Johnson and Johnson 2010 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 39
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 Finan-
cial 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 compensa-
tion expense associated with the issuance of equity instruments to
employees for their services. The fair value of each award is esti-
mated 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 account-
ing 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 busi-
nesses 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 inflation-
ary in 2010, as the prior three-year cumulative inflation rate has sur-
passed 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 phar-
maceutical 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 sub-
stantially 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 busi-
ness. 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 opin-
ion, 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