Quarterly Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended July 1, 2012
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or
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
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Commission file number 1-3215
(Exact name of registrant as specified in its charter)
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NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
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22-1024240
(I.R.S. Employer
Identification No.)
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One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant’s telephone number, including area code (732) 524-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On July 27, 2012
2,757,041,143 shares of Common Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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No.
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EX-31.1
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EX-32.1
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EX-101 INSTANCE DOCUMENT
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EX-101 SCHEMA DOCUMENT
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EX-101 CALCULATION LINKBASE DOCUMENT
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EX-101 LABELS LINKBASE DOCUMENT
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EX-101 PRESENTATION LINKBASE DOCUMENT
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EX-101 DEFINITION LINKBASE DOCUMENT
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2
Part I — FINANCIAL INFORMATION
Item 1 — FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions Except Share and Per Share Data)
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July 1, 2012
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January 1, 2012
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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14,042
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$
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24,542
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Marketable securities
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2,873
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7,719
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Accounts receivable, trade, less allowances for doubtful accounts $434 (2011, $361)
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10,992
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10,581
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Inventories (Note 2)
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7,697
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6,285
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Deferred taxes on income
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3,117
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2,556
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Prepaid expenses and other receivables
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2,894
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2,633
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Total current assets
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41,615
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54,316
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Property, plant and equipment at cost
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33,297
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31,829
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Less: accumulated depreciation
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(17,675
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)
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(17,090
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)
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Property, plant and equipment, net
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15,622
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14,739
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Intangible assets, net (Note 3)
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29,199
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18,138
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Goodwill, net (Note 3)
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21,412
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16,138
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Deferred taxes on income
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4,011
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6,540
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Other assets
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3,891
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3,773
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Total assets
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$
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115,750
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$
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113,644
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Loans and notes payable
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$
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6,040
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$
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6,658
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Accounts payable
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5,145
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5,725
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Accrued liabilities
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6,533
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4,608
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Accrued rebates, returns and promotions
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2,960
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2,637
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Accrued compensation and employee related obligations
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1,911
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2,329
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Accrued taxes on income
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1,259
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854
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Total current liabilities
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23,848
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22,811
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Long-term debt (Note 4)
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11,525
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12,969
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Deferred taxes on income
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2,276
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1,800
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Employee related obligations
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8,180
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8,353
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Other liabilities
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9,487
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10,631
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Total liabilities
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55,316
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56,564
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Shareholders’ equity:
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Common stock — par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
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$
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3,120
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$
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3,120
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Accumulated other comprehensive income (loss) (Note 7)
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(6,204
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)
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(5,632
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)
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Retained earnings
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83,530
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81,251
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Less: common stock held in treasury, at cost (369,284,000 and 395,480,000 shares)
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20,012
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21,659
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Total shareholders’ equity
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60,434
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57,080
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Total liabilities and shareholders' equity
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$
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115,750
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$
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113,644
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See Notes to Consolidated Financial Statements
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
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Fiscal Second Quarters Ended
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July 1,
2012 |
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Percent
to Sales
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July 3,
2011 |
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Percent
to Sales
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Sales to customers (Note 9)
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$
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16,475
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100.0
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%
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$
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16,597
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100.0
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%
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Cost of products sold
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5,143
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31.2
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5,172
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31.2
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Gross profit
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11,332
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68.8
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11,425
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68.8
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Selling, marketing and administrative expenses
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4,965
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30.1
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5,215
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31.4
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Research and development expense
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1,766
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10.7
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1,882
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11.3
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In-process research and development
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429
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2.6
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—
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—
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Interest income
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(14
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(0.1
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(18
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(0.1
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)
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Interest expense, net of portion capitalized
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143
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0.9
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129
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0.8
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Other (income) expense, net
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2,008
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12.2
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206
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1.3
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Restructuring expense
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—
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—
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589
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3.5
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Earnings before provision for taxes on income
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2,035
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12.4
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3,422
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20.6
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Provision for taxes on income (Note 5)
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627
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3.9
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646
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3.9
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NET EARNINGS
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$
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1,408
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8.5
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%
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$
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2,776
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16.7
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%
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NET EARNINGS PER SHARE (Note 8)
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Basic
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$
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0.51
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$
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1.01
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Diluted
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$
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0.50
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$
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1.00
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CASH DIVIDENDS PER SHARE
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$
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0.61
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$
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0.57
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AVG. SHARES OUTSTANDING
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Basic
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2,747.4
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2,740.5
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Diluted
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2,798.2
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2,781.3
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See Notes to Consolidated Financial Statements
4
5
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)
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Fiscal Second Quarters Ended
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Fiscal Six Months Ended
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July 1, 2012
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July 3, 2011
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July 1, 2012
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July 3, 2011
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Net Earnings
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$
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1,408
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$
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2,776
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5,318
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6,252
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Other Comprehensive Income (Loss), net of tax
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Foreign currency translation
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(1,619
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)
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414
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(796
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)
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1,787
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Securities:
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Unrealized holding gain (loss) arising during period
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(38
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)
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322
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69
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435
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Reclassifications adjustment for gains included in earnings
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—
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|
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(4
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)
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(1
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)
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(139
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)
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|||
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Net change
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(38
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)
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318
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68
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296
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Employee benefit plans:
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Prior service cost amortization during period
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—
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1
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1
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2
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Gain (loss) amortization during period
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95
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55
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188
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126
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|||
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Net change
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95
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56
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189
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128
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|||
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Derivatives & hedges:
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Unrealized gain (loss) arising during period
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(111
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)
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2
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(85
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)
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12
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|||
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Reclassifications to earnings
|
9
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|
40
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|
52
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|
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118
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|||
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Net change
|
(102
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)
|
|
42
|
|
(33
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)
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130
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|
|||
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|||||||
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Other Comprehensive Income (Loss)
|
(1,664
|
)
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830
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(572
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)
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2,341
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Comprehensive Income (Loss)
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$
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(256
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)
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$
|
3,606
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$
|
4,746
|
|
|
8,593
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|
|
|
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See Notes to Consolidated Financial Statements
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The tax effects in other comprehensive income for the fiscal second quarters were as follows for 2012 and 2011 respectively: Securities; $20 million and $171 million, Employee Benefits; $49 million and $30 million, Derivatives & Hedges; $55 million and $22 million.
