NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson & Johnson and its subsidiaries (the Company). Intercompany accounts and transactions are eliminated.
Description of the Company and Business Segments
The Company has approximately
134,000
employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being.
The Company is organized into
three
business segments: Consumer, Pharmaceutical and Medical Devices. The Consumer segment includes a broad range of products used in the baby care, oral care, beauty, over-the-counter pharmaceutical, women’s health and wound care markets. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment is focused on six therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, pulmonary hypertension, and cardiovascular and metabolic diseases. Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. The Medical Devices segment includes a broad range of products used in the orthopaedic, surgery, cardiovascular, diabetes care and vision care fields, which are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics.
Accounting Standard adopted in 2016
During the fiscal second quarter of 2016, the Company adopted Accounting Standards Update (ASU) 2016-09 Compensation - Stock Compensation: Improvements to Employee Share Based Payment Accounting for the reporting of additional tax benefits on share-based compensation that vested or were exercised during the fiscal year. The update requires all excess tax benefits and deficiencies to be recognized as a reduction or an increase to the provision for taxes on income. Previously, the Company recorded these benefits directly to Retained Earnings. The tax benefit for the Company was
$353 million
for the fiscal year 2016. The standard does not permit retroactive presentation of this benefit to prior fiscal years on the Consolidated Statement of Earnings.
New Accounting Standards
Recently Adopted Accounting Standards
ASU 2016-07: Simplifying the Transition to the Equity Method of Accounting
The amendments in the update eliminate the requirement that when an investment qualifies for the use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the application of the equity method. The adoption of this standard did not have a material impact on the presentation of the Company's consolidated financial statements.
ASU 2015-11: Simplifying the Measurement of Inventory
This update requires inventory to be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This update is effective for the Company for all annual and interim periods beginning after December 15, 2016. The amendments in this update should be applied prospectively. This update did not have any material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards
Not Adopted as of December 31, 2017
ASU 2018-02: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Act enacted in December 2017. This update will be effective for the Company for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this standard to have a material impact on the Company's consolidated financial statements.
ASU 2017-12: Targeted Improvements to Accounting for Hedging Activities
This update makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This update will be effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted upon its issuance. The Company is currently assessing the impact of the future adoption of this standard on its financial statements.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
This update requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost (“NPBC”). In addition, only the service cost component will be eligible for capitalization. This update is effective for the Company for all annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of NPBC in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of NPBC in assets. The Company is assessing the retroactive restatement methodology and impact to the individual line items on Consolidated Statement of Earnings. The Company does not expect there to be a material impact to net earnings.
ASU 2017-01: Clarifying the Definition of a Business
This update narrows the definition of a business by providing a screen to determine when an integrated set of assets and activities is not a business. The screen specifies that an integrated set of assets and activities is not a business if substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single or a group of similar identifiable assets. This update will be effective for the Company for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. This update should be applied prospectively. The Company does not expect this standard to have a material impact on the Company's consolidated financial statements.
ASU 2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
This update removes the current exception in US GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. The results from a preliminary assessment indicate that the adoption of the standard will not have a significant impact on the Company’s financial results. The Company expects to record net adjustments to deferred taxes of approximately
$2.0 billion
, a decrease to Other Assets of approximately
$0.7 billion
and an increase to retained earnings of approximately
$1.3 billion
.
ASU 2016-02: Leases
This update requires the recognition of lease assets and lease liabilities on the balance sheet for all lease obligations and disclosing key information about leasing arrangements. This update requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current generally accepted accounting principles. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company anticipates that most of its operating leases will result in the recognition of additional assets and the corresponding liabilities on its Consolidated Balance Sheets, however does not expect the standard to have a material impact on the financial position. The actual impact will depend on the Company's lease portfolio at the time of adoption. The Company continues to assess all implications of the standard and related financial disclosures.
ASU 2016-01: Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities
The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The standard amends financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. This update will be effective for the Company for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of this standard will not have a material impact on the Company's consolidated financial statements.
ASU 2014-09: Revenue from Contracts with Customers
The amendments replace substantially all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. Early adoption of this standard is permitted but not before the original effective date for all annual periods and interim reporting
periods beginning after December 15, 2017. The Company will adopt the standard using the modified retrospective method. The adoption of this standard will not have a material impact on the Company's consolidated financial statements including the additional disclosure requirements.
Cash Equivalents
The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating. The Company invests its cash primarily in government securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (RRAs).
RRAs are collateralized by deposits in the form of Government Securities and Obligations for an amount not less than
102%
of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an A (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at
102%
of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities.
Investments
Investments classified as held to maturity investments are reported at amortized cost and realized gains or losses are reported in earnings. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Available-for-sale securities available for current operations are classified as current assets otherwise, they are classified as long term. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in equity securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. If losses on these securities are considered to be other than temporary, the loss is recognized in earnings.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:
|
|
|
Building and building equipment
|
20 - 30 years
|
Land and leasehold improvements
|
10 - 20 years
|
Machinery and equipment
|
2 - 13 years
|
The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from
3
to
8
years.
The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded.
Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, which include Medicaid, are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
Sales returns are generally estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales returns accruals.
Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for
returned goods. The Company’s sales returns reserves are accounted for in accordance with U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices segment are typically resalable but are not material. The Company infrequently exchanges products from inventory for returned products. The sales returns reserve for the total Company has been approximately
1.0%
of annual sales to customers during the fiscal reporting years
2017
,
2016
and
2015
.
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of revenue.
Shipping and Handling
Shipping and handling costs incurred were
$1,042 million
,
$974 million
and
$996 million
in
2017
,
2016
and
2015
, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than
0.5%
of sales to customers for all periods presented.
Inventories
Inventories are stated at the lower of cost or net realizable value determined by the first-in, first-out method.
Intangible Assets and Goodwill
The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed annually for impairment. The Company completed the annual impairment test for 2017 in the fiscal fourth quarter. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted. Purchased in-process research and development is accounted for as an indefinite lived intangible asset until the underlying project is completed, at which point the intangible asset will be accounted for as a definite lived intangible asset, or abandoned, at which point the intangible asset will be written off or partially impaired.
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill.
Financial Instruments
As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. 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 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, with Level 1 having the highest priority and Level 3 having the lowest. 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 Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments.
Product Liability
Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information and actuarially determined estimates where applicable. The accruals are adjusted periodically as additional information becomes available. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated.
As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated.
Research and Development
Research and development expenses are expensed as incurred. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval.
Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.
The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. In general, the income statement presentation for these collaborations is as follows:
|
|
|
|
Nature/Type of Collaboration
|
|
Statement of Earnings Presentation
|
Third-party sale of product
|
|
Sales to customers
|
Royalties/milestones paid to collaborative partner (post-regulatory approval)*
|
|
Cost of products sold
|
Royalties received from collaborative partner
|
|
Other income (expense), net
|
Upfront payments & milestones paid to collaborative partner (pre-regulatory approval)
|
|
Research and development expense
|
Research and development payments to collaborative partner
|
|
Research and development expense
|
Research and development payments received from collaborative partner
|
|
Reduction of Research and development expense
|
|
|
|
*
|
Milestones are capitalized as intangible assets and amortized to cost of products 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.
The Company has a number of products and compounds developed in collaboration with strategic partners including XARELTO
®
, co-developed with Bayer HealthCare AG and IMBRUVICA
®
, developed in collaboration and co-marketed with Pharmacyclics LLC, an AbbVie company.
Advertising
Costs associated with advertising are expensed in the year incurred and are included in selling, marketing and administrative expenses. Advertising expenses worldwide, which comprised television, radio, print media and Internet advertising, were
$2.5 billion
,
$2.4 billion
and
$2.5 billion
in
2017
,
2016
and
2015
, respectively.
Income Taxes
Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on enacted tax regulations and rates. Future changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future.
The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.
In the fourth quarter of 2017, the United States enacted the TCJA, which includes provisions for a tax on all previously undistributed earnings in foreign jurisdictions. The Company has provisionally booked a
$10.1 billion
charge on these undistributed earnings in 2017. Additionally, the Company has provisionally recorded a
$4.5 billion
deferred tax liability for foreign local and withholding taxes, offset by a
$1.1 billion
deferred tax asset for U.S. foreign tax credits, for repatriation of substantially all undistributed foreign earnings. The Company is currently evaluating the remaining undistributed foreign earnings for which it has not provided deferred taxes for foreign local and withholding tax, as these earnings are considered to be indefinitely reinvested. The amount of these unrecorded deferred taxes is not expected to be material.
See Note 8 for further information regarding income taxes.
Net Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock using the treasury stock method.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, income taxes, withholding taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. Actual results may or may not differ from those estimates.
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.
Annual Closing Date
The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of
52 weeks, but every five or six years the fiscal year consists of 53 weeks
, and therefore includes additional shipping days, as was the case in 2015, and will be the case again in 2020.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation.
|
|
2.
|
Cash, Cash Equivalents and Current Marketable Securities
|
At the end of
2017
and
2016
, cash, cash equivalents and current marketable securities were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
Cash & Cash Equivalents
|
|
Current Marketable Securities
|
Cash
|
|
$
|
2,929
|
|
|
|
2,929
|
|
|
$
|
2,929
|
|
|
—
|
|
U.S. Gov't Securities
(1)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other Sovereign Securities
(1)
|
|
279
|
|
|
|
279
|
|
|
219
|
|
|
60
|
|
U.S. Reverse repurchase agreements
|
|
4,025
|
|
|
|
4,025
|
|
|
4,025
|
|
|
—
|
|
Other Reverse repurchase agreements
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate debt securities
(1)
|
|
289
|
|
|
|
289
|
|
|
244
|
|
|
45
|
|
Money market funds
|
|
4,288
|
|
|
|
4,288
|
|
|
4,288
|
|
|
—
|
|
Time deposits
(1)
|
|
1,176
|
|
|
|
1,176
|
|
|
1,175
|
|
|
1
|
|
Subtotal
|
|
$
|
12,986
|
|
|
|
12,986
|
|
|
12,880
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gov't Securities
|
|
$
|
4,864
|
|
|
|
4,864
|
|
|
4,833
|
|
|
31
|
|
Other Sovereign Securities
|
|
186
|
|
|
|
186
|
|
|
80
|
|
|
106
|
|
Corporate debt securities
|
|
260
|
|
|
|
260
|
|
|
31
|
|
|
229
|
|
Subtotal available for sale
(2)
|
|
$
|
5,310
|
|
|
|
5,310
|
|
|
4,944
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and current marketable securities
|
|
|
|
|
|
|
|
$
|
17,824
|
|
|
472
|
|
In 2017, the carrying amount was the same as the estimated fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2016
|
|
|
Carrying Amount
|
|
Unrecognized Gain
|
|
Unrecognized Loss
|
|
Estimated Fair Value
|
|
Cash Equivalents
|
|
Current Marketable Securities
|
Cash
|
|
$
|
1,979
|
|
|
—
|
|
|
—
|
|
|
1,979
|
|
|
1,979
|
|
|
—
|
|
U.S. Gov't Securities
(1)
|
|
10,832
|
|
|
—
|
|
|
(1
|
)
|
|
10,831
|
|
|
2,249
|
|
|
8,583
|
|
Other Sovereign Securities
(1)
|
|
1,299
|
|
|
—
|
|
|
—
|
|
|
1,299
|
|
|
120
|
|
|
1,179
|
|
U.S. Reverse repurchase agreements
|
|
6,103
|
|
|
—
|
|
|
—
|
|
|
6,103
|
|
|
6,103
|
|
|
—
|
|
Other Reverse repurchase agreements
|
|
240
|
|
|
—
|
|
|
—
|
|
|
240
|
|
|
240
|
|
|
—
|
|
Corporate debt securities
(1)
|
|
754
|
|
|
—
|
|
|
—
|
|
|
754
|
|
|
—
|
|
|
754
|
|
Money market funds
|
|
7,187
|
|
|
—
|
|
|
—
|
|
|
7,187
|
|
|
7,187
|
|
|
—
|
|
Time deposits
(1)
|
|
1,094
|
|
|
—
|
|
|
—
|
|
|
1,094
|
|
|
1,094
|
|
|
—
|
|
Subtotal
|
|
$
|
29,488
|
|
|
—
|
|
|
(1
|
)
|
|
29,487
|
|
|
18,972
|
|
|
10,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
|
|
|
|
|
Gov't Securities
|
|
$
|
10,277
|
|
|
5
|
|
|
(51
|
)
|
|
10,231
|
|
|
—
|
|
|
10,231
|
|
Other Sovereign Securities
|
|
90
|
|
|
—
|
|
|
—
|
|
|
90
|
|
|
|
|
90
|
|
Corporate debt securities
|
|
1,777
|
|
|
1
|
|
|
(12
|
)
|
|
1,766
|
|
|
—
|
|
|
1,766
|
|
Equity investments
|
|
34
|
|
|
298
|
|
|
—
|
|
|
332
|
|
|
|
|
332
|
|
Subtotal available for sale
(2)
|
|
$
|
12,178
|
|
|
304
|
|
|
(63
|
)
|
|
12,419
|
|
|
—
|
|
|
12,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and current marketable securities
|
|
|
|
|
|
|
|
|
|
$
|
18,972
|
|
|
22,935
|
|
(1)
Held to maturity investments are reported at amortized cost and realized gains or losses are reported in earnings.
(2)
Available for sale securities are reported at fair value with unrealized gains and losses reported net of taxes in other comprehensive income.
Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices and significant other observable inputs.
The contractual maturities of the available for sale debt securities at
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Cost Basis
|
|
Fair Value
|
Due within one year
|
|
$
|
5,214
|
|
|
5,214
|
|
Due after one year through five years
|
|
96
|
|
|
96
|
|
Due after five years through ten years
|
|
—
|
|
|
—
|
|
Total debt securities
|
|
$
|
5,310
|
|
|
5,310
|
|
The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating.
At the end of
2017
and
2016
, inventories were comprised of:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
Raw materials and supplies
|
|
$
|
1,140
|
|
|
952
|
|
Goods in process
|
|
2,317
|
|
|
2,185
|
|
Finished goods
|
|
5,308
|
|
|
5,007
|
|
Total inventories
|
|
$
|
8,765
|
|
|
8,144
|
|
|
|
4.
|
Property, Plant and Equipment
|
At the end of
2017
and
2016
, property, plant and equipment at cost and accumulated depreciation were:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
Land and land improvements
|
|
$
|
829
|
|
|
753
|
|
Buildings and building equipment
|
|
11,240
|
|
|
10,112
|
|
Machinery and equipment
|
|
25,949
|
|
|
23,554
|
|
Construction in progress
|
|
3,448
|
|
|
3,354
|
|
Total property, plant and equipment, gross
|
|
$
|
41,466
|
|
|
37,773
|
|
Less accumulated depreciation
|
|
24,461
|
|
|
21,861
|
|
Total property, plant and equipment, net
|
|
$
|
17,005
|
|
|
15,912
|
|
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in
2017
,
2016
and
2015
was
$94 million
,
$102 million
and
$102 million
, respectively.
Depreciation expense, including the amortization of capitalized interest in
2017
,
2016
and
2015
was
$2.6 billion
,
$2.5 billion
and
$2.5 billion
, respectively.
Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings.
|
|
5.
|
Intangible Assets and Goodwill
|
At the end of
2017
and
2016
, the gross and net amounts of intangible assets were:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
Intangible assets with definite lives:
|
|
|
|
|
|
|
Patents and trademarks — gross
|
|
$
|
36,427
|
|
|
10,521
|
|
Less accumulated amortization
|
|
7,223
|
|
|
5,076
|
|
Patents and trademarks — net
|
|
$
|
29,204
|
|
|
5,445
|
|
Customer relationships and other intangibles — gross
|
|
$
|
20,204
|
|
|
17,615
|
|
Less accumulated amortization
|
|
7,463
|
|
|
6,515
|
|
Customer relationships and other intangibles — net
|
|
$
|
12,741
|
|
|
11,100
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
Trademarks
|
|
$
|
7,082
|
|
|
6,888
|
|
Purchased in-process research and development
|
|
4,201
|
|
|
3,443
|
|
Total intangible assets with indefinite lives
|
|
$
|
11,283
|
|
|
10,331
|
|
Total intangible assets — net
|
|
$
|
53,228
|
|
|
26,876
|
|
Goodwill as of
December 31, 2017
and
January 1, 2017
, as allocated by segment of business, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Consumer
|
|
Pharmaceutical
|
|
Medical Devices
|
|
Total
|
Goodwill at January 3, 2016
|
|
$
|
7,240
|
|
|
2,889
|
|
|
11,500
|
|
|
21,629
|
|
Goodwill, related to acquisitions
|
|
1,362
|
|
|
—
|
|
|
210
|
|
|
1,572
|
|
Goodwill, related to divestitures
|
|
(63
|
)
|
|
(12
|
)
|
|
—
|
|
|
(75
|
)
|
Currency translation/other
|
|
(276
|
)
|
|
(37
|
)
|
|
(8
|
)
|
|
(321
|
)
|
Goodwill at January 1, 2017
|
|
$
|
8,263
|
|
|
2,840
|
|
|
11,702
|
|
|
22,805
|
|
Goodwill, related to acquisitions
|
|
102
|
|
|
6,161
|
|
|
2,200
|
|
|
8,463
|
|
Goodwill, related to divestitures
|
|
(74
|
)
|
|
(1
|
)
|
|
(102
|
)
|
|
(177
|
)
|
Currency translation/other
|
|
584
|
|
|
109
|
|
|
122
|
|
|
815
|
|
Goodwill at December 31, 2017
|
|
$
|
8,875
|
|
|
9,109
|
|
|
13,922
|
|
|
31,906
|
|
The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are
12 years
and
23 years
, respectively. The amortization expense of amortizable assets included in cost of products sold was
$3.0 billion
,
$1.2 billion
and
$1.2 billion
before tax, for the fiscal years ended
December 31, 2017
,
January 1, 2017
and
January 3, 2016
, respectively. The estimated amortization expense for the five succeeding years approximates
$4.4 billion
before tax, per year. Intangible asset write-downs are included in Other (income) expense, net.
The primary driver of the increase to intangible assets and goodwill is related to the Actelion acquisition in the fiscal second quarter of 2017, which resulted in the recording of
$25.0 billion
to intangible assets and
$6.2 billion
to goodwill. The intangible assets and goodwill amounts related to the Actelion acquisition are based on the preliminary purchase price allocation. Additionally, the Abbott Medical Optics (AMO) acquisition in the fiscal first quarter of 2017, resulted in the recording of
$2.3 billion
to intangible assets and
$1.7 billion
to goodwill. The intangible assets and goodwill amounts related to the AMO acquisition are based on the final purchase price allocation.
See Note 20 to the Consolidated Financial Statements for additional details related to acquisitions and divestitures.
|
|
6.
|
Fair Value Measurements
|
The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany products and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. The Company also uses equity collar contracts to manage exposure to market risk associated with certain equity investments. All three types of derivatives are designated as cash flow hedges.
Additionally, the Company uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate borrowings. These derivatives are designated as fair value hedges. The Company uses forward foreign exchange contracts designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward foreign 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. During the fiscal second quarter of 2017, the Company entered into credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of
December 31, 2017
, the total amount of collateral paid under the credit support agreements (CSA) amounted to
$162 million
net. For equity collar contracts, the Company pledged the underlying hedged marketable equity securities to the counter-party as collateral. On an ongoing basis, the Company monitors counter-party credit ratings. The Company considers credit non-performance risk to be low, because the Company primarily enters into agreements with commercial institutions that have at least an investment grade credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this footnote for receivables and payables with these commercial institutions. As of
December 31, 2017
, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of
$34.5 billion
,
$2.3 billion
, and
$1.1 billion
respectively. As of January 1, 2017, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps, interest rate swaps and equity collar contracts of
$36.0 billion
,
$2.3 billion
,
$1.8 billion
, and
$0.3 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 and losses associated with interest rate swaps and changes in fair value of hedged debt attributable to changes in interest rates are recorded to interest expense in the period in which they occur. Gains and losses on net investment hedges are accounted for through the currency translation account. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes 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 for forward foreign exchange contracts, cross currency interest rate swaps, net investment hedges and equity collar contracts. For interest rate swaps designated as fair value hedges, hedge ineffectiveness, if any, is included in current period earnings within interest expense. For the current reporting period, hedge ineffectiveness associated with interest rate swaps was not material.
