JOHNSON & JOHNSON
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended October 1, 2017
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or
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
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Commission file number 1-3215
(Exact name of registrant as specified in its charter)
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NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
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22-1024240
(I.R.S. Employer
Identification No.)
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One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant’s telephone number, including area code (732) 524-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
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No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On October 27, 2017, 2,686,520,050 shares of Common Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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No.
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EX-31.1
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EX-32.1
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EX-101 INSTANCE DOCUMENT
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EX-101 SCHEMA DOCUMENT
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EX-101 CALCULATION LINKBASE DOCUMENT
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EX-101 LABELS LINKBASE DOCUMENT
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EX-101 PRESENTATION LINKBASE DOCUMENT
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EX-101 DEFINITION LINKBASE DOCUMENT
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q
and Johnson & Johnson's other publicly available documents contain
“
forward-looking statements
”
within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Management and representatives of Johnson & Johnson and its subsidiaries (the
“
Company
”
) also may from time to time make forward-looking statements.
Forward-looking statements do not relate strictly to historical or current facts and reflect management’s assumptions, views, plans, objectives and projections about the future. Forward-looking statements may be identified by the use of words such as “plans,” “expects,” “will,” “anticipates,” “estimates,” “intends,” and other words of similar meaning in conjunction with, among other things, discussions of: future operating results, financial performance and liquidity; impact of planned acquisitions and dispositions; impact and timing of restructuring initiatives including associated cost savings and other benefits; strategy for growth; product development activities including planned research and clinical trials; regulatory filings and approvals; market position; investment and expenditures; and impact of potential and actual changes in tax and other laws and public policy.
Because forward-looking statements are based on current beliefs, expectations and assumptions regarding future events, they are subject to uncertainties, risks and changes that are difficult to predict and many of which are outside of the Company's control. Investors should realize that if underlying assumptions prove inaccurate, or known or unknown risks or uncertainties materialize, the Company’s actual results and financial condition could vary materially from expectations and projections expressed or implied in its forward-looking statements. Investors are therefore cautioned not to rely on these forward-looking statements. Risks and uncertainties include, but are not limited to:
Risks Related to Product Development, Market Success and Competition
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Challenges and uncertainties inherent in innovation and development of new and improved products and technologies on which the Company’s continued growth and success depend, including uncertainty of clinical outcomes, obtaining regulatory approvals, health plan coverage and customer access, and initial and continued commercial success;
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Challenges to the Company’s ability to obtain and protect adequate patent and other intellectual property rights for new and existing products and technologies in the United States and other important markets;
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The impact of patent expirations, typically followed by the introduction of competing biosimilars and generics and resulting revenue and market share losses;
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Increasingly aggressive and frequent challenges to the Company’s patents by competitors and others seeking to launch competing generic, biosimilar or other products, potentially resulting in loss of market exclusivity and rapid decline in sales for the relevant product;
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Competition in research and development of new and improved products, processes and technologies, which can result in product and process obsolescence;
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Competition to reach agreement with third parties for collaboration, licensing, development and marketing agreements for products and technologies;
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Competition on the basis of cost-effectiveness, product performance, technological advances and patents attained by competitors; and
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Allegations that the Company’s products infringe the patents and other intellectual property rights of third parties, which could adversely affect the Company’s ability to sell the products in question and require the payment of money damages and future royalties.
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Risks Related to Product Liability, Litigation and Regulatory Activity
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Product efficacy or safety concerns, whether or not based on scientific evidence, potentially resulting in product withdrawals, recalls, regulatory action on the part of the United States Food and Drug Administration (or international counterparts), declining sales and reputational damage;
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Impact of significant litigation or government action adverse to the Company, including product liability claims;
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Increased scrutiny of the health care industry by government agencies and state attorneys general resulting in investigations and prosecutions, which carry the risk of significant civil and criminal penalties, including, but not limited to, debarment from government business;
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Failure to meet compliance obligations in the McNEIL-PPC, Inc. Consent Decree or the Corporate Integrity Agreements of the Johnson & Johnson Pharmaceutical Affiliates, or any other compliance agreements with governments or government agencies, which could result in significant sanctions;
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Potential changes to applicable laws and regulations affecting United States and international operations, including relating to: approval of new products; licensing and patent rights; sales and promotion of health care products; access to, and reimbursement and pricing for, health care products and services; environmental protection and sourcing of raw materials;
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Changes in tax laws or regulations, increasing audit scrutiny by tax authorities around the world and exposures to additional tax liabilities potentially in excess of existing reserves or requiring new reserves; and
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Issuance of new or revised accounting standards by the Financial Accounting Standards Board and the Securities and Exchange Commission.
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Risks Related to the Company’s Strategic Initiatives and Health Care Market Trends
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Pricing pressures resulting from trends toward health care cost containment, including the continued consolidation among health care providers, trends toward managed care and the shift toward governments increasingly becoming the primary payers of health care expenses;
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Restricted spending patterns of individual, institutional and governmental purchasers of health care products and services due to economic hardship and budgetary constraints;
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Challenges to the Company’s ability to realize its strategy for growth including through externally sourced innovations, such as development collaborations, strategic acquisitions, licensing and marketing agreements, and the potential heightened costs of any such external arrangements due to competitive pressures;
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The potential that the expected strategic benefits and opportunities from any planned or completed acquisition or divestiture by the Company, including the acquisition of Actelion Ltd., may not be realized or may take longer to realize than expected; and
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The potential that the expected benefits and opportunities related to the restructuring actions in the Medical Device segment may not be realized or may take longer to realize than expected, including due to any required consultation procedures relating to restructuring of workforce.