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The tax effects in other comprehensive income for the fiscal six months were as follows for 2012 and 2011 respectively: Securities; $37 million and $159 million, Employee Benefits; $98 million and $69 million, Derivatives & Hedges; $18 million and $70 million.
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Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries.
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6
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
See Notes to Consolidated Financial Statements
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Fiscal Six Months Ended
|
||||||
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July 1,
2012 |
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July 3,
2011 |
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net earnings
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$
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5,318
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$
|
6,252
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Adjustments to reconcile net earnings to cash flows from operating activities:
|
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||||
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Depreciation and amortization of property and intangibles
|
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1,625
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|
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1,532
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Stock based compensation
|
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369
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|
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339
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|
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Intangible asset write-downs
|
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1,368
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|
|
160
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||
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Deferred tax provision
|
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(511
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)
|
|
(504
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)
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Accounts receivable allowances
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83
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|
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(33
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)
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Changes in assets and liabilities, net of effects from acquisitions:
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|
||||
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Decrease/(Increase) in accounts receivable
|
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155
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(576
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)
|
||
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Increase in inventories
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(618
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)
|
|
(620
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)
|
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Increase/(Decrease) in accounts payable and accrued liabilities
|
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899
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|
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(444
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)
|
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Increase in other current and non-current assets
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|
(29
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)
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(1,080
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)
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(Decrease)/Increase in other current and non-current liabilities
|
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(1,136
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)
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1,199
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|
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|
||||
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NET CASH FLOWS FROM OPERATING ACTIVITIES
|
|
7,523
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|
|
6,225
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||
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|
||||
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CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
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|
||||
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Additions to property, plant and equipment
|
|
(1,100
|
)
|
|
(1,054
|
)
|
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Proceeds from the disposal of assets
|
|
690
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|
|
143
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|
||
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Acquisitions, net of cash acquired
|
|
(17,659
|
)
|
|
(2,049
|
)
|
||
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Purchases of investments
|
|
(5,211
|
)
|
|
(16,820
|
)
|
||
|
Sales of investments
|
|
9,883
|
|
|
10,582
|
|
||
|
Other
|
|
(8
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)
|
|
(62
|
)
|
||
|
|
|
|
|
|
||||
|
NET CASH USED BY INVESTING ACTIVITIES
|
|
(13,405
|
)
|
|
(9,260
|
)
|
||
|
|
|
|
|
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
||||
|
Dividends to shareholders
|
|
(3,241
|
)
|
|
(3,043
|
)
|
||
|
Repurchase of common stock
|
|
(12,919
|
)
|
|
(929
|
)
|
||
|
Reissuance of common stock
|
|
12,852
|
|
|
—
|
|
||
|
Proceeds from short-term debt
|
|
2,518
|
|
|
3,586
|
|
||
|
Retirement of short-term debt
|
|
(4,780
|
)
|
|
(6,194
|
)
|
||
|
Proceeds from long-term debt
|
|
6
|
|
|
4,404
|
|
||
|
Retirement of long-term debt
|
|
(10
|
)
|
|
(5
|
)
|
||
|
Proceeds from the exercise of stock options/excess tax benefits
|
|
1,148
|
|
|
717
|
|
||
|
Other
|
|
(160
|
)
|
|
—
|
|
||
|
|
|
|
|
|
||||
|
NET CASH USED BY FINANCING ACTIVITIES
|
|
(4,586
|
)
|
|
(1,464
|
)
|
||
|
|
|
|
|
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(32
|
)
|
|
118
|
|
||
|
Decrease in cash and cash equivalents
|
|
(10,500
|
)
|
|
(4,381
|
)
|
||
|
Cash and Cash equivalents, beginning of period
|
|
24,542
|
|
|
19,355
|
|
||
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
14,042
|
|
|
$
|
14,974
|
|
|
Acquisitions
|
|
|
|
|
||||
|
Fair value of assets acquired
|
|
$
|
18,868
|
|
|
$
|
2,248
|
|
|
Fair value of liabilities assumed and non-controlling interests
|
|
(1,209
|
)
|
|
(199
|
)
|
||
|
Net cash paid for acquisitions
|
|
$
|
17,659
|
|
|
$
|
2,049
|
|
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 1, 2012
. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented.
In July 2012, the Financial Accounting Standards Board (FASB) issued guidance and amendments related to testing indefinite lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update will become effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. However, early adoption is permitted. This adoption of this standard is not expected to have a material impact on the Company’s results of operations, cash flows or financial position.
During the fiscal first quarter of 2012, the Company adopted the FASB guidance and amendments issued related to goodwill impairment testing. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. This update became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
During the fiscal first quarter of 2012, the Company adopted the FASB amendment to the disclosure requirements for presentation of comprehensive income. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance became effective retrospectively for the interim periods and annual periods beginning after December 15, 2011; however, the FASB agreed to an indefinite deferral of the reclassification requirement. For the Consolidated Statements of Comprehensive Income see page 6.
During the fiscal first quarter of 2012, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments result in convergence of fair value measurement and disclosure requirements between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). This guidance became effective prospectively for the interim periods and annual periods beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows or financial position.
NOTE 2 — INVENTORIES
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
January 1, 2012
|
|||
|
Raw materials and supplies
|
|
$
|
1,300
|
|
|
1,206
|
|
|
Goods in process
|
|
1,934
|
|
|
1,637
|
|
|
|
Finished goods
|
|
4,463
|
|
|
3,442
|
|
|
|
Total inventories
|
|
$
|
7,697
|
|
|
6,285
|
|
Inventories increased by approximately $
0.9 billion
related to the Synthes acquisition. See Note 10 to the Consolidated Financial Statements.
NOTE 3 — INTANGIBLE ASSETS AND GOODWILL
8
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The latest impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of
2011
. Future impairment tests for goodwill and indefinite lived intangible assets will be performed annually in the fiscal fourth quarter, or sooner if warranted, as was the case for certain indefinite lived intangible assets in the fiscal second quarter of 2012.
