regulatory agencies under whose purview Johnson & Johnson’s operating companies operate have administrative powers that may subject those companies to such actions as product withdrawals, recalls, seizure of products and other civil and criminal sanctions. In some cases, Johnson & Johnson’s operating companies may deem it advisable to initiate product recalls.


3


 

In addition, business practices in the health care industry have come under increased scrutiny, particularly in the United States, by government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
 
Available Information
 
The Company’s main corporate website address is www.jnj.com. Copies of Johnson & Johnson’s Quarterly Reports on Form 10-Q, Annual Report on Form 10-K and Current Reports on Form 8-K filed or furnished to the U.S. Securities and Exchange Commission (the “SEC”), and any amendments to the foregoing, will be provided without charge to any shareholder submitting a written request to the Secretary at the principal executive offices of the Company or by calling 1-800-950-5089. All of the Company’s SEC filings are also available on the Company’s website at www.investor.jnj.com/governance/materials.cfm , as soon as reasonably practicable after having been electronically filed or furnished to the SEC. All SEC filings are also available at the SEC’s website at www.sec.gov . In addition, the written charters of the Audit Committee, the Compensation & Benefits Committee and the Nominating & Corporate Governance Committee of the Board of Directors and the Company’s Principles of Corporate Governance, Policy on Business Conduct for employees and Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers are available at the www.investor.jnj.com/governance/materials.cfm website address and will be provided without charge to any shareholder submitting a written request, as provided above.
 
Item 1A.   RISK FACTORS
 
Some important factors that could cause the Company’s actual results to differ from the Company’s expectations in any forward-looking statements in this Report are set forth in Exhibit 99 to this Report on Form 10-K.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
Item 2.   PROPERTIES
 
Johnson & Johnson and its subsidiaries operate 139 manufacturing facilities occupying approximately 21.8 million square feet of floor space.
 
The manufacturing facilities are used by the industry segments of Johnson & Johnson’s business approximately as follows:
 
         
    Square Feet
 
    (in
 
  Segment   thousands)  
 
Consumer
    6,968  
Pharmaceutical
    6,739  
Medical Devices and Diagnostics
    8,108  
         
Worldwide Total
    21,815  
         
 
Within the United States, 7 facilities are used by the Consumer segment, 11 by the Pharmaceutical segment and 36 by the Medical Devices and Diagnostics segment. Johnson & Johnson’s manufacturing operations outside the United States are often conducted in facilities that serve more than one business segment.


4


 

The locations of the manufacturing facilities by major geographic areas of the world are as follows:
 
                 
          Square Feet
 
    Number of
    (in
 
Geographic Area   Facilities     thousands)  
 
United States
    54       7,449  
Europe
    37       7,602  
Western Hemisphere, excluding U.S. 
    17       3,380  
Africa, Asia and Pacific
    31       3,384  
                 
Worldwide Total
    139       21,815  
                 
 
In addition to the manufacturing facilities discussed above, Johnson & Johnson and its subsidiaries maintain numerous office and warehouse facilities throughout the world. Research facilities are also discussed in Item 1 under “Business — Research and Development.”
 
Johnson & Johnson and its subsidiaries generally seek to own their manufacturing facilities, although some, principally in locations abroad, are leased. Office and warehouse facilities are often leased.
 
Johnson & Johnson is committed to maintaining all of its properties in good operating condition and repair, and the facilities are well utilized.
 
Production at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility was suspended in the second quarter of 2010. Alternate supplies of products are planned to be available in the latter half of 2011. McNeil Consumer Healthcare submitted its Comprehensive Action Plan (CAP) to the U.S. Food and Drug Administration (FDA) on July 15, 2010, which encompasses, among other items, training, resources and capital investments in quality and manufacturing systems across the McNeil organization. The Company continues to communicate with the FDA on remediation actions and is on schedule with the commitments made in the CAP.
 
For information regarding lease obligations, see Note 16 “Rental Expense and Lease Commitments” under “Notes to Consolidated Financial Statements” on page 59 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K. Segment information on additions to property, plant and equipment is contained in Note 18 “Segments of Business and Geographic Areas” under “Notes to Consolidated Financial Statements” on page 61 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 3.   LEGAL PROCEEDINGS
 
The information set forth in Note 21 “Legal Proceedings” under “Notes to Consolidated Financial Statements” on pages 64 through 71 of the Annual Report is incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K.
 
The Company or its subsidiaries are parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws, in which the primary relief sought is the cost of past and future remediation. While it is not feasible to predict or determine the outcome of these proceedings, in the opinion of the Company, such proceedings would not have a material adverse effect on the results of operations, cash flows or financial position of the Company.
 
Item 4.   (REMOVED AND RESERVED)
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
Listed below are the executive officers of Johnson & Johnson as of February 15, 2011, each of whom, unless otherwise indicated below, has been an employee of the Company or its affiliates and held the position indicated during the past five years. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of the Board of Directors, the executive officers are elected by the Board to hold office for one year and until their respective successors are elected and qualified, or until earlier resignation or removal.


5


 

Information with regard to the directors of the Company, including information for William C. Weldon, is incorporated herein by reference to the material captioned “Election of Directors” in the Proxy Statement.
 
             
Name   Age   Position
 
Dominic J. Caruso
    53    
Member, Executive Committee; Vice President, Finance; Chief Financial Officer(a)
Russell C. Deyo
    61    
Member, Executive Committee; Vice President, General Counsel(b)
Peter M. Fasolo
    48    
Member, Executive Committee, Vice President, Worldwide Human Resources(c)
Alex Gorsky
    50    
Vice Chairman, Executive Committee(d)
Sherilyn S. McCoy
    52    
Vice Chairman, Executive Committee(e)
William C. Weldon
    62    
Chairman, Board of Directors; Chairman, Executive Committee; Chief Executive Officer
(a) Mr. D. J. Caruso joined the Company in 1999 when the Company acquired Centocor, Inc. At the time of that acquisition, he had been Senior Vice President, Finance of Centocor. Mr. Caruso was named Vice President, Finance of Ortho-McNeil Pharmaceutical, Inc., a subsidiary of the Company, in 2001 and Vice President, Group Finance of the Company’s Medical Devices and Diagnostics Group in 2003. In 2005, Mr. Caruso was named Vice President of the Company’s Group Finance organization. Mr. Caruso became a Member of the Executive Committee and Vice President, Finance and Chief Financial Officer in 2007.
 
(b) Mr. R. C. Deyo joined the Company in 1985 and became Associate General Counsel in 1991. He became a Member of the Executive Committee and Vice President, Administration in 1996 and Vice President, General Counsel in 2004.
 
(c) Mr. P. M. Fasolo joined the Company in 2004 as Vice President, Worldwide Human Resources for Cordis Corporation, a subsidiary of the Company. He was then named Vice President, Global Talent Management for the Company. He left Johnson & Johnson in 2007 to join Kohlberg Kravis Roberts & Co. as Chief Talent Officer. Mr. Fasolo returned to the Company in September 2010 as the Vice President, Worldwide Human Resources, and in January 2011, he became a Member of the Executive Committee.
 
(d) Mr. A. Gorsky joined the Company in 2008 as Company Group Chairman and Worldwide Franchise Chairman for Ethicon, Inc., a subsidiary of the Company. Previously, he was head of the North American pharmaceuticals business at Novartis Pharmaceuticals Corporation from 2004 to 2008. Prior to Novartis, Mr. Gorsky served in various management positions at Johnson & Johnson, including Company Group Chairman for the Company’s pharmaceutical business in Europe, Middle East and Africa and President of Janssen Pharmaceutica Inc. (U.S.), a subsidiary of the Company. In January 2009, he became a Member of the Executive Committee and Worldwide Chairman, Surgical Care Group, and in September 2009, he became Worldwide Chairman, Medical Devices and Diagnostics Group. Mr. Gorsky was appointed as Vice Chairman, Executive Committee in January 2011.
 
(e) Ms. S. S. McCoy joined the Company in 1982 as an Associate Scientist in Research & Development for Personal Products Company, a subsidiary of the Company. She was named Vice President, Research & Development for the Personal Products Worldwide Division of McNEIL-PPC, Inc., a subsidiary of the Company, in 1995, and Vice President, Marketing for its Skin Care franchise in 2000. In 2002, Ms. McCoy became Global President for its Baby and Wound Care franchise. She was named Company Group Chairman and Worldwide Franchise Chairman of Ethicon, Inc., a subsidiary of the Company, in 2005. In 2008 she became a Member of the Executive Committee and Worldwide Chairman, Surgical Care Group. In 2009, she became Worldwide Chairman, Pharmaceuticals Group. Ms. McCoy was appointed as Vice Chairman, Executive Committee in January 2011.


6


 

 
PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
As of February 15, 2011, there were 181,232 record holders of Common Stock of the Company. Additional information called for by this item is incorporated herein by reference to: the material under the captions “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Liquidity and Capital Resources — Share Repurchase and Dividends” on page 37; “— Other Information — Common Stock Market Prices” on page 39; Note 17 “Common Stock, Stock Option Plans and Stock Compensation Agreements” under “Notes to Consolidated Financial Statements” on pages 59 and 60; and “Shareholder Return Performance Graphs” on page 75 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K; and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plan Information” of this Report on Form 10-K.
 
Issuer Purchases of Equity Securities
 
On July 9, 2007, the Company announced that its Board of Directors approved a stock repurchase program, authorizing the Company to buy back up to $10 billion of the Company’s Common Stock. As of January 2, 2011, the current stock repurchase program has been completed. The Company repurchased an aggregate of 158.3 million shares of Johnson & Johnson Common Stock at a cost of $10 billion. The Company funded the share repurchase program through a combination of available cash and debt.
 
In addition, the Company has an annual program to repurchase shares for use in employee stock and incentive plans.
 
The following table provides information with respect to Common Stock purchases by the Company during the fiscal fourth quarter of 2010.
 
                         
                Total Number
 
                of Shares
 
                Purchased as
 
                Part of
 
    Total Number
    Avg. Price
    Publicly Announced
 
    of Shares
    Paid Per
    Plans or
 
Period   Purchased (1)     Share     Programs (2)  
 
October 4, 2010 through October 31, 2010
    6,204,032     $ 63.28        
November 1, 2010 through November 28, 2010
    8,913,651       63.70       2,520,817  
November 29, 2010 through January 2, 2011
    5,192,211       62.35       3,372,164  
Total
    20,309,894               5,892,981  
 
 
(1)   During the fiscal fourth quarter of 2010, the Company repurchased an aggregate of 5,892,981 shares of the Company’s Common Stock pursuant to the repurchase program that was publicly announced on July 9, 2007, and an aggregate of 14,416,913 shares in open-market transactions outside of the program.
 
(2)   As of January 2, 2011, an aggregate of 158,315,129 shares were purchased, completing the buyback program totaling $10 billion since the inception of the repurchase program announced on July 9, 2007.
 
Item 6.   SELECTED FINANCIAL DATA
 
The information called for by this item is incorporated herein by reference to the material under the caption “Summary of Operations and Statistical Data 2000-2010” on page 74 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.


7


 

Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
The information called for by this item is incorporated herein by reference to the narrative and tabular (but not the graphic) material under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition” on pages 30 through 40 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The information called for by this item is incorporated herein by reference to the material under the caption “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Liquidity and Capital Resources — Financing and Market Risk” on pages 36 and 37 and Note 1 “Summary of Significant Accounting Policies — Financial Instruments” under “Notes to Consolidated Financial Statements” on pages 46 and 47 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information called for by this item is incorporated herein by reference to the Audited Consolidated Financial Statements and Notes thereto and the material under the caption “Report of Independent Registered Public Accounting Firm” on pages 41 through 72 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.
 
Item 9A.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures.   At the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. William C. Weldon, Chairman and Chief Executive Officer, and Dominic J. Caruso, Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Weldon and Caruso concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
 
Management’s Report on Internal Control Over Financial Reporting.   Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of external financial statements in accordance with generally accepted accounting principles.
 
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


8


 

The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of January 2, 2011. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.
 
Based on the Company’s processes and assessment, as described above, management has concluded that, as of January 2, 2011, the Company’s internal control over financial reporting was effective.
 
The effectiveness of the Company’s internal control over financial reporting as of January 2, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears in the “Report of Independent Registered Public Accounting Firm” on page 72 of the Annual Report, which is incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K.
 
Changes in Internal Control Over Financial Reporting.   During the fiscal quarter ended January 2, 2011, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required under Rules 13a-15 and 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B.   OTHER INFORMATION
 
Not applicable.
 
PART III
 
Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information called for by this item is incorporated herein by reference to the material under the captions “Election of Directors” and “Stock Ownership and Section 16 Compliance — Section 16(a) Beneficial Ownership Reporting Compliance” and the discussion of the Audit Committee under the caption “Corporate Governance — Standing Board Committees” in the Proxy Statement; and the material under the caption “Executive Officers of the Registrant” in Part I of this Report on Form 10-K.
 
The Company’s Policy on Business Conduct, which covers all employees (including the Chief Executive Officer, Chief Financial Officer and Controller), meets the requirements of the SEC rules promulgated under Section 406 of the Sarbanes-Oxley Act of 2002. The Policy on Business Conduct is available on the Company’s website at www.investor.jnj.com/governance/policies.cfm , and copies are available to shareholders without charge upon written request to the Secretary at the Company’s principal executive offices. Any substantive amendment to the Policy on Business Conduct or any waiver of the Policy granted to the Chief Executive Officer, the Chief Financial Officer or the Controller will be posted on the Company’s website at www.investor.jnj.com/governance.cfm within five business days (and retained on the website for at least one year).
 
In addition, the Company has adopted a Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers. The Code of Business Conduct & Ethics for Members of the Board of Directors and Executive Officers is available on the Company’s website at www.investor.jnj.com/governance/policies.cfm , and copies are available to shareholders without charge upon written request to the Secretary at the Company’s principal executive offices. Any substantive amendment to the Code or any waiver of the Code granted to any member of the Board of Directors or any executive officer will be posted on the Company’s website at www.investor.jnj.com/governance.cfm within five business days (and retained on the website for at least one year).
 
Item 11.   EXECUTIVE COMPENSATION
 
The information called for by this item is incorporated herein by reference to the material under the captions “Compensation Discussion and Analysis,” “Executive and Director Compensation” and “Compensation Committee Report” in the Proxy Statement.