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Risks Related to Economic Conditions, Financial Markets and Operating Internationally
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Impact of inflation and fluctuations in interest rates and currency exchange rates and the potential effect of such fluctuations on revenues, expenses and resulting margins;
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Potential changes in export/import and trade laws, regulations and policies of the United States, United Kingdom and other countries, including any increased trade restrictions and potential drug reimportation legislation;
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The impact on international operations from financial instability in international economies, sovereign risk, possible imposition of governmental controls and restrictive economic policies, and unstable international governments and legal systems;
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Global climate changes, extreme weather and natural disasters that could affect demand for the Company's products and services, cause disruptions in manufacturing and distribution networks, alter the availability of goods and services within the supply chain, and affect the overall design and integrity of the Company's products and operations; and
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The impact of armed conflicts and terrorist attacks in the United States and other parts of the world including social and economic disruptions and instability of financial and other markets.
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Risks Related to Supply Chain and Operations
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Difficulties and delays in manufacturing, internally or within the supply chain, that may lead to voluntary or involuntary business interruptions or shutdowns, product shortages, withdrawals or suspensions of products from the market, and potential regulatory action;
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Interruptions and breaches of the Company's information technology systems, and those of the Company's vendors, potentially resulting in reputational, competitive, operational or other business harm as well as financial costs and regulatory action; and
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Reliance on global supply chains and production and distribution processes that are complex and subject to increasing regulatory requirements that may adversely affect supply, sourcing and pricing of materials used in the Company’s products.
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Investors also should carefully read the Risk Factors described in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2017, for a description of certain risks that could, among other things, cause the Company’s actual results to differ materially from those expressed in its forward-looking statements. Investors should understand that it is not possible to identify or predict all potential risks and uncertainties. The Company does not undertake to publicly update any
forward-looking statement that may be made from time to time, whether as a result of new information or future events or developments.
Part I — FINANCIAL INFORMATION
Item 1 — FINANCIAL STATEMENTS
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions Except Share and Per Share Data)
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October 1, 2017
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January 1, 2017
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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15,721
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18,972
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Marketable securities
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510
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22,935
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Accounts receivable, trade, less allowances for doubtful accounts $332 (2016, $252)
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13,155
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11,699
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Inventories (Note 2)
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9,521
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8,144
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Prepaid expenses and other
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2,922
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3,282
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Total current assets
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41,829
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65,032
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Property, plant and equipment at cost
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40,928
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37,773
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Less: accumulated depreciation
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(24,300
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(21,861
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Property, plant and equipment, net
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16,628
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15,912
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Intangible assets, net (Note 3)
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54,569
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26,876
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Goodwill (Note 3)
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31,308
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22,805
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Deferred taxes on income
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6,303
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6,148
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Other assets
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5,021
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4,435
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Total assets
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$
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155,658
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141,208
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Loans and notes payable
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$
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8,491
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4,684
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Accounts payable
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6,390
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6,918
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Accrued liabilities
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5,897
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5,635
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Accrued rebates, returns and promotions
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6,945
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5,403
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Accrued compensation and employee related obligations
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2,900
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2,676
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Accrued taxes on income
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1,183
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971
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Total current liabilities
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31,806
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26,287
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Long-term debt (Note 4)
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26,675
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22,442
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Deferred taxes on income
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4,410
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2,910
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Employee related obligations
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9,686
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9,615
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Other liabilities
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9,102
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9,536
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Total liabilities
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81,679
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70,790
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Shareholders’ equity:
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Common stock — par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
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$
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3,120
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3,120
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Accumulated other comprehensive income (loss) (Note 7)
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(12,747
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(14,901
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Retained earnings
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114,805
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110,551
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Less: common stock held in treasury, at cost (434,861,000 and 413,332,000 shares)
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31,199
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28,352
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Total shareholders’ equity
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73,979
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70,418
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Total liabilities and shareholders' equity
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$
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155,658
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141,208
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See Notes to Consolidated Financial Statements
1
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
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Fiscal Third Quarters Ended
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October 1,
2017 |
Percent
to Sales
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October 2,
2016 |
Percent
to Sales
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Sales to customers (Note 9)
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$
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19,650
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100.0
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%
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$
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17,820
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100.0
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%
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Cost of products sold
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6,902
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35.1