During the fiscal second quarter of 2016, the Company designated its Euro denominated notes issued in May 2016 with due dates ranging from 2022 to 2035 as a net investment hedge of the Company's investments in certain of its international subsidiaries that use the Euro as their functional currency in order to reduce the volatility caused by changes in exchange rates.
The change in the carrying value due to remeasurement of these Euro notes resulted in a
$597 million
unrealized pretax loss for the fiscal year ended December 31, 2017, reflected in foreign currency translation adjustment, within the Consolidated Statements of Comprehensive Income. The change in the carrying value due to remeasurement of these Euro notes resulted in a cumulative
$222 million
unrealized pretax loss from hedge inception through the fiscal year ended December 31, 2017, reflected in foreign currency translation adjustment, within the Consolidated Statements of Comprehensive Income.
As of
December 31, 2017
, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was
$70 million
after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 13. The Company expects that substantially all of the amounts related to forward 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 contracts, net investment hedges and equity collar contracts. The amount ultimately realized in earnings may 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 cash flow hedges for the fiscal years ended
December 31, 2017
and
January 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Gain/(Loss)
Recognized In Accumulated OCI
(1)
|
|
Gain/(Loss) Reclassified From
Accumulated OCI Into Income
(1)
|
|
Gain/(Loss) Recognized In
Other Income/Expense
(2)
|
Cash Flow Hedges by Income Statement Caption
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales to customers
(3)
|
|
$
|
49
|
|
|
(65
|
)
|
|
(31
|
)
|
|
(47
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Cost of products sold
(3)
|
|
96
|
|
|
(212
|
)
|
|
(159
|
)
|
|
(3
|
)
|
|
(10
|
)
|
|
(15
|
)
|
Research and development expense
(3)
|
|
(199
|
)
|
|
(76
|
)
|
|
(165
|
)
|
|
(90
|
)
|
|
5
|
|
|
—
|
|
Interest (income)/Interest expense, net
(4)
|
|
110
|
|
|
66
|
|
|
83
|
|
|
37
|
|
|
—
|
|
|
—
|
|
Other (income) expense, net
(3) (5)
|
|
(60
|
)
|
|
(72
|
)
|
|
(87
|
)
|
|
(7
|
)
|
|
—
|
|
|
2
|
|
Total
|
|
$
|
(4
|
)
|
|
(359
|
)
|
|
(359
|
)
|
|
(110
|
)
|
|
(6
|
)
|
|
(14
|
)
|
All amounts shown in the table above are net of tax.
|
|
(3)
|
Forward foreign exchange contracts
|
|
|
(4)
|
Cross currency interest rate swaps
|
|
|
(5)
|
Includes equity collar contracts
|
For the fiscal years ended
December 31, 2017
and
January 1, 2017
, a loss of
$5 million
and
$56 million
, respectively, was recognized in Other (income) expense, net, relating to forward 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 determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.
The fair value of a derivative financial instrument (i.e., forward foreign exchange contracts, interest rate contracts) 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 and debt securities which are classified as Level 2. 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
December 31, 2017
and
January 1, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(Dollars in Millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total
(1)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(7)
|
|
$
|
—
|
|
|
342
|
|
|
—
|
|
|
342
|
|
|
747
|
|
Interest rate contracts
(2)(4) (7)
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
31
|
|
Total
|
|
—
|
|
|
349
|
|
|
—
|
|
|
349
|
|
|
778
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(7)
|
|
—
|
|
|
314
|
|
|
—
|
|
|
314
|
|
|
723
|
|
Interest rate contracts
(3)(4) (7)
|
|
—
|
|
|
15
|
|
|
—
|
|
|
15
|
|
|
382
|
|
Equity collar contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57
|
|
Total
|
|
—
|
|
|
329
|
|
|
—
|
|
|
329
|
|
|
1,162
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(7)
|
|
—
|
|
|
38
|
|
|
—
|
|
|
38
|
|
|
34
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(7)
|
|
—
|
|
|
38
|
|
|
—
|
|
|
38
|
|
|
57
|
|
Available For Sale Other Investments:
|
|
|
|
|
|
|
|
|
|
|
Equity investments
(5)
|
|
751
|
|
|
—
|
|
|
—
|
|
|
751
|
|
|
1,209
|
|
Debt securities
(6)
|
|
$
|
—
|
|
|
5,310
|
|
|
—
|
|
|
5,310
|
|
|
12,087
|
|
|
|
(1)
|
2016 assets and liabilities are all classified as Level 2 with the exception of equity investments of
$1,209 million
, which are classified as Level 1.
|
|
|
(2)
|
Includes
$7 million
and
$23 million
of non-current assets for the fiscal years ending
December 31, 2017
and
January 1, 2017
, respectively.
|
|
|
(3)
|
Includes
$9 million
and
$382 million
of non-current liabilities for the fiscal years ending
December 31, 2017
and
January 1, 2017
, respectively.
|
|
|
(4)
|
Includes cross currency interest rate swaps and interest rate swaps.
|
|
|
(5)
|
Classified as non-current other assets. The carrying amount of the equity investments were
$394 million
and
$520 million
as of
December 31, 2017
and
January 1, 2017
, respectively. The unrealized gains were
$367 million
and
$757 million
as of
December 31, 2017
and
January 1, 2017
, respectively. The unrealized losses were
$10 million
and
$68 million
as of
December 31, 2017
and
January 1, 2017
, respectively.
|
|
|
(6)
|
Classified as cash equivalents and current marketable securities.
|
|
|
(7)
|
Includes collateral exchanged on the credit support agreements on derivatives.
|
See Notes 2 and 7 for financial assets and liabilities held at carrying amount on the Consolidated Balance Sheet.
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
Effective Rate %
|
|
2016
|
|
Effective Rate %
|
|
5.55% Debentures due 2017
|
|
$
|
—
|
|
|
—
|
|
|
1,000
|
|
|
5.55
|
|
1.125% Notes due 2017
|
|
—
|
|
|
—
|
|
|
699
|
|
|
1.15
|
|
5.15% Debentures due 2018
|
|
900
|
|
|
5.18
|
|
|
899
|
|
|
5.18
|
|
1.65% Notes due 2018
|
|
597
|
|
|
1.70
|
|
|
600
|
|
|
1.70
|
|
4.75% Notes due 2019 (1B Euro 1.1947)
(2)
/
(1B Euro 1.0449)
(3)
|
|
1,192
|
|
(2)
|
5.83
|
|
|
1,041
|
|
(3)
|
5.83
|
|
1.875% Notes due 2019
|
|
496
|
|
|
1.93
|
|
|
499
|
|
|
1.93
|
|
0.89% Notes due 2019
|
|
300
|
|
|
1.75
|
|
|
299
|
|
|
1.20
|
|
1.125% Notes due 2019
|
|
699
|
|
|
1.13
|
|
|
699
|
|
|
1.13
|
|
3% Zero Coupon Convertible Subordinated Debentures due 2020
|
|
60
|
|
|
3.00
|
|
|
84
|
|
|
3.00
|
|
2.95% Debentures due 2020
|
|
547
|
|
|
3.15
|
|
|
546
|
|
|
3.15
|
|
1.950% Notes due 2020
|
|
499
|
|
|
1.99
|
|
|
—
|
|
|
—
|
|
3.55% Notes due 2021
|
|
448
|
|
|
3.67
|
|
|
447
|
|
|
3.67
|
|
2.45% Notes due 2021
|
|
349
|
|
|
2.48
|
|
|
348
|
|
|
2.48
|
|
1.65% Notes due 2021
|
|
998
|
|
|
1.65
|
|
|
997
|
|
|
1.65
|
|
0.250% Notes due 2022 (1B Euro 1.1947)
(2)/
(1B Euro 1.0449)
(3)
|
|
1,191
|
|
(2)
|
0.26
|
|
|
1,041
|
|
(3)
|
0.26
|
|
2.25% Notes due 2022
|
|
995
|
|
|
2.31
|
|
|
—
|
|
|
—
|
|
6.73% Debentures due 2023
|
|
250
|
|
|
6.73
|
|
|
249
|
|
|
6.73
|
|
3.375% Notes due 2023
|
|
806
|
|
|
3.17
|
|
|
807
|
|
|
3.17
|
|
2.05% Notes due 2023
|
|
498
|
|
|
2.09
|
|
|
497
|
|
|
2.09
|
|
0.650% Notes due 2024 (750MM Euro 1.1947)
(2)/
(750MM Euro 1.0449)
(3)
|
|
891
|
|
(2)
|
0.68
|
|
|
779
|
|
(3)
|
0.68
|
|
5.50% Notes due 2024 (500MM GBP 1.3444)
(2)
/(500MM GBP 1.2237)
(3)
|
|
666
|
|
(2)
|
6.75
|
|
|
605
|
|
(3)
|
6.75
|
|
2.625% Notes due 2025
|
|
747
|
|
|
2.63
|
|
|
—
|
|
|
—
|
|
2.45% Notes due 2026
|
|
1,990
|
|
|
2.47
|
|
|
1,989
|
|
|
2.47
|
|
2.95% Notes due 2027
|
|
995
|
|
|
2.96
|
|
|
—
|
|
|
—
|
|
1.150% Notes due 2028 (750MM Euro 1.1947)
(2)/
(750MM Euro 1.0449)
(3)
|
|
887
|
|
(2)
|
1.21
|
|
|
775
|
|
(3)
|
1.21
|
|
2.900% Notes due 2028
|
|
1,492
|
|
|
2.91
|
|
|
—
|
|
|
—
|
|
6.95% Notes due 2029
|
|
296
|
|
|
7.14
|
|
|
296
|
|
|
7.14
|
|
4.95% Debentures due 2033
|
|
498
|
|
|
4.95
|
|
|
497
|
|
|
4.95
|
|
4.375% Notes due 2033
|
|
856
|
|
|
4.24
|
|
|
857
|
|
|
4.24
|
|
1.650% Notes due 2035 (1.5B Euro 1.1947)
(2)/
(1.5B Euro 1.0449)
(3)
|
|
1,774
|
|
(2)
|
1.68
|
|
|
1,549
|
|
(3)
|
1.68
|
|
3.55% Notes due 2036
|
|
987
|
|
|
3.59
|
|
|
987
|
|
|
3.59
|
|
5.95% Notes due 2037
|
|
991
|
|
|
5.99
|
|
|
990
|
|
|
5.99
|
|
3.625% Notes due 2037
|
|
1,486
|
|
|
3.64
|
|
|
—
|
|
|
—
|
|
5.85% Debentures due 2038
|
|
696
|
|
|
5.85
|
|
|
695
|
|
|
5.85
|
|
3.400% Notes due 2038
|
|
990
|
|
|
3.42
|
|
|
—
|
|
|
—
|
|
4.50% Debentures due 2040
|
|
538
|
|
|
4.63
|
|
|
537
|
|
|
4.63
|
|
4.85% Notes due 2041
|
|
296
|
|
|
4.89
|
|
|
296
|
|
|
4.89
|
|
4.50% Notes due 2043
|
|
495
|
|
|
4.52
|
|
|
495
|
|
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.70% Notes due 2046
|
|
1,971
|
|
|
3.74
|
|
|
1,970
|
|
|
3.74
|
|
3.75% Notes due 2047
|
|
990
|
|
|
3.76
|
|
|
—
|
|
|
—
|
|
3.500% Notes due 2048
|
|
742
|
|
|
3.52
|
|
|
—
|
|
|
—
|
|
Other
|
|
75
|
|
|
—
|
|
|
77
|
|
|
—
|
|
Subtotal
|
|
32,174
|
|
(4)
|
3.19
|
%
|
(1)
|
24,146
|
|
(4)
|
3.33
|
(1
|
)
|
Less current portion
|
|
1,499
|
|
|
|
|
|
1,704
|
|
|
|
|
Total long-term debt
|
|
$
|
30,675
|
|
|
|
|
|
22,442
|
|
|
|
|
|
|
(1)
|
Weighted average effective rate.
|
|
|
(2)
|
Translation rate at
December 31, 2017
.
|
|
|
(3)
|
Translation rate at
January 1, 2017
.
|
|
|
(4)
|
The excess of the fair value over the carrying value of debt was
$2.0 billion
in
2017
and
$1.6 billion
in
2016
.
|
Fair value of the long-term debt 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 2017
, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates
$10 billion
, which expires on
September 13, 2018
. Interest charged on borrowings under the credit line agreements is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreements are not material.
Throughout
2017
, the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately
$3.9 billion
at the end of
2017
, of which
$2.3 billion
was borrowed under the Commercial Paper Program,
$1.5 billion
is the current portion of the long term debt, and the remainder principally represents local borrowing by international subsidiaries.
Throughout 2016, the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately
$4.7 billion
at the end of 2016, of which
$2.7 billion
was borrowed under the Commercial Paper Program,
$1.7 billion
is the current portion of the long term debt, and the remainder principally represents local borrowing by international subsidiaries.
Aggregate maturities of long-term obligations commencing in
2018
are:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
After 2022
|
$1,499
|
|
2,752
|
|
1,105
|
|
1,797
|
|
2,189
|
|
22,832
|
Tax Cuts and Jobs Act (TCJA) and SEC Staff Accounting Bulletin 118 (SAB 118)
On December 22, 2017, the United States enacted into law new U.S. tax legislation, referred to as the TCJA. This law includes provisions for a comprehensive overhaul of the corporate income tax code, including a reduction of the statutory corporate tax rate from 35% to 21%, effective on January 1, 2018. This new legislation also eliminated or reduced certain corporate income tax deductions as well as introduced new provisions that taxed certain foreign income not previously taxed by the United States. The TCJA also includes a provision for a tax on all previously undistributed earnings of U.S. companies located in foreign jurisdictions. Undistributed earnings in the form of cash and cash equivalents is taxed at a rate of 15.5% and all other earnings are taxed at a rate of 8.0%. This tax is payable over 8 years and will not accrue interest.
In December 2017, the SEC provided regulatory guidance for accounting of the impacts of the TCJA, referred to as SAB 118. Under the guidance in SAB 118, the income tax effects, which the accounting under ASC 740 is incomplete, are reported as a provisional amount based on a reasonable estimate. The reasonable estimate is subject to adjustment during a "measurement period", not to exceed one year, until the accounting is complete. The estimate is also subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provision of the TCJA, changes to certain estimates and amounts related to the earnings and profits of certain subsidiaries and the filing of tax returns.
As a result of the enactment of the TCJA, the Company recorded a provisional tax cost of
$13.0 billion
in the fourth quarter of 2017. This provisional charge was assessed as of January 18, 2018 and consisted of:
|
|
•
|
a
$10.1 billion
charge on previously undistributed foreign earnings as of December 31, 2017
|
|
|
•
|
a
$4.5 billion
deferred tax liability for foreign local and withholding taxes, offset by a
$1.1 billion
deferred tax asset for U.S. foreign tax credits, for repatriation of substantially all those earnings
|
|
|
•
|
a
$0.6 billion
tax benefit relating to the remeasurement of U.S. deferred tax assets and liabilities and the impact of the TCJA on tax reserves, and
|
|
|
•
|
a
$0.1 billion
charge for U.S. state and local taxes on the repatriation of these foreign earnings.
|
In determining this charge, the Company utilized the most recent information and guidance available related to the calculation of the tax liability and the impact to its deferred tax assets and liabilities, including those recorded for foreign local and withholding taxes that the Company assessed as of January 18, 2018. The provisional charge may require further adjustments and changes to the Company’s estimates as new guidance is made available. Revisions to the provisional charge may be material to the Company's financial results.
The TCJA also includes provisions for a tax on global intangible low-taxed income (GILTI). GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets, as provided by the TCJA. In January 2018, in response to inquiries by companies, the FASB issued guidance that allows companies to elect as an accounting policy whether to treat the GILTI tax as a period cost or to recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal. The Company has provisionally elected to treat GILTI as a period expense pending further analysis of this new tax provision.
The provision for taxes on income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
Currently payable:
|
|
|
|
|
|
|
U.S. taxes
|
|
$
|
11,969
|
|
|
1,896
|
|
|
2,748
|
|
International taxes
|
|
1,998
|
|
|
1,708
|
|
|
1,309
|
|
Total currently payable
|
|
13,967
|
|
|
3,604
|
|
|
4,057
|
|
Deferred:
|
|
|
|
|
|
|
U.S. taxes
|
|
(1,956
|
)
|
|
294
|
|
|
37
|
|
International taxes
|
|
4,362
|
|
|
(635
|
)
|
|
(307
|
)
|
Total deferred
|
|
2,406
|
|
|
(341
|
)
|
|
(270
|
)
|
Provision for taxes on income
|
|
$
|
16,373
|
|
|
3,263
|
|
|
3,787
|
|
A comparison of income tax expense at the U.S. statutory rate of
35%
in
2017
,
2016
and
2015
, to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
U.S.
|
|
$
|
4,865
|
|
|
7,457
|
|
|
8,179
|
|
International
|
|
12,808
|
|
|
12,346
|
|
|
11,017
|
|
Earnings before taxes on income:
|
|
$
|
17,673
|
|
|
19,803
|
|
|
19,196
|
|
Tax rates:
|
|
|
|
|
|
|
U.S. statutory rate
|
|
35.0
|
%
|
|
35.0
|
|
|
35.0
|
|
International operations
(1)
|
|
(12.8
|
)
|
|
(17.2
|
)
|
|
(15.4
|
)
|
Research and orphan drug tax credits
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
(0.2
|
)
|
U.S. state and local
|
|
0.6
|
|
|
(0.1
|
)
|
|
0.4
|
|
U.S. manufacturing deduction
|
|
(0.8
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
U.S. tax on international income
|
|
0.7
|
|
|
1.3
|
|
|
0.2
|
|
Tax benefits on share based compensation
|
|
(2.1
|
)
|
|
(1.8
|
)
|
|
—
|
|
U.S. tax benefit on asset/business disposals
|
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
All other
|
|
(0.1
|
)
|
|
0.3
|
|
|
0.3
|
|
TCJA impact
|
|
73.3
|
|
(2)
|
—
|
|
|
—
|
|
Effective Rate
|
|
92.6
|
%
|
|
16.5
|
%
|
|
19.7
|
%
|
(1) For all periods presented the Company has subsidiaries operating in Puerto Rico under various tax incentives. In 2017, International operations reflects the impacts of operations in jurisdictions with statutory tax rates different than the United States, particularly Ireland, Switzerland and Puerto Rico, which is a
favorable impact on the effective tax rate as compared with the
35.0%
U.S. statutory rate. The 2017 amount also includes tax cost related to the revaluation of deferred tax balances related to the change in the Belgian statutory tax rate increasing the tax provision by approximately
3.4%
.
(2) Includes U.S. state and local taxes provisionally recorded as part TCJA provisional charge which was approximately
0.6%
of the total effective tax rate
The 2017 effective tax rate increased by
76.1%
as compared to 2016, primarily driven by the enactment of the TCJA in the United States in December 2017. The enactment of the TCJA resulted in a provisional tax charge in the fourth quarter of 2017, of approximately
$13.0 billion
or approximately
73.3
percentage point increase to the effective tax rate.