9


 

The material incorporated herein by reference to the material under the caption “Compensation Committee Report” in the Proxy Statement shall be deemed furnished, and not filed, in this Report on Form 10-K and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as a result of this furnishing, except to the extent that the Registrant specifically incorporates it by reference.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Additional information called for by this item is incorporated herein by reference to the material under the captions “Stock Ownership and Section 16 Compliance” in the Proxy Statement and Note 17 “Common Stock, Stock Option Plans and Stock Compensation Agreements” under “Notes to Consolidated Financial Statements” on pages 59 and 60 of the Annual Report, filed as Exhibit 13 to this Report on Form 10-K.
 
Equity Compensation Plan Information
 
The following table provides certain information as of January 2, 2011 concerning the shares of the Company’s Common Stock that may be issued under existing equity compensation plans.
 
                         
    Number of Securities to
  Weighted Average
  Number of Securities
    be Issued Upon Exercise of
  Exercise Price of
  Remaining Available for
    Outstanding Options
  Outstanding Options
  Future Issuance Under
Plan Category   and Rights   and Rights   Equity Compensation Plans (4)
 
Equity Compensation Plans Approved by Security Holders (1)
    223,164,807     $ 51.74       121,322,775  
Equity Compensation Plans Not Approved by Security Holders (2)(3)
    259,334       46.23        
Total
    223,424,141     $ 51.73       121,322,775  
 
 
(1)   Included in this category are the following equity compensation plans, which have been approved by the Company’s shareholders: 2000 Stock Option Plan and 2005 Long-Term Incentive Plan.
 
(2)  Included in this category are 216,584 shares of Common Stock of the Company issuable under various equity compensation plans which were assumed by the Company upon acquisition of the following companies: ALZA Corporation, Scios Inc., and Inverness Medical Technology, Inc. 122,629 of the shares listed as issuable in this category were issued under plans that were approved by the shareholders of these companies prior to the acquisition and the assumption of these plans by the Company. At the time of each of these acquisitions, options to acquire equity of the acquired company were replaced by options to acquire the Common Stock of the Company. No stock options or equity awards of any type have been made under any of these plans since the assumption of these plans by the Company, and no further stock options or other equity awards of any type will be made under any of these plans in the future.
 
The shares that are included in this column that were issued under plans not approved by shareholders of the applicable acquired company are: 93,955 shares issuable under the 1996 Scios Non-Officer Stock Option Plan.
 
(3)  Also included in this category are 42,750 shares of Common Stock of the Company issuable upon the exercise of outstanding stock options under the Company’s Stock Option Plan for Non-Employee Directors. All options outstanding under this plan have fully vested with an expiration period of ten years from the date of grant.
 
(4)  This column excludes shares reflected under the column “Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights.”
 
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information called for by this item is incorporated herein by reference to the material under the captions “Transactions with Related Persons” and “Corporate Governance — Director Independence” in the Proxy Statement.


10


 

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information called for by this item is incorporated herein by reference to the material under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.
 
PART IV
 
Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this report:
 
1.  Financial Statements
 
The following Audited Consolidated Financial Statements and Notes thereto and the material under the caption “Report of Independent Registered Public Accounting Firm” on pages 41 through 72 of the Annual Report are incorporated herein by reference and filed as Exhibit 13 to this Report on Form 10-K:
 
Consolidated Balance Sheets at end of Fiscal Years 2010 and 2009
 
Consolidated Statements of Earnings for Fiscal Years 2010, 2009 and 2008
 
Consolidated Statements of Equity for Fiscal Years 2010, 2009 and 2008
 
Consolidated Statements of Cash Flows for Fiscal Years 2010, 2009 and 2008
 
Notes to Consolidated Financial Statements
 
Report of Independent Registered Public Accounting Firm
 
2.  Financial Statement Schedules
 
Schedule II — Valuation and Qualifying Accounts
 
Schedules other than those listed above are omitted because they are not required or are not applicable.
 
3.  Exhibits Required to be Filed by Item 60l of Regulation S-K
 
The information called for by this item is incorporated herein by reference to the Exhibit Index in this report.


11


 

Schedule II

Schedule Of Valuation And Qualifying Accounts Disclosure

JOHNSON & JOHNSON AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

Fiscal Years Ended January 2, 2011, January 3, 2010 and December 28, 2008
(Dollars in Millions)
 
                                 
    Balance at
                Balance at
 
    Beginning of
                End of
 
    Period     Accruals     Payments/Other     Period  
 
2010
                               
Accrued Rebates (1)
  $ 1,639       7,492       (6,985 )     2,146  
Accrued Returns
    689       517       (566 )     640  
Accrued Promotions
    429       2,664       (2,666 )     427  
                                 
Subtotal
  $ 2,757       10,673       (10,217 )     3,213  
Reserve for doubtful accounts
    333       130       (123 )     340  
Reserve for cash discounts
    101       1,112       (1,103 )     110  
                                 
Total
  $ 3,191       11,915       (11,443 )     3,663  
                                 
2009
                               
Accrued Rebates (1)
  $ 1,808       6,584       (6,753 )     1,639  
Accrued Returns
    794       355       (460 )     689  
Accrued Promotions
    356       2,446       (2,373 )     429  
                                 
Subtotal
  $ 2,958       9,385       (9,586 )     2,757  
Reserve for doubtful accounts
    267       110       (44 )     333  
Reserve for cash discounts
    79       1,163       (1,141 )     101  
                                 
Total
  $ 3,304       10,658       (10,771 )     3,191  
                                 
2008
                               
Accrued Rebates (1)
  $ 1,802       5,578       (5,572 )     1,808  
Accrued Returns
    648       402       (256 )     794  
Accrued Promotions
    578       2,991       (3,213 )     356  
                                 
Subtotal
  $ 3,028       8,971       (9,041 )     2,958  
Reserve for doubtful accounts
    193       101       (27 )     267  
Reserve for cash discounts
    71       905       (897 )     79  
                                 
Total
  $ 3,292       9,977 (2)     (9,965 )     3,304  
                                 
 
(1)   Includes reserve for customer rebates of $701 million, $729 million and $721 million at January 2, 2011, January 3, 2010 and December 28, 2008, respectively.
 
(2)   Includes $171 million adjustment related to previously estimated accrued sales reserve.


12


 

 
SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: February 15, 2011
JOHNSON & JOHNSON
(Registrant)
 
  By 
/s/   W. C. Weldon

W. C. Weldon, Chairman, Board of Directors,
and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
         
Signature   Title   Date
 
         
/s/   W. C. Weldon

W. C. Weldon
  Chairman, Board of Directors,
Chief Executive Officer, and Director (Principal Executive Officer)
  February 15, 2011
         
/s/   D. J. Caruso

D. J. Caruso
  Chief Financial Officer (Principal Financial Officer)   February 15, 2011
         
/s/   S. J. Cosgrove

S. J. Cosgrove
  Controller (Principal Accounting Officer)   February 15, 2011
         
/s/   M. S. Coleman

M. S. Coleman
  Director   February 15, 2011
         
/s/   J. G. Cullen

J. G. Cullen
  Director   February 15, 2011
         
/s/   I. E. L. Davis

I. E. L. Davis
  Director   February 15, 2011
         
/s/   M. M. E. Johns

M. M. E. Johns
  Director   February 15, 2011
         


13


 

         
Signature   Title   Date
 
/s/   S. L. Lindquist

S. L. Lindquist
  Director   February 15, 2011
         
/s/   A. M. Mulcahy

A. M. Mulcahy
  Director   February 15, 2011
         
/s/   L. F. Mullin

L. F. Mullin
  Director   February 15, 2011
         
/s/   W. D. Perez

W. D. Perez
  Director   February 15, 2011
         
/s/   C. Prince

C. Prince
  Director   February 15, 2011
         
/s/   D. Satcher

D. Satcher
  Director   February 15, 2011


14


 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
 
To the Board of Directors of
Johnson & Johnson:
 
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 24, 2011 appearing in the 2010 Annual Report to Shareholders of Johnson & Johnson (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)2 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
 
/s/   PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
 
New York, New York
February 24, 2011


15


 

 
EXHIBIT INDEX
 
         
Reg. S-K
   
Exhibit Table
  Description
Item No.   of Exhibit
 
  3 (i)(a)   Restated Certificate of Incorporation dated April 26, 1990 — Incorporated herein by reference to Exhibit 3(a) of the Registrant’s Form 10-K Annual Report for the year ended December 30, 1990.
  3 (i)(b)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated May 20, 1992 — Incorporated herein by reference to Exhibit 3(a) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1993.
  3 (i)(c)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company dated May 21, 1996 — Incorporated herein by reference to Exhibit 3(a)(iii) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 1996.
  3 (i)(d)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company effective May 22, 2001 — Incorporated herein by reference to Exhibit 3 of the Registrant’s Form 10-Q Quarterly Report for the quarter ended July 1, 2001.
  3 (i)(e)   Certificate of Amendment to the Restated Certificate of Incorporation of the Company effective April 27, 2006 — Incorporated herein by reference to Exhibit 3(i) of the Registrant’s Form 10-Q Quarterly Report for the quarter ended April 2, 2006.
  3 (ii)   By-Laws of the Company, as amended effective February 9, 2009 — Incorporated herein by reference to Exhibit 3.1 the Registrant’s Form 8-K Current Report filed February 13, 2009.
  4 (a)   Upon the request of the Securities and Exchange Commission, the Registrant will furnish a copy of all instruments defining the rights of holders of long-term debt of the Registrant.
  10 (a)   Stock Option Plan for Non-Employee Directors — Incorporated herein by reference to Exhibit 10(a) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 1996.*
  10 (b)   2000 Stock Option Plan (as amended) — Incorporated herein by reference to Exhibit 10(b) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 2002.*
  10 (c)   2005 Long-Term Incentive Plan — Incorporated herein by reference to Exhibit 4 of the Registrant’s S-8 Registration Statement filed with the Commission on May 10, 2005 (file no. 333-124785).*
  10 (d)   Form of Stock Option Certificate and Restricted Shares to Non-Employee Directors Certificate under the 2005 Long-Term Incentive Plan — Incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K Current Report filed August 25, 2005.*
  10 (e)   Form of Restricted Stock Unit Certificate under the 2005 Long-Term Incentive Plan — Incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q Quarterly Report for the quarter ended October 2, 2005.*
  10 (f)   Executive Bonus Plan — Incorporated herein by reference to Exhibit 4 of the Registrant’s Form S-8 Registration Statement filed with the Commission on November 8, 2005 (file no. 333-129542).*
  10 (g)   Executive Incentive Plan (as amended) — Incorporated herein by reference to Exhibit 10(f) of the Registrant’s Form 10-K Annual Report for the year ended December 31, 2000.*
  10 (h)   Domestic Deferred Compensation (Certificate of Extra Compensation) Plan — Incorporated herein by reference to Exhibit 10(g) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2003.*
  10 (i)   Amendments to the Certificate of Extra Compensation Plan effective as of January 1, 2009 — Incorporated herein by reference to Exhibit 10(j) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2008.*
  10 (j)   2009 Certificates of Long-Term Performance Plan — Incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 27, 2009.*
  10 (k)   Deferred Fee Plan Directors (as amended) — Incorporated herein by reference to Exhibit 10(h) of the Registrant’s Form 10-K Annual Report for the year ended January 2, 2005.*
  10 (l)   Amendments to the Deferred Fee Plan for Directors effective as of January 1, 2009 — Incorporated herein by reference to Exhibit 10(l) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2008.*
  10 (m)   Executive Income Deferral Plan (as amended) — Incorporated herein by reference to Exhibit 10(i) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2003.*


16


 

         
Reg. S-K
   
Exhibit Table
  Description
Item No.   of Exhibit
 
  10 (n)   Amendments to the Executive Income Deferral Plan effective as of January 1, 2009 — Incorporated herein by reference to Exhibit 10(n) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2008.*
  10 (o)   Excess Savings Plan — Incorporated herein by reference to Exhibit 10(j) of the Registrant’s Form 10-K Annual Report for the year ended December 29, 1996.*
  10 (p)   Amendments to the Johnson & Johnson Excess Savings Plan effective as of January 1, 2009 — Incorporated herein by reference to Exhibit 10(p) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2008.*
  10 (q)   Excess Benefit Plan (Supplemental Retirement Plan) — Incorporated herein by reference to Exhibit 10(h) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1993.*
  10 (r)   Amendments to the Excess Benefit Plan of Johnson & Johnson and Affiliated Companies effective as of January 1, 2009 — Incorporated herein by reference to Exhibit 10(r) of the Registrant’s Form 10-K Annual Report for the year ended December 28, 2008.*
  10 (s)   Executive Life Insurance Plan — Incorporated herein by reference to Exhibit 10(i) of the Registrant’s Form 10-K Annual Report for the year ended January 3, 1993.*
  10 (t)   Stock Option Gain Deferral Plan — Incorporated herein by reference to Exhibit 10(m) of the Registrant’s Form 10-K Annual Report for the year ended January 2, 2000.*
  10 (u)   Estate Preservation Plan — Incorporated herein by reference to Exhibit 10(n) of the Registrant’s Form 10-K Annual Report for the year ended January 2, 2000.*
  10 (v)   Summary of Compensation Arrangements for Named Executive Officers and Directors — Filed with this document.*
  12     Statement of Computation of Ratio of Earnings to Fixed Charges — Filed with this document.
  13     — Pages 30 through 75 of the Company’s Annual Report to Shareholders for fiscal year 2010 (only those portions of the Annual Report incorporated by reference in this report are deemed “filed”) — Filed with this document.
  21     Subsidiaries — Filed with this document.
  23     Consent of Independent Registered Public Accounting Firm — Filed with this document.
  31 (a)   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act — Filed with this document.
  31 (b)   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act — Filed with this document.
  32 (a)   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act — Furnished with this document.
  32 (b)   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act — Furnished with this document.
  99     Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995 — “Safe Harbor” for Forward-Looking Statements — Filed with this document.
  101     XBRL (Extensible Business Reporting Language) The following materials from Johnson & Johnson’s Annual Report on Form 10-K for the fiscal year-ended January 2, 2011, formatted in Extensive Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Earnings, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to the Consolidated Financial Statements, and (vi) Schedule II — Valuation and Qualifying Accounts.
 