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5,486
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30.8
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Gross profit
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12,748
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64.9
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12,334
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69.2
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Selling, marketing and administrative expenses
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5,396
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27.5
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4,772
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26.8
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Research and development expense
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2,574
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13.1
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2,178
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12.2
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Interest income
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(74
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)
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(0.4
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(97
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)
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(0.5
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)
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Interest expense, net of portion capitalized
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229
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1.2
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192
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1.0
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Other (income) expense, net
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(236
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)
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(1.2
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(54
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)
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(0.2
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)
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Restructuring (Note 12)
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69
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0.3
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62
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0.3
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Earnings before provision for taxes on income
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4,790
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24.4
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5,281
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29.6
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Provision for taxes on income (Note 5)
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1,026
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5.2
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1,009
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5.6
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NET EARNINGS
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$
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3,764
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19.2
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%
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$
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4,272
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24.0
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%
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||||
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NET EARNINGS PER SHARE (Note 8)
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Basic
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$
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1.40
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$
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1.56
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Diluted
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$
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1.37
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$
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1.53
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CASH DIVIDENDS PER SHARE
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$
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0.84
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$
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0.80
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AVG. SHARES OUTSTANDING
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Basic
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2,684.6
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2,731.6
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Diluted
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2,737.7
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2,785.4
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See Notes to Consolidated Financial Statements
2
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
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Fiscal Nine Months Ended
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||||||||||||||
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October 1,
2017 |
Percent
to Sales
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October 2,
2016 |
Percent
to Sales
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Sales to customers (Note 9)
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$
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56,255
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100.0
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%
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$
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53,784
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100.0
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%
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Cost of products sold
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18,111
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32.2
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16,151
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30.0
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Gross profit
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38,144
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67.8
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37,633
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70.0
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||||||
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Selling, marketing and administrative expenses
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15,395
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27.4
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14,636
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27.2
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Research and development expense
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6,919
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12.3
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6,455
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12.0
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In-process research and development
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—
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—
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29
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0.1
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||||||
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Interest income
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(300
|
)
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(0.5
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)
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(268
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)
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(0.5
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)
|
||||||
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Interest expense, net of portion capitalized
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660
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1.1
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|
542
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1.0
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|
||||||
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Other (income) expense, net
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192
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0.3
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|
464
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0.9
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|
||||||
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Restructuring expense (Note 12)
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165
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0.3
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|
296
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0.5
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|
||||||
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Earnings before provision for taxes on income
|
15,113
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26.9
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|
15,479
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|
28.8
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||||||
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Provision for taxes on income (Note 5)
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3,100
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5.5
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|
2,753
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5.1
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||||||
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NET EARNINGS
|
$
|
12,013
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21.4
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%
|
$
|
12,726
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23.7
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%
|
||||
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NET EARNINGS PER SHARE (Note 8)
|
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|
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|
||||||||||
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Basic
|
$
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4.46
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|
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$
|
4.64
|
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|
||||||
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Diluted
|
$
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4.37
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$
|
4.55
|
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|
||||||
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CASH DIVIDENDS PER SHARE
|
$
|
2.48
