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Annual Report 2012

Table of contents

  • Page 1
    Annual Report 2012

  • Page 2
    ... and unites the people of Johnson & Johnson. ON THE COVER: Michelle, an employee with the Johnson & Johnson Family of Companies, enjoys time with her young daughter, Alexis, while grandmother, Jacqueline, looks on. Johnson & Johnson helps people all over the world care for the health and well-being...

  • Page 3
    ... in health care to patients and customers. • We generated significant cash flow and maintained our AAA credit rating. Importantly, we continued our track record of consistent performance, with 29 straight years of adjusted earnings* increases and 50 consecutive years of dividend increases. Johnson...

  • Page 4
    ... infrastructure or cultural obstacles, addressing this gap is a key long-term goal for us as the leader in global health care. There is a gap in adequate mental health care services. This has come to public attention in glaring examples of recent tragedies in the United States. Again, this gap may...

  • Page 5
    ... & Johnson. At last year's annual shareholder meeting, I described myself as a realistic optimist, and despite our challenges, I firmly believe there is no company better positioned to be recognized as the world's leader in health care. Sincerely, Alex Gorsky Chairman, Board of Directors, and Chief...

  • Page 6
    ... Synthes acquisition, MD&D total change = (1.5%) and Orthopaedics total change = (0.4%) PHARMACEUTICALS With $25.4 billion in worldwide sales in 2012, we are the eighth-largest pharmaceuticals business in the world and the sixth-largest biotech business. Primary contributors to strong operational...

  • Page 7
    ... sales from the recently completed acquisition of Synthes, Inc. in the Orthopaedics business; a number of products in the Specialty Surgery business; electrophysiology products in the Cardiovascular Care business of Biosense Webster, Inc.; disposable contact lenses from Vistakon Division of Johnson...

  • Page 8
    ... resulting in product recalls or regulatory action. A further list and description of these risks, uncertainties and other factors can be found in Exhibit 99 of Johnson & Johnson's Annual Report on Form 10-K for the fiscal year ended December 30, 2012. Copies of this Form 10-K, as well as subsequent...

  • Page 9
    ... Registered Public Accounting Firm Management's Report on Internal Control Over Financial Reporting SUPPORTING SCHEDULES Summary of Operations and Statistical Data 2002 - 2012 Shareholder Return Performance Graphs 71 72 20 21 22 23 24 25 69 70 2 3 4 8 11 14 19 Johnson & Johnson 2012 Annual Report...

  • Page 10
    ... 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...

  • Page 11
    ... of 3.5% in 2012, 12.4% in 2011 and 3.6% in 2010. The acquisition of Synthes, Inc., net of the related divestiture, increased both total worldwide sales growth and operational growth by 3.1%. The five-year compound annual growth rates for worldwide, U.S. and international sales were 1.9%, (1.7)% and...

  • Page 12
    ... portfolio focused on key brands. The Fort Washington, Pennsylvania manufacturing site is not in operation at this time. McNeil continues to work on the re-siting of the products previously produced at the Fort Washington facility to other facilities. The Skin Care franchise sales were $3.6 billion...

  • Page 13
    ... in market share growth of PREZISTA® (darunavir), EDURANT® (rilpivirine) and INTELENCE® (etravirine) partially offset by lower sales of LEVAQUIN® (levofloxacin)/FLOXIN® (ofloxacin), due to the loss of market exclusivity in the U.S. in June 2011. Johnson & Johnson 2012 Annual Report • 5

  • Page 14
    ...seeking conditional approval for the use of bedaquiline (TMC207) as an oral treatment, to be used as part of combination therapy for pulmonary, multi-drug resistant tuberculosis in adults. Pharmaceutical segment sales in 2011 were $24.4 billion, an increase of 8.8% from 2010, with operational growth...

  • Page 15
    ...& Shurtleff, Inc., in the fiscal fourth quarter of 2011, and the divestiture of certain rights and assets related to the DePuy trauma business. The positive impact on the Orthopaedics franchise total sales growth and operational growth due to the newly acquired products from Synthes, Inc. net of the...

  • Page 16
    ... cost of products sold. Percent to sales of selling, marketing and administrative expenses increased in 2011 compared to the prior year primarily due to investment spending, as well as the fee on branded pharmaceutical products incurred due to the U.S. health care reform legislation. 8 • Johnson...