 
* Management contract or compensatory plan.
 
A copy of any of the Exhibits listed above will be provided without charge to any shareholder submitting a written request specifying the desired exhibit(s) to the Secretary at the principal executive offices of the Company.

17

EXHIBIT 10(v)
 
Summary of Compensation Arrangements for
Named Executive Officers and Directors
 
Compensation Arrangements for Named Executive Officers
 
Following is a description of the compensation arrangements that have been approved by the Compensation & Benefits Committee of the Board of Directors of Johnson & Johnson (the “Compensation Committee”) on January 10, 2011 for the Company’s Chief Executive Officer, Chief Financial Officer and the other three most highly compensated executive officers in 2010 (the “Named Executive Officers”).
 
Annual Base Salary:
 
The Compensation Committee has approved the following base salaries for 2011 for the Named Executive Officers:
 
         
William C. Weldon
  $ 1,915,800  
Chairman/CEO        
Dominic J. Caruso
  $ 776,500  
Vice President, Finance; CFO        
Russell C. Deyo
  $ 899,300  
Vice President, General Counsel        
Colleen A. Goggins
  $ 827,200 *
Worldwide Chairman, Consumer Group        
Sherilyn S. McCoy
  $ 900,000  
Vice Chairman, Executive Committee        
 
 
* Will retire in March 2011.
 
Annual Performance Bonus:
 
The Compensation Committee has approved the following annual performance bonus payments under the Company’s Executive Incentive Plan for performance in 2010 (paid in the form of 85% cash and 15% Company Common Stock as determined by the Compensation Committee):
 
         
Mr. Weldon
  $ 1,976,000  
Mr. Caruso
  $ 900,000  
Mr. Deyo
  $ 1,080,000  
Ms. Goggins
  $ 500,000  
Ms. McCoy
  $ 1,125,000  
 
Stock Option and Restricted Share Unit Grants:
 
The Compensation Committee has approved the following stock option and Restricted Share Unit (“RSU”) grants under the Company’s 2005 Long-Term Incentive Plan (the “LTI Plan”). The stock options were granted at an exercise price of $62.20, at the “fair market value” (calculated as the average of the high and low prices of the Company’s Common Stock on the New York Stock Exchange) on January 10, 2011. The options will become exercisable on January 11, 2014 and expire on January 10, 2021. The RSUs will vest on January 10, 2014, upon which, the holder, if still employed by the Company on such date, will receive one share of the Company’s Common Stock for each RSU. Due to her intention to retire, Ms. Goggins did not receive stock options or RSUs in 2011.
 
                 
Mr. Weldon
    560,691 stock options       46,724 RSUs  
Mr. Caruso
    145,447 stock options       12,121 RSUs  
Mr. Deyo
    168,444 stock options       14,037 RSUs  
Ms. McCoy
    151,621 stock options       12,635 RSUs  


 

Non-Equity Incentive Plan Awards:
 
The Compensation Committee has approved the following non-equity incentive plan awards in recognition of performance during 2010 under the Company’s Certificates of Long-Term Performance (“CLP”) program. Vested awards are not paid out until the earlier of ten years from the date of grant or retirement or other termination of employment. As of the grant date, the defined present value per CLP was $5.03. The CLP unit value will vary over time based on the performance of the Company. Due to her intention to retire, Ms. Goggins did not receive CLPs in 2011.
 
             
Mr. Weldon
    1,357,855     CLPs
Mr. Caruso
    359,840     CLPs
Mr. Deyo
    359,840     CLPs
Ms. McCoy
    437,375     CLPs
 
Equity Compensation for Non-Employee Directors
 
Each Non-Employee Director receives non-retainer equity compensation in the first quarter of each year under the LTI Plan in the form of shares of restricted Common Stock having a fair market value of $100,000 on the grant date. Accordingly, each Non-Employee Director was granted 1,650 shares of restricted Common Stock under the LTI Plan on February 15, 2011. The restricted shares will become freely transferable on February 15, 2014.

EXHIBIT 12
 
JOHNSON & JOHNSON AND SUBSIDIARIES
 
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(Dollars in Millions)
 
                                         
    Fiscal Year Ended  
    January 2,
    January 3,
    December 28,
    December 30,
    December 31,
 
    2011     2010     2008     2007     2006  
 
Determination of Earnings:
                                       
Earnings Before Provision for Taxes on Income
  $ 16,947     $ 15,755     $ 16,929     $ 13,283     $ 14,587  
Fixed Charges, less Capitalized Interest
    555       558       538       397       158  
                                         
Total Earnings as Defined
  $ 17,502     $ 16,313     $ 17,467     $ 13,680     $ 14,745  
                                         
Fixed Charges:
                                       
Estimated Interest Portion of Rent Expense
    100       107       103       101       95  
Interest Expense before Capitalization of Interest
    528       552       583       426       181  
                                         
Total Fixed Charges
  $ 628     $ 659     $ 686     $ 527     $ 276  
                                         
Ratio of Earnings to Fixed Charges
    27.87       24.75       25.46       25.96       53.42  
                                         
(1)   The ratio of earnings to fixed charges is computed by dividing the sum of earnings before provision for taxes on income and fixed charges by fixed charges. Fixed charges represent interest expense (before interest is capitalized), amortization of debt discount and an appropriate interest factor on operating leases.

 
Table of Contents
 
         
MANAGEMENT’S DISCUSSION AND ANALYSIS
 
30
    Organization and Business Segments
 
30
    Results of Operations
 
31
    Analysis of Sales by Business Segments
 
33
    Analysis of Consolidated Earnings Before Provision for Taxes on Income
 
36
    Liquidity and Capital Resources
 
37
    Other Information
 
40
    Cautionary Factors That May Affect Future Results
 
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
41
    Consolidated Balance Sheets
 
42
    Consolidated Statements of Earnings
 
43
    Consolidated Statements of Equity
 
44
    Consolidated Statements of Cash Flows
 
45
    Notes to Consolidated Financial Statements
 
72
    Report of Independent Registered Public Accounting Firm
 
73
    Management’s Report on Internal Control Over Financial Reporting
 
SUPPORTING SCHEDULES
 
74
    Summary of Operations and Statistical Data 2000 — 2010
 
75
    Shareholder Return Performance Graphs
 
 
JOHNSON & JOHNSON 2010 ANNUAL REPORT 29


 

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
Organization and Business Segments
 
Description of the Company and Business Segments
 
Johnson & Johnson and its subsidiaries (the “Company”) have approximately 114,000 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.
 
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products and wellness and prevention platforms. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment includes products in the following areas: anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Biosense Webster’s electrophysiology products; Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care, neurological and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products and advanced sterilization products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses.
 
The Company’s structure is based upon the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments.
 
In all of its product lines, the Company competes with companies both local and global, located throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to the Company’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and in maintaining sales forces. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.
 
Management’s Objectives
 
The Company manages within a strategic framework aimed at achieving sustainable growth. To accomplish this, the Company’s management operates the business consistent with certain strategic principles that have proven successful over time. To this end, the Company participates in growth areas in human health care and is committed to attaining leadership positions in these growth areas through the development of high quality, innovative products and services. New products introduced within the past five years accounted for approximately 25% of 2010 sales. In 2010, $6.8 billion, or 11.1% of sales, was invested in research and development. This investment reflects management’s commitment to the importance of ongoing development of new and differentiated products and services to sustain long-term growth.
 
With more than 250 operating companies located in 60 countries, the Company views its principle of decentralized management as an asset and fundamental to the success of a broadly based business. It also fosters an entrepreneurial spirit, combining the extensive resources of a large organization with the ability to anticipate and react quickly to local market changes and challenges.
 
The Company is committed to developing global business leaders who can drive growth objectives. Businesses are managed for the long-term in order to sustain leadership positions and achieve growth that provides an enduring source of value to our shareholders.
 
Our Credo unifies the management team and the Company’s dedicated employees in achieving these objectives, and provides a common set of values that serve as a constant reminder of the Company’s responsibilities to its customers, employees, communities and shareholders. The Company believes that these basic principles, along with its overall mission of improving the quality of life for people everywhere, will enable Johnson & Johnson to continue to be among the leaders in the health care industry.
 
Results of Operations
 
Analysis of Consolidated Sales
 
In 2010, worldwide sales decreased 0.5% to $61.6 billion, compared to a decrease of 2.9% in 2009 and an increase of 4.3% in 2008. These sales changes consisted of the following:
 
                         
Sales (decrease)/increase Due to:   2010     2009     2008  
 
Volume
    (0.5 )%     (0.2 )     1.1  
Price
    (0.8 )     (0.1 )     0.8  
Currency
    0.8       (2.6 )     2.4  
                         
Total
    (0.5 )%     (2.9 )     4.3  
                         
 
Sales by U.S. companies were $29.5 billion in 2010, $30.9 billion in 2009 and $32.3 billion in 2008. This represents a decrease of 4.7% in 2010, a decrease of 4.4% in 2009 and a decrease of 0.4% in 2008. Sales by international companies were $32.1 billion in 2010, $31.0 billion in 2009 and $31.4 billion in 2008. This represents an increase of 3.6% in 2010, a decrease of 1.4% in 2009 and an increase of 9.7% in 2008, respectively.
 
 
 
30 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

(PERFORMANCE GRAPH)
 
The five-year compound annual growth rates for worldwide, U.S. and international sales were 4.0%, 0.7% and 7.7%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 7.8%, 5.5% and 10.5%, respectively.
 
(PERFORMANCE GRAPH)
 
Sales in Europe experienced a decline of 2.7% including operational growth of 0.5% and a negative impact from currency of 3.2%. Sales in the Western Hemisphere (excluding the U.S.) achieved growth of 7.6% including an operational decline of 0.5% and an increase of 8.1% related to the positive impact of currency. Sales in the Asia-Pacific, Africa region achieved growth of 11.7%, including operational growth of 5.5% and an increase of 6.2% related to the positive impact of currency.
 
In 2010, 2009 and 2008, the Company did not have a customer that represented 10% or more of total consolidated revenues.
 
2009 results benefited from the inclusion of a 53rd week. (See Note 1 to the Consolidated Financial Statements for Annual Closing Date details). The Company estimated that the fiscal year 2009 growth rate was enhanced by approximately 0.5% due to the 53rd week.
 
U.S. Health Care Reform
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law during March 2010. The newly enacted health care reform legislation included an increase in the minimum Medicaid rebate rate from 15.1% to 23.1% and also extended the rebate to drugs provided through Medicaid managed care organizations. The 2010 impact was an increase in sales rebates reducing sales revenue by approximately $400 million. The 2011 full year impact to sales of the legislation is estimated to be $400 — $500 million.
 
Beginning in 2011, companies that sell branded prescription drugs to specified U.S. Government programs will pay an annual non-tax deductible fee based on an allocation of the company’s market share of total branded prescription drug sales from the prior year. The estimate of the impact on the Company in 2011 is $150 — $200 million. Beginning in 2013, the Company will be required to pay a tax deductible 2.3% excise tax imposed on the sale of certain medical devices.
 
(PERFORMANCE GRAPH)
 
Analysis of Sales by Business Segments
 
Consumer Segment
Consumer segment sales in 2010 were $14.6 billion, a decrease of 7.7% from 2009, with 8.9% of this change due to an operational decline partially offset by positive currency impact of 1.2%. U.S. Consumer segment sales were $5.5 billion, a decrease of 19.3%. International sales were $9.1 billion, an increase of 1.2%, with an operational decline of 1.0% offset by positive currency impact of 2.2%.
 
The Over-the-Counter (OTC) Pharmaceuticals and Nutritionals franchise sales were $4.5 billion, a decrease of 19.2% from 2009. Sales were negatively impacted by the voluntary recalls of certain OTC products announced earlier in the year and suspension of production at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility. McNeil’s recalls of products manufactured at both Las Piedras and Fort Washington facilities impacted the total year sales by approximately $900 million.
 
Alternate supplies of products are planned to be available in the latter half of 2011. McNeil Consumer Healthcare submitted its Comprehensive Action Plan (CAP) to the U.S. Food and Drug Administration (FDA) on July 15, 2010, which encompasses, among other items, training, resources and capital investments in quality and manufacturing systems across the McNeil organization. The
 
Major Consumer Franchise Sales:
 
                                         
                      % Change  
(Dollars in Millions)   2010     2009     2008     ’10 vs. ’09     ’09 vs. ’08  
 
OTC Pharmaceuticals & Nutritionals
  $ 4,549       5,630       5,894       (19.2 )%     (4.5 )
Skin Care
    3,452       3,467       3,381       (0.4 )     2.5  
Baby Care
    2,209       2,115       2,214       4.4       (4.5 )
Women’s Health
    1,844       1,895       1,911       (2.7 )     (0.8 )
Oral Care
    1,526       1,569       1,624       (2.7 )     (3.4 )
Wound Care/Other
    1,010       1,127       1,030       (10.4 )     9.4  
                                         
Total
  $ 14,590       15,803       16,054       (7.7 )%     (1.6 )
                                         
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 31


 

Company continues to communicate with the FDA on remediation actions and is on schedule with the commitments made in the CAP.
 
The Skin Care franchise sales were $3.5 billion, a decline of 0.4% compared to the prior year due in part to a temporary reduction in shipments of Neutrogena products due to product supply constraints partially offset by growth in the AVEENO ® , JOHNSON’s ® Adult, LE PETIT MARSEILLAIS ® and DABAO ® skin care lines. The Baby Care franchise sales grew by 4.4% to $2.2 billion in 2010, primarily due to growth in the Asia Pacific region partially offset by the impact of the economic situation in Venezuela. The Women’s Health franchise sales were $1.8 billion, a decrease of 2.7% primarily due to increased competitive pressures and the impact of the economic situation in Venezuela. The Oral Care franchise sales were $1.5 billion, a decrease of 2.7% primarily due to the divestiture of the EFFERDENT ® /Effergrip ® brands in the fiscal fourth quarter of 2009 and lower sales of mouth rinses and toothbrushes in the United States. The Wound Care/Other franchise sales were $1.0 billion, a decrease of 10.4% primarily due to private label competition and slower category growth.
 