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
January 1, 2012
|
|||
|
Intangible assets with definite lives:
|
|
|
|
|
|||
|
Patents and trademarks — gross
|
|
$
|
8,778
|
|
|
7,947
|
|
|
Less accumulated amortization
|
|
3,196
|
|
|
2,976
|
|
|
|
Patents and trademarks — net
|
|
5,582
|
|
|
4,971
|
|
|
|
Customer relationships and other intangibles — gross
|
|
18,227
|
|
|
8,716
|
|
|
|
Less accumulated amortization
|
|
3,560
|
|
|
3,432
|
|
|
|
Customer relationships and other intangibles — net
|
|
14,667
|
|
|
5,284
|
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|||
|
Trademarks
|
|
7,356
|
|
|
6,034
|
|
|
|
Purchased in-process research and development
|
|
1,594
|
|
|
1,849
|
|
|
|
Total intangible assets with indefinite lives
|
|
8,950
|
|
|
7,883
|
|
|
|
Total intangible assets — net
|
|
$
|
29,199
|
|
|
18,138
|
|
Goodwill as of
July 1, 2012
was allocated by segment of business as follows:
|
(Dollars in Millions)
|
|
Consumer
|
|
Pharm
|
|
Med Dev & Diag
|
|
Total
|
|||||
|
Goodwill, net at January 1, 2012
|
|
$
|
8,298
|
|
|
1,721
|
|
|
6,119
|
|
|
16,138
|
|
|
Acquisitions
|
|
—
|
|
|
48
|
|
|
5,397
|
|
|
5,445
|
|
|
|
Currency translation/Other
|
|
(119
|
)
|
|
(27
|
)
|
|
(25
|
)
|
|
(171
|
)
|
|
|
Goodwill, net as of July 1, 2012
|
|
$
|
8,179
|
|
|
1,742
|
|
|
11,491
|
|
|
21,412
|
|
The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are
17
years and
23
years, respectively. The amortization expense of amortizable intangible assets for the fiscal
six
months ended
July 1, 2012
was
$488 million
, and the estimated amortization expense for the five succeeding years approximates
$1,340 million
, before tax, per year. Amortization expense is included in cost of products sold.
Intangible assets and goodwill increased by $
12.9 billion
and $
5.4 billion
respectively, related to the Synthes acquisition. The increase in intangible assets was partially offset by $
0.9 billion
in intangible asset write-downs and a $
0.4 billion
impairment of purchased in-process research and development. See Note 10 to the Consolidated Financial Statements for additional details on Synthes.
NOTE 4 — FAIR VALUE MEASUREMENTS
The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of raw materials denominated in foreign currency. The Company also uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges. The Company also uses forward exchange contracts to manage its exposure to the variability of cash flows for repatriation of foreign dividends. These contracts are designated as net investment hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward exchange contracts are not designated as hedges, and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features or requirements to post collateral. On an ongoing basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company enters into agreements with commercial institutions that have at least an A (or equivalent) credit rating. As of
July 1, 2012
, the Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate
9
swaps of
$22.7 billion
and
$2.8 billion
, respectively.
All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains/losses on net investment hedges are accounted for through the currency translation account and are insignificant. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings in Other (income) expense, net.
As of
July 1, 2012
, the balance of deferred net losses on derivatives included in accumulated other comprehensive income was
$201 million
after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts related to foreign exchange contracts will be reclassified into earnings over the
next 12 months
as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is
18 months
excluding interest rate swaps. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.
The following table is a summary of the activity related to derivatives designated as hedges for the fiscal
second
quarters in
2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
Gain/ (Loss)
recognized in
Accumulated
OCI
(1)
|
|
Gain/(Loss) reclassified from
Accumulated OCI
into income
(1)
|
|
Gain/ (Loss)
recognized in
Other
income/expense
(2)
|
|||||||||||||
|
|
|
Fiscal Second Quarters Ended
|
|||||||||||||||||
|
(Dollars in Millions)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|||||||
|
Cash Flow Hedges by Income Statement Caption
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Sales to customers
(A)
|
|
$
|
(42
|
)
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
Cost of products sold
(A)
|
|
(97
|
)
|
|
12
|
|
|
(13
|
)
|
|
(44
|
)
|
|
1
|
|
|
6
|
|
|
|
Research and development expense
(A)
|
|
30
|
|
|
28
|
|
|
11
|
|
|
18
|
|
|
—
|
|
|
(2
|
)
|
|
|
Interest (income)/Interest expense, net
(B)
|
|
(41
|
)
|
|
(31
|
)
|
|
(6
|
)
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
|
Other (income)expense, net
(A)
|
|
39
|
|
|
(7
|
)
|
|
9
|
|
|
2
|
|
|
(1
|
)
|
|
—
|
|
|
|
Total
|
|
$
|
(111
|
)
|
|
2
|
|
|
(9
|
)
|
|
(40
|
)
|
|
(1
|
)
|
|
4
|
|
The following table is a summary of the activity related to derivatives designated as hedges for the
first fiscal six months
in
2012
and
2011
:
10
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
Gain/ (Loss)
recognized in
Accumulated
OCI
(1)
|
|
Gain/ (Loss) reclassified from
Accumulated OCI
into income
(1)
|
|
Gain/ (Loss)
recognized in
other
income/expense
(2)
|
|||||||||||||
|
|
|
Fiscal Six Months Ended
|
|||||||||||||||||
|
(Dollars in Millions)
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|||||||
|
Cash Flow Hedges by Income Statement Caption
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Sales to customers
(A)
|
|
$
|
(14
|
)
|
|
27
|
|
|
(30
|
)
|
|
(10
|
)
|
|
—
|
|
|
(2
|
)
|
|
Cost of products sold
(A)
|
|
(39
|
)
|
|
92
|
|
|
(34
|
)
|
|
(106
|
)
|
|
—
|
|
|
3
|
|
|
|
Research and development expense
(A)
|
|
11
|
|
|
(8
|
)
|
|
13
|
|
|
19
|
|
|
—
|
|
|
(2
|
)
|
|
|
Interest (income)/Interest expense, net
(B)
|
|
(42
|
)
|
|
(40
|
)
|
|
(9
|
)
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
|
Other (income)expense, net
(A)
|
|
(1
|
)
|
|
(59
|
)
|
|
8
|
|
|
(3
|
)
|
|
(1
|
)
|
|
2
|
|
|
|
Total
|
|
$
|
(85
|
)
|
|
12
|
|
|
(52
|
)
|
|
(118
|
)
|
|
(1
|
)
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
All amounts shown in the tables above are net of tax.