  • Page 17
    ...2011. The Company recorded a pre-tax charge of $0.7 billion, of which $0.1 billion was included in the cost of products sold. There was no restructuring charge in 2012. See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring. Interest (Income) Expense...

  • Page 18
    ..., and general corporate (income) expense. A $0.2 billion and $0.5 billion currency related expense for the acquisition of Synthes, Inc., was included in 2012 and 2011, respectively. Consumer Segment: In 2012, Consumer segment pre-tax profit as a percent to sales was 11.7% versus 14.1% in 2011. Pre...

  • Page 19
    ... net sales of investments in marketable securities of $1.4 billion and $1.5 billion of proceeds from the disposal of assets. Financing activities use of $20.6 billion was for the repurchase of common stock of $12.9 billion primarily for the acquisition of Synthes, Inc., dividends to shareholders of...

  • Page 20
    ... to date. The Company will continue to work closely with these customers on payment plans, monitor the economic situation and take appropriate actions as necessary. Financing and Market Risk The Company uses financial instruments to manage the impact of foreign exchange rate changes on cash flows...

  • Page 21
    ... 2, 2013, the Board of Directors declared a regular quarterly cash dividend of $0.61 per share, payable on March 12, 2013, to shareholders of record as of February 26, 2013. The Company expects to continue the practice of paying regular cash dividends. Johnson & Johnson 2012 Annual Report • 13

  • Page 22
    ...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...

  • Page 23
    ...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 December 30, 2012 and January 1, 2012. Consumer Segment (Dollars in Millions) Balance at Beginning of Period Accruals Payments...

  • Page 24
    ... is not practical. See Note 8 to the Consolidated Financial Statements for further information regarding income taxes. Legal and Self Insurance Contingencies: The Company records accruals for various contingencies including legal proceedings and product liability claims as these arise in the normal...

  • Page 25
    ..., 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 2002 - 2012, in the United States, the weighted average compound annual growth rate of...

  • Page 26
    ... effect on the Company's results of operations and cash flows for that period. See Note 21 to the Consolidated Financial Statements for further information regarding legal proceedings. Common Stock Market Prices The Company's Common Stock is listed on the New York Stock Exchange under the symbol...

  • Page 27
    ... health care industry by government agencies; changes in behavior and spending patterns of purchasers of health care products and services; financial instability of international economies and sovereign risk; disruptions due to natural disasters; manufacturing difficulties or delays; complex global...

  • Page 28
    ...issued 3,119,843,000 shares) Accumulated other comprehensive income (Note 13) Retained earnings Less: common stock held in treasury, at cost (Note 12) (341,354,000 shares and 395,480,000 shares) Total shareholders' equity Total liabilities and shareholders' equity See Notes to Consolidated Financial...

  • Page 29
    ...STATEMENTS OF EARNINGS (Dollars and Shares in Millions Except Per Share Amounts) (Note 1) 2012 2011 2010 Sales to customers Cost of products sold Gross profit Selling, marketing and administrative expenses Research and development expense In-process research and development (Note 5) Interest income...

  • Page 30
    ...11 million, Derivatives & Hedges; $95 million, $144 million and $25 million. Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries. See Notes to Consolidated Financial Statements 22 • Johnson & Johnson 2012 Annual Report

  • Page 31
    ... Stock Amount Total Retained Earnings Common Stock Issued Amount Balance, January 3, 2010 Net earnings attributable to Johnson & Johnson Cash dividends paid Employee compensation and stock option plans Repurchase of common stock Other comprehensive income, net of tax: Balance, January 2, 2011...

  • Page 32
    ... of assets Acquisitions, net of cash acquired (Note 20) Purchases of investments Sales of investments Other (primarily intangibles) Net cash used by investing activities Cash flows from financing activities Dividends to shareholders Repurchase of common stock Proceeds from short-term debt Retirement...

  • Page 33
    ... world and its primary focus is on products related to human health and well-being. The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care...

  • Page 34
    ... 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...

  • Page 35
    ...fiscal reporting years 2012, 2011 and 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...

  • Page 36
    ... 30, 2012 and approximately $1.4 billion as of January 1, 2012 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices and Diagnostics customers which are...