Consumer segment sales in 2009 were $15.8 billion, a decrease of 1.6% from 2008, with 2.0% of this change due to operational growth and negative currency impact of 3.6%. U.S. Consumer segment sales were $6.8 billion, a decrease of 1.4%. International sales were $9.0 billion, a decrease of 1.7%, with growth of 4.7% achieved by operations and a decrease of 6.4% resulting from the negative impact of currency fluctuations.
 
Pharmaceutical Segment
 
Pharmaceutical segment sales in 2010 were $22.4 billion, a decrease of 0.6% from 2009, with an operational decline of 1.0% and a positive currency impact of 0.4%. U.S. sales were $12.5 billion, a decrease of 4.0%. International sales were $9.9 billion, an increase of 4.2%, which included 3.4% operational growth and a positive currency impact of 0.8%. Pharmaceutical segment sales in 2010 were reduced by approximately $400 million as a result of U.S. health care reform legislation.
 
REMICADE ® (infliximab), a biologic approved for the treatment of a number of immune mediated inflammatory diseases, achieved sales of $4.6 billion in 2010, with growth of 7.1% over the prior year. U.S. export sales grew 24.3% versus the prior year primarily driven by market growth. REMICADE ® is competing in a market that is experiencing increased competition due to new entrants, including the successful launches of STELARA ® (ustekinumab) and SIMPONI ® (golimumab) and the expansion of indications for existing competitors.
 
PROCRIT ® (Epoetin alfa) and EPREX ® (Epoetin alfa) had combined sales of $1.9 billion in 2010, a decline of 13.9% compared to the prior year. Lower sales of PROCRIT ® and EPREX ® were primarily due to the declining markets for Erythropoiesis Stimulating Agents (ESAs). EPREX ® also experienced increased competition.
 
RISPERDAL ® CONSTA ® (risperidone), a long-acting injectable antipsychotic, achieved sales of $1.5 billion in 2010, representing an increase of 5.3% as compared to the prior year. Solid growth of 16.4% was achieved outside the U.S., with very strong growth in Japan. In the U.S. the successful launch of INVEGA ® SUSTENNA tm (paliperidone palmitate) also increased the growth of the long-acting injectable antipsychotic market.
 
LEVAQUIN ® (levofloxacin)/FLOXIN ® (ofloxacin) sales were $1.4 billion, a decline of 12.5% versus the prior year primarily due to the decline in the market and increased penetration of generics. Market exclusivity in the U.S. expires in June 2011. The expiration of a product’s market exclusivity is likely to result in a significant reduction in sales.
 
CONCERTA ® (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder (ADHD), achieved sales of $1.3 billion in 2010, a decrease of 0.5% compared to the prior year. Sales growth in the U.S. was impacted by lower market share and the health care reform legislation enacted in March 2010 resulting from changes to rebates to Medicaid managed care organizations. On November 1, 2010, the Company entered into a U.S. supply and distribution agreement with Watson Laboratories, Inc. to distribute an authorized generic version of CONCERTA ® beginning May 1, 2011. This authorized generic launch is likely to result in a significant reduction in CONCERTA ® sales.
 
VELCADE ® (bortezomib), a product for the treatment for multiple myeloma, for which the Company has commercial rights in Europe and the rest of the world outside the U.S., achieved sales of $1.1 billion in 2010, representing an increase of 15.8% as compared to the prior year.
 
ACIPHEX ® /PARIET ® (rabeprazole sodium) sales were $1.0 billion, a decline of 8.2% versus the prior year due to increased competition from generics in the category.
 
TOPAMAX ® (topiramate), experienced a sales decline of 53.3% compared to the prior year. Market exclusivity for TOPAMAX ® expired in March 2009 in the U.S. and in September 2009 in most European countries. Multiple generics have entered the market. Loss of market exclusivity for the TOPAMAX ® patent has resulted in the significant reduction of sales in the U.S. and Europe.
 
In 2010, Other Pharmaceutical sales were $9.1 billion, representing a growth of 6.6% over the prior year. Contributors to the increase were sales of STELARA ® (ustekinumab), SIMPONI ® (golimumab),
 
Major Pharmaceutical Product Revenues*:
 
                                         
                      % Change  
(Dollars in Millions)   2010     2009     2008     ’10 vs. ’09     ’09 vs. ’08  
 
REMICADE ® (infliximab)
  $ 4,610       4,304       3,748       7.1 %     14.8  
PROCRIT ® /EPREX ® (Epoetin alfa)
    1,934       2,245       2,460       (13.9 )     (8.7 )
RISPERDAL ® CONSTA ® (risperidone)
    1,500       1,425       1,309       5.3       8.9  
LEVAQUIN ® /FLOXIN ® (levofloxacin/ofloxacin)
    1,357       1,550       1,591       (12.5 )     (2.6 )
CONCERTA ® (methylphenidate HCl)
    1,319       1,326       1,247       (0.5 )     6.3  
VELCADE ® (bortezomib)
    1,080       933       787       15.8       18.6  
ACIPHEX ® /PARIET ® (rabeprazole sodium)
    1,006       1,096       1,158       (8.2 )     (5.4 )
TOPAMAX ® (topiramate)
    538       1,151       2,731       (53.3 )     (57.9 )
Other Pharmaceuticals
    9,052       8,490       9,536       6.6       (11.0 )
                                         
Total
  $ 22,396       22,520       24,567       (0.6 )%     (8.3 )
                                         
Prior year amounts have been reclassified to conform to current presentation.
 
 
32 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

PREZISTA ® (darunavir), INTELENCE ® (etravirine), NUCYNTA ® (tapentadol) and INVEGA SUSTENNA ® (paliperidone palmitate). This growth was partially offset by lower sales of DURAGESIC ® /Fentanyl Transdermal (fentanyl transdermal system) and RISPERDAL ® /risperidone oral due to continued generic competition.
 
During 2010, several new compounds were filed for regulatory approval. These included abiraterone acetate, an investigational agent for the treatment of metastatic, advanced prostate cancer which was granted priority review in the U.S. and accepted for accelerated assessment in Europe, and telaprevir, developed in collaboration with Vertex Pharmaceuticals Incorporated, for hepatitis C which was filed and accepted for accelerated assessment in Europe. TMC 278 (rilpivirine) for HIV in treatment-naïve patients was filed in both the U.S. and Europe. Rivaroxaban, an anti-coagulant co-developed with Bayer HealthCare, has been filed in the U.S. for the prevention of stroke in patients with atrial fibrulation. The Company also responded to the FDA complete response letter for its review of the rivaroxaban filing for preventing deep vein thrombosis and pulmonary embolism following total knee and hip replacement surgery.
 
Pharmaceutical segment sales in 2009 were $22.5 billion, a decrease of 8.3% from 2008, with an operational decline of 6.1% and the remaining 2.2% due to the negative impact of currency fluctuations. U.S. sales were $13.0 billion, a decrease of 12.1%. International sales were $9.5 billion, a decrease of 2.6%, which included 3.0% operational growth and a decrease of 5.6% resulting from the negative impact of currency fluctuations.
 
Medical Devices and Diagnostics Segment
 
The Medical Devices and Diagnostics segment achieved sales of $24.6 billion in 2010, representing an increase of 4.4% over the prior year, with operational growth of 3.4% and a positive currency impact of 1.0%. U.S. sales were $11.4 billion, an increase of 3.6% over the prior year. International sales were $13.2 billion, an increase of 5.0% over the prior year, with growth of 3.0% from operations and a positive currency impact of 2.0%.
 
The DePuy franchise achieved sales of $5.6 billion in 2010, a 4.0% increase over the prior year. This growth was primarily due to an increase in the knee and Mitek sports medicine product lines, and outside the U.S., growth of the hip product line. Pressure on pricing continued as a result of economic trends, however new product launches and incremental sales of newly acquired products from Micrus Endovascular Corporation have mitigated some of the impact. In August 2010, DePuy Orthopaedics, Inc. (DePuy) announced a worldwide voluntary recall of its ASR tm XL Acetabular System and DePuy ASR tm Hip Resurfacing System used in hip replacement surgery, principally sold between 2003 and 2009.
 
The Ethicon Endo-Surgery franchise achieved sales of $4.8 billion in 2010, a 5.9% increase over the prior year. This was attributable to growth in the endoscopy, Advanced Sterilization, HARMONIC ® , SurgRx and ENSEAL ® product lines. The growth was partially offset by the divestiture of the Breast Care business in the third quarter of 2010.
 
The Ethicon franchise achieved sales of $4.5 billion in 2010, a 9.2% increase over the prior year. The growth was attributable to sales of newly acquired products from Acclarent, Inc. in addition to growth in the sutures, Mentor, biosurgical, Women’s Health and Urology, and mesh product lines.
 
The Vision Care franchise achieved sales of $2.7 billion in 2010, a 6.9% increase over prior year primarily driven by 1-DAY ACUVUE ® TruEye tm , ACUVUE ® OASYS tm for Astigmatism, and 1-DAY ACUVUE ® MOIST ® , partially offset by lower sales of reusable lenses. During 2010, the Company and Novartis AG, CIBAVISION Corporation and CIBA VISION AG agreed to resolve all pending patent litigation on a worldwide basis enabling the Company to reenter the markets in France and the Netherlands.
 
Sales in the Cordis franchise were $2.6 billion, a decline of 4.7% versus the prior year. The decline reflects lower sales of the CYPHER ® Sirolimus-eluting Coronary Stent due to increased global competition. The decline was partially offset by strong growth of the Biosense Webster business.
 
Sales in the Diabetes Care franchise were $2.5 billion in 2010, a 1.2% increase over the prior year. This was primarily attributable to growth in the U.S. and Asia Pacific region partially offset by a sales decline in Europe.
 
The Ortho-Clinical Diagnostics franchise achieved sales of $2.1 billion in 2010, a 4.6% increase over the prior year. Growth was primarily attributable to sales of the VITROS ® 5600 and 3600 analyzers partially offset by lower sales in donor screening primarily due to more selective screening for Chagas testing in the U.S.
 
The Medical Devices and Diagnostics segment achieved sales of $23.6 billion in 2009, representing an increase of 1.9% over the prior year, with operational growth of 4.2% and a negative currency impact of 2.3%. U.S. sales were $11.0 billion, an increase of 4.5% over the prior year. International sales were $12.6 billion, a decrease of 0.2%, with growth of 4.0% from operations and a decrease of 4.2% resulting from the negative impact of currency fluctuations.
 
Major Medical Devices and Diagnostics Franchise Sales:
 
                                         
                      % Change  
(Dollars in Millions)   2010     2009     2008     ’10 vs. ’09     ’09 vs. ’08  
 
DEPUY ®
  $ 5,585       5,372       5,136       4.0 %     4.6  
ETHICON ENDO-SURGERY ®
    4,758       4,492       4,286       5.9       4.8  
ETHICON ®
    4,503       4,122       3,840       9.2       7.3  
Vision Care
    2,680       2,506       2,500       6.9       0.2  
CORDIS ®
    2,552       2,679       2,988       (4.7 )     (10.3 )
Diabetes Care
    2,470       2,440       2,535       1.2       (3.7 )
ORTHO-CLINICAL DIAGNOSTICS ®
    2,053       1,963       1,841       4.6       6.6  
                                         
Total
  $ 24,601       23,574       23,126       4.4 %     1.9  
                                         
 
Analysis of Consolidated Earnings Before Provision for Taxes on Income
 
Consolidated earnings before provision for taxes on income increased by $1.1 billion to $16.9 billion in 2010 as compared to the $15.8 billion earned in 2009, an increase of 7.6%. The increase was primarily related to lower selling, marketing and administrative expenses due to cost containment actions resulting from the restructuring plan initiated and implemented in 2009, income from litigation settlements and the gain on the divestiture of the Breast Care business of Ethicon Endo-Surgery, Inc. This was partially offset by costs associated with product liability expense and the impact of the OTC and DePuy ASR tm Hip recalls. Additional offsets were lower
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 33


 

net selling prices in the Pharmaceutical business due to U.S. health care reform and price reductions in certain Medical Devices and Diagnostics businesses. The 2009 decrease of 6.9% as compared to $16.9 billion in 2008 was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of $1.2 billion. This was partially offset by lower selling, marketing and administrative expenses due to cost containment efforts across all the businesses. The 2008 earnings included purchased in-process research and development (IPR&D) charges of $0.2 billion and increased investment spending in selling, marketing and administrative expenses utilized from the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. As a percent to sales, consolidated earnings before provision for taxes on income in 2010 was 27.5% versus 25.4% in 2009.
 
The sections that follow highlight the significant components of the changes in consolidated earnings before provision for taxes on income.
 
Cost of Products Sold and Selling, Marketing and Administrative Expenses:   Cost of products sold and selling, marketing and administrative expenses as a percent to sales were as follows:
 
                         
% of Sales   2010   2009   2008
 
Cost of products sold
    30.5 %     29.8       29.1  
Percent point increase over the prior year
    0.7       0.7        
Selling, marketing and administrative expenses
    31.5       32.0       33.7  
Percent point (decrease)/increase over the prior year
    (0.5 )     (1.7 )     0.2  
 
In 2010, cost of products sold as a percent to sales increased compared to the prior year primarily due to costs associated with the impact of the OTC recall and remediation efforts in the Consumer business, lower net selling prices in the Pharmaceutical business due to U.S. health care reform and price reductions in certain Medical Devices and Diagnostics businesses. Additionally, unfavorable product mix attributable to the loss of market exclusivity for TOPAMAX ® contributed to the increase. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2010 compared to the prior year primarily due to cost containment initiatives principally resulting from the restructuring plan implemented in 2009. The decrease was partially offset by lower net selling prices in the Pharmaceutical business due to U.S. health care reform and price reductions in certain Medical Devices and Diagnostics businesses.
 
In 2009, cost of products sold as a percent to sales increased compared to the prior year primarily due to the continued negative impact of product mix and inventory write-offs associated with the restructuring activity. Additionally, 2008 included some non-recurring positive items. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2009 compared to the prior year primarily due to cost containment efforts across all the businesses and the annualized savings recognized from the 2007 restructuring program. In addition, in 2008 the Company utilized the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. to fund increased investment spending.
 