The remainder of the increase in the tax rate for 2017 was related to the remeasurement of the Company’s deferred tax assets in Belgium, as a result of changes in the Belgian statutory corporate tax rate enacted in December 2017, offset by a tax benefit for the closure of the Company’s Animas insulin pump business.
The decrease in the 2016 effective tax rate, as compared to 2015 was primarily attributable to the Company adopting a new accounting standard for the reporting of additional tax benefits on share-based compensation that vested or were exercised during the fiscal year. The remainder of the change in the effective tax rate was primarily related to the lower earnings before taxes in the United States and the settlement of several uncertain tax positions in 2016 versus 2015.
The decrease in the 2015 effective tax rate, as compared to 2014 was primarily attributable to the increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions and a tax benefit resulting from a restructuring of international affiliates.
The items noted above reflect the key drivers of the rate reconciliation.
Temporary differences and carryforwards for
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Deferred Tax
|
|
2016 Deferred Tax
|
(Dollars in Millions)
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
Employee related obligations
|
|
$
|
2,259
|
|
|
|
|
|
2,958
|
|
|
|
|
Stock based compensation
|
|
507
|
|
|
|
|
|
749
|
|
|
|
|
Depreciation
|
|
|
|
|
(9
|
)
|
|
|
|
|
(219
|
)
|
Non-deductible intangibles
|
|
|
|
|
(6,506
|
)
|
|
|
|
|
(6,672
|
)
|
International R&D capitalized for tax
|
|
1,307
|
|
|
|
|
|
1,264
|
|
|
|
|
Reserves & liabilities
|
|
1,718
|
|
|
|
|
|
1,857
|
|
|
|
|
Income reported for tax purposes
|
|
1,316
|
|
|
|
|
|
1,309
|
|
|
|
|
Net operating loss carryforward international
|
|
762
|
|
|
|
|
|
717
|
|
|
|
|
Undistributed foreign earnings
|
|
1,101
|
|
|
(4,457
|
)
|
|
|
|
|
Miscellaneous international
|
|
755
|
|
|
(194
|
)
|
|
1,135
|
|
|
(15
|
)
|
Miscellaneous U.S.
|
|
177
|
|
|
|
|
|
155
|
|
|
|
|
Total deferred income taxes
|
|
$
|
9,902
|
|
|
(11,166
|
)
|
|
10,144
|
|
|
(6,906
|
)
|
The Company has wholly-owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will realize future taxable income sufficient to utilize these deferred tax assets.
The following table summarizes the activity related to unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
Beginning of year
|
|
$
|
3,041
|
|
|
3,080
|
|
|
2,465
|
|
Increases related to current year tax positions
|
|
332
|
|
|
348
|
|
|
570
|
|
Increases related to prior period tax positions
|
|
232
|
|
|
11
|
|
|
182
|
|
Decreases related to prior period tax positions
|
|
(416
|
)
|
(1)
|
(338
|
)
|
|
(79
|
)
|
Settlements
|
|
(2
|
)
|
|
(37
|
)
|
|
(4
|
)
|
Lapse of statute of limitations
|
|
(36
|
)
|
|
(23
|
)
|
|
(54
|
)
|
End of year
|
|
$
|
3,151
|
|
|
3,041
|
|
|
3,080
|
|
(1)
$347 million
of this decrease is related to the TCJA
The unrecognized tax benefits of
$3.2 billion
at
December 31, 2017
, 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 IRS has completed its audit for the tax years through 2009 and is currently auditing the tax years 2010-2012. In other major jurisdictions where the Company conducts business, the years remain open generally back to the year 2004. The Company believes it is possible that audits may be completed by tax authorities in some
jurisdictions over the next twelve months. However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.
The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense. The Company recognized after tax interest expense of
$60 million
,
$7 million
and
$44 million
in
2017
,
2016
and
2015
, respectively. The total amount of accrued interest was
$436 million
and
$344 million
in
2017
and
2016
, respectively.
|
|
9.
|
Employee Related Obligations
|
At the end of
2017
and
2016
, employee related obligations recorded on the Consolidated Balance Sheets were:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
Pension benefits
|
|
$
|
5,343
|
|
|
4,710
|
|
Postretirement benefits
|
|
2,331
|
|
|
2,733
|
|
Postemployment benefits
|
|
2,250
|
|
|
2,050
|
|
Deferred compensation
|
|
475
|
|
|
534
|
|
Total employee obligations
|
|
10,399
|
|
|
10,027
|
|
Less current benefits payable
|
|
325
|
|
|
412
|
|
Employee related obligations — non-current
|
|
$
|
10,074
|
|
|
9,615
|
|
Prepaid employee related obligations of
$526 million
and
$227 million
for
2017
and
2016
, 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. The Company also provides post-retirement benefits, primarily health care, to all eligible U.S. retired employees and their dependents.
Many international employees are covered by government-sponsored programs and the cost to the Company is not significant.
Retirement plan benefits for employees are primarily based on the employee’s compensation during the last
three
to
five
years before retirement and the number of years of service. Due to an amendment of the formula used to calculate benefits of the U.S. Defined Benefit Plan that occurred in 2014, benefits for employees hired on or after January 1, 2015, are primarily calculated using employee compensation over total years of service.
International subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided.
The Company does not typically fund retiree health care benefits in advance, but may do so at its discretion. The Company also has the right to modify these plans in the future.
In 2017 and 2016 the Company used
December 31, 2017
and
December 31, 2016
, respectively, as the measurement date for all U.S. and international retirement and other benefit plans.
Net periodic benefit costs for the Company’s defined benefit retirement plans and other benefit plans for
2017
,
2016
and
2015
include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
1,080
|
|
|
949
|
|
|
1,037
|
|
|
247
|
|
|
224
|
|
|
257
|
|
Interest cost
|
|
927
|
|
|
927
|
|
|
988
|
|
|
159
|
|
|
158
|
|
|
186
|
|
Expected return on plan assets
|
|
(2,041
|
)
|
|
(1,962
|
)
|
|
(1,809
|
)
|
|
(6
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Amortization of prior service cost (credit)
|
|
2
|
|
|
1
|
|
|
2
|
|
|
(30
|
)
|
|
(34
|
)
|
|
(33
|
)
|
Recognized actuarial losses
|
|
609
|
|
|
496
|
|
|
745
|
|
|
138
|
|
|
135
|
|
|
201
|
|
Curtailments and settlements
|
|
17
|
|
|
11
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
594
|
|
|
422
|
|
|
971
|
|
|
508
|
|
|
477
|
|
|
604
|
|
Amounts expected to be recognized in net periodic benefit cost in the coming year for the Company’s defined benefit retirement plans and other post-retirement plans:
|
|
|
|
|
(Dollars in Millions)
|
|
Amortization of net transition obligation
|
$
|
—
|
|
Amortization of net actuarial losses
|
931
|
|
Amortization of prior service credit
|
30
|
|
Unrecognized gains and losses for the U.S. pension plans are amortized over the average remaining future service for each plan. For plans with no active employees, they are amortized over the average life expectancy. The amortization of gains and losses for the other U.S. benefit plans is determined by using a
10%
corridor of the greater of the market value of assets or the accumulated postretirement benefit obligation. Total unamortized gains and losses in excess of the corridor are amortized over the average remaining future service.
Prior service costs/benefits for the U.S. pension plans are amortized over the average remaining future service of plan participants at the time of the plan amendment. Prior service cost/benefit for the other U.S. benefit plans is amortized over the average remaining service to full eligibility age of plan participants at the time of the plan amendment.
The following table represents the weighted-average actuarial assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
Worldwide Benefit Plans
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost discount rate
|
|
3.59
|
%
|
|
3.98
|
|
3.78
|
|
4.63
|
|
4.77
|
|
4.31
|
Interest cost discount rate
|
|
3.98
|
%
|
|
4.24
|
|
3.78
|
|
3.94
|
|
4.10
|
|
4.31
|
Rate of increase in compensation levels
|
|
4.01
|
%
|
|
4.02
|
|
4.05
|
|
4.31
|
|
4.32
|
|
4.11
|
Expected long-term rate of return on plan assets
|
|
8.43
|
%
|
|
8.55
|
|
8.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.30
|
%
|
|
3.78
|
|
4.11
|
|
3.78
|
|
4.42
|
|
4.63
|
Rate of increase in compensation levels
|
|
3.99
|
%
|
|
4.02
|
|
4.01
|
|
4.30
|
|
4.29
|
|
4.28
|
The Company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities. For the fiscal year 2016, the Company changed its methodology in determining service and interest cost from the single weighted average discount rate approach to duration specific spot rates along that yield curve to the plans’ liability cash flows, which management has concluded is a more precise estimate. Prior to this change in methodology, the Company measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it on a prospective basis. This change does not impact the benefit obligation and did not have a material impact to the 2016 full year results.
The expected rates of return on plan asset assumptions represent the Company's assessment of long-term returns on diversified investment portfolios globally. The assessment is determined using projections from external financial sources, long-term historical averages, actual returns by asset class and the various asset class allocations by market.
The following table displays the assumed health care cost trend rates, for all individuals:
|
|
|
|
|
|
|
|
Health Care Plans
|
|
2017
|
|
2016
|
Health care cost trend rate assumed for next year
|
|
6.33
|
%
|
|
6.32
|
%
|
Rate to which the cost trend rate is assumed to decline (ultimate trend)
|
|
4.55
|
%
|
|
4.50
|
%
|
Year the rate reaches the ultimate trend rate
|
|
2038
|
|
|
2038
|
|
A one-percentage-point change in assumed health care cost trend rates would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage-
|
|
One-Percentage-
|
(Dollars in Millions)
|
|
Point Increase
|
|
Point Decrease
|
Health Care Plans
|
|
|
|
|
|
|
Total interest and service cost
|
|
$
|
29
|
|
|
(23
|
)
|
Post-retirement benefit obligation
|
|
$
|
355
|
|
|
(291
|
)
|
The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end
2017
and
2016
for the Company’s defined benefit retirement plans and other post-retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation — beginning of year
|
|
$
|
28,116
|
|
|
25,855
|
|
|
4,605
|
|
|
4,669
|
|
Service cost
|
|
1,080
|
|
|
949
|
|
|
247
|
|
|
224
|
|
Interest cost
|
|
927
|
|
|
927
|
|
|
159
|
|
|
158
|
|
Plan participant contributions
|
|
60
|
|
|
54
|
|
|
—
|
|
|
—
|
|
Amendments
|
|
(7
|
)
|
|
(48
|
)
|
|
(17
|
)
|
|
—
|
|
Actuarial (gains) losses
|
|
2,996
|
|
|
2,302
|
|
|
(166
|
)
|
|
(73
|
)
|
Divestitures & acquisitions
|
|
201
|
|
|
(24
|
)
|
|
88
|
|
|
—
|
|
Curtailments, settlements & restructuring
|
|
(35
|
)
|
|
(25
|
)
|
|
2
|
|
|
—
|
|
Benefits paid from plan*
|
|
(1,050
|
)
|
|
(1,210
|
)
|
|
(351
|
)
|
|
(378
|
)
|
Effect of exchange rates
|
|
933
|
|
|
(664
|
)
|
|
15
|
|
|
5
|
|
Projected benefit obligation — end of year
|
|
$
|
33,221
|
|
|
28,116
|
|
|
4,582
|
|
|
4,605
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Plan assets at fair value — beginning of year
|
|
$
|
23,633
|
|
|
22,254
|
|
|
75
|
|
|
74
|
|
Actual return on plan assets
|
|
4,274
|
|
|
2,286
|
|
|
12
|
|
|
7
|
|
Company contributions
|
|
664
|
|
|
838
|
|
|
545
|
|
|
372
|
|
Plan participant contributions
|
|
60
|
|
|
54
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
(32
|
)
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
Divestitures & acquisitions
|
|
173
|
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
Benefits paid from plan assets*
|
|
(1,050
|
)
|
|
(1,210
|
)
|
|
(351
|
)
|
|
(378
|
)
|
Effect of exchange rates
|
|
682
|
|
|
(540
|
)
|
|
—
|
|
|
—
|
|
Plan assets at fair value — end of year
|
|
$
|
28,404
|
|
|
23,633
|
|
|
281
|
|
|
75
|
|
Funded status — end of year
|
|
$
|
(4,817
|
)
|
|
(4,483
|
)
|
|
(4,301
|
)
|
|
(4,530
|
)
|
Amounts Recognized in the Company’s Balance Sheet consist of the following:
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
526
|
|
|
227
|
|
|
—
|
|
|
—
|
|
Current liabilities
|
|
(92
|
)
|
|
(86
|
)
|
|
(228
|
)
|
|
(315
|
)
|
Non-current liabilities
|
|
(5,251
|
)
|
|
(4,624
|
)
|
|
(4,073
|
)
|
|
(4,215
|
)
|
Total recognized in the consolidated balance sheet — end of year
|
|
$
|
(4,817
|
)
|
|
(4,483
|
)
|
|
(4,301
|
)
|
|
(4,530
|
)
|
Amounts Recognized in Accumulated Other Comprehensive Income consist of the following:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
8,140
|
|
|
7,749
|
|
|
1,500
|
|
|
1,804
|
|
Prior service cost (credit)
|
|
(25
|
)
|
|
(12
|
)
|
|
(137
|
)
|
|
(150
|
)
|
Unrecognized net transition obligation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total before tax effects
|
|
$
|
8,115
|
|
|
7,737
|
|
|
1,363
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
Accumulated Benefit Obligations — end of year
|
|
$
|
29,793
|
|
|
25,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*In 2016, the Company offered a voluntary lump-sum payment option below a pre-determined threshold for certain eligible former employees who are vested participants of the U.S. Qualified Defined Benefit Pension Plan. The
distribution of the lump-sums was completed by the end of fiscal 2017. The amounts distributed in 2017 and 2016 were approximately $127 million and $420 million, respectively. These distributions from the plan did not have a material impact on the Company’s financial position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amounts Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
594
|
|
|
422
|
|
|
508
|
|
|
477
|
|
Net actuarial (gain) loss
|
|
740
|
|
|
1,965
|
|
|
(169
|
)
|
|
(72
|
)
|
Amortization of net actuarial loss
|
|
(609
|
)
|
|
(496
|
)
|
|
(138
|
)
|
|
(135
|
)
|
Prior service cost (credit)
|
|
(7
|
)
|
|
(48
|
)
|
|
(17
|
)
|
|
—
|
|
Amortization of prior service (cost) credit
|
|
(2
|
)
|
|
(1
|
)
|
|
30
|
|
|
34
|
|
Effect of exchange rates
|
|
256
|
|
|
(218
|
)
|
|
3
|
|
|
(1
|
)
|
Total loss/(income) recognized in other comprehensive income, before tax
|
|
$
|
378
|
|
|
1,202
|
|
|
(291
|
)
|
|
(174
|
)
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
972
|
|
|
1,624
|
|
|
217
|
|
|
303
|
|
The Company plans to continue to fund its U.S. Qualified Plans to comply with the Pension Protection Act of 2006. International Plans are funded in accordance with local regulations. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the plans. For certain plans, funding is not a common practice, as funding provides no economic benefit. Consequently, the Company has several pension plans that are not funded.
In
2017
, the Company contributed
$72 million
and
$592 million
to its U.S. and international pension plans, respectively.
The following table displays the funded status of the Company's U.S. Qualified & Non-Qualified pension plans and international funded and unfunded pension plans at December 31, 2017 and December 31, 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
International Plans
|
|
Qualified Plans
|
Non-Qualified Plans
|
Funded Plans
|
Unfunded Plans
|
(Dollars in Millions)
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
2017
|
2016
|
Plan Assets
|
$
|
18,681
|
|
16,057
|
|
—
|
|
—
|
|
9,723
|
|
7,576
|
|
—
|
|
—
|
|
Projected Benefit Obligation
|
19,652
|
|
16,336
|
|
2,257
|
|
1,905
|
|
10,863
|
|
9,502
|
|
449
|
|
373
|
|
Accumulated Benefit Obligation
|
17,654
|
|
14,759
|
|
1,849
|
|
1,568
|
|
9,893
|
|
8,663
|
|
397
|
|
329
|
|
Over (Under) Funded Status
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation
|
$
|
(971
|
)
|
(279
|
)
|
(2,257
|
)
|
(1,905
|
)
|
(1,140
|
)
|
(1,926
|
)
|
(449
|
)
|
(373
|
)
|
Accumulated Benefit Obligation
|
1,027
|
|
1,298
|
|
(1,849
|
)
|
(1,568
|
)
|
(170
|
)
|
(1,087
|
)
|
(397
|
)
|
(329
|
)
|
Plans with accumulated benefit obligations in excess of plan assets have an accumulated benefit obligation, projected benefit obligation and plan assets of
$3.8 billion
,
$4.6 billion
and
$0.7 billion
, respectively, at the end of
2017
, and
$8.8 billion
,
$9.9 billion
and
$5.6 billion
, respectively, at the end of
2016
.
The following table displays the projected future benefit payments from the Company’s retirement and other benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023-2027
|
Projected future benefit payments
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plans
|
|
$
|
970
|
|
|
1,007
|
|
|
1,057
|
|
|
1,131
|
|
|
1,190
|
|
|
7,062
|
|
Other benefit plans
|
|
$
|
322
|
|
|
312
|
|
|
306
|
|
|
301
|
|
|
297
|
|
|
1,395
|
|
The following table displays the projected future minimum contributions to the unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023-2027
|
Projected future contributions
|
|
$
|
88
|
|
|
89
|
|
|
94
|
|
|
100
|
|
|
108
|
|
|
651
|
|
Each pension plan is overseen by a local committee or board that is responsible for the overall administration and investment of the pension plans. In determining investment policies, strategies and goals, each committee or board considers factors including, local pension rules and regulations; local tax regulations; availability of investment vehicles (separate accounts, commingled accounts, insurance funds, etc.); funded status of the plans; ratio of actives to retirees; duration of liabilities; and other relevant factors including: diversification, liquidity of local markets and liquidity of base currency. 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.
The Company’s retirement plan asset allocation at the end of
2017
and
2016
and target allocations for
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
Plan Assets
|
|
Target
Allocation
|
|
|
2017
|
|
2016
|
|
2018
|
Worldwide Retirement Plans
|
|
|
|
|
|
|
Equity securities
|
|
76
|
%
|
|
75
|
%
|
|
73
|
%
|
Debt securities
|
|
24
|
|
|
25
|
|
|
27
|
|
Total plan assets
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Determination of Fair Value of Plan Assets
The Plan has an established and well-documented process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon models that primarily use, as inputs, market-based or independently sourced market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves.