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|
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$
|
2.35
|
|
|
||||||
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AVG. SHARES OUTSTANDING
|
|
|
|
|
||||||||||
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Basic
|
2,694.4
|
|
|
2,744.9
|
|
|
||||||||
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Diluted
|
2,746.4
|
|
|
2,796.6
|
|
|
||||||||
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See Notes to Consolidated Financial Statements
|
||||||||||||||
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)
|
Fiscal Third Quarters Ended
|
Fiscal Nine Months Ended
|
|||||||||||
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October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
|||||||||
|
Net earnings
|
$
|
3,764
|
|
4,272
|
|
12,013
|
|
12,726
|
|
|||
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Other comprehensive income (loss), net of tax
|
||||||||||||
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Foreign currency translation
|
359
|
|
(94
|
)
|
1,597
|
|
490
|
|
||||
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Securities:
|
||||||||||||
|
Unrealized holding gain (loss) arising during period
|
14
|
|
29
|
|
150
|
|
129
|
|
||||
|
Reclassifications to earnings
|
(99
|
)
|
(42
|
)
|
(292
|
)
|
(136
|
)
|
||||
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Net change
|
(85
|
)
|
(13
|
)
|
(142
|
)
|
(7
|
)
|
||||
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Employee benefit plans:
|
||||||||||||
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Prior service cost amortization during period
|
(4
|
)
|
(5
|
)
|
(13
|
)
|
(15
|
)
|
||||
|
Gain (loss) amortization during period
|
124
|
|
103
|
|
370
|
|
310
|
|
||||
|
Net change
|
120
|
|
98
|
|
357
|
|
295
|
|
||||
|
Derivatives & hedges:
|
||||||||||||
|
Unrealized gain (loss) arising during period
|
62
|
|
4
|
|
(8
|
)
|
(437
|
)
|
||||
|
Reclassifications to earnings
|
31
|
|
(3
|
)
|
350
|
|
109
|
|
||||
|
Net change
|
93
|
|
1
|
|
342
|
|
(328
|
)
|
||||
|
Other comprehensive income (loss)
|
487
|
|
(8
|
)
|
2,154
|
|
450
|
|
||||
|
Comprehensive income
|
$
|
4,251
|
|
4,264
|
|
14,167
|
|
13,176
|
|
|||
See Notes to Consolidated Financial Statements
|
The tax effects in other comprehensive income for the fiscal third quarters were as follows for 2017 and 2016, respectively: Securities: $45 million and $7 million; Employee Benefit Plans: $61 million and $51 million; Derivatives & Hedges: $50 million and less than $1 million.
|
|
The tax effects in other comprehensive income for the fiscal nine months were as follows for 2017 and 2016, respectively: Securities: $76 million and $4 million; Employee Benefit Plans: $181 million and $155 million; Derivatives & Hedges:$184 million and $177 million.
|
4
|
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
|
|||||||
|
|
Fiscal Nine Months Ended
|
||||||
|
October 1,
2017 |
October 2,
2016 |
||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|||||
|
Net earnings
|
$
|
12,013
|
|
12,726
|
|
||
|
Adjustments to reconcile net earnings to cash flows from operating activities:
|
|
|
|||||
|
Depreciation and amortization of property and intangibles
|
3,773
|
|
2,699
|
|
|||
|
Stock based compensation
|
758
|
|
704
|
|
|||
|
Asset write-downs
|
309
|
|
187
|
|
|||
|
Net gain on sale of assets/businesses
|
(527
|
)
|
(276
|
)
|
|||
|
Deferred tax provision
|
(407
|
)
|
215
|
|
|||
|
Accounts receivable allowances
|
59
|
|
(10
|
)
|
|||
|
Changes in assets and liabilities, net of effects from acquisitions and divestitures:
|
|
|
|||||
|
Increase in accounts receivable
|
(300
|
)
|
(736
|
)
|
|||
|
Increase in inventories
|
(193
|
)
|
(408
|
)
|
|||
|
Increase (Decrease) in accounts payable and accrued liabilities
|
339
|
|
(1,220
|
)
|
|||
|
Increase in other current and non-current assets
|
(555
|
)
|
(514
|
)
|
|||
|
Decrease in other current and non-current liabilities
|
(318
|
)
|
(1,253
|
)
|
|||
|
NET CASH FLOWS FROM OPERATING ACTIVITIES
|
14,951
|
|
12,114
|
|
|||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|||||
|
Additions to property, plant and equipment
|
(2,039
|
)
|
(2,133
|
)
|
|||
|
Proceeds from the disposal of assets/businesses, net
|
726
|
|
873
|
|
|||
|
Acquisitions, net of cash acquired
|
(34,646
|
)
|
(4,050
|
)
|
|||
|
Purchases of investments
|
(5,798
|
)
|
(27,677
|
)
|
|||
|
Sales of investments
|
27,511
|
|
30,437
|
|
|||
|
Other
|
(117
|
)
|
(37
|
)
|
|||
|
NET CASH USED BY INVESTING ACTIVITIES
|
(14,363
|
)
|
(2,587
|
)
|
|||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|||||
|
Dividends to shareholders
|
(6,687
|
)
|
(6,451
|
)
|
|||
|
Repurchase of common stock
|
(5,543
|
)
|
(6,954
|
)
|
|||
|
Proceeds from short-term debt
|
4,760
|
|
149
|
|
|||
|
Retirement of short-term debt
|
(936
|
)
|
(3,926
|
)
|
|||
|
Proceeds from long-term debt, net of issuance costs
|
4,465
|
|
11,951
|
|
|||
|
Retirement of long-term debt
|
(1,024
|
)
|
(953
|
)
|
|||
|
Proceeds from the exercise of stock options/employee withholding tax on stock awards, net
|
854
|
|
1,112
|
|
|||
|
Other
|
(25
|
)
|
(15
|
)
|
|||
|
NET CASH USED BY FINANCING ACTIVITIES
|
(4,136
|
)
|
(5,087
|
)
|
|||
|
Effect of exchange rate changes on cash and cash equivalents
|
297
|
|
33
|
|
|||
|
(Decrease)/Increase in cash and cash equivalents
|
(3,251
|
)
|
4,473
|
|
|||
|
Cash and Cash equivalents, beginning of period
|
18,972
|
|
13,732
|
|
|||
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
15,721
|
|
18,205
|
|
||
|
Acquisitions
|
|
|
|||||
|
Fair value of assets acquired
|
$
|
36,494
|
|
4,094
|
|
||
|
Fair value of liabilities assumed and noncontrolling interests
|
(1,848
|
)
|
(44
|
)
|
|||
|
Net cash paid for acquisitions
|
$
|
34,646
|
|
4,050
|
|
||
Prior year amounts have been reclassified to conform to current year presentation
See Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 1, 2017
. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented.
New Accounting Standards
Adopted as of October 1, 2017
During the fiscal first quarter of 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-07 Investments - Equity Method and Joint Ventures: 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.
During the fiscal second quarter of 2015, the FASB issued Accounting Standards Update 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 October 1, 2017
During the fiscal third quarter of 2017, the FASB issued Accounting Standard Update 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 amendments in this update should be applied on a modified retrospective basis except for the presentation and disclosure guidance which is required prospectively. The Company is currently assessing the impact of the future adoption of this standard on its financial statements.
During the fiscal first quarter of 2017, the FASB issued Accounting Standards Update 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 Company will adopt this new standard in 2018. 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.
During the fiscal first quarter of 2017, the FASB issued Accounting Standard Update 2017-05: Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. This update clarifies the scope of asset derecognition guidance, adds guidance for partial sales of nonfinancial assets and clarifies recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This update will be effective for the Company for its annual and interim reporting periods beginning after December 15, 2017, the same time as the amendments in Update 2014-09 Revenue from Contracts with
6
Customers. This update allows the Company to choose either a full retrospective method or modified retrospective method upon adoption. The Company does not expect this standard to have a material impact on the Company's consolidated financial statements.
During the fiscal first quarter of 2017, the FASB issued Accounting Standard Update 2017-04: Simplifying the Test for Goodwill Impairment. This update simplifies how an entity is required to test goodwill for impairment. A goodwill impairment will now be measured by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update will be effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. 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.
During the fiscal first quarter of 2017, the FASB issued Accounting Standard Update 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.
During the fiscal fourth quarter of 2016, the FASB issued Accounting Standards Update 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 Company continues to assess the impact of the future adoption of this standard for fiscal 2018. 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. Upon adoption, and based on current tax and foreign exchange rates, the Company expects to record additional deferred tax assets in the range of
$2.2 billion
to
$2.5 billion
and an increase to retained earnings between
$1.2 billion
and
$1.5 billion
at the beginning of 2018.
During the fiscal third quarter of 2016, the FASB issued Accounting Standards Update 2016-15 Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This update addresses whether to present certain specific cash flow items as operating, investing or financing activities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company does not expect this standard to have a material impact on its consolidated Statements of Cash Flows.
During the fiscal first quarter of 2016, the FASB issued Accounting Standards Update 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 update is required to be adopted using a modified retrospective approach. 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 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.
During the fiscal first quarter of 2016, the FASB issued Accounting Standards Update 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
7
Company is unable to estimate the impact of the future adoption of this standard on its financial statements as it will depend on the equity investments as of the adoption date.
During the fiscal second quarter of 2014, the FASB issued Accounting Standards Update 2014-09: Revenue from Contracts with Customers, which, along with amendments issued in 2015 and 2016, will 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 guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures). The Company plans to adopt the standard using the modified retrospective method. While the Company continues to evaluate the effect of the standard, preliminarily, it does not anticipate a material impact on its financial statements including the potential impact of additional disclosure requirements. To complete the assessment of the impact of the standard, the Company continues to assess all implications of the standard on its financial statements and disclosures. Additionally, the Company continues to monitor modifications, clarifications and interpretations issued by the FASB that may affect current conclusions.
NOTE 2 — INVENTORIES
|
(Dollars in Millions)
|
October 1, 2017
|
January 1, 2017
|
|||||
|
Raw materials and supplies
|
$
|
1,141
|
|
952
|
|
||
|
Goods in process
|
2,388
|
|
2,185
|
|
|||
|
Finished goods
|
5,992
|
|
5,007
|
|
|||
|
Total inventories
|
$
|
9,521
|
|
8,144
|
|
||
Inventory of
$63 million
was classified as held for sale, and reported in prepaid expenses and other on the Consolidated Balance Sheet, related to the divestiture of the Codman Neurosurgery business which was pending as of October 1, 2017.