In 2008, cost of products sold as a percent to sales remained flat to the prior year. The change in the mix of businesses, with higher sales growth in the Consumer business and a slight sales decline in the Pharmaceutical business, had a negative impact on the cost of products sold as a percent to sales. In 2008, this was offset by manufacturing efficiencies and non-recurring positive items in 2008 and negative items in 2007. There was an increase in the percent to sales of selling, marketing and administrative expenses in 2008 primarily due to the change in the mix of businesses, whereby a greater proportion of sales were attributable to the Consumer segment, which has higher selling, marketing and administrative spending. Additionally, in 2008 the Company utilized the gain associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. to fund increased investment spending. This was partially offset by ongoing cost containment efforts.
 
Research and Development expense (excluding purchased in-process research and development charges) by segment of business was as follows:
 
                                                 
    2010     2009     2008  
(Dollars in Millions)   Amount     % of Sales*     Amount     % of Sales*     Amount     % of Sales*  
 
Consumer
  $ 609       4.2 %     632       4.0       624       3.9  
Pharmaceutical
    4,432       19.8       4,591       20.4       5,095       20.7  
Medical Devices and Diagnostics
    1,803       7.3       1,763       7.5       1,858       8.0  
                                                 
Total research and development expense
  $ 6,844       11.1 %     6,986       11.3       7,577       11.9  
Percent (decrease)/increase over the prior year
    (2.0 )%             (7.8 )             (1.3 )        
                                                 
As a percent to segment sales
 
Research and Development Expense:   Research and development activities represent a significant part of the Company’s business. These expenditures relate to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products.
 
Restructuring:   In 2009, the Company announced global restructuring initiatives that are expected to generate pre-tax, annual cost savings of approximately $1.5 billion when fully implemented in 2011. The associated savings has provided additional resources to invest in new growth platforms; ensure the successful launch of the Company’s many new products and continued growth of the core businesses; and provide flexibility to adjust to the changed and evolving global environment. In the fiscal fourth quarter of 2009, the Company recorded a pre-tax charge of $1.2 billion, of which $113 million was included in cost of products sold.
 
See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring.
 
Purchased In-Process Research and Development:   Beginning in 2009, in accordance with U.S. GAAP for business combinations, purchased in-process research and development (IPR&D) is no longer expensed but capitalized and tested for impairment. The Company capitalized approximately $0.2 billion of IPR&D in 2010, primarily associated with the acquisitions of Acclarent, Inc., RespiVert Ltd. and Micrus Endovascular Corporation. The Company capitalized $1.7 billion of IPR&D in 2009, primarily associated with the acquisitions of Cougar Biotechnology, Inc. and substantially all of the assets and rights of Elan related to its Alzheimer’s Immunotherapy Program.
 
 
34 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

In 2008, the Company recorded a charge for IPR&D of $181 million before and after tax related to the acquisitions of Amic AB, SurgRx, Inc., HealthMedia, Inc. and Omrix Biopharmaceuticals, Inc. HealthMedia, Inc., a privately held company that creates web-based behavior change interventions, accounted for $7 million before tax of the IPR&D charges and was included in the operating profit of the Consumer segment. The IPR&D charges for all of the following acquisitions were included in the operating profit of the Medical Devices and Diagnostics segment. Amic AB, a Swedish developer of in vitro diagnostic technologies for use in point-of-care and near-patient settings (outside the physical facilities of the clinical laboratory), accounted for $40 million before tax of the IPR&D charges. SurgRx, Inc., a privately held developer of the advanced bipolar tissue sealing system used in the ENSEAL ® family of devices, accounted for $7 million before tax of the IPR&D charges. Omrix Biopharmaceuticals, Inc., a fully integrated biopharmaceutical company that develops and markets biosurgical and immunotherapy products, accounted for $127 million before tax of the IPR&D charges.
 
Other (Income) Expense, Net:   Other (income) expense, net includes royalty income; gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Development Corporation; gains and losses on the disposal of property, plant and equipment; currency gains and losses; non-controlling interests; and litigation settlements. The favorable change of $0.2 billion in other (income) expense, net, in 2010 as compared to 2009, was primarily due to a net gain from litigation settlements and the gain on the divestiture of businesses partially offset by product liability expense.
 
In 2009, other (income) expense, net included net litigation settlements of $0.4 billion. In 2008, other (income) expense, net included income from net litigation settlements and awards of $0.5 billion and a gain of $0.5 billion from the divestiture of the Professional Wound Care business of Ethicon, Inc.
 
Operating Profit by Segment
 
Operating profits by segment of business were as follows:
 
                                 
                Percent of Segment Sales  
(Dollars in Millions)   2010     2009     2010     2009  
 
Consumer
  $ 2,342       2,475       16.1 %     15.7  
Pharmaceutical
    7,086       6,413       31.6       28.5  
Medical Devices and Diagnostics
    8,272       7,694       33.6       32.6  
                                 
Total (1)
    17,700       16,582       28.7       26.8  
Less: Expenses not allocated to segments (2)
    753       827                  
                                 
Earnings before provision for taxes on income
  $ 16,947       15,755       27.5 %     25.4  
                                 
 
(1)   See Note 18 to the Consolidated Financial Statements for more details.
 
(2)   Amounts not allocated to segments include interest (income) expense, non-controlling interests, and general corporate (income) expense.
 
(PERFORMANCE GRAPH)
 
Consumer Segment:   In 2010, Consumer segment operating profit decreased 5.4% from 2009. The primary reasons for the decrease in the operating profit were lower sales and higher costs associated with the recall of certain OTC products and the suspension of production at McNeil Consumer Healthcare’s Fort Washington, Pennsylvania facility. In 2009, Consumer segment operating profit decreased 7.4% from 2008. The primary reasons for the decrease in operating profit were $369 million of restructuring charges, partially offset by cost containment initiatives in 2009.
 
Pharmaceutical Segment:   In 2010, Pharmaceutical segment operating profit increased 10.5% from 2009. The primary reasons for the increase in operating profit were lower manufacturing costs, the gain on a divestiture, and benefits from cost improvement initiatives related to the restructuring plan implemented in 2009, partially offset by $333 million of expense related to litigation matters, increased product liability expense and the impact of the newly enacted U.S. health care reform legislation. In 2009, Pharmaceutical segment operating profit decreased 15.7% from 2008. The primary reasons for the decrease in operating profit were $496 million of restructuring charges, $92 million of litigation expense and negative product mix due to the loss of market exclusivity for TOPAMAX ® and RISPERDAL ® oral.
 
Medical Devices and Diagnostics Segment:   In 2010, Medical Devices and Diagnostics segment operating profit increased 7.5% from 2009. The improved operating profit was due to a gain of $1.3 billion from net litigation matters and the gain on the divestiture of the Breast Care business recorded in 2010. This was partially offset by increased product liability expense, $280 million of costs associated with the DePuy ASR tm Hip recall program and price reductions in certain Medical Devices and Diagnostics businesses. In 2009, the operating profit in the Medical Devices and Diagnostics segment increased 6.5% from 2008. The improved operating profit was due to a $478 million gain from net litigation settlements, favorable product mix, manufacturing efficiencies and cost containment initiatives related to selling, marketing and administrative expenses. This was partially offset by $321 million in restructuring charges.
 
Interest (Income) Expense:   Interest income in 2010 increased by $17 million over the prior year due to higher average cash balances. Cash, cash equivalents and marketable securities totaled $27.7 billion at the end of 2010, and averaged $23.6 billion as compared to the $15.6 billion average cash balance in 2009. The increase in the average cash balance was primarily due to cash generated from operating activities and net cash proceeds from litigation matters and divestitures.
 
Interest expense in 2010 was relatively flat as compared to 2009 due to a lower average rate despite a higher debt balance. The total debt balance at the end of 2010 was $16.8 billion as compared to $14.5 billion at the end of 2009. The higher average debt balance of $15.7 billion in 2010 versus $13.5 billion in 2009 was due to increased borrowings. The Company increased borrowings, capitalizing on favorable terms in the capital markets. The proceeds of the notes were used for general corporate purposes.
 
Interest income in 2009 decreased by $271 million as compared to 2008 due to lower rates of interest earned despite higher average cash balances. The cash balance, including marketable securities, was $19.4 billion at the end of 2009, and averaged $15.6 billion as compared to the $12.2 billion average cash balance in 2008. The increase in the average cash balance was primarily due to cash generated from operating activities.
 
Interest expense in 2009 increased by $16 million as compared to 2008 due to a higher debt balance. The net debt balance at the end of 2009 was $14.5 billion as compared to $11.9 billion at the end of 2008. The higher average debt balance of $13.5 billion in 2009
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 35


 

versus $12.9 billion in 2008 was primarily related to funding acquisitions and investments and the purchase of the Company’s Common Stock under the ongoing Common Stock repurchase program announced on July 9, 2007.
 
Interest income in 2008 decreased by $91 million as compared to 2007 due to lower rates of interest earned despite higher average cash balances. The cash balance, including marketable securities, was $12.8 billion at the end of 2008, and averaged $12.2 billion as compared to the $6.6 billion average cash balance in 2007. The increase in the average cash balance was primarily due to cash generated from operating activities.
 
Interest expense in 2008 increased by $139 million as compared to 2007 due to a higher debt balance. In the second half of 2007, the Company converted some of its short-term debt to fixed long-term debt at higher interest rates. The net debt balance at the end of 2008 was $11.9 billion as compared to $9.5 billion at the end of 2007. The higher debt balance in 2008 was primarily due to the purchase of the Company’s Common Stock under the ongoing Common Stock repurchase program announced on July 9, 2007 and to fund acquisitions.
 
Provision for Taxes on Income:   The worldwide effective income tax rate was 21.3% in 2010, 22.1% in 2009 and 23.5% in 2008. The 2010 tax rate decreased as compared to 2009 due to decreases in taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions and certain U.S. tax adjustments. The 2009 tax rate decreased as compared to 2008 due to increases in taxable income in lower tax jurisdictions relative to taxable income in higher tax jurisdictions.
 
Liquidity and Capital Resources
 
Liquidity & Cash Flows
 
Cash and cash equivalents were $19.4 billion at the end of 2010 as compared with $15.8 billion at the end of 2009. The primary sources of cash that contributed to the $3.6 billion increase versus the prior year were $16.4 billion of cash generated from operating activities, $2.4 billion net proceeds from long and short-term debt and $0.5 billion proceeds from the disposal of assets. The major uses of cash were capital spending of $2.4 billion, acquisitions of $1.3 billion, net investment purchases of $4.7 billion, dividends to shareholders of $5.8 billion, and the repurchase of Common Stock, net of proceeds from the exercise of options, of $1.6 billion.
 
Cash flows from operations were $16.4 billion in 2010. The major sources of cash flow were net income of $13.3 billion, adjusted for non-cash charges for depreciation, amortization, stock based compensation and deferred tax provision of $3.9 billion. The remaining changes to operating cash flow were increases in accounts receivable, inventories and other assets.
 
In 2010, the Company continued to have access to liquidity through the commercial paper market. For additional details on borrowings, see Note 7 to the Consolidated Financial Statements.
 
The Company anticipates that operating cash flows, existing credit facilities and access to the commercial paper markets will provide sufficient resources to fund operating needs in 2011.
 
(PERFORMANCE GRAPH)
 
Financing and Market Risk
 
The Company uses financial instruments to manage the impact of foreign exchange rate changes on cash flows. Accordingly, the Company enters into forward foreign exchange contracts to protect the value of certain foreign currency assets and liabilities and to hedge future foreign currency transactions primarily related to product costs. Gains or losses on these contracts are offset by the gains or losses on the underlying transactions. A 10% appreciation of the U.S. Dollar from the January 2, 2011 market rates would increase the unrealized value of the Company’s forward contracts by $239 million. Conversely, a 10% depreciation of the U.S. Dollar from the January 2, 2011 market rates would decrease the unrealized value of the Company’s forward contracts by $292 million. In either scenario, the gain or loss on the forward contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated earnings and cash flows.
 
The Company hedges the exposure to fluctuations in currency exchange rates, and the effect on certain assets and liabilities in foreign currency, by entering into currency swap contracts. A 1% change in the spread between U.S. and foreign interest rates on the Company’s interest rate sensitive financial instruments would either increase or decrease the unrealized value of the Company’s swap contracts by approximately $212 million. In either scenario, at maturity, the gain or loss on the swap contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated cash flows.
 
The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an “A” (or equivalent) credit rating. The counterparties to these contracts are major financial institutions and there is no significant concentration of exposure with any one counterparty. Management believes the risk of loss is remote.
 
The Company has access to substantial sources of funds at numerous banks worldwide. In September 2010, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires September 22, 2011. Interest charged on borrowings under the credit line agreement is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreement are not material.
 
Total borrowings at the end of 2010 and 2009 were $16.8 billion and $14.5 billion, respectively. The increase in borrowings between 2010 and 2009 was a result of financing for general corporate purposes and the continuation of the Company’s Common Stock repurchase program announced in 2007. In 2010, net cash (cash and current marketable securities, net of debt) was $10.9 billion compared to net cash of $4.9 billion in 2009. Total debt represented 22.9% of total capital (shareholders’ equity and total debt) in 2010 and 22.3% of total capital in 2009. Shareholders’ equity
 
 
36 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

per share at the end of 2010 was $20.66 compared with $18.37 at year-end 2009, an increase of 12.5%.
 
A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements.
 
Contractual Obligations and Commitments
 
The Company’s contractual obligations are primarily for leases, debt and unfunded retirement plans, with no other significant obligations. To satisfy these obligations, the Company will use cash from operations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as of January 2, 2011 (see Notes 7, 10 and 16 to the Consolidated Financial Statements for further details):
 
                                         
    Long-Term
    Interest on
    Unfunded
             
    Debt
    Debt
    Retirement
    Operating
       
(Dollars in Millions)   Obligations     Obligations     Plans     Leases     Total  
 
2011
  $ 13       528       54       182       777  
2012
    644       507       55       159       1,365  
2013
    509       457       59       130       1,155  
2014
    9       444       62       106       621  
2015
          444       69       89       602  
After 2015
    7,994       5,180       428       74       13,676  
                                         
Total
  $ 9,169       7,560       727       740       18,196  
                                         
 
For tax matters, see Note 8 to the Consolidated Financial Statements.
 
Share Repurchase and Dividends
 
On July 9, 2007, the Company announced that its Board of Directors approved a stock repurchase program authorizing the Company to buy back up to $10.0 billion of the Company’s Common Stock. As of January 2, 2011, the current stock repurchase program has been completed. The Company repurchased an aggregate of 158.3 million shares of Johnson & Johnson Common Stock at a cost of $10.0 billion. The Company funded the share repurchase program through a combination of available cash and debt. In addition, the Company has an annual program to repurchase shares for use in employee stock and incentive plans.
 