While the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Valuation Hierarchy
The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described in the table below with Level 1 having the highest priority and Level 3 having the lowest.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for the investments measured at fair value.
|
|
•
|
Short-term investment funds
— Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank. Other investments are through investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in a market that is not active and classified as Level 2.
|
|
|
•
|
Government and agency securities
— A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. When quoted market prices for a security are not available in an active market, they are classified as Level 2.
|
|
|
•
|
Debt instruments
— A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified as Level 1. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are classified as Level 2. Level 3 debt instruments are priced based on unobservable inputs.
|
|
|
•
|
Equity securities
— Equity securities are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all common stock is classified within Level 1 of the valuation hierarchy.
|
|
|
•
|
Commingled funds
— These investment vehicles are valued using the NAV provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Assets in the Level 2 category have a quoted market price.
|
|
|
•
|
Insurance contracts
— The instruments are issued by insurance companies. The fair value is based on negotiated value and the underlying investments held in separate account portfolios as well as considering 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.
|
|
|
•
|
Other assets
— Other assets are represented primarily by limited partnerships and real estate investments, as well as commercial loans and commercial mortgages that are not classified as corporate debt. Other assets that are exchange listed and actively traded are classified as Level 1, while inactively traded assets are classified as Level 2.
|
The following table sets forth the Retirement Plans' investments measured at fair value as of December 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
(a)
|
|
Investments Measured at Net Asset Value
|
|
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
Total Assets
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Short-term investment funds
|
|
$
|
429
|
|
|
145
|
|
|
427
|
|
|
652
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
856
|
|
|
797
|
|
Government and agency securities
|
|
—
|
|
|
—
|
|
|
3,094
|
|
|
2,655
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,094
|
|
|
2,655
|
|
Debt instruments
|
|
—
|
|
|
—
|
|
|
2,013
|
|
|
1,237
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,013
|
|
|
1,237
|
|
Equity securities
|
|
13,848
|
|
|
11,433
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,848
|
|
|
11,445
|
|
Commingled funds
|
|
—
|
|
|
—
|
|
|
1,780
|
|
|
1,316
|
|
|
57
|
|
|
—
|
|
|
6,158
|
|
|
5,767
|
|
|
7,995
|
|
|
7,083
|
|
Insurance contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
199
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
199
|
|
|
24
|
|
Other assets
|
|
—
|
|
|
—
|
|
|
121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
278
|
|
|
392
|
|
|
399
|
|
|
392
|
|
Investments at fair value
|
|
$
|
14,277
|
|
|
11,578
|
|
|
7,435
|
|
|
5,872
|
|
|
256
|
|
|
24
|
|
|
6,436
|
|
|
6,159
|
|
|
28,404
|
|
|
23,633
|
|
(a)
The activity for the Level 3 assets is not significant for all years presented.
The Company's Other Benefit Plans are unfunded except for U.S. commingled funds (Level 2) of
$81 million
and
$75 million
and U.S. short-term investment funds (Level 2) of
$200 million
and
$0
at December 31, 2017 and December 31, 2016, respectively.
The fair value of Johnson & Johnson Common Stock directly held in plan assets was
$938 million
(
3.3%
of total plan assets) at December 31, 2017 and
$847 million
(
3.6%
of total plan assets) at December 31, 2016.
The Company has voluntary 401(k) savings plans designed to enhance the existing retirement programs covering eligible employees. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which he/she is eligible. Total Company matching contributions to the plans were
$214 million
,
$191 million
and
$187 million
in
2017
,
2016
and
2015
, respectively.
|
|
12.
|
Capital and Treasury Stock
|
Changes in treasury stock were:
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
(Amounts in Millions Except Treasury Stock Shares in Thousands)
|
|
Shares
|
|
Amount
|
Balance at December 28, 2014
|
|
336,620
|
|
|
$
|
19,891
|
|
Employee compensation and stock option plans
|
|
(24,413
|
)
|
|
(2,497
|
)
|
Repurchase of common stock
|
|
52,474
|
|
|
5,290
|
|
Balance at January 3, 2016
|
|
364,681
|
|
|
22,684
|
|
Employee compensation and stock option plans
|
|
(30,839
|
)
|
|
(3,311
|
)
|
Repurchase of common stock
|
|
79,490
|
|
|
8,979
|
|
Balance at January 1, 2017
|
|
413,332
|
|
|
28,352
|
|
Employee compensation and stock option plans
|
|
(25,508
|
)
|
|
(3,156
|
)
|
Repurchase of common stock
|
|
49,494
|
|
|
6,358
|
|
Balance at December 31, 2017
|
|
437,318
|
|
|
$
|
31,554
|
|
Aggregate shares of common stock issued were approximately
3,119,843,000
shares at the end of
2017
,
2016
and
2015
.
Cash dividends paid were
$3.32
per share in
2017
, compared with dividends of
$3.15
per share in
2016
, and
$2.95
per share in
2015
.
On October 13, 2015, the Company announced that its Board of Directors approved a share repurchase program, authorizing the Company to purchase up to
$10.0 billion
of the Company's shares of common stock. This share repurchase program was completed as of July 2, 2017.
On July 21, 2014, the Company announced that its Board of Directors approved a share repurchase program, authorizing the Company to purchase up to
$5.0 billion
of the Company's shares of common stock. This share repurchase program was completed on April 28, 2015.
|
|
13.
|
Accumulated Other Comprehensive Income (Loss)
|
Components of other comprehensive income (loss) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Foreign
Currency Translation
|
|
Gain/(Loss) On Securities
|
|
Employee Benefit Plans
|
|
Gain/
(Loss) On
Derivatives & Hedges
|
|
Total
Accumulated
Other
Comprehensive Income (Loss)
|
December 28, 2014
|
|
$
|
(4,803
|
)
|
|
257
|
|
|
(6,317
|
)
|
|
141
|
|
|
(10,722
|
)
|
Net 2015 changes
|
|
(3,632
|
)
|
|
347
|
|
|
1,019
|
|
|
(177
|
)
|
|
(2,443
|
)
|
January 3, 2016
|
|
(8,435
|
)
|
|
604
|
|
|
(5,298
|
)
|
|
(36
|
)
|
|
(13,165
|
)
|
Net 2016 changes
|
|
(612
|
)
|
|
(193
|
)
|
|
(682
|
)
|
|
(249
|
)
|
|
(1,736
|
)
|
January 1, 2017
|
|
(9,047
|
)
|
|
411
|
|
|
(5,980
|
)
|
|
(285
|
)
|
|
(14,901
|
)
|
Net 2017 changes
|
|
1,696
|
|
|
(179
|
)
|
|
(170
|
)
|
|
355
|
|
|
1,702
|
|
December 31, 2017
|
|
$
|
(7,351
|
)
|
|
232
|
|
|
(6,150
|
)
|
|
70
|
|
|
(13,199
|
)
|
Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes where it relates to permanent investments in international subsidiaries. For additional details on comprehensive income see the Consolidated Statements of Comprehensive Income.
Details on reclassifications out of Accumulated Other Comprehensive Income:
Gain/(Loss) On Securities - reclassifications released to Other (income) expense, net.
Employee Benefit Plans - reclassifications are included in net periodic benefit cost. See Note 10 for additional details.
Gain/(Loss) On Derivatives & Hedges - reclassifications to earnings are recorded in the same account as the hedged transaction. See Note 6 for additional details.
|
|
14.
|
International Currency Translation
|
For translation of its subsidiaries operating in non-U.S. Dollar currencies, the Company has determined that the local currencies of its international subsidiaries are the functional currencies except those in highly inflationary economies, which are defined as those which have had compound cumulative rates of inflation of
100% or more during the past three years
, or where a substantial portion of its cash flows are not in the local currency. For the majority of the Company's subsidiaries the local currency is the functional currency.
In consolidating international subsidiaries, balance sheet currency effects are recorded as a component of accumulated other comprehensive income. This equity account includes the results of translating certain balance sheet assets and liabilities at current exchange rates and some accounts at historical 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
2017
,
2016
and
2015
for foreign currency translation adjustments is included in Note 13.
Net currency transaction gains and losses included in Other (income) expense were losses of
$216 million
,
$289 million
and
$104 million
in
2017
,
2016
and
2015
, respectively.
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal years ended
December 31, 2017
,
January 1, 2017
and
January 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions Except Per Share Amounts)
|
|
2017
|
|
2016
|
|
2015
|
Basic net earnings per share
|
|
$
|
0.48
|
|
|
6.04
|
|
|
5.56
|
|
Average shares outstanding — basic
|
|
2,692.0
|
|
|
2,737.3
|
|
|
2,771.8
|
|
Potential shares exercisable under stock option plans
|
|
139.7
|
|
|
142.4
|
|
|
141.5
|
|
Less: shares repurchased under treasury stock method
|
|
(87.3
|
)
|
|
(92.1
|
)
|
|
(102.6
|
)
|
Convertible debt shares
|
|
0.9
|
|
|
1.3
|
|
|
2.2
|
|
Adjusted average shares outstanding — diluted
|
|
2,745.3
|
|
|
2,788.9
|
|
|
2,812.9
|
|
Diluted net earnings per share
|
|
$
|
0.47
|
|
|
5.93
|
|
|
5.48
|
|
The diluted net earnings per share calculation included the dilutive effect of convertible debt that is offset by the related reduction in interest expense of
$1 million
after-tax for year 2017,
$2 million
for year 2016 and
$3 million
for year 2015.
The diluted net earnings per share calculation for 2017, 2016 and 2015 included all shares related to stock options, as the exercise price of all options was less than the average market value of the Company's stock.
|
|
16.
|
Rental Expense and Lease Commitments
|
Rentals of space, vehicles, manufacturing equipment and office and data processing equipment under operating leases were approximately
$372 million
,
$330 million
and
$316 million
in
2017
,
2016
and
2015
, respectively.
The approximate minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at
December 31, 2017
are:
(Dollars in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
After 2022
|
|
Total
|
$227
|
|
184
|
|
143
|
|
106
|
|
76
|
|
103
|
|
839
|
Commitments under capital leases are not significant.
|
|
17.
|
Common Stock, Stock Option Plans and Stock Compensation Agreements
|
At
December 31, 2017
, the Company had
2
stock-based compensation plans. The shares outstanding are for contracts under the Company's 2005 Long-Term Incentive Plan and the 2012 Long-Term Incentive Plan. The 2005 Long-Term Incentive Plan expired April 26, 2012. All options and restricted shares granted subsequent to that date were under the 2012 Long-Term Incentive Plan. Under the 2012 Long-Term Incentive Plan, the Company may issue up to
650 million
shares of common stock, plus any shares canceled, expired, forfeited, or not issued from the 2005 Long-Term Incentive Plan subsequent to April 26, 2012. Shares available for future grants under the 2012 Long-Term Incentive Plan were
389 million
at the end of
2017
.
The compensation cost that has been charged against income for these plans was
$962 million
,
$878 million
and
$874 million
for
2017
,
2016
and
2015
, respectively. The total income tax benefit recognized in the income statement for share-based compensation costs was
$275 million
,
$256 million
and
$253 million
for
2017
,
2016
and
2015
, respectively. An additional tax
benefit of
$353 million
was recognized in 2016 due to the adoption of a new accounting standard for the reporting of additional tax benefits on share-based compensation. The total unrecognized compensation cost was
$798 million
,
$749 million
and
$744 million
for
2017
,
2016
and
2015
, respectively. The weighted average period for this cost to be recognized was
1.76
years,
1.09
years and
0.98
years for
2017
,
2016
, and
2015
, respectively. Share-based compensation costs capitalized as part of inventory were insignificant in all periods.
The Company settles employee benefit equity issuances with treasury shares. Treasury shares are replenished throughout the year for the number of shares used to settle employee benefit equity issuances.
Stock Options
Stock options expire
10
years from 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.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. For 2017, 2016 and 2015 grants, expected volatility represents a blended rate of 10-year weekly historical overall volatility rate, and a 5-week average implied volatility rate based on at-the-money traded Johnson & Johnson options with a life of 2 years. For all grants, historical data is used to determine the expected life of the option. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.
The average fair value of options granted was
$13.38
,
$10.01
and
$10.68
, in
2017
,
2016
and
2015
, respectively. The fair value was estimated based on the weighted average assumptions of:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free rate
|
2.25
|
%
|
|
1.51
|
%
|
|
1.77
|
%
|
Expected volatility
|
15.30
|
%
|
|
15.76
|
%
|
|
15.48
|
%
|
Expected life (in years)
|
7.0
|
|
|
7.0
|
|
|
7.0
|
|
Expected dividend yield
|
2.90
|
%
|
|
3.10
|
%
|
|
2.90
|
%
|
A summary of option activity under the Plan as of
December 31, 2017
,
January 1, 2017
and
January 3, 2016
, and changes during the years ending on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in Thousands)
|
|
Outstanding Shares
|
|
Weighted
Average Exercise Price
|
|
Aggregate
Intrinsic
Value
(Dollars in Millions)
|
Shares at December 28, 2014
|
|
115,712
|
|
|
$
|
70.37
|
|
|
$
|
4,014
|
|
Options granted
|
|
20,484
|
|
|
100.06
|
|
|
|
Options exercised
|
|
(16,683
|
)
|
|
62.53
|
|
|
|
Options canceled/forfeited
|
|
(2,996
|
)
|
|
82.22
|
|
|
|
Shares at January 3, 2016
|
|
116,517
|
|
|
76.41
|
|
|
3,065
|
|
Options granted
|
|
22,491
|
|
|
101.87
|
|
|
|
Options exercised
|
|
(22,547
|
)
|
|
65.66
|
|
|
|
Options canceled/forfeited
|
|
(3,006
|
)
|
|
92.83
|
|
|
|
Shares at January 1, 2017
|
|
113,455
|
|
|
83.16
|
|
|
3,636
|
|
Options granted
|
|
19,287
|
|
|
115.67
|
|
|
|
Options exercised
|
|
(18,975
|
)
|
|
70.87
|
|
|
|
Options canceled/forfeited
|
|
(2,461
|
)
|
|
101.40
|
|
|
|
Shares at December 31, 2017
|
|
111,306
|
|
|
$
|
90.48
|
|
|
$
|
5,480
|
|
The total intrinsic value of options exercised was
$1,060 million
,
$980 million
and
$644 million
in
2017
,
2016
and
2015
, respectively.
The following table summarizes stock options outstanding and exercisable at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in Thousands)
|
|
Outstanding
|
|
Exercisable
|
Exercise Price Range
|
|
Options
|
|
Average Life
(1)
|
|
Average Exercise Price
|
|
Options
|
|
Average Exercise Price
|
$52.13-$62.20
|
|
12,148
|
|
|
1.7
|
|
$60.37
|
|
12,148
|
|
|
$60.37
|
$62.62-$65.62
|
|
9,548
|
|
|
3.0
|
|
$63.91
|
|
9,547
|
|
|
$63.91
|
$66.07-$72.54
|
|
14,816
|
|
|
5.0
|
|
$72.53
|
|
14,816
|
|
|
$72.53
|
$90.44-$100.48
|
|
35,035
|
|
|
6.6
|
|
$95.48
|
|
15,843
|
|
|
$90.49
|
$101.87-$115.67
|
|
39,759
|
|
|
8.6
|
|
$108.35
|
|
67
|
|
|
$105.91
|
|
|
111,306
|
|
|
6.3
|
|
$90.48
|
|
52,421
|
|
|
$73.61
|
(1)
Average contractual life remaining in years.
Stock options outstanding at
January 1, 2017
and
January 3, 2016
were
113,455
and an average life of
6.2
years and
116,517
and an average life of
5.9
years, respectively. Stock options exercisable at
January 1, 2017
and
January 3, 2016
were
50,414
at an average price of
$65.77
and
48,345
at an average price of
$62.26
, respectively.
Restricted Share Units and Performance Share Units
The Company grants restricted share units which vest over service periods that range from
6 months
to
3 years
. The Company also grants performance share units, which are paid in shares of Johnson & Johnson Common Stock after the end of a
three
-year performance period. Whether any performance share units vest, and the amount that does vest, is tied to the completion of service periods that range from
6 months
to
3 years
and the achievement, over a
three
-year period, of three equally-weighted goals that directly align with or help drive long-term total shareholder return: operational 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 on actual performance, from
0%
to
200%
of the target number of performance share units granted
.
In the fourth quarter of 2017, the Company modified the restricted share units that are scheduled to vest between January 1, 2018 and March 15, 2018. This modification guaranteed a minimum aggregate value, below the market value of the total expected payout amount, for all awards expected to vest during this period. The amount that was committed was not material to the Company’s overall financial position.
A summary of the restricted share units and performance share units activity under the Plans as of
December 31, 2017
is presented below:
|
|
|
|
|
|
|
|
(Shares in Thousands)
|
|
Outstanding Restricted Share Units
|
|
Outstanding Performance Share Units
|
Shares at January 1, 2017
|
|
21,061
|
|
|
2,415
|
|
Granted
|
|
7,248
|
|
|
1,276
|
|
Issued
|
|
(7,205
|
)
|
|
(1,361
|
)
|
Canceled/forfeited/adjusted
|
|
(943
|
)
|
|
295
|
|
Shares at December 31, 2017
|
|
20,161
|
|
|
2,625
|
|
The average fair value of the restricted share units granted was
$107.69
,
$92.45
and
$91.65
in
2017
,
2016
and
2015
, respectively, using the fair market value at the date of grant. The fair value of restricted share units was discounted for dividends, which are not paid on the restricted share units during the vesting period. The fair value of restricted share units issued was
$596.5 million
,
$587.7 million
and
$597.6 million
in
2017
,
2016
and
2015
, respectively.
The weighted average fair value of the performance share units granted was
$114.13
,
$105.30
and
$93.54
in
2017
,
2016
and
2015
, calculated using the weighted average fair market value for each of the three component goals at the date of grant.
The fair values for the sales and earnings per share goals of each performance share unit were estimated on the date of grant using the fair market value of the shares at the time of the award discounted for dividends, which are not paid on the performance share units during the vesting period. The fair value for the relative total shareholder return goal of each performance share unit was estimated on the date of grant using the Monte Carlo valuation model. The fair value of performance share units issued was
$132.5 million
,
$127.7 million
and
$16.7 million
in
2017
,
2016
and
2015
, respectively.
|
|
18.
|
Segments of Business and Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Customers
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
Consumer —
|
|
|
|
|
|
|
United States
|
|
$
|
5,565
|
|
|
5,420
|
|
|
5,222
|
|
International
|
|
8,037
|
|
|
7,887
|
|
|
8,285
|
|
Total
|
|
13,602
|
|
|
13,307
|
|
|
13,507
|
|
Pharmaceutical —
|
|
|
|
|
|
|
United States
|
|
21,474
|
|
|
20,125
|
|
|
18,333
|
|
International
|
|
14,782
|
|
|
13,339
|
|
|
13,097
|
|
Total
|
|
36,256
|
|
|
33,464
|
|
|
31,430
|
|
Medical Devices —
|
|
|
|
|
|
|
United States
|
|
12,824
|
|
|
12,266
|
|
|
12,132
|
|
International
|
|
13,768
|
|
|
12,853
|
|
|
13,005
|
|
Total
|
|
26,592
|
|
|
25,119
|
|
|
25,137
|
|
Worldwide total
|
|
$
|
76,450
|
|
|
71,890
|
|
|
70,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Tax
|
|
Identifiable Assets
|
(Dollars in Millions)
|
|
2017
(3)
|
|
2016
(4)
|
|
2015
(5)
|
|
2017
|
|
2016
|
Consumer
|
|
$
|
2,524
|
|
|
2,441
|
|
|
1,787
|
|
|
$
|
25,030
|
|
|
23,971
|
|
Pharmaceutical
|
|
11,083
|
|
|
12,827
|
|
|
11,734
|
|
|
59,450
|
|
|
27,477
|
|
Medical Devices
|
|
5,392
|
|
|
5,578
|
|
|
6,826
|
|
|
45,413
|
|
|
39,773
|
|
Total
|
|
18,999
|
|
|
20,846
|
|
|
20,347
|
|
|
129,893
|
|
|
91,221
|
|
Less: Expense not allocated to segments
(1)
|
|
1,326
|
|
|
1,043
|
|
|
1,151
|
|
|
|
|
|
General corporate
(2)
|
|
|
|
|
|
|
|
27,410
|
|
|
49,987
|
|
Worldwide total
|
|
$
|
17,673
|
|
|
19,803
|
|
|
19,196
|
|
|
$
|
157,303
|
|
|
141,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to Property,
Plant & Equipment
|
|
Depreciation and
Amortization
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Consumer
|
|
$
|
485
|
|
|
486
|
|
|
544
|
|
|
$
|
674
|
|
|
608
|
|
|
559
|
|
Pharmaceutical
|
|
936
|
|
|
927
|
|
|
1,063
|
|
|
2,416
|
|
|
886
|
|
|
929
|
|
Medical Devices
|
|
1,566
|
|
|
1,472
|
|
|
1,631
|
|
|
2,216
|
|
|
1,928
|
|
|
1,945
|
|
Segments total
|
|
2,987
|
|
|
2,885
|
|
|
3,238
|
|
|
5,306
|
|
|
3,422
|
|
|
3,433
|
|
General corporate
|
|
292
|
|
|
341
|
|
|
225
|
|
|
336
|
|
|
332
|
|
|
313
|
|
Worldwide total
|
|
$
|
3,279
|
|
|
3,226
|
|
|
3,463
|
|
|
$
|
5,642
|
|
|
3,754
|
|
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Customers
|
|
Long-Lived Assets
(6)
|
(Dollars in Millions)
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
United States
|
|
$
|
39,863
|
|
|
37,811
|
|
|
35,687
|
|
|
$
|
38,556
|
|
|
36,934
|
|
Europe
|
|
17,126
|
|
|
15,770
|
|
|
15,995
|
|
|
56,677
|
|
|
21,996
|
|
Western Hemisphere excluding U.S.
|
|
6,041
|
|
|
5,734
|
|
|
6,045
|
|
|
2,990
|
|
|
2,961
|
|
Asia-Pacific, Africa
|
|
13,420
|
|
|
12,575
|
|
|
12,347
|
|
|
2,773
|
|
|
2,512
|
|
Segments total
|
|
76,450
|
|
|
71,890
|
|
|
70,074
|
|
|
100,996
|
|
|
64,403
|
|
General corporate
|
|
|
|
|
|
|
|
1,143
|
|
|
1,190
|
|
Other non long-lived assets
|
|
|
|
|
|
|
|
55,164
|
|
|
75,615
|
|
Worldwide total
|
|
$
|
76,450
|
|
|
71,890
|
|
|
70,074
|
|
|
$
|
157,303
|
|
|
141,208
|
|
See Note 1 for a description of the segments in which the Company operates.