(1) Effective portion
(2) Ineffective portion
(A) Foreign exchange contracts
(B) Cross currency interest rate swaps
For the fiscal
second
quarters ended
July 1, 2012
and
July 3, 2011
, a loss of
$17 million
and a loss of
$7 million
, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.
For the
first fiscal six months
ended
July 1, 2012
and
July 3, 2011
, a loss of
$26 million
and a gain of
$8 million
, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that is determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.
The fair value of a derivative financial instrument (i.e., foreign exchange contract or cross currency interest rate swap) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 because they are traded in an active exchange market. The Company did not have any other significant financial assets or liabilities which would require revised valuations under this standard that are recognized at fair value.
The following three levels of inputs are used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Significant other observable inputs.
Level 3 — Significant unobservable inputs.
The Company’s significant financial assets and liabilities measured at fair value as of
July 1, 2012
and
January 1, 2012
were as follows:
11
|
|
|
July 1, 2012
|
|
|
|
January 1, 2012
|
||||||||||
|
(Dollars in Millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total
(1)
|
||||||
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Foreign exchange contracts
|
|
$
|
—
|
|
|
449
|
|
|
—
|
|
|
449
|
|
|
442
|
|
|
Cross currency interest rate swaps
(2)
|
|
—
|
|
|
17
|
|
|
—
|
|
|
17
|
|
|
15
|
|
|
|
Total
|
|
—
|
|
|
466
|
|
|
—
|
|
|
466
|
|
|
457
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Foreign exchange contracts
|
|
—
|
|
|
403
|
|
|
—
|
|
|
403
|
|
|
452
|
|
|
|
Cross currency interest rate swaps
(3)
|
|
—
|
|
|
699
|
|
|
—
|
|
|
699
|
|
|
594
|
|
|
|
Total
|
|
—
|
|
|
1,102
|
|
|
—
|
|
|
1,102
|
|
|
1,046
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Foreign exchange contracts
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
29
|
|
|
|
Swiss Franc Option*
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
|
Total
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
46
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Foreign exchange contracts
|
|
—
|
|
|
41
|
|
|
—
|
|
|
41
|
|
|
34
|
|
|
|
Other Investments
(4)
|
|
$
|
1,675
|
|
|
—
|
|
|
—
|
|
|
1,675
|
|
|
1,563
|
|
* Currency option related to the acquisition of Synthes, Inc., which expired in January 2012.
|
(1)
|
As of January 1, 2012, these assets and liabilities are classified as Level 2 with the exception of Other Investments of $
1,563 million
which are classified as Level 1.
|
|
(2)
|
Includes
$14 million
and
$15 million
of non-current assets for
July 1, 2012
and January 1, 2012, respectively.
|
|
(3)
|
Includes
$699 million
and
$594 million
of non-current liabilities for
July 1, 2012
and January 1, 2012, respectively.
|
|
(4)
|
Classified as non-current other assets.
|
Financial Instruments not measured at Fair Value:
The following financial assets and liabilities are held at carrying amount on the consolidated balance sheet as of
July 1, 2012
:
12
The weighted average effective rate on non-current debt is
4.33%
.
Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.
NOTE 5 — INCOME TAXES
The worldwide effective income tax rates for the fiscal
six
months of
2012
and
2011
were
24.9%
and
21.2%
, respectively. The higher effective tax rate in 2012 as compared to 2011 was primarily due to lower tax rates associated with the Synthes integration and transaction costs and litigation accruals which added 2.8 points to the effective tax rate. The expiration of the Research and Development tax credit at year end 2011 increased the 2012 tax rate by 0.6 points.
NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS
13
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal
second
quarters of
2012
and
2011
include the following components:
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
|||||||||
|
|
|
Fiscal Second Quarters Ended
|
|||||||||||
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
|
July 1, 2012
|
|
July 3, 2011
|
|||||
|
Service cost
|
|
$
|
168
|
|
|
144
|
|
|
45
|
|
|
37
|
|
|
Interest cost
|
|
219
|
|
|
214
|
|
|
41
|
|
|
46
|
|
|
|
Expected return on plan assets
|
|
(308
|
)
|
|
(277
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
|
Amortization of prior service cost/(credit)
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
|
Amortization of net transition obligation
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
Recognized actuarial losses
|
|
124
|
|
|
98
|
|
|
20
|
|
|
12
|
|
|
|
Curtailments and settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Net periodic benefit cost
|
|
$
|
203
|
|
|
181
|
|
|
104
|
|
|
94
|
|
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the
first fiscal six months
of
2012
and
2011
include the following components:
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
|||||||||
|
|
|
Fiscal Six Months Ended
|
|||||||||||
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
|
July 1, 2012
|
|
July 3, 2011
|
|||||
|
Service cost
|
|
$
|
329
|
|
|
287
|
|
|
89
|
|
|
74
|
|
|
Interest cost
|
|
441
|
|
|
427
|
|
|
82
|
|
|
94
|
|
|
|
Expected return on plan assets
|
|
(620
|
)
|
|
(555
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
|
Amortization of prior service cost/(credit)
|
|
2
|
|
|
4
|
|
|
(2
|
)
|
|
(1
|
)
|
|
|
Amortization of net transition obligation
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
Recognized actuarial losses
|
|
248
|
|
|
194
|
|
|
38
|
|
|
23
|
|
|
|
Curtailments and settlements
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Net periodic benefit cost
|
|
$
|
399
|
|
|
358
|
|
|
205
|
|
|
189
|
|
Company Contributions
For the fiscal
six
months ended
July 1, 2012
, the Company contributed
$142 million
and
$17 million
to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table sets forth the components of accumulated other comprehensive income:
14
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
Foreign
|
|
Securities
|
|
Employee
|
|
Derivatives
|
|
Total Accumulated
|
||||||
|
Gains/(Losses)
|
|
Currency
|
|
Available
|
|
Benefit
|
|
&
|
|
Other Comprehensive
|
||||||
|
(Dollars in Millions)
|
|
Translation
|
|
For Sale
|
|
Plans
|
|
Hedges
|
|
Income/(Loss)
|
||||||
|
January 1, 2012
|
|
$
|
(1,526
|
)
|
|
448
|
|
|
(4,386
|
)
|
|
(168
|
)
|
|
(5,632
|
)
|
|
Net change
|
|
(796
|
)
|
|
68
|
|
|
189
|
|
|
(33
|
)
|
|
(572
|
)
|
|
|
July 1, 2012
|
|
$
|
(2,322
|
)
|
|
516
|
|
|
(4,197
|
)
|
|
(201
|
)
|
|
(6,204
|
)
|
Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries. For additional details on comprehensive income see the Consolidated Statements of Comprehensive Income.