The Company increased its dividend in 2010 for the 48th consecutive year. Cash dividends paid were $2.110 per share in 2010, compared with dividends of $1.930 per share in 2009 and $1.795 per share in 2008. The dividends were distributed as follows:
 
                         
    2010     2009     2008  
 
First quarter
  $ 0.490       0.460       0.415  
Second quarter
    0.540       0.490       0.460  
Third quarter
    0.540       0.490       0.460  
Fourth quarter
    0.540       0.490       0.460  
                         
Total
  $ 2.110       1.930       1.795  
                         
 
On January 3, 2011, the Board of Directors declared a regular quarterly cash dividend of $0.540 per share, payable on March 15, 2011, to shareholders of record as of March 1, 2011. The Company expects to continue the practice of paying regular cash dividends.
 
Other Information
 
Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of results of operations and financial condition are based on the Company’s consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The preparation of these financial statements requires that management make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. The Company believes that the understanding of certain key accounting policies and estimates are essential in achieving more insight into the Company’s operating results and financial condition. These key accounting policies include revenue recognition, income taxes, legal and self-insurance contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock options.
 
Revenue Recognition:   The Company recognizes revenue from product sales when goods are shipped or delivered, and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
 
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
 
Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals.
 
Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales return reserves are accounted for in accordance with the U.S. GAAP guidance for revenue recognition when right of return exists. Sales return reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices and Diagnostics segment are typically resalable but are not material. The Company rarely exchanges products from inventory for returned products. The sales returns reserve for the total Company has ranged between 1.0% and 1.2% of annual net trade sales during the prior three fiscal reporting years 2008 — 2010.
 
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products. For all years presented, service revenues were less than 2% of total revenues and are included in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred.
 
In addition, the Company enters into collaboration arrangements, which contain multiple revenue generating activities. The revenue for these arrangements is recognized as each activity is performed or delivered, based on the relative fair value. Upfront fees received as part of these arrangements are deferred and recognized as revenue earned over the obligation period. See Note 1 to
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 37


 

the Consolidated Financial Statements for additional disclosures on collaborations.
 
Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
 
Below are tables that show the progression of accrued rebates, returns, promotions, reserve for doubtful accounts and reserve for cash discounts by segment of business for the fiscal years ended January 2, 2011 and January 3, 2010.
 
Consumer Segment
 
                                 
    Balance at
                Balance at
 
    Beginning of
                End of
 
(Dollars in Millions)   Period     Accruals     Payments/Other     Period  
 
2010
                               
Accrued rebates (1)
  $ 121       361       (351 )     131  
Accrued returns
    127       156       (138 )     145  
Accrued promotions
    272       2,418       (2,396 )     294  
                                 
Subtotal
  $ 520       2,935       (2,885 )     570  
                                 
Reserve for doubtful accounts
    107       6       (56 )     57  
Reserve for cash discounts
    21       249       (249 )     21  
                                 
Total
  $ 648       3,190       (3,190 )     648  
                                 
                                 
2009
                               
Accrued rebates (1)
  $ 131       380       (390 )     121  
Accrued returns
    115       134       (122 )     127  
Accrued promotions
    202       1,996       (1,926 )     272  
                                 
Subtotal
  $ 448       2,510       (2,438 )     520  
                                 
Reserve for doubtful accounts
    110       23       (26 )     107  
Reserve for cash discounts
    22       285       (286 )     21  
                                 
Total
  $ 580       2,818       (2,750 )     648  
                                 
 
(1)   Includes reserve for customer rebates of $50 million at January 2, 2011 and $46 million at January 3, 2010, recorded as a contra asset.
 
Pharmaceutical Segment
 
                                 
    Balance at
                Balance at
 
    Beginning of
                End of
 
(Dollars in Millions)   Period     Accruals     Payments/Other     Period  
 
2010
                               
Accrued rebates (1)(2)
  $ 1,064       4,768       (4,312 )     1,520  
Accrued returns
    342       27       (75 )     294  
Accrued promotions
    84       135       (136 )     83  
                                 
Subtotal
  $ 1,490       4,930       (4,523 )     1,897  
                                 
Reserve for doubtful accounts
    83       91       (29 )     145  
Reserve for cash discounts
    48       379       (373 )     54  
                                 
Total
  $ 1,621       5,400       (4,925 )     2,096  
                                 
                                 
2009
                               
Accrued rebates (1)
  $ 1,261       3,975       (4,172 )     1,064  
Accrued returns
    490       147       (295 )     342  
Accrued promotions
    107       330       (353 )     84  
                                 
Subtotal
  $ 1,858       4,452       (4,820 )     1,490  
                                 
Reserve for doubtful accounts
    48       37       (2 )     83  
Reserve for cash discounts
    23       462       (437 )     48  
                                 
Total
  $ 1,929       4,951       (5,259 )     1,621  
                                 
 
(1)   Includes reserve for customer rebates of $320 million at January 2, 2011 and $372 million at January 3, 2010, recorded as a contra asset.
 
(2)   Includes additional sales rebates to Medicaid managed care organizations as a result of health care reform legislation.
 
Medical Devices and Diagnostics Segment
 
                                 
    Balance at
                Balance at
 
    Beginning of
                End of
 
(Dollars in Millions)   Period     Accruals     Payments/Other     Period  
 
2010
                               
Accrued rebates (1)
  $ 454       2,363       (2,322 )     495  
Accrued returns
    220       334       (353 )     201  
Accrued promotions
    73       111       (134 )     50  
                                 
Subtotal
  $ 747       2,808       (2,809 )     746  
                                 
Reserve for doubtful accounts
    143       33       (38 )     138  
Reserve for cash discounts
    32       484       (481 )     35  
                                 
Total
  $ 922       3,325       (3,328 )     919  
                                 
                                 
2009
                               
Accrued rebates (1)
  $ 416       2,229       (2,191 )     454  
Accrued returns
    189       74       (43 )     220  
Accrued promotions
    47       120       (94 )     73  
                                 
Subtotal
  $ 652       2,423       (2,328 )     747  
                                 
Reserve for doubtful accounts
    109       50       (16 )     143  
Reserve for cash discounts
    34       416       (418 )     32  
                                 
Total
  $ 795       2,889       (2,762 )     922  
                                 
 
(1)   Includes reserve for customer rebates of $331 million at January 2, 2011 and $311 million at January 3, 2010, recorded as a contra asset.
 
Income Taxes:   Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on current tax regulations and rates. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future. Management believes that changes in these estimates would not have a material effect on the Company’s results of operations, cash flows or financial position.
 
In 2007, in accordance with U.S. GAAP, the Company adopted the standard related to accounting for uncertainty in income taxes. The Codification prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Codification also provides guidance on derecognition, classification and other matters. See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
 
At January 2, 2011 and January 3, 2010, the cumulative amounts of undistributed international earnings were approximately $37.0 billion and $32.2 billion, respectively. The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation.
 
Legal and Self Insurance Contingencies:   The Company records accruals for various contingencies including legal proceedings and product liability cases as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. Additionally, the Company records insurance receivable amounts from third-party insurers when recovery is probable. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from third-party insurers.
 
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.
 
 
38 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

Long-Lived and Intangible Assets:   The Company assesses changes in economic conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges.
 
Employee Benefit Plans:   The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on assumptions for the discount rate, expected return on plan assets, expected salary increases and health care cost trend rates. See Note 10 to the Consolidated Financial Statements for further details on these rates and the effect a rate change would have on the Company’s results of operations.
 
Stock Based Compensation:   The Company recognizes compensation expense associated with the issuance of equity instruments to employees for their services. The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model and is expensed in the financial statements over the vesting period. The input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and the dividend yield. See Note 17 to the Consolidated Financial Statements for additional information.
 
New Accounting Pronouncements
 
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of January 2, 2011.
 
Economic and Market Factors
 
The Company is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concerns about the rising cost of health care. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 2000 — 2010, in the United States, the weighted average compound annual growth rate of the Company’s net price increases for health care products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI).
 
Inflation rates continue to have an effect on worldwide economies and, consequently, on the way companies operate. The Company accounted for operations in Venezuela as highly inflationary in 2010, as the prior three-year cumulative inflation rate has surpassed 100%. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.
 
The Company is exposed to fluctuations in currency exchange rates. A 1% change in the value of the U.S. Dollar as compared to all foreign currencies in which the Company had sales, income or expense in 2010 would have increased or decreased the translation of foreign sales by approximately $300 million and income by $65 million.
 
The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement.
 
Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn, may continue to impact the Company’s businesses.
 
The Company also operates in an environment which has become increasingly hostile to intellectual property rights. Generic drug firms have filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of most of the Company’s key pharmaceutical products, prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in ANDA filings, the generic firms will then introduce generic versions of the product at issue, resulting in the potential for substantial market share and revenue losses for that product. For further information see the discussion on “Litigation Against Filers of Abbreviated New Drug Applications” in Note 21 to the Consolidated Financial Statements.
 
Legal Proceedings
 
The Company is involved in numerous product liability cases in the United States, many of which concern alleged adverse reactions to drugs and medical devices. The damages claimed are substantial, and while the Company is confident of the adequacy of the warnings and instructions for use that accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Company believes that in most cases product liability will be substantially covered by existing amounts accrued in the Company’s balance sheet under its self-insurance program.
 
The Company is also involved in a number of patent, trademark and other lawsuits, as well as investigations, incidental to its business. The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings referred to above cannot be reasonably estimated. However, 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 already accrued in the Company’s balance sheet, is not expected to be material to the Company’s financial position, although the resolution in any reporting period of one or more of these matters could have a material impact on the Company’s results of operations and cash flows for that period.
 
See Note 21 to the Consolidated Financial Statements for further information regarding legal proceedings.
Common Stock Market Prices
 
The Company’s Common Stock is listed on the New York Stock Exchange under the symbol JNJ. The composite market price ranges for Johnson & Johnson Common Stock during 2010 and 2009 were:
 
                                 
    2010     2009  
    High     Low     High     Low  
 
First quarter
  $ 65.95       61.89       61.00       46.25  
Second quarter
    66.20       57.55       56.65       50.12  
Third quarter
    62.70       56.86       62.47       55.71  
Fourth quarter
    64.92       61.25       65.41       58.78  
Year-end close
  $61.85   64.41
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 39


 

 
Cautionary Factors That May Affect Future Results
 
This Annual Report contains forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management’s plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words such as “plans,” “expects,” “will,” “anticipates,” “estimates” and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company’s strategy for growth, product development, regulatory approval, market position and expenditures.
 
Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that unknown risks or uncertainties materialize, actual results could vary materially from the Company’s expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.
 
Risks and uncertainties include, but are not limited to, general industry conditions and competition; economic factors, such as interest rate and currency exchange rate fluctuations; technological advances, new products and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approvals; challenges to patents; significant litigation adverse to the Company; impact of business combinations; financial distress and bankruptcies experienced by significant customers and suppliers; changes to governmental laws and regulations and U.S. and foreign health care reforms; trends toward healthcare cost containment; increased scrutiny of the healthcare industry by government agencies; changes in behavior and spending patterns of purchasers of healthcare products and services; manufacturing difficulties or delays; product efficacy or safety concerns resulting in product recalls or regulatory action.
 
The Company’s report on Form 10-K for the year ended January 2, 2011 includes, in Exhibit 99, a discussion of additional factors that could cause actual results to differ from expectations. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995.
 
 
40 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

 
JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
At January 2, 2011 and January 3, 2010
(Dollars in Millions Except Share and Per Share Data) (Note 1)
 
                 
    2010     2009  
 
Assets
               
Current assets
               
Cash and cash equivalents (Notes 1 and 2)
  $ 19,355       15,810  
Marketable securities (Notes 1 and 2)
    8,303       3,615  
Accounts receivable trade, less allowances for doubtful accounts $340 (2009, $333)
    9,774       9,646  
Inventories (Notes 1 and 3)
    5,378       5,180  
Deferred taxes on income (Note 8)
    2,224       2,793  
Prepaid expenses and other receivables
    2,273       2,497  
                 
Total current assets
    47,307       39,541  
                 
Property, plant and equipment, net (Notes 1 and 4)
    14,553       14,759  
Intangible assets, net (Notes 1 and 5)
    16,716       16,323  
Goodwill (Notes 1 and 5)
    15,294       14,862  
Deferred taxes on income (Note 8)
    5,096       5,507  
Other assets
    3,942       3,690  
                 
Total assets
  $ 102,908       94,682  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Loans and notes payable (Note 7)
  $ 7,617       6,318  
Accounts payable
    5,623       5,541  
Accrued liabilities
    4,100       4,625  
Accrued rebates, returns and promotions
    2,512       2,028  
Accrued compensation and employee related obligations
    2,642       2,777  
Accrued taxes on income
    578       442  
                 
Total current liabilities
    23,072       21,731  
                 
Long-term debt (Note 7)
    9,156       8,223  
Deferred taxes on income (Note 8)
    1,447       1,424  
Employee related obligations (Notes 9 and 10)
    6,087       6,769  
Other liabilities
    6,567       5,947  
                 
Total liabilities
    46,329       44,094  
                 
Shareholders’ equity
               
Preferred stock — without par value (authorized and unissued 2,000,000 shares)
           
Common stock — par value $1.00 per share (Note 12) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
    3,120       3,120  
Accumulated other comprehensive income (Note 13)
    (3,531 )     (3,058 )
Retained earnings
    77,773       70,306  
                 
      77,362       70,368  
Less: common stock held in treasury, at cost (Note 12) (381,746,000 shares and 365,522,000 shares)
    20,783       19,780  
                 
Total shareholders’ equity
    56,579       50,588  
                 
Total liabilities and shareholders’ equity
  $ 102,908       94,682  
                 
 
See Notes to Consolidated Financial Statements
 
 
CONSOLIDATED FINANCIAL STATEMENTS 41


 

JOHNSON & JOHNSON AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Millions Except Per Share Figures) (Note 1)
 