Export sales are not significant. In 2017, the Company had two wholesalers distributing products for all
three
segments that represented approximately
14.0%
and
10.0%
of the total consolidated revenues. In 2016, the Company had two wholesalers distributing products for all
three
segments that represented approximately
13.5%
and
10.7%
of the total consolidated revenues. In 2015, the Company had one wholesaler distributing products for all three segments that represented approximately
12.5%
of the total consolidated revenues.
|
|
(1)
|
Amounts not allocated to segments include interest (income) expense and general corporate (income) expense.
|
|
|
(2)
|
General corporate includes cash, cash equivalents and marketable securities.
|
|
|
(3)
|
The Pharmaceutical segment includes
$797 million
for Actelion acquisition related costs, an in-process research and development expense of
$396 million
and net litigation expense of
$117 million
. The Medical Devices segment includes net litigation expense of
$1,139 million
, a restructuring related charge of
$760 million
, an asset impairment of
$215 million
primarily related to the insulin pump business and
$140 million
for AMO acquisition related costs. The Medical Devices segment includes a gain of
$0.7 billion
from the divestiture of Codman Neurosurgery. The Consumer segment includes a gain of
$0.5 billion
from the divestiture of COMPEED
®
.
|
|
|
(4)
|
Includes net litigation expense of
$806 million
and a restructuring related charge of
$685 million
in the Medical Devices segment. The Pharmaceutical segment includes a positive adjustment of
$0.5 billion
to previous reserve estimates, an in-process research and development expense of
$29 million
, and gains from the divestitures of the controlled substance raw material and active pharmaceutical ingredient (API) business and certain anesthetic products in Europe.
|
|
|
(5)
|
The Medical Devices segment includes a restructuring related charge of
$590 million
, an intangible asset write-down of
$346 million
related to Acclarent, Synthes integration costs of
$196 million
and
$148 million
expense for the cost associated with the DePuy ASR
TM
Hip program. Includes
$224 million
of in-process research and development expense, comprised of
$214 million
and
$10 million
in the Pharmaceutical and Medical Devices segments, respectively. Includes net litigation expense of
$141 million
comprised of
$136 million
in the Pharmaceutical segment and
$5 million
in the Medical Devices segment, which included the gain from the litigation settlement agreement with Guidant for
$600 million
. The Medical Devices Segment includes a gain of
$1.3 billion
from the divestiture of the Cordis business. The Pharmaceutical segment includes a gain of
$981 million
from the U.S. divestiture of NUCYNTA
®
and a positive adjustment of
$0.5 billion
to previous reserve estimates, including Managed Medicaid rebates. The Consumer segment includes a gain of
$229 million
from the divestiture of SPLENDA
®
brand.
|
|
|
(6)
|
Long-lived assets include property, plant and equipment, net for
2017
, and
2016
of
$17,005
and
$15,912
, respectively, and intangible assets and goodwill, net for
2017
and
2016
of
$85,134
and
$49,681
, respectively.
|
|
|
19.
|
Selected Quarterly Financial Data (unaudited)
|
Selected unaudited quarterly financial data for the years
2017
and
2016
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(Dollars in Millions Except Per Share Data)
|
|
First Quarter
(1)
|
|
Second Quarter
(2)
|
|
Third Quarter
(3)
|
|
Fourth Quarter
(4)
|
|
First Quarter
(5)
|
|
Second Quarter
(6)
|
|
Third Quarter
(7)
|
|
Fourth Quarter
(8)
|
Segment sales to customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
3,228
|
|
|
3,478
|
|
|
3,356
|
|
|
3,540
|
|
|
3,195
|
|
|
3,419
|
|
|
3,261
|
|
|
3,432
|
|
Pharmaceutical
|
|
8,245
|
|
|
8,635
|
|
|
9,695
|
|
|
9,681
|
|
|
8,178
|
|
|
8,654
|
|
|
8,400
|
|
|
8,232
|
|
Medical Devices
|
|
6,293
|
|
|
6,726
|
|
|
6,599
|
|
|
6,974
|
|
|
6,109
|
|
|
6,409
|
|
|
6,159
|
|
|
6,442
|
|
Total sales
|
|
17,766
|
|
|
18,839
|
|
|
19,650
|
|
|
20,195
|
|
|
17,482
|
|
|
18,482
|
|
|
17,820
|
|
|
18,106
|
|
Gross profit
|
|
12,380
|
|
|
13,016
|
|
|
12,748
|
|
|
12,952
|
|
|
12,153
|
|
|
13,146
|
|
|
12,334
|
|
|
12,572
|
|
Earnings before provision for taxes on income
|
|
5,575
|
|
|
4,748
|
|
|
4,790
|
|
|
2,560
|
|
|
5,294
|
|
|
4,904
|
|
|
5,281
|
|
|
4,324
|
|
Net earnings (loss)
|
|
4,422
|
|
|
3,827
|
|
|
3,764
|
|
|
(10,713
|
)
|
|
4,457
|
|
|
3,997
|
|
|
4,272
|
|
|
3,814
|
|
Basic net earnings (loss) per share
|
|
$
|
1.63
|
|
|
1.42
|
|
|
1.40
|
|
|
(3.99
|
)
|
|
1.62
|
|
|
1.46
|
|
|
1.56
|
|
|
1.41
|
|
Diluted net earnings (loss) per share
|
|
$
|
1.61
|
|
|
1.40
|
|
|
1.37
|
|
|
(3.99
|
)
|
|
1.59
|
|
|
1.43
|
|
|
1.53
|
|
|
1.38
|
|
|
|
(1)
|
The first quarter of 2017 includes a restructuring charge of
$121 million
after-tax (
$161 million
before-tax) and an AMO acquisition related cost of
$251 million
after-tax (
$38 million
before-tax).
|
|
|
(2)
|
The second quarter of 2017 includes a net litigation expense of
$352 million
after-tax (
$493 million
before-tax), Actelion acquisition related costs of
$199 million
after-tax (
$213 million
before-tax) a restructuring charge of
$101 million
after-tax (
$128 million
before-tax) and an asset impairment charge of
$125 million
after-tax (
$182 million
before-tax).
|
|
|
(3)
|
The third quarter of 2017 includes a net litigation expense of
$97 million
after-tax (
$118 million
before-tax), Actelion acquisition related costs of
$255 million
after-tax (
$367 million
before-tax) and a restructuring charge of
$136 million
after-tax (
$187 million
before-tax).
|
|
|
(4)
|
The fourth quarter of 2017 includes a net litigation expense of
$506 million
after-tax (
$645 million
before-tax), Actelion acquisition related costs of
$313 million
after-tax (
$217 million
before-tax), a restructuring charge of
$237 million
after-tax (
$284 million
before-tax), an in-process research and development expense of
$266 million
after-tax (
$408 million
before-tax) and an after-tax benefit of
$116 million
related to the insulin pump business. Additionally, the fourth quarter of 2017 includes a provisional charge of
$13.6 billion
for recently enacted tax legislation.
|
|
|
(5)
|
The first quarter of 2016 includes a restructuring charge of
$120 million
after-tax (
$137 million
before-tax) and net litigation expense of
$56 million
after-tax (
$66 million
before-tax).
|
|
|
(6)
|
The second quarter of 2016 includes a restructuring charge of
$97 million
after-tax (
$141 million
before-tax) and net litigation expense of
$493 million
after-tax (
$600 million
before-tax).
|
|
|
(7)
|
The third quarter of 2016 includes a restructuring charge of
$76 million
after-tax (
$109 million
before-tax) and net litigation expense of
$46 million
after-tax (
$55 million
before-tax).
|
|
|
(8)
|
The fourth quarter of 2016 includes a restructuring charge of
$251 million
after-tax (
$298 million
before-tax) and net litigation expense of
$80 million
after-tax (
$96 million
before-tax).
|
|
|
20.
|
Business Combinations and Divestitures
|
Certain businesses were acquired for
$35,151 million
in cash and
$1,786 million
of liabilities assumed during 2017. These acquisitions were accounted for using the acquisition method and, accordingly, results of operations have been included in the financial statements from their respective dates of acquisition.
The 2017 acquisitions primarily included: Actelion Ltd an established leading franchise of differentiated, innovative products for pulmonary arterial hypertension (PAH); Abbott Medical Optics (AMO), a wholly-owned subsidiary of Abbott Laboratories, which included ophthalmic products related to: cataract surgery, laser refractive surgery and consumer eye health; Neuravi Limited, a privately-held medical device company that develops and markets medical devices for neurointerventional therapy; TearScience Inc., a manufacturer of products dedicated to treating meibomian gland dysfunction; Sightbox, Inc., a privately-held company that developed a subscription vision care service that connects consumers with eye care professionals and a supply of contact lenses; Torax Medical, Inc., a privately-held medical device company that manufactures and markets the LINX™ Reflux Management System for the surgical treatment of gastroesophageal reflux disease and Megadyne Medical Products, Inc., a privately-held medical device company that develops, manufactures and markets electrosurgical tools.
The excess of purchase price over the estimated fair value of tangible assets acquired amounted to
$34,379 million
and has been assigned to identifiable intangible assets, with any residual recorded to goodwill. Of this amount, approximately
$1,139 million
has been identified as the value of IPR&D primarily associated with the acquisition of Actelion Ltd. The value of the IPR&D was calculated using cash flow projections discounted for the inherent risk in the projects.
During 2017, the Company completed the acquisition of Actelion Ltd through an all cash tender offer in Switzerland for
$280
per share, amounting to
$29.6 billion
, net of cash acquired. As part of the transaction, immediately prior to the completion of the acquisition, Actelion spun out its drug discovery operations and early-stage clinical development assets into a newly created Swiss biopharmaceutical company, Idorsia Ltd. The shares of Idorsia are listed on the SIX Swiss Exchange (SIX). The Company currently holds
9.9%
of the shares of Idorsia and has rights to an additional
22.1%
of Idorsia equity through a convertible loan with a principal amount of approximately
$0.5 billion
. The convertible loan may be converted into Idorsia shares as follows: (i) up to an aggregate shareholding of
16%
of Idorsia shares as a result of certain shareholders holding more than
20%
of the issued Idorsia shares, and (ii) up to the balance of the remaining amount within 20 business days of the maturity date of the convertible loan, which has a
10
year term, or if Idorsia undergoes a change of control transaction. The investment in Idorsia was recorded as a cost method investment in Other assets in the Company's consolidated Balance Sheet. The Company also exercised the option acquired on ACT-132577, a product within Idorsia being developed for resistant hypertension currently in phase 2 of clinical development. The Company has also entered into an agreement to provide Idorsia with a Swiss franc denominated credit facility of approximately
$250 million
. As of December 31, 2017, Idorsia has not made any draw-downs under the credit facility. Actelion has entered into a transitional services agreement with Idorsia. Actelion has established a leading franchise of differentiated, innovative products for pulmonary arterial hypertension (PAH) that are highly complementary to the existing portfolio of the Company. The addition of Actelion’s specialty in-market medicines and late-stage products is consistent with the Company's efforts to grow in attractive and complementary therapeutic areas and serve patients with serious illnesses and significant unmet medical need.
The Company is still finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The allocation of the purchase price included in the current period balance sheet is based on the best estimate of management and is preliminary and subject to change. To assist management in the allocation, the Company engaged valuation specialists to prepare appraisals. The Company will finalize the amounts recognized as the information necessary to complete the analysis is obtained. The Company expects to finalize these amounts as soon as possible but no later than one year from the acquisition date.
The following table presents the preliminary amounts recognized for assets acquired and liabilities assumed for Actelion as of the acquisition date as well as the adjustments made up to December 31, 2017:
|
|
|
|
|
|
|
(Dollars in Millions)
|
June 16, 2017
|
December 31, 2017
|
Cash & Cash equivalents
|
$
|
469
|
|
469
|
|
Inventory
(1)
|
759
|
|
759
|
|
Accounts Receivable
|
485
|
|
485
|
|
Other current assets
|
93
|
|
93
|
|
Property, plant and equipment
|
104
|
|
104
|
|
Goodwill
|
5,986
|
|
6,161
|
|
Intangible assets
|
25,010
|
|
25,010
|
|
Deferred Taxes
|
3
|
|
99
|
|
Other non-current assets
|
19
|
|
19
|
|
Total Assets Acquired
|
32,928
|
|
33,199
|
|
|
|
|
Current liabilities
|
531
|
|
956
|
|
Deferred Taxes
|
1,960
|
|
1,776
|
|
Other non-current liabilities
|
383
|
|
413
|
|
Total Liabilities Assumed
|
2,874
|
|
3,145
|
|
|
|
|
Net Assets Acquired
|
$
|
30,054
|
|
30,054
|
|
(1)
Includes adjustment of
$642 million
to write-up the acquired inventory to its estimated fair value.
Subsequent to the date of acquisition there was an adjustment of
$0.2 billion
to the deferred taxes and
$0.4 billion
to the current liabilities with the offset to goodwill.
The assets acquired are recorded in the Pharmaceutical segment. The acquisition of Actelion resulted in approximately
$6.2 billion
of goodwill. The goodwill is primarily attributable to synergies expected to arise from the acquisition. The goodwill is not expected to be deductible for tax purposes.
The purchase price allocation to the identifiable intangible assets is as follows:
|
|
|
|
|
|
(Dollars in Millions)
|
|
|
Intangible assets with definite lives:
|
|
|
Patents and trademarks
|
|
$
|
24,230
|
|
Total amortizable intangibles
|
|
24,230
|
|
|
|
|
In-process research and development
|
|
780
|
|
Total intangible assets
|
|
$
|
25,010
|
|
The patents and trademarks acquired are comprised of developed technology with a weighted average life of
9 years
and was primarily based on the patent life of the marketed products. The intangible assets with definite lives were assigned asset lives ranging from
4
to
10 years
. The in-process research and development intangible assets were valued for technology programs for unapproved products.
The value of the IPR&D was calculated using probability adjusted cash flow projections discounted for the risk inherent in such projects. The discount rate applied was
9%
.
The acquisition was accounted for using the acquisition method and, accordingly, the results of operations of Actelion were reported in the Company's financial statements beginning on June 16, 2017, the date of acquisition. For the year ended December 31, 2017 total sales and a net loss for Actelion from the date of acquisition were
$1.4 billion
and
$1.4 billion
, respectively.
The following table provides pro forma results of operations for the fiscal year ended December 31, 2017 and January 1, 2017, as if Actelion had been acquired as of January 4, 2016. The pro forma results include the effect of 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 Actelion. 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
|
(Dollars in Millions Except Per Share Data)
|
2017
|
2016
|
|
|
|
Net Sales
|
77,681
|
|
74,339
|
|
Net Earnings
|
1,509
|
|
13,916
|
|
Diluted Net Earnings per Common Share
|
0.55
|
|
4.99
|
|
In 2017, the Company recorded Actelion acquisition related costs before tax of approximately
$0.8 billion
, which was recorded in Other (income)/expense and Cost of products sold.
During 2017, the Company acquired Abbott Medical Optics (AMO), a wholly-owned subsidiary of Abbott Laboratories, for
$4.3 billion
, net of cash acquired. The acquisition included ophthalmic products related to: cataract surgery, laser refractive surgery and consumer eye health. The net purchase price was primarily recorded as amortizable intangible assets for
$2.3 billion
and goodwill for
$1.7 billion
. The weighted average life of total amortizable intangibles, the majority being customer relationships, is approximately
14.4 years
. The goodwill is primarily attributable to synergies expected to arise from the business acquisition and is not deductible for tax purposes. The intangible assets and goodwill amounts are based on the final purchase price allocation. The assets acquired were recorded in the Medical Devices segment.
Certain businesses were acquired for
$4,509 million
in cash and
$77 million
of liabilities assumed during 2016. These acquisitions were accounted for using the acquisition method and, accordingly, results of operations have been included in the financial statements from their respective dates of acquisition.
The 2016 acquisitions primarily included: Vogue International LLC, a privately-held company focused on the marketing, development and distribution of salon-influenced and nature inspired hair care and other personal products; NeuWave Medical, Inc., a privately-held medical device company that manufactures and markets minimally invasive soft tissue microwave ablation systems; NeoStrata Company, Inc., a global leader in dermocosmetics, and the global rights for the commercialization of RHINOCORT
®
allergy spray outside the United States.
The excess of purchase price over the estimated fair value of tangible assets acquired amounted to
$4,077 million
and has been assigned to identifiable intangible assets, with any residual recorded to goodwill.
The net purchase price for Vogue International LLC of
$3.3 billion
was primarily recorded as amortizable intangible assets for
$2.3 billion
and goodwill for
$1.1 billion
. The weighted average life for the
$2.3 billion
of total amortizable intangibles is approximately
22 years
. The trademark asset values were determined to have definite lives ranging from
10
to
22
years, with the majority being
22
years. The goodwill is primarily attributable to synergies expected to arise from the business acquisition and is expected to be deductible for tax purposes. The assets acquired were recorded in the Consumer segment.
Certain businesses were acquired for
$954 million
in cash and
$220 million
of liabilities assumed during 2015. The assumed liabilities primarily represent the fair value of the contingent consideration of
$210 million
. These acquisitions were accounted for using the acquisition method and, accordingly, results of operations have been included in the financial statements from their respective dates of acquisition.
The 2015 acquisitions primarily included: XO1 Limited, a privately-held biopharmaceutical company developing an anti-thrombin antibody and Novira Therapeutics, Inc., a privately held clinical-stage biopharmaceutical company developing innovative therapies for curative treatment of chronic hepatitis B virus infection.
The excess of purchase price over the estimated fair value of tangible assets acquired amounted to
$1,173 million
and has been assigned to identifiable intangible assets, with any residual recorded to goodwill. Of this amount, approximately
$839 million
has been identified as the value of IPR&D primarily associated with the acquisitions of XO1 Limited and Novira Therapeutics, Inc. The value of the IPR&D was calculated using cash flow projections discounted for the inherent risk in the projects.