NOTE 8 — EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal
second
quarters ended
July 1, 2012
and
July 3, 2011
:
|
|
|
Fiscal Second Quarters Ended
|
||||||
|
(Shares in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
||||
|
Basic net earnings per share
|
|
$
|
0.51
|
|
|
$
|
1.01
|
|
|
Average shares outstanding — basic
|
|
2,747.4
|
|
|
2,740.5
|
|
||
|
Potential shares exercisable under stock option plans
|
|
138.1
|
|
|
168.9
|
|
||
|
Less: shares which could be repurchased under treasury stock method
|
|
(104.1
|
)
|
|
(131.7
|
)
|
||
|
Convertible debt shares
|
|
3.6
|
|
|
3.6
|
|
||
|
Accelerated share repurchase program
|
|
13.2
|
|
|
—
|
|
||
|
Average shares outstanding — diluted
|
|
2,798.2
|
|
|
2,781.3
|
|
||
|
Diluted earnings per share
|
|
$
|
0.50
|
|
|
$
|
1.00
|
|
The diluted earnings per share calculation for both fiscal
second
quarters ended
July 1, 2012
and
July 3, 2011
included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.
The diluted earnings per share calculation for the fiscal second quarter ended July 1, 2012 included the dilutive effect of 13.2 million shares related to the accelerated share repurchase program, associated with the Synthes, Inc. acquisition. See Note10 to the Consolidated Financial Statements for additional details. A $1 increase/decrease in the volume weighted average share price would impact this estimate by approximately
2.8 million
shares.
The diluted earnings per share calculation for the fiscal
second
quarters ended
July 1, 2012
and
July 3, 2011
, excluded
57 million
and
51 million
shares, respectively, related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the
first fiscal six months
ended
July 1, 2012
and
July 3, 2011
:
15
|
|
|
Fiscal Six Months Ended
|
||||||
|
(Shares in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
||||
|
Basic net earnings per share
|
|
$
|
1.94
|
|
|
$
|
2.28
|
|
|
Average shares outstanding — basic
|
|
2,741.7
|
|
|
2,739.6
|
|
||
|
Potential shares exercisable under stock option plans
|
|
138.0
|
|
|
168.8
|
|
||
|
Less: shares which could be repurchased under treasury stock method
|
|
(104.1
|
)
|
|
(133.9
|
)
|
||
|
Convertible debt shares
|
|
3.6
|
|
|
3.6
|
|
||
|
Accelerated share repurchase program
|
|
13.2
|
|
|
—
|
|
||
|
Average shares outstanding — diluted
|
|
2,792.4
|
|
|
2,778.1
|
|
||
|
Diluted earnings per share
|
|
$
|
1.91
|
|
|
$
|
2.25
|
|
The diluted earnings per share calculation for both the
first fiscal six months
ended
July 1, 2012
and
July 3, 2011
included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.
The diluted earnings per share calculation for the first fiscal six months ended July 1, 2012 included the dilutive effect of 13.2 million shares related to the accelerated share repurchase program, associated with the Synthes, Inc. acquisition. See Note10 to the Consolidated Financial Statements for additional details. A $1 increase/decrease in the volume weighted average share price would impact this estimate by approximately
2.8 million
shares.
The diluted earnings per share calculation for the
first fiscal six months
ended
July 1, 2012
and
July 3, 2011
, excluded
57 million
and
52 million
shares, respectively, related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share.
NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS
|
|
|
Fiscal Second Quarters Ended
|
|||||||||
|
(Dollars in Millions)
|
|
July 1,
2012 |
|
July 3,
2011 |
|
Percent
Change
|
|||||
|
|
|
|
|
|
|
|
|||||
|
Consumer
|
|
|
|
|
|
|
|||||
|
United States
|
|
$
|
1,313
|
|
|
$
|
1,339
|
|
|
(1.9
|
)%
|
|
International
|
|
2,306
|
|
|
2,454
|
|
|
(6.0
|
)
|
||
|
Total
|
|
3,619
|
|
|
3,793
|
|
|
(4.6
|
)
|
||
|
Pharmaceutical
|
|
|
|
|
|
|
|||||
|
United States
|
|
3,094
|
|
|
3,239
|
|
|
(4.5
|
)
|
||
|
International
|
|
3,197
|
|
|
2,994
|
|
|
6.8
|
|
||
|
Total
|
|
6,291
|
|
|
6,233
|
|
|
0.9
|
|
||
|
Medical Devices & Diagnostics
|
|
|
|
|
|
|
|||||
|
United States
|
|
2,953
|
|
|
2,869
|
|
|
2.9
|
|
||
|
International
|
|
3,612
|
|
|
3,702
|
|
|
(2.4
|
)
|
||
|
Total
|
|
6,565
|
|
|
6,571
|
|
|
(0.1
|
)
|
||
|
Worldwide
|
|
|
|
|
|
|
|||||
|
United States
|
|
7,360
|
|
|
7,447
|
|
|
(1.2
|
)
|
||
|
International
|
|
9,115
|
|
|
9,150
|
|
|
(0.4
|
)
|
||
|
Total
|
|
$
|
16,475
|
|
|
$
|
16,597
|
|
|
(0.7
|
)%
|
16
|
|
|
|
|
|
|
|
|||||
|
|
|
Fiscal Six Months Ended
|
|||||||||
|
(Dollars in Millions)
|
|
July 1,
2012 |
|
July 3,
2011 |
|
Percent
Change
|
|||||
|
|
|
|
|
|
|
|
|||||
|
Consumer
|
|
|
|
|
|
|
|||||
|
United States
|
|
$
|
2,629
|
|
|
$
|
2,684
|
|
|
(2.0
|
)%
|
|
International
|
|
4,585
|
|
|
4,791
|
|
|
(4.3
|
)
|
||
|
Total
|
|
7,214
|
|
|
7,475
|
|
|
(3.5
|
)
|
||
|
Pharmaceutical
|
|
|
|
|
|
|
|||||
|
United States
|
|
6,120
|
|
|
6,630
|
|
|
(7.7
|
)
|
||
|
International
|
|
6,304
|
|
|
5,662
|
|
|
11.3
|
|
||
|
Total
|
|
12,424
|
|
|
12,292
|
|
|
1.1
|
|
||
|
Medical Devices & Diagnostics
|
|
|
|
|
|
|
|||||
|
United States
|
|
5,830
|
|
|
5,741
|
|
|
1.6
|
|
||
|
International
|
|
7,146
|
|
|
7,262
|
|
|
(1.6
|
)
|
||
|
Total
|
|
12,976
|
|
|
13,003
|
|
|
(0.2
|
)
|
||
|
Worldwide
|
|
|
|
|
|
|
|||||
|
United States
|
|
14,579
|
|
|
15,055
|
|
|
(3.2
|
)
|
||
|
International
|
|
18,035
|
|
|
17,715
|
|
|
1.8
|
|
||
|
Total
|
|
$
|
32,614
|
|
|
$
|
32,770
|
|
|
(0.5
|
)%
|
OPERATING PROFIT BY SEGMENT OF BUSINESS
|
|
|
Fiscal Second Quarters Ended
|
|||||||||
|
(Dollars in Millions)
|
|
July 1,
2012 |
|
July 3,
2011 |
|
Percent
Change
|
|||||
|
Consumer
(1)
|
|
$
|
267
|
|
|
$
|
549
|
|
|
(51.4
|
)%
|
|
Pharmaceutical
(2)
|
|
515
|
|
|
1,714
|
|
|
(70.0
|
)
|
||
|
Medical Devices & Diagnostics
(3)
|
|
1,875
|
|
|
1,275
|
|
|
47.1
|
|
||
|
Segments operating profit
|
|
2,657
|
|
|
3,538
|
|
|
(24.9
|
)
|
||
|
Expense not allocated to segments
(4)
|
|
(622
|
)
|
|
(116
|
)
|
|
|
|||
|
Worldwide income before taxes
|
|
$
|
2,035
|
|
|
$
|
3,422
|
|
|
(40.5
|
)%
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Fiscal Six Months Ended
|
|||||||||
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
|
Percent
Change
|
|||||
|
Consumer
(1)
|
|
$
|
729
|
|
|
$
|
1,122
|
|
|
(35.0
|
)%
|
|
Pharmaceutical
(2)
|
|
3,106
|
|
|
3,923
|
|
|
(20.8
|
)
|
||
|
Medical Devices & Diagnostics
(3)
|
|
3,953
|
|
|
3,219
|
|
|
22.8
|
|
||
|
Segments operating profit
|
|
7,788
|
|
|
8,264
|
|
|
(5.8
|
)
|
||
|
Expense not allocated to segments
(4)
|
|
(708
|
)
|
|
(332
|
)
|
|
|
|||
|
Worldwide income before taxes
|
|
$
|
7,080
|
|
|
$
|
7,932
|
|
|
(10.7
|
)%
|
(1) Includes intangible asset write-downs of $
294 million
recorded in the fiscal second quarter and the first fiscal six months of 2012.
(2) Includes litigation expense of $
658 million
, intangible asset write-downs of $
499 million
and in-process research and development charges of $
429 million
recorded in the fiscal second quarter and the first fiscal six months of 2012. Includes litigation expense of $
290 million
and $
540 million
recorded in the fiscal second quarter and the first fiscal six months of 2011,
17
respectively.
(3) Includes Synthes integration/transaction costs of $
192 million
and $
223 million
recorded in the fiscal second quarter and the first fiscal six months of 2012, respectively. Includes intangible asset write-downs of $
146 million
recorded in the fiscal second quarter and the first fiscal six months of 2012. Includes restructuring expense of $
676 million
recorded in the fiscal second quarter and the first fiscal six months of 2011. Includes litigation expense of $
25 million
and ASR
TM
Hip related costs of $
102 million
recorded in the fiscal second quarter of 2011. Includes litigation expense of $
36 million
and ASR
TM
Hip related costs of $
187 million
recorded in the first fiscal six months of 2011.
(4) Amounts not allocated to segments include interest income/(expense), non-controlling interests and general corporate income/expense. Includes currency losses related to the Synthes acquisition of $
382 million
and $
234 million
recorded in the fiscal second quarter and the first fiscal six months of 2012, respectively, and litigation expense of $
11 million
recorded in the fiscal second quarter and the first fiscal six months of 2012, respectively. Includes a currency gain of $
102 million
related to the Synthes acquisition recorded in the fiscal second quarter and the first fiscal six months of 2011.