                         
    2010     2009     2008  
 
Sales to customers
  $ 61,587       61,897       63,747  
                         
Cost of products sold
    18,792       18,447       18,511  
                         
Gross profit
    42,795       43,450       45,236  
Selling, marketing and administrative expenses
    19,424       19,801       21,490  
Research and development expense
    6,844       6,986       7,577  
Purchased in-process research and development (Note 20)
                181  
Interest income
    (107 )     (90 )     (361 )
Interest expense, net of portion capitalized (Note 4)
    455       451       435  
Other (income) expense, net
    (768 )     (526 )     (1,015 )
Restructuring (Note 22)
          1,073        
                         
Earnings before provision for taxes on income
    16,947       15,755       16,929  
Provision for taxes on income (Note 8)
    3,613       3,489       3,980  
                         
Net earnings
  $ 13,334       12,266       12,949  
                         
Basic net earnings per share (Notes 1 and 15)
  $ 4.85       4.45       4.62  
Diluted net earnings per share (Notes 1 and 15)
  $ 4.78       4.40       4.57  
Cash dividends per share
  $ 2.110       1.930       1.795  
Basic average shares outstanding (Notes 1 and 15)
    2,751.4       2,759.5       2,802.5  
Diluted average shares outstanding (Notes 1 and 15)
    2,788.8       2,789.1       2,835.6  
                         
 
See Notes to Consolidated Financial Statements
 
 
42 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

JOHNSON & JOHNSON AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Millions) (Note 1)
 
                                                 
                      Accumulated
             
                      Other
          Treasury
 
          Comprehensive
    Retained
    Comprehensive
    Common Stock
    Stock
 
    Total     Income     Earnings     Income     Issued Amount     Amount  
 
Balance, December 30, 2007
  $ 43,319               55,280       (693 )     3,120       (14,388 )
                                                 
Net earnings
    12,949       12,949       12,949                          
Cash dividends paid
    (5,024 )             (5,024 )                        
Employee compensation and stock option plans
    2,180               175                       2,005  
Conversion of subordinated debentures
                  (1 )                     1  
Repurchase of common stock
    (6,651 )                                     (6,651 )
Other comprehensive income, net of tax:
                                               
Currency translation adjustment
    (2,499 )     (2,499 )             (2,499 )                
Unrealized losses on securities
    (59 )     (59 )             (59 )                
Employee benefit plans
    (1,870 )     (1,870 )             (1,870 )                
Gains on derivatives & hedges
    166       166               166                  
Reclassification adjustment
            (27 )                                
                                                 
Total comprehensive income
            8,660                                  
                                                 
                                                 
                                                 
Balance, December 28, 2008
  $ 42,511               63,379       (4,955 )     3,120       (19,033 )
                                                 
Net earnings
    12,266       12,266       12,266                          
Cash dividends paid
    (5,327 )             (5,327 )                        
Employee compensation and stock option plans
    1,402               25                       1,377  
Conversion of subordinated debentures
    2               (4 )                     6  
Repurchase of common stock
    (2,130 )                                     (2,130 )
Other
    (33 )             (33 )                        
Other comprehensive income, net of tax:
                                               
Currency translation adjustment
    1,363       1,363               1,363                  
Unrealized losses on securities
    (55 )     (55 )             (55 )                
Employee benefit plans
    565       565               565                  
Gains on derivatives & hedges
    24       24               24                  
                                                 
Total comprehensive income
            14,163                                  
                                                 
                                                 
                                                 
Balance, January 3, 2010
  $ 50,588               70,306       (3,058 )     3,120       (19,780 )
                                                 
Net earnings
    13,334       13,334       13,334                          
Cash dividends paid
    (5,804 )             (5,804 )                        
Employee compensation and stock option plans
    1,730               (62 )                     1,792  
Conversion of subordinated debentures
    1               (1 )                     2  
Repurchase of common stock
    (2,797 )                                     (2,797 )
Other comprehensive income, net of tax:
                                               
Currency translation adjustment
    (461 )     (461 )             (461 )                
Unrealized gains on securities
    54       54               54                  
Employee benefit plans
    (21 )     (21 )             (21 )                
Losses on derivatives & hedges
    (45 )     (45 )             (45 )                
                                                 
Total comprehensive income
            12,861                                  
                                                 
                                                 
                                                 
Balance, January 2, 2011
  $ 56,579               77,773       (3,531 )     3,120       (20,783 )
                                                 
 
See Notes to Consolidated Financial Statements
 
 
CONSOLIDATED FINANCIAL STATEMENTS 43


 

JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions) (Note 1)
 
                         
    2010     2009     2008  
 
Cash flows from operating activities
                       
Net earnings
  $ 13,334       12,266       12,949  
Adjustments to reconcile net earnings to cash flows from operating activities:
                       
Depreciation and amortization of property and intangibles
    2,939       2,774       2,832  
Stock based compensation
    614       628       627  
Purchased in-process research and development
                181  
Deferred tax provision
    356       (436 )     22  
Accounts receivable allowances
    12       58       86  
Changes in assets and liabilities, net of effects from acquisitions:
                       
(Increase)/decrease in accounts receivable
    (207 )     453       (736 )
(Increase)/decrease in inventories
    (196 )     95       (101 )
Increase/(decrease) in accounts payable and accrued liabilities
    20       (507 )     (272 )
(Increase)/decrease in other current and non-current assets
    (574 )     1,209       (1,600 )
Increase in other current and non-current liabilities
    87       31       984  
                         
Net cash flows from operating activities
    16,385       16,571       14,972  
                         
Cash flows from investing activities
                       
Additions to property, plant and equipment
    (2,384 )     (2,365 )     (3,066 )
Proceeds from the disposal of assets
    524       154       785  
Acquisitions, net of cash acquired (Note 20)
    (1,269 )     (2,470 )     (1,214 )
Purchases of investments
    (15,788 )     (10,040 )     (3,668 )
Sales of investments
    11,101       7,232       3,059  
Other (primarily intangibles)
    (38 )     (109 )     (83 )
                         
Net cash used by investing activities
    (7,854 )     (7,598 )     (4,187 )
                         
Cash flows from financing activities
                       
Dividends to shareholders
    (5,804 )     (5,327 )     (5,024 )
Repurchase of common stock
    (2,797 )     (2,130 )     (6,651 )
Proceeds from short-term debt
    7,874       9,484       8,430  
Retirement of short-term debt
    (6,565 )     (6,791 )     (7,319 )
Proceeds from long-term debt
    1,118       9       1,638  
Retirement of long-term debt
    (32 )     (219 )     (24 )
Proceeds from the exercise of stock options/excess tax benefits
    1,226       882       1,486  
                         
Net cash used by financing activities
    (4,980 )     (4,092 )     (7,464 )
                         
Effect of exchange rate changes on cash and cash equivalents
    (6 )     161       (323 )
                         
Increase in cash and cash equivalents
    3,545       5,042       2,998  
Cash and cash equivalents, beginning of year (Note 1)
    15,810       10,768       7,770  
                         
Cash and cash equivalents, end of year (Note 1)
  $ 19,355       15,810       10,768  
                         
Supplemental cash flow data
                       
Cash paid during the year for:
                       
Interest
  $ 491       533       525  
Income taxes
    2,442       2,363       4,068  
Supplemental schedule of noncash investing and financing activities
                       
Treasury stock issued for employee compensation and stock option plans, net of cash proceeds
  $ 673       541       593  
Conversion of debt
    1       2        
Acquisitions
                       
Fair value of assets acquired
  $ 1,321       3,345       1,328  
Fair value of liabilities assumed and non-controlling interests
    (52 )     (875 )     (114 )
                         
Net cash paid for acquisitions
  $ 1,269       2,470       1,214  
                         
 
See Notes to Consolidated Financial Statements
 
 
44 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

JOHNSON & JOHNSON AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Johnson & Johnson and subsidiaries (the “Company”). Intercompany accounts and transactions are eliminated.
 
Description of the Company And Business Segments
 
The Company has approximately 114,000 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being.
 
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment manufactures and markets a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products and wellness and prevention platforms. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment includes products in the following areas: anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Biosense Webster’s electrophysiology products; Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction, spinal care, neurological and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products and advanced sterilization products; LifeScan’s blood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products and Vistakon’s disposable contact lenses.
 
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
 
During the fiscal first quarter of 2010 the Company adopted the Financial Accounting Standards Board (FASB) guidance and amendments related to the criteria for separating consideration in multiple-deliverable revenue arrangements. The guidance (a) provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated; (b) requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price; and (c) eliminates the use of the residual method and requires an entity to allocate the revenue using the relative selling price method. The adoption did not have a material impact on the Company’s results of operations, cash flows or financial position; however it expanded the disclosures for multiple-deliverable revenue arrangements.
 
During the fiscal first quarter of 2010, the Company adopted the FASB standard related to variable interest entities. The adoption of this standard did not have an impact on the Company’s results of operations, cash flows or financial position.
 
During the fiscal first quarter of 2010, the Company adopted the new accounting guidance on fair value measurements and disclosures. This guidance requires the Company to disclose the amount of significant transfers between Level 1 and Level 2 inputs and the reasons for these transfers as well as the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In addition, the guidance clarifies certain existing disclosure requirements. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
 
Recently Issued Accounting Standards,
Not Adopted as of January 2, 2011
 
During the fiscal second quarter of 2010 the FASB issued an accounting standard update related to revenue recognition under the milestone method. The objective of the accounting standard update is to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This guidance was effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this standard is not expected to have a material impact on the Company’s results of operations, cash flows or financial position.
 
Cash Equivalents
 
The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents.
 
Investments
 
Short-term marketable securities are carried at cost, which approximates fair value. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Long-term debt securities that the Company has the ability and intent to hold until maturity are carried at amortized cost. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in equity securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. If losses on these securities are considered to be other than temporary, the loss is recognized in earnings.
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 45


 

 
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:
 
         
Building and building equipment
    20 — 40 years  
Land and leasehold improvements
    10 — 20 years  
Machinery and equipment
    2 — 13 years  
 
The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 8 years.
 
The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows.
 
Revenue Recognition
 
The Company recognizes revenue from product sales when the goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
 
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, the largest being the Medicaid rebate provision, are estimated based on contractual terms, historical experience, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
 
Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals. Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales return reserves are accounted for in accordance with U.S. GAAP guidance for revenue recognition when right of return exists. Sales return reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices and Diagnostics segment are typically resalable but are not material. The Company rarely exchanges products from inventory for returned products. The sales returns reserve for the total Company has ranged between 1.0% and 1.2% of annual sales to customers during the prior three fiscal reporting years 2008 — 2010.
 
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred.
 
Shipping and Handling
 
Shipping and handling costs incurred were $945 million, $964 million and $1,017 million in 2010, 2009 and 2008, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than 0.5% of sales to customers for all periods presented.
 
Inventories
 
Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
 
Intangible Assets and Goodwill
 
The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed annually for impairment. The Company completed the annual impairment test for 2010 in the fiscal fourth quarter and no impairment was determined. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if a triggering event occurs.
 
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill.
 
Financial Instruments
 
As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
 
 
46 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

 
The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments.
 
Product Liability
 
Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. Based on the availability of prior coverage, receivables for insurance recoveries related to product liability claims are recorded on an undiscounted basis, when it is probable that a recovery will be realized.
 
Research and Development
 
Research and development expenses are expensed as incurred. Upfront and milestone payments made to third-parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.
 
The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. In general, the income statement presentation for these collaborations is as follows:
 
     
Nature/Type of Collaboration   Statement of Earnings Presentation
 
Third-party sale of product
 
Sales to customers
Royalties/milestones paid to collaborative partner (post-regulatory approval)*
 
Cost of goods sold
Royalties received from collaborative partner
 
Other income (expense), net
Upfront payments & milestones paid to collaborative partner (pre-regulatory approval)
 
Research and development expense
Research and development payments to collaborative partner
 
Research and development expense
Research and development payments received from collaborative partner
 
Reduction of Research and development expense
 
 
Milestones are capitalized as intangible assets and amortized to cost of goods sold over the useful life.
 
Advertising
 
Costs associated with advertising are expensed in the year incurred and are included in the selling, marketing and administrative expenses. Advertising expenses worldwide, which are comprised of television, radio, print media and Internet advertising, were $2.5 billion, $2.4 billion and $2.9 billion in 2010, 2009 and 2008, respectively.
 
Income Taxes
 
The Company intends to continue to reinvest its undistributed international earnings to expand its international operations; therefore, no U.S. tax expense has been recorded with respect to the undistributed portion not intended for repatriation. At January 2, 2011 and January 3, 2010, the cumulative amount of undistributed international earnings was approximately $37.0 billion and $32.2 billion, respectively.
 
Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities.
 
Net Earnings Per Share
 
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock using the treasury stock method.
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47


 

 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, income taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. For instance, in determining annual pension and post-employment benefit costs, the Company estimates the rate of return on plan assets, and the cost of future health care benefits. Actual results may or may not differ from those estimates.
 
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.
 
Annual Closing Date
 
The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, as was the case in 2009 and will be the case again in 2014.
 
Reclassification
 
Certain prior period amounts have been reclassified to conform to current year presentation.
 
2.   Cash, Cash Equivalents and Current Marketable Securities
 
At the end of 2010 and 2009, the amortized cost of cash, cash equivalents and current marketable securities were comprised of:
                 
    Amortized Cost  
(Dollars in Millions)   2010     2009  
 
Cash
  $ 2,293       2,517  
Government securities and obligations
    22,349       13,370  
Corporate debt securities
    225       426  
Money market funds
    2,135       1,890  
Time deposits
    656       1,222  
                 
Total cash, cash equivalents and current marketable securities
  $ 27,658       19,425  
                 
 
The estimated fair value was the same as the amortized cost as of January 2, 2011. The estimated fair value was $19,426 million as of January 3, 2010 reflecting a $1 million unrealized gain in Government securities and obligations.
 
As of January 2, 2011, current marketable securities consisted of $8,153 million and $150 million of government securities and obligations and corporate debt securities, respectively.
 
As of January 3, 2010, current marketable securities consisted of $3,434 million and $181 million of government securities and obligations and corporate debt securities, respectively.
 
Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices in active markets.
 
The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an A (or equivalent) credit rating.
 