See Note 10 to the Consolidated Financial Statements for additional details on inventory related to the Actelion acquisition.
NOTE 3 — INTANGIBLE ASSETS AND GOODWILL
Intangible assets that have finite useful lives are amortized over their estimated useful lives. The latest annual impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of
2016
. Future impairment tests for goodwill and indefinite lived intangible assets will be performed annually in the fiscal fourth quarter, or sooner, if warranted.
|
(Dollars in Millions)
|
October 1, 2017
|
January 1, 2017
|
|||||
|
Intangible assets with definite lives:
|
|
|
|||||
|
Patents and trademarks — gross
|
$
|
36,342
|
|
10,521
|
|
||
|
Less accumulated amortization
|
6,395
|
|
5,076
|
|
|||
|
Patents and trademarks — net
|
29,947
|
|
5,445
|
|
|||
|
Customer relationships and other intangibles — gross
|
20,241
|
|
17,615
|
|
|||
|
Less accumulated amortization
|
7,297
|
|
6,515
|
|
|||
|
Customer relationships and other intangibles — net
|
12,944
|
|
11,100
|
|
|||
|
Intangible assets with indefinite lives:
|
|
|
|||||
|
Trademarks
|
7,093
|
|
6,888
|
|
|||
|
Purchased in-process research and development
|
4,585
|
|
3,443
|
|
|||
|
Total intangible assets with indefinite lives
|
11,678
|
|
10,331
|
|
|||
|
Total intangible assets — net
|
$
|
54,569
|
|
26,876
|
|
||
8
Goodwill as of
October 1, 2017
was allocated by segment of business as follows:
|
(Dollars in Millions)
|
Consumer
|
Pharm
|
Med Devices
|
Total
|
|||||||||
|
Goodwill, net at January 1, 2017
|
$
|
8,263
|
|
2,840
|
|
11,702
|
|
22,805
|
|
||||
|
Goodwill, related to acquisitions*
|
102
|
|
5,757
|
|
2,140
|
|
7,999
|
|
|||||
|
Goodwill, related to divestitures
|
(74
|
)
|
—
|
|
—
|
|
(74
|
)
|
|||||
|
Currency translation/Other
|
557
|
|
89
|
|
(68
|
)
|
(1)
|
578
|
|
||||
|
Goodwill, net at October 1, 2017
|
$
|
8,848
|
|
8,686
|
|
13,774
|
|
31,308
|
|
||||
(1) Net of
$106 million
classified as held for sale, reported in other assets on the Consolidated Balance Sheet, related to the divestiture of the Codman Neurosurgery business which was pending as of October 1, 2017.
* Includes measurement period adjustments
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 intangible assets included in cost of products sold was
$1,886 million
and
$895 million
for the fiscal nine months ended
October 1, 2017
and
October 2, 2016
, respectively. The estimated amortization expense for the five succeeding years approximates
$4.3 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 approximately
$5.8 billion
to goodwill. 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
$1.8 billion
to goodwill. The intangible assets and goodwill amounts related to the Actelion and AMO acquisitions are based on the preliminary purchase price allocation. See Note 10 to the Consolidated Financial Statements for additional details related to acquisitions and divestitures.
NOTE 4 — 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 our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of
October 1, 2017
the total amount of collateral received under the credit support agreements (CSA) amounted to
$43 million
. 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
October 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
$34.7 billion
,
$2.3 billion
,
$1.8 billion
, and less than
$0.1 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.
9
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
$151 million
and
$529 million
unrealized pretax loss for the fiscal third quarter and fiscal nine months ended
October 1, 2017
, respectively, 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
$155 million
unrealized pretax loss from hedge inception through the fiscal nine months of 2017, reflected in foreign currency translation adjustment, within the Consolidated Statements of Comprehensive Income.
As of
October 1, 2017
, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was
$57 million
after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts related to 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.
10
The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal
third
quarters in
2017
and
2016
:
|
Gain/(Loss)
Recognized In
Accumulated
OCI
(1)
|
Gain/(Loss) Reclassified From
Accumulated OCI
Into Income
(1)
|
Gain/(Loss)
Recognized In
Other
Income/Expense
(2)
|
|||||||||||||||||
|
(Dollars in Millions)
|
Fiscal Third Quarters Ended
|
||||||||||||||||||
|
Cash Flow Hedges By Income Statement Caption
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
|||||||||||||
|
Sales to customers
(3)
|
$
|
18
|
|
(12
|
)
|
5
|
|
(8
|
)
|
—
|
|
(1
|
)
|
||||||
|
Cost of products sold
(3)
|
(16
|
)
|
(4
|
)
|
(63
|
)
|
13
|
|
5
|
|
(4
|
)
|
|||||||
|
Research and development expense
(3)
|
(39
|
)
|
(5
|
)
|
(30
|
)
|
(2
|
)
|
(1
|
)
|
1
|
|
|||||||
|
Interest (income)/Interest expense, net
(4)
|
114
|
|
29
|
|
106
|
|
12
|
|
—
|
|
—
|
|
|||||||
|
Other (income) expense, net
(3) (5)
|
(15
|
)
|
(4
|
)
|
(49
|
)
|
(12
|
)
|
—
|
|
—
|
|
|||||||
|
Total
|
$
|
62
|
|
4
|
|
(31
|
)
|
3
|
|
4
|
|
(4
|
)
|
||||||
The following table is a summary of the activity related to derivatives designated as cash flow hedges for the
fiscal nine months
in
2017
and
2016
:
|
Gain/(Loss)
Recognized In
Accumulated
OCI
(1)
|
Gain/(Loss) Reclassified From
Accumulated OCI
Into Income
(1)
|
Gain/(Loss)
Recognized In
Other
Income/Expense
(2)
|
|||||||||||||||||
|
(Dollars in Millions)
|
Fiscal Nine Months Ended
|
||||||||||||||||||
|
Cash Flow Hedges By Income Statement Caption
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
|||||||||||||
|
Sales to customers
(3)
|
$
|
40
|
|
(39
|
)
|
(34
|
)
|
(29
|
)
|
(1
|
)
|
(1
|
)
|
||||||
|
Cost of products sold
(3)
|
105
|
|
(226
|
)
|
(162
|
)
|
5
|
|
(11
|
)
|
(10
|
)
|
|||||||
|
Research and development expense
(3)
|
(167
|
)
|
(100
|
)
|
(131
|
)
|
(98
|
)
|
5
|
|
—
|
|
|||||||
|
Interest (income)/Interest expense, net
(4)
|
73
|
|
38
|
|
63
|
|
27
|
|
—
|
|
—
|
|
|||||||
|
Other (income) expense, net
(3) (5)
|
(59
|
)
|
(110
|
)
|
(86
|
)
|
(14
|
)
|
—
|
|
(3
|
)
|
|||||||
|
Total
|
$
|
(8
|
)
|
(437
|
)
|
(350
|
)
|
(109
|
)
|
(7
|
)
|
(14
|
)
|
||||||
All amounts shown in the table above are net of tax.