SALES BY GEOGRAPHIC AREA
|
|
|
Fiscal Second Quarters Ended
|
|||||||||
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
|
Percent
Change
|
|||||
|
United States
|
|
$
|
7,360
|
|
|
$
|
7,447
|
|
|
(1.2
|
)%
|
|
Europe
|
|
4,165
|
|
|
4,543
|
|
|
(8.3
|
)
|
||
|
Western Hemisphere, excluding U.S.
|
|
1,728
|
|
|
1,543
|
|
|
12.0
|
|
||
|
Asia-Pacific, Africa
|
|
3,222
|
|
|
3,064
|
|
|
5.2
|
|
||
|
Total
|
|
$
|
16,475
|
|
|
$
|
16,597
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Fiscal Six Months Ended
|
|||||||||
|
(Dollars in Millions)
|
|
July 1, 2012
|
|
July 3, 2011
|
|
Percent
Change
|
|||||
|
United States
|
|
$
|
14,579
|
|
|
$
|
15,055
|
|
|
(3.2
|
)%
|
|
Europe
|
|
8,359
|
|
|
8,726
|
|
|
(4.2
|
)
|
||
|
Western Hemisphere, excluding U.S.
|
|
3,442
|
|
|
2,979
|
|
|
15.5
|
|
||
|
Asia-Pacific, Africa
|
|
6,234
|
|
|
6,010
|
|
|
3.7
|
|
||
|
Total
|
|
$
|
32,614
|
|
|
$
|
32,770
|
|
|
(0.5
|
)%
|
NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES
On June 14, 2012, the Company completed the acquisition of Synthes, Inc., a global developer and manufacturer of orthopaedics devices, for a purchase price of $
20.2 billion
in cash and stock. The net acquisition cost of the transaction is $
17.5 billion
based on cash on hand at closing of $
2.7 billion
.
Under the terms of the agreement, each share of Synthes common stock was exchanged for CHF
55.65
in cash and
1.717
shares of Johnson & Johnson common stock, based on the calculated exchange ratio. The exchange ratio was calculated on June 12, 2012 and based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of consideration transferred was $
19.7 billion
. When the acquisition was completed on June 14, 2012, based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of the consideration transferred was $
20.2 billion
. Janssen Pharmaceutical, a company organized under the laws of Ireland and
a wholly owned subsidiary of Johnson & Johnson, used cash on hand to satisfy the cash portion of the merger consideration.
The stock portion of the merger consideration consisted of shares of Johnson & Johnson common stock purchased by Janssen Pharmaceutical, from two banks, pursuant to two accelerated share repurchase (ASR) agreements dated June 12, 2012. On June 13, 2012, Janssen Pharmaceutical purchased an aggregate of approximately
203.7 million
shares of Johnson & Johnson common stock at an initial purchase price of $
12.9 billion
under the ASR agreements, with all of the shares delivered to Janssen Pharmaceutical on June 13, 2012. Final settlement of the transactions under each ASR agreement is expected to occur in the second quarter of 2013, and may occur earlier at the option of the two banks, as applicable, or later under certain
18
circumstances. Based on the theoretical settlement of the ASR agreements an additional
13.2 million
shares would be issued to settle the ASR agreements as of July 1, 2012.
In addition, while the Company believes that the transactions under each ASR agreement and a series of related internal transactions were consummated in a tax efficient manner
in accordance with applicable law, it is possible that the Internal Revenue Service could assert one or more contrary positions to challenge the transactions from a tax perspective. If challenged, an amount up to the total purchase price for the Synthes shares could be treated as subject to applicable U.S. tax at approximately the statutory rate to the Company, plus interest.
The following table summarizes the consideration transferred to acquire Synthes, valued on the acquisition date of June 14th, 2012:
|
(Dollars in Millions)
|
|
|
||
|
Cash (multiply 55.65CHF by shares of Synthes common stock outstanding by the exchange rate)
(A)
|
|
$
|
6,902
|
|
|
Common Stock (multiply 1.717 by shares of Synthes common stock outstanding by J&J stock price)
(B)
|
|
$
|
13,335
|
|
|
Total fair value of consideration transferred
|
|
$
|
20,237
|
|
(A) Synthes common stock outstanding of
118.7 million
shares as of the acquisition date and CHF/USD exchange rate of
.95674
(B) Johnson & Johnson closing stock price on the New York Stock Exchange as of acquisition date of
$65.45
per share.
The Company is in the process of finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The preliminary allocation of the purchase price included in the current period balance sheet is based on the best estimates of management and is preliminary and subject to change. To assist management in the allocation, the Company engaged valuation specialists to prepare independent appraisals. The completion of the purchase price allocation may result in adjustments to the carrying value of Synthes, Inc.'s recorded assets and liabilities, revisions of the useful lives of intangible assets, the determination of any residual amount that will be allocated to goodwill and related tax effects. The related depreciation and amortization from the acquired assets are also subject to revision based on the final allocation.
The following table presents the preliminary allocation of the purchase price related to Synthes, Inc. as of the date of acquisition:
|
(Dollars in Millions)
|
|
||
|
Cash & Cash equivalents
|
$
|
2,749
|
|
|
Inventory
(1)
|
889
|
|
|
|
Accounts Receivable, net
|
738
|
|
|
|
Other current assets
|
249
|
|
|
|
Property, plant and equipment
|
1,253
|
|
|
|
Goodwill
|
5,371
|
|
|
|
Intangible assets
|
12,929
|
|
|
|
Other non-current assets
|
46
|
|
|
|
Total Assets Acquired
|
24,224
|
|
|
|
|
|
||
|
Current liabilities
|
825
|
|
|
|
Deferred Taxes
|
2,731
|
|
|
|
Other non-current liabilities
|
431
|
|
|
|
Total Liabilities Assumed
|
3,987
|
|
|
|
|
|
||
|
Net Assets Acquired
|
$
|
20,237
|
|
(1) Includes $
0.4 billion
related to inventory step-up.
19
The acquisition of Synthes, Inc. resulted in
$5.4 billion
of goodwill, which is allocated to the Medical Devices and Diagnostics segment. The goodwill is primarily attributable to synergies expected to arise from the business acquisition of Synthes, Inc. The goodwill is not expected to be deductible for tax purposes.
The preliminary purchase price allocation to the identifiable intangible assets included in the current period balance sheet is as follows:
The weighted average life for the
$11,445 million
of total amortizable intangibles is approximately
21
years.
The trade name asset values were determined to have an indefinite life based on a number of factors, including trade name history, the competitive environment, 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 tradename intangible assets in the Company's trauma, cranio maxillofacial, spine and power tools business lines. Additionally, in-process research and development intangible assets were valued for technology programs for unapproved products.