3.   Inventories
 
At the end of 2010 and 2009, inventories were comprised of:
 
                 
(Dollars in Millions)   2010     2009  
 
Raw materials and supplies
  $ 1,073       1,144  
Goods in process
    1,460       1,395  
Finished goods
    2,845       2,641  
                 
Total inventories
  $ 5,378       5,180  
                 
 
4.   Property, Plant and Equipment
 
At the end of 2010 and 2009, property, plant and equipment at cost and accumulated depreciation were:
 
                 
(Dollars in Millions)   2010     2009  
 
Land and land improvements
  $ 738       714  
Buildings and building equipment
    9,079       8,863  
Machinery and equipment
    18,032       17,153  
Construction in progress
    2,577       2,521  
                 
Total property, plant and equipment, gross
  $ 30,426       29,251  
Less accumulated depreciation
    15,873       14,492  
                 
Total property, plant and equipment, net
  $ 14,553       14,759  
                 
 
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2010, 2009 and 2008 was $73 million, $101 million and $147 million, respectively.
 
Depreciation expense, including the amortization of capitalized interest in 2010, 2009 and 2008, was $2.2 billion, $2.1 billion and $2.0 billion, respectively.
 
Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings.
 
 
48 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

 
5.   Intangible Assets and Goodwill
 
At the end of 2010 and 2009, the gross and net amounts of intangible assets were:
 
                 
(Dollars in Millions)   2010     2009  
 
Intangible assets with definite lives:
               
Patents and trademarks — gross
  $ 6,660       5,697  
Less accumulated amortization
    2,629       2,177  
                 
Patents and trademarks — net
  $ 4,031       3,520  
                 
Other intangibles — gross
  $ 7,674       7,808  
Less accumulated amortization
    2,880       2,680  
                 
Other intangibles — net
  $ 4,794       5,128  
                 
Total intangible assets with definite lives — gross
  $ 14,334       13,505  
Less accumulated amortization
    5,509       4,857  
                 
Total intangible assets with definite lives — net
  $ 8,825       8,648  
                 
Intangible assets with indefinite lives:
               
Trademarks
  $ 5,954       5,938  
Purchased in-process research and development*
    1,937       1,737  
                 
Total intangible assets with indefinite lives
  $ 7,891       7,675  
                 
Total intangible assets — net
  $ 16,716       16,323  
                 
 
 
Purchased in-process research and development will be accounted for as an indefinite-lived intangible asset until the underlying project is completed or abandoned.
 
Goodwill as of January 2, 2011 and January 3, 2010, as allocated by segment of business is as follows:
 
                                 
                Med Dev
       
(Dollars in Millions)   Consumer     Pharm     and Diag     Total  
 
Goodwill at December 28, 2008
  $ 7,474       963       5,282       13,719  
                                 
Acquisitions
          271       401       672  
Currency translation/other*
    600       10       (139 )     471  
                                 
Goodwill at January 3, 2010
  $ 8,074       1,244       5,544       14,862  
                                 
Acquisitions
                397       397  
Currency translation/other
    70       (19 )     (16 )     35  
                                 
Goodwill at January 2, 2011
  $ 8,144       1,225       5,925       15,294  
                                 
 
 
Includes reclassification between segments.
 
The weighted average amortization periods for patents and trademarks and other intangible assets are 17 years and 28 years, respectively. The amortization expense of amortizable assets was $748 million, $675 million and $788 million before tax, for the fiscal years ended January 2, 2011, January 3, 2010 and December 28, 2008, respectively. Certain patents and intangible assets were written down to fair value during fiscal years 2010, 2009 and 2008, with the resulting charge included in amortization expense. These write downs did not have a material impact on the Company’s results of operations, cash flows or financial position.
 
The estimated amortization expense for the five succeeding years approximates $730 million before tax, per year. Substantially all of the amortization expense is included in cost of products sold.
 
6.   Fair Value Measurements
 
The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of raw materials denominated in foreign currency. The Company also uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges. The Company also uses forward exchange contracts to manage its exposure to the variability of cash flows for repatriation of foreign dividends. These contracts are designated as net investment hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward exchange contracts are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The Company does not enter into derivative financial instruments for trading or speculative purposes, or contain credit risk related contingent features or requirements to post collateral. On an ongoing basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company enters into agreements with commercial institutions that have at least an A (or equivalent) credit rating. As of January 2, 2011, the Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate swaps of $21 billion and $3 billion, respectively.
 
All derivative instruments are to be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
 
The designation as a cash flow hedge is made at the entrance date into the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains/losses on net investment hedges are accounted for through the currency translation account and are insignificant. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings in other (income) and expense, net, and was not material for the fiscal years ended January 2, 2011 and January 3, 2010. Refer to Note 13 for disclosures of movements in Accumulated Other Comprehensive Income.
 
As of January 2, 2011, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was $100 million after-tax. For additional information, see Note 13. The Company expects that substantially all of the amount related to foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months, excluding interest rate swaps. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 49


 

 
The following table is a summary of the activity related to designated derivatives for the fiscal years ended January 2, 2011 and January 3, 2010:
 
                                                 
                Gain/(Loss)
    Gain/(Loss)
 
    Gain/(Loss)
    Reclassified from
    Recognized in
 
    Recognized in
    Accumulated OCI
    Other
 
Cash Flow Hedges
  Accumulated OCI (1)     into Income (1)     Income/expense (2)  
(Dollars in Millions)   2010     2009     2010     2009     2010     2009  
 
Foreign exchange contracts
  $ (66 )     (63 )     (52 ) (A)     (47 ) (A)     (2 )     1  
Foreign exchange contracts
    (296 )     (173 )     (300 ) (B)     70 (B)     (38 )     (1 )
Foreign exchange contracts
    51       5       57 (C)     13 (C)     5        
Cross currency interest rate swaps
    (40 )     241       6 (D)     (16 ) (D)            
Foreign exchange contracts
    18       28       1 (E)     (6 ) (E)     3       (12 )
                                                 
Total
  $ (333 )     38       (288 )     14       (32 )     (12 )
                                                 
 
All amounts shown in the table above are net of tax.
 
 
(1)    Effective portion
 
(2)   Ineffective portion
 
(A)  Included in Sales to customer
 
(B)  Included in Cost of products sold
 
(C)  Included in Research and development expense
 
(D)  Included in Interest (income)/Interest expense, net
 
(E)  Included in Other (income)/expense, net
 
For the fiscal years ended January 2, 2011 and January 3, 2010, a loss of $31 million and a gain of $21 million, respectively, was 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 should be determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.
 
The fair value of a derivative financial instrument (i.e. forward exchange contract, currency swap) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments that are classified as Level 1 as they are traded in an active exchange market.
 
The following three levels of inputs are used to measure fair value:
 
Level 1 — Quoted prices in active markets for identical assets and liabilities.
 
Level 2 — Significant other observable inputs.
 
Level 3 — Significant unobservable inputs.
 
 
50 JOHNSON & JOHNSON 2010 ANNUAL REPORT


 

 
The Company’s significant financial assets and liabilities measured at fair value as of January 2, 2011 and January 3, 2010 were as follows:
 
                                         
                      2010     2009  
(Dollars in Millions)   Level 1     Level 2     Level 3     Total     Total (1)  
 
Derivatives designated as hedging instruments:
                                       
Assets:
                                       
Foreign exchange contracts   $       321             321       436  
Cross currency interest rate swaps (2)             17               17       126  
                                         
Total
          338             338       562  
                                         
Liabilities:
                                       
Foreign exchange contracts           586             586       608  
Cross currency interest rate swaps (3)             502               502       571  
                                         
Total
          1,088             1,088       1,179  
                                         
Derivatives not designated as hedging instruments:
                                       
Assets:
                                       
Foreign exchange contracts           19             19       33  
Liabilities:
                                       
Foreign exchange contracts           39             39       40  
Other investments
  $ 1,165                   1,165       1,134  
                                         
 
(1)   2009 assets and liabilities are all classified as Level 2 with the exception of other investments of $1,134 million which are classified as Level 1.
 
(2)   Includes $14 million and $119 million of non-current assets for the fiscal years ending January 2, 2011 and January 3, 2010, respectively.
 
(3)   Includes $502 million and $517 million of non-current liabilities for the fiscal years ending January 2, 2011 and January 3, 2010, respectively.
 
See Notes 2 and 7 for financial assets and liabilities held at carrying amount on the Consolidated Balance Sheet.
 
7.   Borrowings
 
The components of long-term debt are as follows:
 
                                 
          Effective
          Effective
 
(Dollars in Millions)   2010     Rate %     2009     Rate %  
 
5.15% Debentures due 2012
  $ 599       5.18 %     599       5.18  
3.80% Debentures due 2013
    500       3.82       500       3.82  
5.55% Debentures due 2017
    1,000       5.55       1,000       5.55  
5.15% Debentures due 2018
    898       5.15       898       5.15  
4.75% Notes due 2019 (1B Euro 1.3268) (2) /(1B Euro 1.4382) (3)
    1,319 (2)     5.35       1,429 (3)     5.35  
3% Zero Coupon Convertible Subordinated Debentures due 2020
    194       3.00       188       3.00  
2.95% Debentures due 2020
    541       3.15              
6.73% Debentures due 2023
    250       6.73       250       6.73  
5.50% Notes due 2024 (500MM GBP 1.5403) (2) / (500MM GBP 1.6189) (3)
    764 (2)     5.71       803 (3)     5.71  
6.95% Notes due 2029
    294       7.14       294       7.14  
4.95% Debenture due 2033
    500       4.95       500       4.95  
5.95% Notes due 2037
    995       5.99       995       5.99  
5.86% Debentures due 2038
    700       5.86       700       5.86  
4.50% Debentures due 2040
    539       4.63              
Other (Includes Industrial Revenue Bonds)
    76               101          
                                 
      9,169 ( 4 )     5.25 (1)     8,257 (4)     5.42 (1 )
Less current portion
    13               34          
                                 
    $ 9,156               8,223          
                                 
 
(1)   Weighted average effective rate.
 
(2)   Translation rate at January 2, 2011.
 
(3)   Translation rate at January 3, 2010.
 
(4)   The excess of the fair value over the carrying value of debt was $1.0 billion in 2010 and $0.8 billion in 2009.
 
Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices in active markets.
 
The Company has access to substantial sources of funds at numerous banks worldwide. In September 2010, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires September 22, 2011. Interest charged on borrowings under the credit line agreements is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreements are not material.
 
Throughout 2010 the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately $7.6 billion at the end of 2010, of which $7.4 billion was borrowed under the Commercial Paper Program. The remainder represents principally local borrowing by international subsidiaries.
 
The Company has a shelf registration with the Securities and Exchange Commission that enables the Company to issue on a timely basis debt securities and warrants to purchase debt securities.
 
Aggregate maturities of long-term obligations commencing in 2010 are:
 
(Dollars in Millions)
                                             
                              After
 
2011     2012     2013     2014     2015     2015  
 
$ 13       644       509       9             7,994  
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 51


 

 
8.   Income Taxes
 
The provision for taxes on income consists of:
 
                         
(Dollars in Millions)   2010     2009     2008  
 
Currently payable:
                       
U.S. taxes   $ 2,063       2,410       2,334  
International taxes     1,194       1,515       1,624  
                         
Total currently payable
    3,257       3,925       3,958  
                         
Deferred:
                       
U.S. taxes     (4 )     187       126  
International taxes     360       (623 )     (104 )
                         
Total deferred
    356       (436 )     22  
                         
Provision for taxes on income
  $ 3,613       3,489       3,980  
                         
 
A comparison of income tax expense at the U.S. statutory rate of 35% in 2010, 2009 and 2008, to the Company’s effective tax rate is as follows:
 
                         
(Dollars in Millions)   2010     2009     2008  
 
U.S. 
  $ 6,392       7,141       6,579  
International
    10,555       8,614       10,350  
                         
Earnings before taxes on income:
  $ 16,947       15,755       16,929  
                         
Tax rates:
                       
U.S. statutory rate
    35.0 %     35.0       35.0  
Ireland and Puerto Rico operations
    (5.1 )     (5.1 )     (6.8 )
Research and orphan drug tax credits
    (0.6 )     (0.6 )     (0.6 )
U.S. state and local
    1.0       1.8       1.6  
International subsidiaries excluding Ireland
    (7.5 )     (6.7 )     (5.6 )
U.S. manufacturing deduction
    (0.5 )     (0.4 )     (0.4 )
In-process research and development (IPR&D)
                0.4  
U.S. Tax international income
    (0.6 )     (1.6 )     (0.5 )
All other
    (0.4 )     (0.3 )     0.4  
                         
Effective tax rate
    21.3 %     22.1       23.5  
                         
 
The Company has subsidiaries manufacturing in Ireland under an incentive tax rate. In addition, the Company has subsidiaries operating in Puerto Rico under various tax incentive grants. The decrease in the 2010 tax rate was primarily due to decreases in taxable income in higher tax jurisdictions relative to taxable income in lower tax jurisdictions and certain U.S. tax adjustments. The decrease in the 2009 tax rate was primarily due to increases in taxable income in lower tax jurisdictions relative to taxable income in higher tax jurisdictions.
 
Temporary differences and carry forwards for 2010 and 2009 are as follows:
 
                                 
    2010
    2009
 
    Deferred Tax     Deferred Tax  
(Dollars in Millions)   Asset     Liability     Asset     Liability  
 
Employee related obligations
  $ 2,211               2,153          
Stock based compensation
    1,225               1,291          
Depreciation
            (769 )             (661 )
Non-deductible intangibles
            (2,725 )             (2,377 )
International R&D capitalized for tax
    1,857               1,989          
Reserves & liabilities
    948               1,014          
Income reported for tax purposes
    691               648          
Net operating loss carryforward international
    738               615          
Miscellaneous international
    1,326       (106 )     1,474       (110 )
Miscellaneous U.S. 
    470               799          
                                 
Total deferred income taxes
  $ 9,466       (3,600 )     9,983       (3,148 )
                                 
 
The difference between the net deferred tax on income per the balance sheet and the net deferred tax above is included in taxes on income on the balance sheet. The 2009 deferred tax Miscellaneous U.S. includes current year tax receivables. The Company has a wholly-owned international subsidiary that has cumulative net losses. The Company believes that it is more likely than not that this subsidiary will realize future taxable income sufficient to utilize these deferred tax assets.
 
The following table summarizes the activity related to unrecognized tax benefits:
 
                         
(Dollars in Millions)   2010     2009     2008  
 
Beginning of year
  $ 2,403