The IPR&D related to the acquisition of XO1 Limited of
$360 million
is associated with a recombinant human antibody developed to mimic the activity of a human antibody which appears to produce an anticoagulated state without predisposition to bleeding. A probability of success factor of
36.0%
was used to reflect inherent clinical and regulatory risk. The discount rate applied was
11.75%
.
The IPR&D related to the acquisition of Novira Therapeutics, Inc. of
$396 million
is associated with its lead candidate NVR 3-778 which is an investigational small molecule, direct-acting antiviral, for oral administration in patients with HBV that inhibits the HBV core or capsid protein. A probability of success factor of
51.0%
was used to reflect inherent clinical and regulatory risk. The discount rate applied was
16.0%
. During 2017, the Company recorded a charge for the impairment of the IPR&D related to the acquisition of Novira Therapeutics, Inc. The impairment was the result of the cancellation of product development due to safety concerns.
In 2012, the Company completed the acquisition of Synthes, Inc. for a purchase price of
$20.2 billion
in cash and stock. In connection with the acquisition of Synthes, Inc. the Company entered into two accelerated share repurchase (ASR) agreements. In 2013, the Company settled the remaining liabilities under the ASR agreements. 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.
With the exception of the Actelion Ltd acquisition, supplemental pro forma information for 2017, 2016 and 2015 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 position.
During the fiscal first quarter of 2017, the Company announced it is engaging in a process to evaluate potential strategic options for the Johnson & Johnson Diabetes Care Companies, specifically LifeScan, Inc., Animas Corporation, and Calibra Medical, Inc. Strategic options may include the formation of operating partnerships, joint ventures or strategic alliances, a sale of the businesses, or other alternatives either separately or together. During the fiscal second quarter of 2017, the Company recorded an impairment charge of
$0.2 billion
, primarily related to the insulin pump business. During the fiscal fourth quarter of 2017, the Company announced its decision to exit the Animas insulin pump business. The Company is continuing to evaluate potential strategic options for LifeScan, Inc. and determine the best opportunity to drive future growth and maximize shareholder value. There were no assets held for sale as of December 31, 2017 related to the announcement.
During 2017, the Company divestitures primarily included: the Codman Neurosurgery business, to Integra LifeSciences Holdings Corporation and the divestiture of COMPEED
®
to HRA Pharma. In 2017, the pre-tax gains on the divestitures were approximately
$1.3 billion
.
During 2016, the Company divestitures included: the controlled substance raw material and active pharmaceutical ingredient (API) business; certain anesthetic products in Europe; and certain non-strategic Consumer brands. In 2016, the pre-tax gains on the divestitures were approximately
$0.6 billion
.
During 2015, the Company divestitures included: the Cordis business to Cardinal Health; the SPLENDA
®
brand to Heartland Food Products Group; and the U.S. license rights to NUCYNTA
®
(tapentadol), NUCYNTA
®
ER (tapentadol extended-release tablets), and NUCYNTA
®
(tapentadol) oral solution. In 2015, the pre-tax gains on the divestitures were approximately
$2.6 billion
.
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 loss contingencies associated with these legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of
December 31, 2017
, 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 as might be warranted based on new information and further developments in accordance with ASC 450-20-25. For these and other litigation and regulatory matters discussed below for which a loss is probable or reasonably possible, the Company is unable to estimate the possible loss or range of loss beyond the amounts already accrued. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions. The ability to make such estimates and judgments 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 of, or increase in accruals for, one or more of these matters in any reporting period may have a material adverse effect on the Company's results of operations and cash flows for that period.
PRODUCT LIABILITY
Johnson & Johnson and certain of its subsidiaries are involved in numerous product liability claims and lawsuits involving multiple products. Claimants in these cases seek substantial compensatory and, where available, punitive damages. While the Company believes it has substantial defenses, it is not feasible to predict the ultimate outcome of litigation. The Company has
established accruals for product liability claims and lawsuits in compliance with ASC 450-20 based on currently available information, which in some cases may be limited. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated. For certain of these matters, the Company has accrued additional amounts such as estimated costs associated with settlements, damages and other losses. To the extent adverse verdicts have been rendered against the Company, the Company does not record an accrual until a loss is determined to be probable and can be reasonably estimated. Product liability accruals can represent projected product liability for thousands of claims around the world, each in different litigation environments and with different fact patterns. Changes to the accruals may be required in the future as additional information becomes available.
The most significant of these cases include: the DePuy ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System; the PINNACLE
®
Acetabular Cup System; pelvic meshes; RISPERDAL
®
; XARELTO
®
; body powders containing talc, primarily JOHNSONS
®
Baby Powder; and INVOKANA
®
. As of
December 31, 2017
, in the U.S. there were approximately
2,000
plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to the DePuy ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System,
10,000
with respect to the PINNACLE
®
Acetabular Cup System,
53,600
with respect to pelvic meshes,
13,700
with respect to RISPERDAL
®
,
22,900
with respect to XARELTO
®
,
6,610
with respect to body powders containing talc; and
1,100
with respect to INVOKANA
®
.
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. The number of pending lawsuits is expected to fluctuate as certain lawsuits are settled or dismissed and additional lawsuits are filed. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Ohio. Litigation has also been filed in countries outside of the United States, primarily in the United Kingdom, Canada, Australia, Ireland, Germany and Italy. In November 2013, DePuy reached an agreement with a Court-appointed committee of lawyers representing ASR Hip System plaintiffs to establish a program to settle claims with eligible ASR Hip patients in the United States who had surgery to replace their ASR Hips, known as revision surgery, as of August 31, 2013. DePuy reached additional agreements in February 2015 and March 2017, which further extended the settlement program to include ASR Hip patients who had revision surgeries after August 31, 2013 and prior to February 15, 2017. This settlement program has resolved more than
10,000
claims, with more expected from the recent extension, therefore bringing to resolution significant ASR Hip litigation activity in the United States. However, lawsuits in the United States remain, and the settlement program does not address litigation outside of the United States. In Australia, a class action settlement was reached that resolved the claims of the majority of ASR Hip patients in that country. The Company continues to receive information with respect to potential additional costs associated with this recall on a worldwide basis. The Company has established accruals for the costs associated with the United States settlement program and DePuy ASR
™
Hip-related product liability litigation.
Claims for personal injury have also been made against DePuy Orthopaedics, Inc. and Johnson & Johnson relating to the PINNACLE
®
Acetabular Cup System used in hip replacement surgery. 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. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Texas. Litigation has also been filed in some state courts and in countries outside of the United States, primarily in the United Kingdom. In the United Kingdom, a trial is ongoing regarding common issues of liability and a decision is expected in the first half of 2018. The Company has established an accrual for defense costs in connection with product liability litigation associated with the PINNACLE
®
Acetabular Cup System.
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 Company continues to receive information with respect to potential costs and additional cases. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Southern District of West Virginia. The Company has settled or otherwise resolved a majority of the United States cases and the costs associated with these settlements are reflected in the Company's accruals. In addition, class actions and individual personal injury cases or claims have been commenced in various countries outside of the United States, including claims and cases in the United Kingdom, the Netherlands and Belgium, and class actions in Israel, Australia and Canada, seeking damages for alleged injury resulting from Ethicon's pelvic mesh devices. In Australia, a trial of class action issues is ongoing and a decision is expected in 2018. The Company has established accruals with respect to product liability litigation associated with Ethicon's pelvic mesh products.
Claims for personal injury have been made against Janssen Pharmaceuticals, Inc. and Johnson & Johnson arising out of the use of RISPERDAL
®
, indicated for the treatment of schizophrenia, acute manic or mixed episodes associated with bipolar I disorder and irritability associated with autism, and related compounds. Lawsuits have been primarily filed in state courts in Pennsylvania, California, and Missouri. Other actions are pending in various courts in the United States and Canada. Product
liability lawsuits continue to be filed, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. The Company has established an accrual with respect to product liability litigation associated with RISPERDAL
®
.
Claims for personal injury arising out of the use of XARELTO
®
, an oral anticoagulant, have been made against Janssen Pharmaceuticals, Inc. (JPI); Johnson & Johnson; and JPI's collaboration partner for XARELTO
®
Bayer AG and certain of its affiliates. 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. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Eastern District of Louisiana. In addition, cases have been filed in state courts across the United States. Many of these cases have been consolidated into a state mass tort litigation in Philadelphia, Pennsylvania; and there are coordinated proceedings in Delaware, California and Missouri. Class action lawsuits also have been filed in Canada. The Company has established an accrual for defense costs in connection with product liability litigation associated with XARELTO
®
.
Claims for personal injury have been made against Johnson & Johnson Consumer Inc. and Johnson & Johnson arising out of the use of body powders containing talc, primarily JOHNSONS
®
Baby Powder. 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. Lawsuits have been primarily filed in state courts in Missouri, New Jersey and California. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the District of New Jersey. The Company has established an accrual for defense costs in connection with product liability litigation associated with body powders containing talc.
Claims for personal injury have been made against a number of Johnson & Johnson companies, including Janssen Pharmaceuticals, Inc. and Johnson & Johnson, arising out of the use of INVOKANA
®
, a prescription medication indicated to improve glycemic control in adults with Type 2 diabetes. 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. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the District of New Jersey. Cases have also been filed in state courts in Pennsylvania, California and New Jersey. Class action lawsuits have been filed in Canada. The Company has established an accrual with respect to product liability litigation associated with INVOKANA
®
.
INTELLECTUAL PROPERTY
Certain subsidiaries of Johnson & Johnson are subject, from time to time, to legal proceedings and claims related to patent, trademark and other intellectual property matters arising out of their businesses. Many of these matters involve challenges to the coverage and/or validity of the patents on various products and allegations that certain of the Company’s products infringe the patents of third parties. Although these subsidiaries believe that they have substantial defenses to these challenges and allegations with respect to all significant patents, there can be no assurance as to the outcome of these matters. A loss in any of these cases could adversely affect the ability of these subsidiaries to sell their products, result in loss of sales due to loss of market exclusivity, require the payment of past damages and future royalties, and may result in a non-cash impairment charge for any associated intangible asset. The most significant of these matters are described below.
Medical Devices
In June 2009, Rembrandt Vision Technologies, L.P. (Rembrandt) filed a patent infringement lawsuit against Johnson & Johnson Vision Care, Inc. (JJVCI) in the United States District Court for the Eastern District of Texas alleging that JJVCI's manufacture and sale of its ACUVUE
®
ADVANCE and ACUVUE OASYS
®
Hydrogel Contact Lenses infringed Rembrandt’s United States Patent No. 5,712,327 and seeking monetary relief. The case was transferred to the United States District Court for the Middle District of Florida, where a trial in May 2012 resulted in a verdict of non-infringement that was subsequently upheld on appeal. In July 2014, Rembrandt sought a new trial based on alleged new evidence, which the District Court denied. In April 2016, the Court of Appeals overturned that ruling and remanded the case to the District Court for a new trial. A new trial was held in August 2017, and the jury returned a verdict of non-infringement in favor of JJVCI. Rembrandt has appealed the verdict to the United States Court of Appeals for the Federal Circuit.
In March 2013, Medinol Ltd. (Medinol) filed a patent infringement lawsuit against Cordis Corporation (Cordis) and Johnson & Johnson in the United States District Court for the Southern District of New York alleging that Cordis’s sales of the CYPHER
™
and CYPHER SELECT
™
stents made in the United States since 2005 willfully infringed
four
of Medinol's patents directed to the geometry of articulated stents. Medinol is seeking damages and attorneys’ fees. After trial in January 2014, the District Court dismissed the case, finding Medinol unreasonably delayed bringing its claims (the laches defense). In September 2014,
the District Court denied a motion by Medinol to vacate the judgment and grant it a new trial. Medinol appealed the decision to the United States Court of Appeals for the Federal Circuit, then dismissed the appeal in order to file a petition for review with the United States Supreme Court. In March 2017, the United States Supreme Court held that the laches defense is not available in patent cases and remanded this case to the United States Court of Appeals for the Federal Circuit to consider Medinol's appeal of whether Medinol is entitled to seek a new trial. Cordis was divested in 2015, and the Company retained any liability that may result from this case.
In November 2016, MedIdea, L.L.C. (MedIdea) filed a patent infringement lawsuit against DePuy Orthopaedics, Inc. in the United States District Court for the Northern District of Illinois alleging infringement by the ATTUNE
®
Knee System. MedIdea alleges infringement of United States Patent Nos. 6,558,426 (’426); 8,273,132; 8,721,730 and 9,492,280 relating to posterior stabilized knee systems. Specifically, MedIdea alleges that the SOFCAM
TM
Contact feature of the ATTUNE
®
posterior stabilized knee products infringes the patents-in-suit. MedIdea is seeking monetary damages and injunctive relief. In June 2017, the case was transferred to the United States District Court for the District of Massachusetts. In December 2017, DePuy Synthes Products, Inc. filed a Petition for Inter Partes Review with the United States Patent and Trademark Office, seeking to invalidate the ’426 patent.
In December 2016, Ethicon Endo-Surgery, Inc. and Ethicon Endo-Surgery, LLC (now known as Ethicon LLC) sued Covidien, Inc. in the United States District Court for the District of Massachusetts seeking a declaration that United States Patent Nos. 6,585,735 (the ’735 patent); 7,118,587; 7,473,253; 8,070,748 and 8,241,284 (the ’284 patent), are either invalid or not infringed by Ethicon’s ENSEAL
®
X1 Large Jaw Tissue Sealer product. In April 2017, Covidien LP, Covidien Sales LLC, and Covidien AG (collectively, Covidien) answered and counterclaimed, denying the allegations, asserting willful infringement of the ’735 patent, the ’284 patent and United States Patent Nos. 8,323,310; 9,084,608; 9,241,759 and 9,113,882, and seeking damages and an injunction. Covidien filed a motion for preliminary injunction, which was denied in October 2017. Trial is scheduled for September, 2019.
In November 2017, Board of Regents, The University of Texas System and Tissuegen, Inc. filed a lawsuit in the United States District Court for the Western District of Texas against Ethicon, Inc. and Ethicon US, LLC alleging the manufacture and sale of VICRYL
®
Plus Antibacterial Sutures and MONOCRYL
®
Plus Antibacterial Sutures infringe plaintiffs’ United States Patent Nos. 6,596,296 and 7,033,603 directed to implantable polymer drug releasing biodegradable fibers containing a therapeutic agent.
Pharmaceutical
In April 2016, MorphoSys AG, a German biotech company, filed a patent infringement lawsuit against Janssen Biotech, Inc. (JBI), Genmab U.S. Inc. and Genmab A/S (collectively, Genmab) in the United States District Court for the District of Delaware. MorphoSys alleges that JBI’s manufacture and sale of DARZALEX
®
(daratumumab) willfully infringes MorphoSys’ United States Patent Nos. 8,263,746, 9,200,061 and 9,785,590. MorphoSys is seeking money damages. JBI licenses patents and the commercial rights to DARZALEX
®
from Genmab. Trial in the case is scheduled to commence in February 2019.
In August 2016, Sandoz Ltd and Hexal AG (collectively, Sandoz) filed a lawsuit in the English High Court against G.D. Searle LLC (a Pfizer company) and Janssen Sciences Ireland UC (JSI) alleging that Searle’s supplementary protection certificate SPC/GB07/038 (SPC), which is exclusively licensed to JSI, is invalid and should be revoked. Janssen-Cilag Limited sells PREZISTA
®
(darunavir) in the United Kingdom pursuant to this license. In October 2016, Searle and JSI counterclaimed against Sandoz for threatened infringement of the SPC based on statements of its plans to launch generic darunavir in the United Kingdom. Sandoz admitted that its generic darunavir product would infringe the SPC if it is found valid. Searle and JSI are seeking an order enjoining Sandoz from marketing its generic darunavir before the expiration of the SPC. Following a trial in April 2017, the Court entered a decision holding that the SPC is valid and granting a final injunction. Sandoz has appealed the Court’s decision and the injunction will be stayed pending the appeal. In January 2018, the Court referred the issue on appeal to the Court of Justice for the European Union (CJEU) and stayed the proceedings pending the CJEU’s ruling on the issue.
REMICADE
®
Related Cases
United States Proceedings
In September 2013, Janssen Biotech, Inc. (JBI) and NYU Langone Medical Center (NYU) received an Office Action from the United States Patent and Trademark Office (USPTO) rejecting the claims in United States Patent No. 6,284,471 relating to REMICADE
®
(infliximab) (the ’471 patent) in a reexamination proceeding instituted by a third party. The ’471 patent expires in September 2018 and is co-owned by JBI and NYU, with NYU having granted JBI an exclusive license to NYU’s rights under the patent. Following several office actions by the patent examiner, including two further rejections, and responses by
JBI, the USPTO issued a further action maintaining its rejection of the ’471 patent. JBI filed a notice of appeal to the USPTO’s Patent Trial and Appeal Board (the Board), which issued a decision in November 2016 upholding the examiner's rejection. In January 2018, the United States Court of Appeals for the Federal Circuit affirmed the Board's decision.
In August 2014, Celltrion Healthcare Co. Ltd. and Celltrion Inc. (collectively, Celltrion) filed an application with the United States Food and Drug Administration (FDA) for approval to make and sell its own infliximab biosimilar. In March 2015, JBI filed a lawsuit in the United States District Court for the District of Massachusetts against Celltrion and Hospira Healthcare Corporation (Hospira), which has exclusive marketing rights for Celltrion's infliximab biosimilar in the United States, seeking, among other things, a declaratory judgment that their biosimilar product infringes or potentially infringes several JBI patents, including the ’471 patent and United States Patent No. 7,598,083 (the ’083 patent). In August 2016, the District Court granted both Celltrion's and Hospira's motions for summary judgment of invalidity of the ’471 patent. JBI appealed those decisions to the United States Court of Appeals for the Federal Circuit. In January 2018, the Federal Circuit dismissed the appeal as moot based on its affirmance of the Board’s reexamination decision.
In June 2016, JBI filed two additional patent infringement lawsuits asserting the ’083 patent, one against Celltrion and Hospira in the United States District Court for the District of Massachusetts and the other against HyClone Laboratories, Inc., the manufacturer of the cell culture media that Celltrion uses to make its biosimilar product, in the United States District Court for the District of Utah. Although the ’083 patent is already asserted in the existing lawsuit against Celltrion, the additional lawsuit expands the claims to include the sale in the United States of Celltrion's biosimilar product manufactured with cell culture media made in the United States. This additional lawsuit against Celltrion has been consolidated with the existing lawsuit discussed above. Hospira has moved to dismiss all counts of the lawsuit related to the ’083 patent as to it. Celltrion's motion to dismiss all counts of the lawsuit related to the ’083 patent for failure to join all the co-owners of the '083 patent as plaintiffs was denied in October 2017. Trial is scheduled to begin in July 2018. The litigation against HyClone in Utah is stayed pending the outcome of the Massachusetts actions.
The FDA approved Celltrion’s infliximab biosimilar for sale in the United States in April 2016. Hospira's parent company, Pfizer Inc., launched Celltrion's infliximab biosimilar in the United States in late 2016.
In April 2017, JBI received notice that the FDA approved a marketing application submitted by Samsung Bioepis Co. Ltd. (Samsung) for the sale of its infliximab biosimilar in the United States. In May 2017, JBI filed a patent infringement lawsuit against Samsung in the United States District Court for the District of New Jersey alleging that the sale of its biosimilar product may infringe three of JBI’s patents. In July 2017, Samsung launched its biosimilar product (commercialized by Merck) in the United States. In November 2017, JBI voluntarily dismissed this lawsuit.