  • Page 37
    ... are capitalized as intangible assets and amortized to cost of goods sold over the useful life. For all years presented, there was no individual project that represented greater than 5% of the total annual consolidated research and development expense. Advertising Costs associated with advertising...

  • Page 38
    ...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. 30 • Johnson & Johnson 2012 Annual Report

  • Page 39
    ... in 2012, 2011 and 2010, was $2.5 billion, $2.3 billion and $2.2 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...

  • Page 40
    ... tax, per year. Amortization expense is included in cost of products sold. Intangible assets and goodwill increased by $12.9 billion and $6.0 billion, respectively, based on the purchase price allocation for the Synthes, Inc., acquisition. See Note 20 to the Consolidated Financial Statements for...

  • Page 41
    ...(2) 2012 2011 Cash Flow Hedges by Income Statement Caption (Dollars in Millions) Sales to customers (3) $45 103 expense (3) (42) 11 (65) $52 (60) (103) 24 (406) 45 (500) (58) (98) 19 (16) 29 (124) (9) (154) (22) (45) (2) (232) (1) (4) (1) - - (6) (1) 2 (1) - 1 1 Cost of products sold...

  • Page 42
    ...currency interest rate swaps related to outstanding EUR and GBP notes, matured in November 2012. The swaps were settled at fair market value and replaced with new swaps. Currency option related to the acquisition of Synthes, Inc., which expired in January 2012. Classified as non-current other assets...

  • Page 43
    ...was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs. The Company has access to substantial sources of funds at numerous banks worldwide. In September 2012, the Company secured a new 364-day Credit Facility. Total credit available...

  • Page 44
    ...) 2012 2011 2010 U.S. International Earnings before taxes on income: Tax rates: U.S. statutory rate International operations excluding Ireland Ireland and Puerto Rico operations Research and orphan drug tax credits U.S. state and local U.S. manufacturing deduction U.S. tax on international income...

  • Page 45
    ... benefits of $3.1 billion at December 30, 2012, if recognized, would affect the Company's annual effective tax rate. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress with a number of tax authorities. The U.S. Internal Revenue Service...

  • Page 46
    ... 2011, respectively, are included in other assets on the Consolidated Balance Sheets. 10. Pensions and Other Benefit Plans The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide...

  • Page 47
    ... obligation for the year listed and also the net periodic benefit cost for the following year. Retirement Plans 2012 2011 2010 Other Benefit Plans 2012 2011 2010 Worldwide Benefit Plans Discount rate Expected long-term rate of return on plan assets Rate of increase in compensation levels 4.25% 8.45...

  • Page 48
    ... return (loss) on plan assets Company contributions Plan participant contributions Settlements Divestitures & acquisitions Benefits paid from plan assets Effect of exchange rates Plan assets at fair value - end of year Funded status - end of year Amounts Recognized in the Company's Balance Sheet...

  • Page 49
    .... A majority of the Company's pension funds are open to new entrants and are expected to be on-going plans. Permitted investments are primarily liquid and/or listed, with little reliance on illiquid and non-traditional investments such as hedge funds. Johnson & Johnson 2012 Annual Report • 41

  • Page 50
    ... the credit worthiness of the issuer. The underlying investments are government, asset-backed and fixed income securities. In general, insurance contracts are classified as Level 3 as there are no quoted prices nor other observable inputs for pricing. 42 • Johnson & Johnson 2012 Annual Report

  • Page 51
    ... million of U.S. short-term-investment funds (Level 2) at December 30, 2012. The fair value of Johnson & Johnson Common Stock directly held in plan assets was $512 million (2.9% of total plan assets) at December 30, 2012 and $476 million (3.5% of total plan assets) at January 1, 2012. Level 3 Gains...

  • Page 52
    ... issued were approximately 3,119,843,000 shares at the end of 2012, 2011 and 2010. Cash dividends paid were $2.40 per share in 2012, compared with dividends of $2.25 per share in 2011, and $2.11 per share in 2010. (1) Includes repurchase of common stock associated with the acquisition of Synthes...

  • Page 53
    ... all balance sheet assets and liabilities at current exchange rates, except for those located in highly inflationary economies. The translation of balance sheet accounts for highly inflationary economies are reflected in the operating results. A rollforward of the changes during 2012, 2011 and 2010...

