Johnson and Johnson 2012 Annual Report Download - page 25

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 December 30, 2012.
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 2002 - 2012, 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, 2011 and 2012, as the prior three-year
cumulative inflation rate 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.
On February 8, 2013, the Venezuelan government announced a 32% devaluation of its currency. The effect of the
devaluation is not expected to have a material impact on the Company’s 2013 full year results.
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 2012 would have increased or
decreased the translation of foreign sales by approximately $375 million and income by $80 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 of health care
products.
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.
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