The value of the IPR&D was calculated using cash flow projections discounted for the risk inherent in such projects. The discount rate applied was
14%
.
The Company is in the process of executing the integration plans to combine businesses, sales organizations, systems and locations as a result of which the Company is and will continue to incur integration costs.
The operating results of Synthes, Inc. were reported in the Company's financial statements beginning on June 14, 2012. Total sales and net earnings for Synthes, Inc. for the second quarter ended July 1, 2012 were $
193 million
and $
28 million
, respectively.
The following table provides pro forma results of operations for the fiscal second quarters and the fiscal six months ended July 1, 2012 and July 3, 2011, as if Synthes, Inc. had been acquired as of January 3, 2011. The pro forma results include the effect of divestitures and certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Synthes, Inc. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.
|
|
Unaudited Pro forma consolidated results
|
|||||||||
|
|
Fiscal Six Months Ended
|
|
Fiscal Second Quarters Ended
|
|||||||
|
(Dollars in Millions Except Per Share Data)
|
July 1, 2012
|
July 3, 2011
|
|
July 1, 2012
|
July 3, 2011
|
|||||
|
|
|
|
|
|
|
|||||
|
Net Sales
|
$
|
34,481
|
|
34,609
|
|
|
17,410
|
|
17,524
|
|
|
Net Earnings
|
$
|
5,641
|
|
6,108
|
|
|
1,631
|
|
2,772
|
|
|
Diluted Net Earnings per Common Share
|
$
|
2.02
|
|
2.20
|
|
|
0.58
|
|
1.00
|
|
In 2012, the Company recorded acquisition related costs of $
457 million
, before tax, which were recorded in Other income and
20
expense.
In connection with the Synthes acquisition, DePuy Orthopaedics, Inc. agreed to divest certain rights and assets related to its trauma business, to Biomet, Inc. and completed the initial closing for this transaction in the fiscal second quarter of 2012, including those countries that represented the majority of sales.
Additionally, during the fiscal second quarter of 2012, the Company acquired Guangzhou Bioseal Biotech Co., Ltd., a privately held biopharmaceutical company specializing in the design, development and commercialization of a porcine plasma-derived biologic product for controlling bleeding during surgery; CorImmun GmbH, a privately held drug development company in Germany, whose lead compound, COR-1, is a small cyclic peptide currently in early clinical development for the treatment of heart failure; and certain assets of the Angiotech Pharmaceuticals, Inc. barbed suture business.
During the fiscal first quarter of 2012, the Company completed the divestiture of its U.S. patents and other U.S. and Canadian intellectual property for BYSTOLIC
®
(nebivolol), which is currently approved in the U.S. for the treatment of hypertension, to Forest Laboratories Holdings Limited. Proceeds received from the divestiture were
$357 million
.
During the fiscal first quarter of 2011, the Company acquired substantially all of the outstanding equity of Crucell N.V. that it did not already own. Crucell is a global biopharmaceutical company focused on the research and development, production and marketing of vaccines and antibodies against infectious disease worldwide. The net purchase price of
$2.0 billion
was primarily recorded as non-amortizable intangible assets for
$1.0 billion
, amortizable intangible assets for
$0.7 billion
and goodwill for
$0.5 billion
. During the fiscal second quarter of 2012, the Company recorded a charge of
$0.5 billion
for the intangible asset write-down and
$0.4 billion
for the impairment of the in-process research and development related to the Crucell business.
NOTE 11 — LEGAL PROCEEDINGS
Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of their business.
The Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of July 1, 2012, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated. The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals for new information and further developments in accordance with ASC 450-20-25. For these and other litigation and regulatory matters currently disclosed for which a loss is probable or reasonably possible, the Company is unable to determine an estimate of the possible loss or range of loss beyond the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.
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 accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution in any reporting period of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on the Company's results of operations and cash flows for that period.
PRODUCT LIABILITY
Certain of Johnson & Johnson's subsidiaries are involved in numerous product liability cases. The damages claimed are substantial, and while these subsidiaries are confident of the adequacy of the warnings and instructions for use that accompany the products at issue, it is not feasible to predict the ultimate outcome of litigation. The Company has established product liability accruals in compliance with ASC 450-20 based on currently available information, which in some cases may be limited. Changes to the accruals may be required in the future as additional information becomes available.
Multiple products of Johnson & Johnson's subsidiaries are subject to product liability claims and lawsuits in which claimants seek substantial compensatory and, where available, punitive damages, including LEVAQUIN
®
, the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, the PINNACLE
®
Acetabular Cup System, RISPERDAL
®
, pelvic meshes, DURAGESIC
®
/fentanyl patches and TOPAMAX
®
. As of July 1, 2012, in the U.S. there were approximately
3,400
plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to LEVAQUIN
®
,
7,200
with respect to the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System,
1,700
with respect to the PINNACLE
®
Acetabular Cup
21
System,
420
with respect to RISPERDAL
®
,
1,400
with respect to pelvic meshes,
35
with respect to DURAGESIC
®
/fentanyl patches and
60
with respect to TOPAMAX
®
.
In August 2010, DePuy Orthopaedics, Inc. (DePuy) announced a worldwide voluntary recall of its ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System used in hip replacement surgery. Claims for personal injury have been made against DePuy and Johnson & Johnson, and the number of pending lawsuits continues to increase. The Company continues to receive information with respect to potential costs associated with this recall. The Company has established a product liability accrual in anticipation of product liability litigation and costs associated with the DePuy ASR™ Hip Recall program. Changes to these accruals may be required in the future as additional information becomes available.
Claims for personal injury have been made against Ethicon, Inc. (Ethicon) and Johnson & Johnson arising out of Ethicon's pelvic mesh devices used to treat stress urinary incontinence and pelvic organ prolapse. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. In addition, a class action and several individual personal injury cases have been commenced in Canada seeking damages for alleged injury resulting from Ethicon's pelvic mesh devices. The Company has established a product liability accrual in anticipation of product liability litigation associated with Ethicon's pelvic mesh products. Changes to these accruals may be required in the future as additional information becomes available.