  • Page 54
    ... the date of grant and vest over service periods that range from 6 months to 4 years. All options are granted at the average of the high and low prices of the Company's Common Stock on the New York Stock Exchange on the date of grant. Under the 2012 Long-Term Incentive Plan, the Company may issue up...

  • Page 55
    ... period, of three equally-weighted goals that directly align with or help drive long-term total shareholder return: sales, adjusted operational earnings per share, and relative total shareholder return. The number of shares actually earned at the end of the three-year period will vary, based only...

  • Page 56
    ... total shareholder return goal of each performance share unit was estimated on the date of grant using the Monte Carlo valuation model. No performance share units were issued in 2012. 18. Segments of Business and Geographic Areas Sales to Customers (Dollars in Millions) 2012 2011 2010 Consumer...

  • Page 57
    ... The Medical Devices and Diagnostics segment also includes $280 million expense for the cost associated with the DePuy ASRâ„¢ Hip program. (6) Long-lived assets include property, plant and equipment, net for 2012, 2011 and 2010 of $16,097, $14,739 and $14,553, respectively, and intangible assets and...

  • Page 58
    ... First Quarter(5) 2011 Second Quarter(6) Third Quarter(7) Fourth Quarter(8) Segment sales to customers Consumer Pharmaceutical Med Devices & Diagnostics Total sales Gross profit Earnings before provision for taxes on income Net earnings attributable to Johnson & Johnson Basic net earnings per share...

  • Page 59
    ... of success factor of 38%, discounted using a 25% rate. During the fiscal second quarter, the Company completed the acquisition of Synthes, Inc., a global developer and manufacturer of orthopaedics devices, for a purchase price of $20.2 billion in cash and stock. The net acquisition cost of...

  • Page 60
    ..., market share and future operating plans. The intangible assets with definite lives were assigned asset lives ranging from 7 to 22 years. The majority of the intangible asset valuation relates to customer relationships, patents and technology and trade name intangible assets in the Company...

  • Page 61
    ... per share attributable to Johnson & Johnson $68,894 $11,564 $4.11 68,741 9,427 3.40 In 2012, the Company recorded acquisition related costs of $1,028 million before tax, which were recorded in Cost of products sold and Other (income) expense. In connection with the Synthes acquisition, DePuy...

  • Page 62
    ... for 2012, 2011 and 2010 in accordance with U.S. GAAP standards related to business combinations, and goodwill and other intangible assets, is not provided, as the impact of the aforementioned acquisitions did not have a material effect on the Company's results of operations, cash flows or financial...

  • Page 63
    ... the United States, primarily in the United Kingdom, Canada and Australia. The Company continues to receive information with respect to potential costs associated with this recall. During the fiscal third and fourth quarters of 2012, the Company increased its accruals for the DePuy ASRâ„¢ Hip recall...

  • Page 64
    ... subsidiaries to sell their products, or require the payment of past damages and future royalties. Medical Devices and Diagnostics In October 2004, Tyco Healthcare Group, LP (Tyco) and U.S. Surgical Corporation filed a lawsuit against Ethicon EndoSurgery, Inc. (EES) in the United States District...

  • Page 65
    ... of the United States Food and Drug Administration (FDA), to introduce generic versions of the products at issue, resulting in very substantial market share and revenue losses for those products. CONCERTA® A number of generic companies have filed ANDAs seeking approval to market generic versions of...

  • Page 66
    ... approval. In October 2011, JPI filed a patent infringement lawsuit against Sun Pharma Global FZE and Sun Pharmaceutical Industries (collectively, Sun) in the United States District Court for the District of New Jersey in response to Sun's ANDA seeking approval to market a generic version of ORTHO...

  • Page 67
    ... INTELLECTUAL PROPERTY MATTERS In September 2009, Centocor Ortho Biotech Products, L.P. (now Janssen Products, LP (JPLP)) intervened in an inventorship lawsuit filed by the University of Kansas Center for Research, Inc. (KUCR) against the United States of America (USA) in the United States District...

  • Page 68
    ... lawsuit, the State claims that an employee of a governmentowned hospital was the inventor on several patents related to fibrin glue technology that the employee developed while he was a government employee. The State claims that he had no right to transfer any intellectual property to Omrix because...