(1) Effective portion
(2) Ineffective portion
(3) Forward foreign exchange contracts
(4) Cross currency interest rate swaps
(5) Includes equity collar contracts
For the fiscal
third
quarters ended
October 1, 2017
and
October 2, 2016
, a loss of
$12 million
and gain
$35 million
, respectively, was recognized in Other (income) expense, net, relating to forward foreign exchange contracts not designated as hedging instruments.
For the
fiscal nine months
ended
October 1, 2017
and
October 2, 2016
, a gain of
$22 million
and a loss of
$6 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.
11
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
October 1, 2017
and
January 1, 2017
were as follows:
|
|
October 1, 2017
|
|
January 1, 2017
|
|||||||||||||
|
(Dollars in Millions)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Total
(1)
|
|||||||||||
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|||||||||||
|
Assets:
|
|
|
|
|
|
|||||||||||
|
Forward foreign exchange contracts
(7)
|
$
|
—
|
|
556
|
|
—
|
|
556
|
|
747
|
|
|||||
|
Interest rate contracts
(2)(4)(7)
|
—
|
|
16
|
|
—
|
|
16
|
|
31
|
|
||||||
|
Total
|
—
|
|
572
|
|
—
|
|
572
|
|
778
|
|
||||||
|
Liabilities:
|
|
|
|
|
|
|||||||||||
|
Forward foreign exchange contracts
(8)
|
—
|
|
292
|
|
—
|
|
292
|
|
723
|
|
||||||
|
Interest rate contracts
(3)(4)(8)
|
—
|
|
210
|
|
—
|
|
210
|
|
382
|
|
||||||
|
Equity collar contracts
(8)
|
—
|
|
6
|
|
—
|
|
6
|
|
57
|
|
||||||
|
Total
|
—
|
|
508
|
|
—
|
|
508
|
|
1,162
|
|
||||||
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|||||||||||
|
Assets:
|
|
|
|
|
|
|||||||||||
|
Forward foreign exchange contracts
(7)
|
—
|
|
38
|
|
—
|
|
38
|
|
34
|
|
||||||
|
Liabilities:
|
|
|
|
|
|
|||||||||||
|
Forward foreign exchange contracts
(8)
|
—
|
|
72
|
|
—
|
|
72
|
|
57
|
|
||||||
|
Available For Sale Other Investments:
|
||||||||||||||||
|
Equity investments
(5)
|
920
|
|
—
|
|
—
|
|
920
|
|
1,209
|
|
||||||
|
Debt securities
(6)
|
$
|
—
|
|
3,044
|
|
—
|
|
3,044
|
|
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
$10 million
and
$23 million
of non-current other assets for
October 1, 2017
and January 1, 2017, respectively.
|
|
(3)
|
Includes
$210 million
and
$382 million
of non-current other liabilities for
October 1, 2017
and January 1, 2017, respectively.
|
|
(4)
|
Includes cross currency interest rate swaps and interest rate swaps.
|
|
(5)
|
Classified as non-current other assets with the exception of
$46 million
of current assets for
October 1, 2017
. The original cost of the equity investments were
$506 million
and
$520 million
as of
October 1, 2017
and January 1, 2017, respectively. The unrealized gains were
$414 million
and
$757 million
as of
October 1, 2017
and January 1, 2017, respectively. The unrealized losses were less than
$1 million
and
$68 million
as of
October 1, 2017
and January 1, 2017, respectively.
|
|
(6)
|
Classified as cash equivalents and current marketable securities.
|
|
(7)
|
Classified as other current assets, including the net effect of the CSA
|
|
(8)
|
Classified as accounts payable, including the net effect of the CSA.