Litigation Against Filers of Abbreviated New Drug Applications (ANDAs)
The following summarizes lawsuits pending against generic companies that have filed Abbreviated New Drug Applications (ANDAs) with the FDA, or undertaken similar regulatory processes outside of the United States, seeking to market generic forms of products sold by various subsidiaries of Johnson & Johnson prior to expiration of the applicable patents covering those products. These ANDAs typically include allegations of non-infringement, invalidity and unenforceability of the applicable patents. In the event the subsidiaries are not successful in these actions, or the statutory 30-month stays of the ANDAs expire before the United States District Court rulings are obtained, the third-party companies involved will have the ability, upon approval of the FDA, to introduce generic versions of the products at issue to the market, resulting in the potential for substantial market share and revenue losses for those products, and which may result in a non-cash impairment charge in any associated intangible asset. In addition, from time to time, subsidiaries may settle these actions and such settlements can involve the introduction of generic versions of the products at issue to the market prior to the expiration of the relevant patents. The inter partes review (IPR) process with the United States Patent and Trademark Office (USPTO), created under the 2011 America Invents Act, is also being used by generic companies in conjunction with these ANDAs and lawsuits to challenge patents held by the Company’s subsidiaries.
ZYTIGA
®
In July 2015, Janssen Biotech, Inc., Janssen Oncology, Inc. and Janssen Research & Development, LLC (collectively, Janssen) and BTG International Ltd. (BTG) initiated a patent infringement lawsuit in the United States District Court for the District of New Jersey against a number of generic companies (and certain of their affiliates and/or suppliers) who filed ANDAs seeking approval to market a generic version of ZYTIGA
®
250mg before the expiration of United States Patent No. 8,822,438 (the ’438 patent). The generic companies currently include Amneal Pharmaceuticals, LLC and Amneal Pharmaceuticals of New York, LLC (collectively, Amneal); Apotex Inc. and Apotex Corp. (collectively, Apotex); Citron Pharma LLC (Citron); Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. (collectively, Dr. Reddy’s); Mylan Pharmaceuticals Inc. and Mylan Inc.
(collectively, Mylan); Par Pharmaceuticals, Inc. and Par Pharmaceutical Companies, Inc. (collectively, Par); Sun Pharmaceutical Industries Ltd. and Sun Pharmaceuticals Industries, Inc. (collectively, Sun); Teva Pharmaceuticals USA, Inc. (Teva); Wockhardt Bio A.G.; Wockhardt USA LLC and Wockhardt Ltd. (collectively, Wockhardt); West-Ward Pharmaceutical Corp. (West-Ward) and Hikma Pharmaceuticals, LLC (Hikma). In February 2018, the court heard oral arguments on a motion for summary judgment of non-infringement filed by certain defendants. The parties await a decision. If the decision is unfavorable, the stay could be lifted and a generic version of ZYTIGA
®
could enter the market.
Janssen and BTG also initiated patent infringement lawsuits in the United States District Court for the District of New Jersey against Amerigen Pharmaceuticals Limited (Amerigen) in May 2016, and Glenmark Pharmaceuticals, Inc. in June 2016, each of whom filed an ANDA seeking approval to market its generic version of ZYTIGA
®
before the expiration of the ’438 patent.
In August 2015, Janssen and BTG filed an additional jurisdictional protective lawsuit against the Mylan defendants in the United States District Court for the Northern District of West Virginia, which has been stayed.
In August 2017, Janssen and BTG initiated a patent infringement lawsuit in the United States District Court for the District of New Jersey against Teva, who filed an ANDA seeking approval to market a generic version of ZYTIGA
®
500mg before the expiration of the ’438 patent.
In January 2018, Janssen dismissed its lawsuit against Sun after it withdrew its ANDA.
In each of the above lawsuits, Janssen is seeking an order enjoining the defendants from marketing their generic versions of ZYTIGA
®
before the expiration of the ’438 patent.
Several generic companies including Amerigen, Argentum Pharmaceuticals LLC (Argentum), Mylan, Wockhardt, Actavis, Amneal, Dr. Reddy’s, Sun, Teva, West-Ward and Hikma filed Petitions for Inter Partes Review (IPR) with the USPTO, seeking to invalidate the ’438 patent. In January 2018, the USPTO issued decisions invalidating the '438 patent, and Janssen is appealing this decision. The IPR decisions are not binding on the district court in the pending litigation.
In October 2017, Janssen Inc. and Janssen Oncology, Inc. (collectively, Janssen) initiated two Notices of Application under Section 6 of the Patented Medicines (Notice of Compliance) Regulations against Teva Canada Limited (Teva) and the Minister of Health in Canada in response to Teva's filing Abbreviated New Drug Submissions (ANDS) and seeking approval to market generic versions of ZYTIGA
®
250mg and ZYTIGA
®
500mg
before the expiration of Canadian Patent No. 2,661,422.
In November 2017, Janssen initiated a Notice of Application under Section 6 of the Patented Medicines (Notice of Compliance) Regulations against Apotex Inc. (Apotex) and the Minister of Health in Canada in response to Apotex’s filing of an Abbreviated New Drug Submission (ANDS) seeking approval to market a generic version of ZYTIGA
®
before the expiration of Canadian Patent No. 2,661,422.
In each of these Notices of Application, Janssen is seeking an order prohibiting the Minister of Health from issuing a Notice of Compliance with respect to Teva's and Apotex's ANDS before the expiration of Janssen's patent.
COMPLERA
®
In August and September 2015, Janssen Pharmaceutica NV and Janssen Sciences Ireland UC (collectively, Janssen) and Gilead Sciences, Inc. and Gilead Sciences Ireland UC (collectively, Gilead) initiated patent infringement lawsuits in the United States District Courts for the District of Delaware and the District of West Virginia, respectively, against Mylan, Inc. and Mylan Pharmaceuticals, Inc. (collectively, Mylan), who filed an ANDA seeking approval to market a generic version of COMPLERA
®
before the expiration of United States Patent Nos. 8,841,310, 7,125,879 and 8,101,629. In July 2017, the West Virginia lawsuit was dismissed without prejudice by stipulation of the parties.
In the Delaware lawsuit, Janssen and Gilead amended their complaint to add claims for patent infringement with respect to United States Patent Nos. 8,080,551; 7,399,856; 7,563,922; 8,101,752 and 8,618,291. In November 2017, the parties entered into a settlement agreement.
XARELTO
®
B
eginning in October 2015, Janssen Pharmaceuticals, Inc. (JPI) and Bayer Pharma AG and Bayer Intellectual Property GmbH (collectively, Bayer) filed patent infringement lawsuits in the United States District Court for the District of Delaware against a number of generic companies who filed ANDAs seeking approval to market generic versions of XARELTO
®
before expiration
of Bayer’s United States Patent Nos. 7,157,456 , 7,585,860 and 7,592,339 relating to XARELTO
®
. JPI is the exclusive sublicensee of the asserted patents. The following generic companies are named defendants: Aurobindo Pharma Limited and Aurobindo Pharma USA, Inc. (collectively, Aurobindo); Breckenridge Pharmaceutical, Inc. (Breckenridge); InvaGen Pharmaceuticals Inc. (InvaGen); Micro Labs USA Inc. and Micro Labs Ltd (collectively, Micro); Mylan Pharmaceuticals Inc. (Mylan); Prinston Pharmaceuticals, Inc.; Sigmapharm Laboratories, LLC (Sigmapharm); Torrent Pharmaceuticals, Limited and Torrent Pharma Inc. (collectively, Torrent). All defendants except Mylan and Sigmapharm have agreed to have their cases stayed and to be bound by the outcome of any final judgment rendered against any of the other defendants. Trial is scheduled for March 2018.
Beginning in April 2017, JPI and Bayer Intellectual Property GmbH and Bayer AG (collectively, Bayer AG) filed patent infringement lawsuits in the United States District Court for the District of Delaware against a number of generic companies who filed ANDAs seeking approval to market generic versions of XARELTO
®
before expiration of Bayer AG’s United States Patent No. 9,539,218 (’218) relating to XARELTO
®
. The following generic companies are named defendants: Alembic Pharmaceuticals Limited, Alembic Global Holding SA and Alembic Pharmaceuticals, Inc.; Aurobindo; Breckenridge; InvaGen; Lupin Limited and Lupin Pharmaceuticals, Inc. (collectively, Lupin); Micro; Mylan; Sigmapharm; Taro Pharmaceutical Industries Ltd. and Taro Pharmaceuticals U.S.A., Inc. (collectively, Taro) and Torrent. Lupin has counterclaimed for a declaratory judgment of noninfringement and invalidity of United States Patent No. 9,415,053, but Lupin dismissed its counterclaims after it was provided a covenant not to sue on that patent. Aurobindo, Taro, Torrent and Micro have agreed to have their cases stayed and to be bound by the outcome of any final judgment rendered against any of the other defendants. The ’218 cases have been consolidated for discovery and trial, and are currently set for trial in April 2019.
In each of these lawsuits, JPI is seeking an order enjoining the defendants from marketing their generic versions of XARELTO
®
before the expiration of the relevant patents.
PREZISTA
®
In September 2017, Janssen Sciences Ireland UC and Janssen Products, L.P. (collectively, Janssen) initiated a patent infringement lawsuit in the United States District Court for the District of New Jersey against Aurobindo Pharma Ltd. and Aurobindo Pharma USA Inc. (collectively, Aurobindo), who filed an ANDA seeking approval to market a generic version of PREZISTA
®
before the expiration of United States Patent Nos. 8,518,987; 7,700,645; 7,126,015; and 7,595,408. In January 2018, the parties entered into a settlement agreement.
In November 2017, Janssen Inc. initiated Notices of Application under Section 6 of the Patented Medicines (Notice of Compliance) Regulations against Apotex Inc. (Apotex) and the Minister of Health in Canada in response to Apotex’s filing of an Abbreviated New Drug Submission (ANDS) seeking approval to market a generic version of PREZISTA
®
before the expiration of Canadian Patent Nos. 2,485,834 and 2,336,160, which is owned by the United States and the Board of Trustees of the University of Illinois. Janssen is seeking an order prohibiting the Minister of Health from issuing a Notice of Compliance with respect to Apotex's ANDS before the expiration of the relevant patents.
RISPERDAL CONSTA
®
In November 2016, the United States Patent and Trademark Office (USPTO) instituted an Inter Partes Review filed by Luye Pharma Group Ltd., Luye Pharma (USA) Ltd., Sandong Luye Pharmaceutical Co., Ltd. and Nanjing Luye Pharmaceutical Co., Ltd., seeking to invalidate United States Patent No. 6,667,061 relating to RISPERDAL CONSTA
®
. Janssen Pharmaceuticals, Inc. markets RISPERDAL CONSTA
®
pursuant to a license from Alkermes Pharma Ireland Ltd. In November 2017, the USPTO issued a decision upholding the validity of the patent.
INVOKANA
®
/INVOKAMET
®
Beginning in July 2017, Janssen Pharmaceuticals, Inc., Janssen Research & Development, LLC, Cilag GmbH International and Janssen Pharmaceutica NV (collectively, Janssen) and Mitsubishi Tanabe Pharma Corporation (MTPC) filed patent infringement lawsuits in the United States District Court for the District of New Jersey, the United States District Court for the District of Colorado and the United States District Court for the District of Delaware against a number of generic companies who filed ANDAs seeking approval to market generic versions of INVOKANA
®
and/or INVOKAMET
®
before expiration of MTPC’s United States Patent Nos. 7,943,582 and/or 8,513,202 relating to INVOKANA
®
and INVOKAMET
®
. Janssen is the exclusive licensee of the asserted patents. The following generic companies are named defendants: Apotex Inc. and Apotex Corp. (Apotex); Aurobindo Pharma USA Inc. (Aurobindo); Macleods Pharmaceuticals Ltd. and MacLeods Pharma USA, Inc.; InvaGen Pharmaceuticals, Inc. (InvaGen); Prinston Pharmaceuticals Inc.; Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories Ltd; Hetero USA, Inc., Hetero Labs Limited Unit-V and Hetero Labs Limited; MSN Laboratories Private Ltd. and MSN Pharmaceuticals, Inc.; Laurus Labs Ltd.; Indoco Remedies Ltd.; Zydus Pharmaceuticals (USA) Inc. (Zydus); Sandoz, Inc. (Sandoz); Teva Pharmaceuticals USA, Inc.; and Lupin Ltd. and Lupin Pharmaceuticals, Inc.
Beginning in July 2017, Janssen and MTPC filed patent infringement lawsuits in the United States District Court for the District of New Jersey and the United States District Court for the District of Colorado against Sandoz and InvaGen, who filed ANDAs seeking approval to market generic versions of INVOKANA
®
and/or INVOKAMET
®
before expiration of MTPC’s United States Patent No. 7,943,788 (the '788 patent) relating to INVOKANA
®
and INVOKAMET
®
and against Zydus, who filed ANDAs seeking approval to market generic versions of INVOKANA
®
and INVOKAMET
®
before expiration of the '788 patent, MTPC's United States Patent No. 8,222,219 relating to INVOKANA
®
and INVOKAMET
®
and MTPC’s United States Patent No. 8,785,403 relating to INVOKAMET
®
, and against Aurobindo, who filed an ANDA seeking approval to market a generic version of INVOKANA
®
before expiration of the ’788 patent and the ’219 patent relating to INVOKANA
®
. Janssen is the exclusive licensee of the asserted patents. In October 2017, the Colorado lawsuits against Sandoz were dismissed. In December 2017, the Delaware lawsuits against Apotex and Teva were dismissed.
In each of these lawsuits, Janssen and MTPC are seeking an order enjoining the defendants from marketing their generic versions of INVOKANA
®
and/or INVOKAMET
®
before the expiration of the relevant patents.
VELETRI
®
In July 2017, Actelion Pharmaceuticals Ltd. (Actelion) initiated a patent infringement lawsuit in the United States District Court for the District of New Jersey against Sun Pharmaceutical Industries, Inc. and Sun Pharmaceutical Industries Limited (collectively, Sun Pharmaceutical), who filed an ANDA seeking approval to market a generic version of VELETRI
®
before the expiration of United States Patent No. 8,598,227. Actelion is seeking an order enjoining Sun Pharmaceutical from marketing its generic version of VELETRI
®
before the expiration of the patent. Trial is scheduled to commence in June 2019.
OPSUMIT
®
In January 2018, Actelion Pharmaceuticals Ltd (Actelion) initiated a patent infringement lawsuit in the United States District Court for the District of New Jersey against Zydus Pharmaceuticals (USA) Inc. (Zydus) and Amneal Pharmaceuticals LLC (Amneal), who filed an ANDA seeking approval to market a generic version of OPSUMIT
®
before the expiration of United States Patent No. 7,094,781. In the lawsuit, Actelion is seeking an order enjoining Zydus and Amneal from marketing generic versions of OPSUMIT
®
before the expiration of the patent.
INVEGA SUSTENNA
®
In January 2018, Janssen Pharmaceutica NV and Janssen Pharmaceuticals, Inc. (collectively, Janssen) initiated a patent infringement lawsuit in the United States District Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc. (Teva), who filed an ANDA seeking approval to market a generic version of INVEGA SUSTENNA
®
before the expiration of United States Patent No. 9,439,906. In the lawsuit, Janssen is seeking an order enjoining Teva from marketing a generic version of INVEGA SUSTENNA
®
before the expiration of the patent.
IMBRUVICA
®
Beginning in January 2018, Pharmacyclics LLC (Pharmacyclics) and Janssen Biotech, Inc. (Janssen) filed patent infringement lawsuits in the United States District Court for the District of Delaware against a number of generic companies who filed ANDAs seeking approval to market generic versions of IMBRUVICA
®
before expiration of Pharmacyclics’ United States Patent Nos. 8,008,309, 7,514,444, 8,697,711, 8,735,403, 8,957,079, 9,181,257, 8,754,091, 8,497,277, 8,925,015, 8,476,284, 8,754,090, 8,999,999, 9,125,889, 9,801,881, 9,801,883, 9,814,721, 9,795,604, 9,296,753, 9,540,382, 9,713,617 and/or 9,725,455 relating to IMBRUVICA
®
. Janssen is the exclusive licensee of the asserted patents. The following generic companies are named defendants: Cipla Limited and Cipla USA Inc. (Cipla); Fresenius Kabi USA, LLC, Fresenius Kabi USA, Inc., and Fresenius Kabi Oncology Limited (Fresenius Kabi); Sandoz Inc. and Lek Pharmaceuticals d.d. (Sandoz); Shilpa Medicare Limited (Shilpa); Sun Pharma Global FZE and Sun Pharmaceutical Industries Limited (Sun); Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Limited (Teva); and Zydus Worldwide DMCC and Cadila Healthcare Limited (Zydus).
In each of the lawsuits, Pharmacyclics and Janssen are seeking an order enjoining the defendants from marketing generic versions of IMBRUVICA
®
before the expiration of the relevant patents.
GOVERNMENT PROCEEDINGS
Like other companies in the pharmaceutical and medical devices industries, Johnson & Johnson and certain of its subsidiaries are subject to extensive regulation by national, state and local government agencies in the United States and other countries in which they operate. As a result, interaction with government agencies is ongoing. The most significant litigation brought by, and investigations conducted by, government agencies are listed below. It is possible that criminal charges and substantial fines and/or civil penalties or damages could result from government investigations or litigation.
Average Wholesale Price (AWP) Litigation
Johnson & Johnson and several of its pharmaceutical subsidiaries (the J&J AWP Defendants), along with numerous other pharmaceutical companies, were named as defendants in a series of lawsuits in state and federal courts involving allegations that the pricing and marketing of certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because, among other things, the companies allegedly reported an inflated Average Wholesale Price (AWP) for the drugs at issue. Payors alleged that they used those AWPs in calculating provider reimbursement levels. The plaintiffs in these cases included three classes of private persons or entities that paid for any portion of the purchase of the drugs at issue based on AWP, and state government entities that made Medicaid payments for the drugs at issue based on AWP. Many of these cases, both federal actions and state actions removed to federal court, were consolidated for pre-trial purposes in a multi-district litigation in the United States District Court for the District of Massachusetts, where all claims against the J&J AWP Defendants were ultimately dismissed. The J&J AWP Defendants also prevailed in a case brought by the Commonwealth of Pennsylvania. Other AWP cases have been resolved through court order or settlement. Two cases remain pending. In a case brought by Illinois, the parties are awaiting assignment of a trial date. In New Jersey, a putative class action based upon AWP allegations is pending against Centocor, Inc. and Ortho Biotech Inc. (both now Janssen Biotech, Inc.), Johnson & Johnson and ALZA Corporation.
Opioids Litigation
Beginning in 2014 and continuing to the present, Johnson & Johnson and Janssen Pharmaceuticals, Inc. (JPI), along with other pharmaceutical companies, have been named in numerous lawsuits brought by certain state and local governments related to the marketing of opioids, including DURAGESIC
®
, NUCYNTA
®
and NUCYNTA
®
ER. To date, complaints against pharmaceutical companies, including Johnson & Johnson and JPI, have been filed in state court by the state Attorneys General in Louisiana, Mississippi, Missouri, New Mexico, Ohio and Oklahoma. Complaints against the manufacturers also have been filed in state or federal court by city, county and local government agencies in the following states: Arkansas; California; Connecticut; Florida; Georgia; Illinois; Kentucky; Louisiana; Mississippi; Missouri; Nevada; New Hampshire; New Jersey; New Mexico; New York; Ohio; Oklahoma; Oregon; Pennsylvania; Tennessee; Texas; Washington and West Virginia. These actions allege a variety of claims related to opioids marketing practices, including false advertising, unfair competition, public nuisance, consumer fraud violations, deceptive acts and practices, false claims and unjust enrichment. The suits generally seek penalties and/or injunctive and monetary relief. These cases are in early stages of litigation. In October 2017, Johnson & Johnson and JPI were both served with a motion to consolidate 66 pending matters into a federal Multi District Litigation in the Southern District of Ohio. In December 2017, the MDL was approved in the Northern District of Ohio and there are approximately 190 cases that have been transferred to the MDL.