  • Page 69
    ... Drug and Cosmetic Act, but certain issues remain open before a settlement can be finalized. During 2011, the Company accrued amounts to cover the financial component of the proposed criminal settlement. In 2012, the Company also reached an agreement in principle with the United States Department...

  • Page 70
    ... September 2005, Johnson & Johnson received a subpoena from the United States Attorney's Office for the District of Massachusetts, seeking documents related to the sales and marketing of eight drugs to Omnicare, Inc. (Omnicare), a manager of pharmaceutical benefits for long-term care facilities. In...

  • Page 71
    ... dismiss all claims. MCNEIL CONSUMER HEALTHCARE Starting in June 2010, McNeil Consumer Healthcare Division of McNEIL-PPC, Inc. (McNeil Consumer Healthcare) and certain affiliates, including Johnson & Johnson (the Companies), received grand jury subpoenas from the United States Attorney's Office for...

  • Page 72
    ... claims or false statements affecting federal health care programs in connection with the marketing and use of the ASRâ„¢ XL Hip device. DePuy Orthopaedics, Inc., DePuy Synthes, and Johnson & Johnson Services, Inc. have voluntarily produced documents in response to the government's informal requests...

  • Page 73
    ... policy of Johnson & Johnson to cooperate with these inquiries by producing the requested information. GENERAL LITIGATION Starting in July 2006, five lawsuits were filed in United States District Court for the District of New Jersey by various employers and employee benefit plans and funds seeking...

  • Page 74
    ...the cost of past and/or future remediation. SHAREHOLDER DERIVATIVE ACTIONS Starting in April 2010, a number of shareholder derivative lawsuits were filed in the United States District Court for the District of New Jersey against certain current and former directors and officers of Johnson & Johnson...

  • Page 75
    ... provide any benefit to the Company, and that plaintiffs' counsel had requested an excessive fee award. In June 2012, two other shareholders who had submitted a shareholder demand letter in March 2010, the New Jersey Building Laborers Annuity and the New Jersey Building Laborers Pension Funds, filed...

  • Page 76
    ..., intangible assets of $160 million and inventory of $87 million (recorded in cost of products sold). The Cordis restructuring program has been substantially completed. The restructuring charge was recorded in the Medical Devices and Diagnostics segment. 68 • Johnson & Johnson 2012 Annual Report

  • Page 77
    ...of Directors of Johnson & Johnson: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, statements of comprehensive income, statements of equity, and statements of cash flows present fairly, in all material respects, the financial position...

  • Page 78
    ... LLP, an independent registered public accounting firm, as stated in their report, which appears herein. Alex Gorsky Chairman, Board of Directors Chief Executive Officer Dominic J. Caruso Vice President, Finance Chief Financial Officer 70 • Johnson & Johnson 2012 Annual Report

  • Page 79
    ..., plant and equipment Total assets Long-term debt Operating cash flow Common stock information Dividends paid per share Shareholders' equity per share Market price per share (year-end close) Average shares outstanding (millions) - basic - diluted Employees (thousands) (1) 2012 $29,830 37,394...

  • Page 80
    ...cumulative total shareholder return on the Company's Common Stock for periods of five years and ten years ending December 31, 2012, against the cumulative total return of the Standard & Poor's 500 Stock Index, the Standard & Poor's Pharmaceutical Index and the Standard & Poor's Health Care Equipment...

  • Page 81
    ... Chief Financial Officer Member, Executive Committee DOUGLAS K. CHIA Corporate Secretary Assistant General Counsel STEPHEN J. COSGROVE Corporate Controller Chief Accounting Officer JOAQUIN DUATO Worldwide Chairman, Pharmaceuticals Group PETER M. FASOLO Vice President, Global Human Resources Member...

  • Page 82
    ... OFFICE COMMON STOCK JOHNSON & JOHNSON ON THE WEB One Johnson & Johnson Plaza New Brunswick, New Jersey 08933 (732) 524-0400 ANNUAL MEETING Listed on New York Stock Exchange Stock Symbol: JNJ SHAREHOLDER RELATIONS CONTACT Our website: www.jnj.com Our company blog: www.jnjbtw.com Our history...

  • Page 83
    ... live and work and to the world community as well. We must be good citizens - support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the...