|
12
The Company's cash, cash equivalents and current marketable securities as of
October 1, 2017
comprised:
|
October 1, 2017
|
||||||||||||||||||
|
(Dollars in Millions)
|
Carrying Amount
|
Unrecognized Gain
|
Unrecognized Loss
|
Estimated Fair Value
|
Cash & Cash Equivalents
|
Current Marketable Securities
|
||||||||||||
|
Cash
|
$
|
2,813
|
|
—
|
|
—
|
|
2,813
|
|
2,813
|
|
|||||||
|
U.S. Gov't Securities
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
||||||
|
Other Sovereign Securities
(1)
|
1,109
|
|
—
|
|
—
|
|
1,109
|
|
799
|
|
310
|
|
||||||
|
U.S. Reverse repurchase agreements
|
4,602
|
|
—
|
|
—
|
|
4,602
|
|
4,602
|
|
|
|||||||
|
Other Reverse repurchase agreements
|
491
|
|
—
|
|
—
|
|
491
|
|
491
|
|
||||||||
|
Corporate debt securities
(1)
|
1,957
|
|
—
|
|
—
|
|
1,957
|
|
1,952
|
|
5
|
|
||||||
|
Money market funds
|
1,078
|
|
—
|
|
—
|
|
1,078
|
|
1,078
|
|
||||||||
|
Time deposits
(1)
|
1,091
|
|
—
|
|
—
|
|
1,091
|
|
1,091
|
|
||||||||
|
Subtotal
|
13,141
|
|
—
|
|
—
|
|
13,141
|
|
12,826
|
|
315
|
|
||||||
|
Unrealized Gain
|
Unrealized Loss
|
|||||||||||||||||
|
Gov't securities
|
2,906
|
|
—
|
|
—
|
|
2,906
|
|
2,876
|
|
30
|
|
||||||
|
Other Sovereign Securities
|
9
|
|
—
|
|
—
|
|
9
|
|
—
|
|
9
|
|
||||||
|
Corporate debt securities
|
129
|
|
—
|
|
—
|
|
129
|
|
19
|
|
110
|
|
||||||
|
Equity investments
|
6
|
|
40
|
|
|
|
46
|
|
—
|
|
46
|
|
||||||
|
Subtotal Available for Sale
(2)
|
$
|
3,050
|
|
40
|
|
—
|
|
3,090
|
|
2,895
|
|
195
|
|
|||||
|
Total cash, cash equivalents and current marketable securities
|
|
|
|
|
|
|
|
|
15,721
|
|
510
|
|
||||||
(1)
Held to maturity investments are reported at amortized cost and 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 was estimated using quoted broker prices and significant other observable inputs.
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. Available for sale securities with stated maturities of greater than one year from the date of purchase are available for current operations and are classified as cash equivalents and current marketable securities.
The excess of the estimated fair value over the carrying value of cash equivalents and current marketable securities was
$0.2 billion
at January 1, 2017.
The contractual maturities of the available for sale securities at
October 1, 2017
are as follows:
|
(Dollars in Millions)
|
Cost Basis
|
Fair Value
|
|||||
|
Due within one year
|
$
|
2,974
|
|
2,974
|
|
||
|
Due after one year through five years
|
70
|
|
70
|
|
|||
|
Due after five years through ten years
|
—
|
|
—
|
|
|||
|
Total debt securities
|
$
|
3,044
|
|
3,044
|
|
||
13
Financial Instruments not measured at Fair Value:
The following financial liabilities are held at carrying amount on the consolidated balance sheet as of
October 1, 2017
:
|
(Dollars in Millions)
|
Carrying Amount
|
Estimated Fair Value
|
|||||
|
Financial Liabilities
|
|
|
|||||
|
Current Debt
|
$
|
8,491
|
|
8,491
|
|
||
|
Non-Current Debt
|
|
|
|||||
|
1.65% Notes due 2018
|
601
|
|
602
|
|
|||
|
4.75% Notes due 2019 (1B Euro 1.1777)
|
1,175
|
|
1,299
|
|
|||
|
1.875% Notes due 2019
|
501
|
|
506
|
|
|||
|
0.89% Notes due 2019
|
300
|
|
301
|
|
|||
|
1.125% Notes due 2019
|
699
|
|
696
|
|
|||
|
3% Zero Coupon Convertible Subordinated Debentures due in 2020
|
68
|
|
121
|
|
|||
|
2.95% Debentures due 2020
|
547
|
|
567
|
|
|||
|
3.55% Notes due 2021
|
448
|
|
480
|
|
|||
|
2.45% Notes due 2021
|
349
|
|
358
|
|
|||
|
1.65% Notes due 2021
|
998
|
|
991
|
|
|||
|
0.250% Notes due 2022 (1B Euro 1.1777)
|
1,174
|
|
1,183
|
|
|||
|
2.25% Notes due 2022
|
995
|
|
1,005
|
|
|||
|
6.73% Debentures due 2023
|
250
|
|
310
|
|
|||
|
3.375% Notes due 2023
|
806
|
|
853
|
|
|||
|
2.05% Notes due 2023
|
497
|
|
494
|
|
|||
|
0.650% Notes due 2024 (750MM Euro 1.1777)
|
879
|
|
887
|
|
|||
|
5.50% Notes due 2024 (500 MM GBP 1.3415)
|
665
|
|
842
|
|
|||
|
2.45% Notes due 2026
|
1,990
|
|
1,958
|
|
|||
|
2.95% Notes due 2027
|
995
|
|
1,010
|
|
|||
|
1.150% Notes due 2028 (750MM Euro 1.1777)
|
874
|
|
888
|
|
|||
|
6.95% Notes due 2029
|
296
|
|
409
|
|
|||
|
4.95% Debentures due 2033
|
498
|
|
601
|
|
|||
|
4.375% Notes due 2033
|
856
|
|
976
|
|
|||
|
1.650% Notes due 2035 (1.5B Euro 1.1777)
|
1,748
|
|
1,798
|
|
|||
|
3.55% Notes due 2036
|
987
|
|
1,024
|
|
|||
|
5.95% Notes due 2037
|
991
|
|
1,348
|
|
|||
|
3.625% Notes due 2037
|
1,485
|
|
1,558
|
|
|||
|
5.85% Debentures due 2038
|
696
|
|
934
|
|
|||
|
4.50% Debentures due 2040
|
537
|
|
634
|
|
|||
|
4.85% Notes due 2041
|
296
|
|
357
|
|
|||
|
4.50% Notes due 2043
|
495
|
|
570
|
|
|||
|
3.70% Notes due 2046
|
1,971
|
|
2,058
|
|
|||
|
3.75% Notes due 2047
|
990
|
|
1,038
|
|
|||
|
Other
|
18
|
|
19
|
|
|||
|
Total Non-Current Debt
|
$
|
26,675
|
|
28,675
|
|
||
The weighted average effective interest rate on non-current debt is
3.20%
.