Johnson & Johnson, JPI and other pharmaceutical companies have also received subpoenas or requests for information related to opioids marketing practices from the following state Attorneys General: Alaska, Indiana, New Hampshire, New Jersey, Tennessee and Washington. In September 2017, Johnson & Johnson and JPI were contacted by the Texas and Colorado Attorney General’s Offices on behalf of approximately 38 states regarding a multi-state Attorney General investigation. The multi-state coalition served Johnson & Johnson and JPI with subpoenas as part of the investigation. Johnson & Johnson and JPI have also received requests for information from the ranking minority member of the United States Senate Committee on Homeland Security and Governmental Affairs regarding the sales, marketing, and educational strategies related to the promotion of opioids use.
Other
In August 2012, DePuy Orthopaedics, Inc., DePuy, Inc. (now DePuy Synthes, Inc.), and Johnson & Johnson Services, Inc. received an informal request from the United States Attorney's Office for the District of Massachusetts and the Civil Division of the United States Department of Justice (the United States) for the production of materials relating to the DePuy ASR™ XL Hip device. In July 2014, the United States notified the United States District Court for the District of Massachusetts that it had declined to intervene in a qui tam case filed pursuant to the False Claims Act against the companies. In February 2016, the District Court granted the companies’ motion to dismiss with prejudice, unsealed the qui tam complaint, and denied the qui tam relators’ request for leave to file a further amended complaint. The qui tam relators appealed the case to the United States Court of Appeals for the First Circuit. In July 2017, the First Circuit affirmed the District Court’s dismissal in part, reversed in part, and affirmed the decision to deny the relators’ request to file a third amended complaint. The relators’ remaining claims are now pending before the District Court.
Since October 2013, a group of State Attorneys General have issued Civil Investigative Demands relating to the development, sales and marketing of several of DePuy Orthopaedics, Inc.'s hip products. The states are seeking monetary and injunctive relief, and DePuy Orthopaedics, Inc. has entered into a tolling agreement with the states. In July 2014, the Oregon Department of Justice, which was investigating these matters independently of the other states, announced a settlement of its ASR™ XL Hip device investigation
with the State of Oregon.
In October 2012, Johnson & Johnson was contacted by the California Attorney General's office regarding a multi-state Attorney General investigation of the marketing of surgical mesh products for hernia and urogynecological purposes by Johnson & Johnson's subsidiary, Ethicon, Inc. (Ethicon). Johnson & Johnson and Ethicon have since entered into a series of tolling agreements with the 47 states and the District of Columbia participating in the multi-state investigation and have responded to Civil Investigative Demands served by certain of the participating states. The states are seeking monetary and injunctive relief. In May 2016, California and Washington filed civil complaints against Johnson & Johnson, Ethicon Inc. and Ethicon US, LLC alleging violations of their consumer protection statutes. Similar complaints were filed against the companies by Kentucky in August 2016 and by Mississippi in October 2017. Johnson & Johnson and Ethicon have entered into a new tolling agreement with the remaining 43 states and the District of Columbia.
In December 2012, Therakos, Inc. (Therakos), formerly a subsidiary of Johnson & Johnson and part of the Ortho-Clinical Diagnostics, Inc. (OCD) franchise, received a letter from the civil division of the United States Attorney's Office for the Eastern District of Pennsylvania informing Therakos that the United States Attorney's Office was investigating the sales and marketing of Uvadex
®
(methoxsalen) and the Uvar Xts
®
and Cellex
®
Systems during the period 2000 to the present. The United States Attorney's Office requested that OCD and Johnson & Johnson preserve documents that could relate to the investigation. Therakos was subsequently acquired by an affiliate of Gores Capital Partners III, L.P. in January 2013, and OCD was divested in June 2014. Following the divestiture of OCD, Johnson & Johnson retains OCD’s portion of any liability that may result from the investigation for activity that occurred prior to the sale of Therakos. In March 2014 and March 2016, the United States Attorney’s Office requested that Johnson & Johnson produce certain documents, and Johnson & Johnson is cooperating with those requests.
In June 2014, the Mississippi Attorney General filed a complaint in Chancery Court of The First Judicial District of Hinds County, Mississippi against Johnson & Johnson and Johnson & Johnson Consumer Companies, Inc. (now Johnson & Johnson Consumer Inc.) (JJCI). The complaint alleges that defendants failed to disclose alleged health risks associated with female consumers' use of talc contained in JOHNSON'S
®
Baby Powder and JOHNSON'S
®
Shower to Shower (a product no longer sold by JJCI) and seeks injunctive and monetary relief. The parties have agreed to adjourn the trial date and currently expect the trial to be re-scheduled to the fall of 2018.
In March 2016, Janssen Pharmaceuticals, Inc. (JPI) received a Civil Investigative Demand from the United States Attorney’s Office for the Southern District of New York related to JPI’s contractual relationships with pharmacy benefit managers over the
period from January 1, 2006 to the present with regard to certain of JPI's pharmaceutical products. The demand was issued in connection with an investigation under the False Claims Act.
In January 2017, Janssen Pharmaceuticals, Inc. (JPI) received a Civil Investigative Demand from the United States Department of Justice relating to allegations concerning the sales and marketing practices of OLYSIO
®
. In December 2017, Johnson & Johnson and JPI were served with a whistleblower lawsuit filed in the United States District Court for the Central District of California alleging the off-label promotion of OLYSIO
®
and additional products, including NUCYNTA
®
, XARELTO
®
, LEVAQUIN
®
and REMICADE
®
. At this time, the federal and state governments have declined to intervene and the lawsuit, which is related to the Civil Investigative Demand, is being prosecuted by a former company employee. JPI filed a motion to dismiss in the United States District Court for the Central District of California in January 2018.
In February 2017, Johnson & Johnson received a subpoena from the United States Attorney's Office for the District of Massachusetts seeking the production of records pertaining to payments to any 501(c)(3) charitable organization that provides financial assistance to Medicare patients. Multiple pharmaceutical companies have publicly reported receipt of subpoenas and ongoing inquiries similar to this one and the one described below.
Actelion Pharmaceuticals US, Inc. (Actelion US), received a subpoena in May 2016, with follow-up requests in June and December 2016, from the United States Attorney's Office for the District of Massachusetts. The subpoena seeks the production of records pertaining to Actelion US’ payments to 501(c)(3) charitable organizations that provide financial assistance to Medicare patients.
In March 2017, Janssen Biotech, Inc. received a Civil Investigative Demand from the United States Department of Justice regarding a False Claims Act investigation concerning management and advisory services provided to rheumatology and gastroenterology practices that purchased REMICADE
®
or SIMPONI ARIA
®
.
In April and September 2017, Johnson & Johnson received subpoenas from the United States Attorney for the District of Massachusetts seeking documents broadly relating to pharmaceutical copayment support programs for DARZALEX
®
, OLYSIO
®
, REMICADE
®
, SIMPONI
®
, STELARA
®
and ZYTIGA
®
. The subpoenas also seek documents relating to Average Manufacturer Price and Best Price reporting to the Center for Medicare and Medicaid Services related to those products, as well as rebate payments to state Medicaid agencies.
In June 2017, Johnson & Johnson received a subpoena from the United States Attorney's Office for the District of Massachusetts seeking information regarding practices pertaining to the sterilization of DePuy Synthes, Inc. spinal implants at three hospitals in Boston as well as interactions of Company employees with physicians at these hospitals. Johnson & Johnson is producing documents in response to this subpoena.
From time to time, Johnson & Johnson has received requests from a variety of United States Congressional Committees to produce information relevant to ongoing congressional inquiries. It is the policy of Johnson & Johnson to cooperate with these inquiries by producing the requested information.
GENERAL LITIGATION
In June 2009, following the public announcement that Ortho-Clinical Diagnostics, Inc. (OCD) had received a grand jury subpoena from the United States Department of Justice, Antitrust Division, in connection with an investigation that has since been closed, multiple class action complaints were filed against OCD by direct purchasers seeking damages for alleged price fixing. These cases were consolidated for pre-trial purposes in the United States District Court for the Eastern District of Pennsylvania as In re Blood Reagent Antitrust Litigation. Following the appeal and reversal of its initial grant of a motion for class certification, on remand, the District Court in October 2015 again granted a motion by the plaintiffs for class certification. In July 2017, the Court issued an opinion granting in part and denying in part OCD's motion for summary judgment. The Court granted summary judgment concerning allegations of price fixing in 2005 and 2008, and denied summary judgment concerning allegations of price fixing in 2001. Trial has been set for June 2018. OCD was divested in 2014 and Johnson & Johnson retained any liability that may result from these cases.
In June 2011, DePuy Orthopaedics, Inc. (DePuy) filed suit against Orthopaedic Hospital (OH) in the United States District Court for the Northern District of Indiana seeking a declaratory judgment that DePuy did not owe OH royalties under a 1999 development agreement. In January 2012, OH filed a breach of contract case in California federal court, which was later consolidated with the Indiana case. In February 2014, OH brought suit for patent infringement relating to the same technology, and that action was also consolidated with the Indiana case. In August 2017, the court denied DePuy’s motions for summary judgment. A trial date has not been set.
In September 2011, Johnson & Johnson, Johnson & Johnson Inc. and McNeil Consumer Healthcare Division of Johnson & Johnson Inc. received a Notice of Civil Claim filed by Nick Field in the Supreme Court of British Columbia, Canada (the BC Civil Claim). The BC Civil Claim is a putative class action brought on behalf of persons who reside in British Columbia and who purchased during the period between September 20, 2001 and in or about December 2010 one or more various McNeil infants' or children's over-the-counter medicines that were manufactured at the Fort Washington, Pennsylvania facility. The BC Civil Claim alleges that the defendants violated the BC Business Practices and Consumer Protection Act, and other Canadian statutes and common laws, by selling medicines that were allegedly not safe and/or effective or did not comply with Canadian Good Manufacturing Practices. The class certification hearing scheduled for October 2015 was adjourned, and the Court entered a Consent Order of Dismissal in November 2017 concluding this action. In addition, in April 2016, a putative class action was filed against Johnson & Johnson, Johnson & Johnson Sales and Logistics Company, LLC and McNeil PPC, Inc. (now known as Johnson & Johnson Consumer, Inc.) in New Jersey Superior Court, Camden County on behalf of persons who reside in the state of New Jersey who purchased various McNeil over-the-counter products from December 2008 through the present. The complaint alleges violations of the New Jersey Consumer Fraud Act. Following the grant of a motion to dismiss and the filing of an amended complaint, in May 2017, the Court denied a motion to dismiss the amended complaint. Discovery is underway.
In May 2014,
two
purported class actions were filed in federal court, one in the United States District Court for the Central District of California and one in the United States District Court for the Southern District of Illinois, against Johnson & Johnson and Johnson & Johnson Consumer Companies, Inc. (now Johnson & Johnson Consumer Inc.) (JJCI) alleging violations of state consumer fraud statutes based on nondisclosure of alleged health risks associated with talc contained in JOHNSON'S
®
Baby Powder and JOHNSON'S
®
Shower to Shower (a product no longer sold by JJCI). Both cases seek injunctive relief and monetary damages; neither includes a claim for personal injuries. In October 2016, both cases were transferred to the United States District Court for the District Court of New Jersey as part of a newly created federal multi-district litigation. In July 2017, the Court granted Johnson & Johnson's and JJCI’s motion to dismiss one of the cases. The plaintiff has appealed. In September 2017, the plaintiff in the second case voluntarily dismissed their complaint.
In August 2014, United States Customs and Border Protection (US CBP) issued a Penalty Notice against Janssen Ortho LLC (Janssen Ortho), assessing penalties for the alleged improper classification of darunavir ethanolate (the active pharmaceutical ingredient in PREZISTA
®
) in connection with its importation into the United States. In October 2014, Janssen Ortho submitted a Petition for Relief in response to the Penalty Notice. In May 2015, US CBP issued an Amended Penalty Notice assessing substantial penalties and Janssen Ortho filed a Petition for Relief in July 2015.
In March and April 2015, over 30 putative class action complaints were filed by contact lens patients in a number of courts around the United States against Johnson & Johnson Vision Care, Inc. (JJVCI) and other contact lens manufacturers, distributors, and retailers, alleging vertical and horizontal conspiracies to fix the retail prices of contact lenses. The complaints allege that the manufacturers reached agreements with each other and certain distributors and retailers concerning the prices at which some contact lenses could be sold to consumers. The plaintiffs are seeking damages and injunctive relief. All of the class action cases were transferred to the United States District Court for the Middle District of Florida in June 2015. The plaintiffs filed a consolidated class action complaint in November 2015. In June 2016, the Court denied motions to dismiss filed by JJVCI and other defendants. Discovery is ongoing. In March 2017, the plaintiffs filed a motion for class certification.
In August 2015, two third-party payors filed a purported class action in the United States District Court for the Eastern District of Louisiana against Janssen Research & Development, LLC, Janssen Ortho LLC, Janssen Pharmaceuticals, Inc., Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Johnson & Johnson (as well as certain Bayer entities), alleging that the defendants improperly marketed and promoted XARELTO
®
as safer and more effective than less expensive alternative medications while failing to fully disclose its risks. The complaint seeks damages.
In May 2017, a purported class action was filed in the United States District Court for the Western District of Washington against Lifescan Inc., Johnson & Johnson, other diabetes test strip manufacturers and certain Pharmacy Benefit Managers (PBMs). The complaint alleges that consumers paid inflated prices for glucose monitor test strips as a consequence of undisclosed rebates and other incentives paid by manufacturers to PBMs. The complaint includes RICO, ERISA, and state consumer protection claims. The complaint seeks equitable relief and damages. In November 2017, the case was ordered transferred to United States District Court for the District of New Jersey.
In May 2017, Lonza Sales AG (Lonza) filed a Request for Arbitration with the London Court of International Arbitration against Janssen Research & Development, LLC (Janssen). Lonza alleges that Janssen breached a 2005 agreement between the parties by sublicensing certain Lonza technology used in the manufacture of daratumumab without Lonza’s consent. Lonza seeks monetary damages.
In September 2017, Strategic Products Group, Inc. (SPG) filed an antitrust complaint against Lifescan, Inc. and Lifescan Scotland, Ltd. (collectively, Lifescan) in the United States District Court for the Northern District of Florida (Pensacola Division). SPG, the exclusive distributor of Unistrip blood glucose meter test strips, alleges that Lifescan has monopolized or is attempting to monopolize the market for blood glucose meter test strips compatible with certain Lifescan meters. The complaint seeks damages.
In September 2017, Pfizer, Inc. (Pfizer) filed an antitrust complaint against Johnson & Johnson and Janssen Biotech, Inc. (collectively Janssen) in United States District Court for the Eastern District of Pennsylvania. Pfizer alleges that Janssen has violated federal antitrust laws through its contracting strategies for REMICADE
®
. The complaint seeks damages and injunctive relief. In November 2017, Janssen moved to dismiss the complaint.
Beginning in September 2017, multiple purported class actions were filed against Johnson & Johnson and Janssen Biotech, Inc. (collectively Janssen) alleging that Janssen’s REMICADE
®
contracting strategies violated federal and state antitrust and consumer laws and seeking damages and injunctive relief. In November 2017, the cases were consolidated for pre-trial purposes in United States District Court for the Eastern District of Pennsylvania as In re Remicade Antitrust Litigation.
In October 2017, certain United States service members and their families brought a complaint against a number of pharmaceutical and medical devices companies, including Johnson & Johnson and certain of its subsidiaries, alleging that the defendants violated the United States Anti-Terrorism Act. The complaint alleges that the defendants provided funding for terrorist organizations through their sales practices pursuant to pharmaceutical and medical device contracts with the Iraqi Ministry of Health.
Andover Healthcare, Inc. filed a Lanham act case against Johnson & Johnson Consumer Inc. in April 2017 in the United Stated District Court for the District of Massachusetts. Andover asserts that the claim “not made with natural rubber latex” on COACH
®
Sports Wrap, BAND-AID
®
Brand SECURE-FLEX
®
Wrap and BAND-AID
®
Brand HURT-FREE
®
Wrap is false. Andover seeks actual damages and pre-judgment interest thereon, disgorgement of profits, treble damages, attorney’s fees and injunctive relief. The Court denied a motion to dismiss, an answer was filed and discovery is underway.
In February 2018, a securities class action lawsuit was filed against Johnson & Johnson in the United States District Court for the District of New Jersey alleging that Johnson & Johnson violated the federal Securities laws by failing to adequately disclose the
alleged asbestos contamination in body powders containing talc, primarily JOHNSONS
®
Baby Powder. The lawsuit was assigned to the District Court Judge managing the personal injury multi-district litigation.
Johnson & Johnson or its subsidiaries are also parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, and comparable state, local or foreign laws in which the primary relief sought is the cost of past and/or future remediation.
22. Restructuring
The Company announced restructuring actions in its Medical Devices segment to better serve the needs of patients and customers in today’s evolving healthcare marketplace. The Company is undertaking actions to strengthen its go-to-market model, accelerate the pace of innovation, further prioritize key platforms and geographies, and streamline operations while maintaining high quality standards.
The Company estimates that, in connection with its plans, it will record pre-tax restructuring related charges of approximately
$2.0 billion
to
$2.4 billion
. In 2017, the Company recorded a pre-tax charge of
$760 million
, of which
$88 million
was included in cost of products sold and
$363 million
was included in other (income) expense. See table below for additional details. Total project costs of
$2.0 billion
have been recorded since the restructuring has been announced.
Additionally, as part of the plan, the Company expects that the restructuring actions will result in position eliminations of approximately
4
to
6
percent of the Medical Devices segment’s global workforce over the next
15 months
. Approximately
2,400
positions have been eliminated of which
1,700
received separation payments since the restructuring announcement.
The Company estimates that approximately one-half of the cumulative pre-tax costs will result in cash outlays, including approximately
$400 million
of employee severance. Approximately one half of the cumulative pre-tax costs are non-cash, relating primarily to facility rationalization, inventory write-offs and intangible asset write-offs.
The following table summarizes the severance charges and the associated spending under this initiative through the fiscal year ended 2017:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
Severance
|
Asset Write-offs
|
Other**
|
Total
|
2015 restructuring charge
|
$
|
484
|
|
86
|
|
20
|
|
590
|
|
|
|
|
|
|
2015 activity
|
|
(86
|
)
|
(3
|
)
|
(89
|
)
|
|
|
|
|
|
Reserve balance, January 3, 2016
|
484
|
|
—
|
|
17
|
|
501
|
|
|
|
|
|
|
2016 activity
|
(104
|
)
|
—
|
|
(16
|
)
|
(120
|
)
|
|
|
|
|
|
Reserve balance, January 1, 2017
|
380
|
|
—
|
|
1
|
|
381
|
|
|
|
|
|
|
Current year activity:
|
|
|
|
|
Charges
|
|
194
|
|
656
|
|
850
|
|
Cash payments
|
(61
|
)
|
|
(619
|
)
|
(680
|
)
|
Settled non cash
|
|
(194
|
)
|
|
(194
|
)
|
Accrual adjustment
|
(90
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
Reserve balance, December 31, 2017*
|
$
|
229
|
|
—
|
|
38
|
|
267
|
|
|
|
|
|
|
*Cash outlays for severance are expected to be substantially paid out over the next 18 months in accordance with the Company's plans and local laws.
**Other includes project expense such as salaries for employees supporting the initiative and consulting expenses.