14
The excess of the estimated fair value over the carrying value of debt was
$1.6 billion
at January 1, 2017.
Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.
NOTE 5 — INCOME TAXES
The worldwide effective income tax rates for the
fiscal nine months
of
2017
and
2016
were
20.5%
and
17.8%
, respectively. The Company completed its acquisition of AMO in the first fiscal quarter of 2017, and incurred incremental tax costs that were discretely recorded in the first quarter, which has increased the effective tax rate by
1.4%
for the first nine months of 2017 compared to the same period in 2016. Additionally, the Company had more income in higher tax jurisdictions relative to lower tax jurisdictions as compared to 2016. These increases to the effective tax rate were partially offset by additional tax benefits received from stock-based compensation that either vested or were exercised during the fiscal nine months of 2017 and 2016, which reduced the effective tax rate by
2.1%
and
2.2%
, respectively.
As of
October 1, 2017
, the Company had approximately
$3.3 billion
of liabilities from unrecognized tax benefits. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months. The Company is not able to provide a reasonably reliable estimate of the timing of any future tax payments relating to uncertain tax positions.
NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal
third
quarters of
2017
and
2016
include the following components:
|
Fiscal Third Quarters Ended
|
|||||||||||||
|
|
Retirement Plans
|
Other Benefit Plans
|
|||||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
|||||||||
|
Service cost
|
$
|
266
|
|
224
|
|
62
|
|
56
|
|
||||
|
Interest cost
|
232
|
|
232
|
|
40
|
|
39
|
|
|||||
|
Expected return on plan assets
|
(514
|
)
|
(490
|
)
|
(2
|
)
|
(1
|
)
|
|||||
|
Amortization of prior service cost/(credit)
|
1
|
|
2
|
|
(8
|
)
|
(9
|
)
|
|||||
|
Recognized actuarial losses
|
154
|
|
123
|
|
34
|
|
33
|
|
|||||
|
Curtailments and settlements
|
2
|
|
6
|
|
—
|
|
—
|
|
|||||
|
Net periodic benefit cost
|
$
|
141
|
|
97
|
|
126
|
|
118
|
|
||||
15
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the
fiscal nine months
of
2017
and
2016
include the following components:
|
Fiscal Nine Months Ended
|
|||||||||||||
|
|
Retirement Plans
|
Other Benefit Plans
|
|||||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
|||||||||
|
Service cost
|
$
|
772
|
|
676
|
|
185
|
|
166
|
|
||||
|
Interest cost
|
693
|
|
698
|
|
119
|
|
118
|
|
|||||
|
Expected return on plan assets
|
(1,528
|
)
|
(1,475
|
)
|
(5
|
)
|
(4
|
)
|
|||||
|
Amortization of prior service cost/(credit)
|
2
|
|
2
|
|
(23
|
)
|
(25
|
)
|
|||||
|
Recognized actuarial losses
|
456
|
|
371
|
|
103
|
|
101
|
|
|||||
|
Curtailments and settlements
|
1
|
|
11
|
|
—
|
|
—
|
|
|||||
|
Net periodic benefit cost
|
$
|
396
|
|
283
|
|
379
|
|
356
|
|
||||
Company Contributions
For the
fiscal nine months
ended
October 1, 2017
, the Company contributed
$51 million
and
$30 million
to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
|
|
Foreign
|
Gain/(Loss)
|
Employee
|
Gain/(Loss)
|
Total Accumulated
|
|||||||||||
|
Currency
|
On
|
Benefit
|
On Derivatives
|
Other Comprehensive
|
||||||||||||
|
(Dollars in Millions)
|
Translation
|
Securities
|
Plans
|
& Hedges
|
Income (Loss)
|
|||||||||||
|
January 1, 2017
|
$
|
(9,047
|
)
|
411
|
|
(5,980
|
)
|
(285
|
)
|
(14,901
|
)
|
|||||
|
Net change
|
1,597
|
|
(142
|
)
|
357
|
|
342
|
|
2,154
|
|
||||||
|
October 1, 2017
|
$
|
(7,450
|
)
|
269
|
|
(5,623
|
)
|
57
|
|
(12,747
|
)
|
|||||
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 6 for additional details.
Gain/(Loss) On Derivatives & Hedges - reclassifications to earnings are recorded in the same account as the underlying transaction. See Note 4 for additional details.
16
NOTE 8 — EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal
third
quarters ended
October 1, 2017
and
October 2, 2016
:
|
|
Fiscal Third Quarters Ended
|
||||||
|
(Shares in Millions)
|
October 1, 2017
|
October 2, 2016
|
|||||
|
Basic net earnings per share
|
$
|
1.40
|
|
1.56
|
|
||
|
Average shares outstanding — basic
|
2,684.6
|
|
2,731.6
|
|
|||
|
Potential shares exercisable under stock option plans
|
139.3
|
|
140.8
|
|
|||
|
Less: shares which could be repurchased under treasury stock method
|
(87.2
|
)
|
(88.4
|
)
|
|||
|
Convertible debt shares
|
1.0
|
|
1.4
|
|
|||
|
Average shares outstanding — diluted
|
2,737.7
|
|
2,785.4
|
|
|||
|
Diluted net earnings per share
|
$
|
1.37
|
|
1.53
|
|
||
The diluted net earnings per share calculation for both the fiscal
third
quarters ended
October 1, 2017
and
October 2, 2016
included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.
The diluted net earnings per share calculation for both the fiscal
third
quarters ended
October 1, 2017
and
October 2, 2016
included all shares related to stock options, as there were
no
options or other instruments which were anti-dilutive.
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the
fiscal nine months
ended
October 1, 2017
and
October 2, 2016
:
|
|
Fiscal Nine Months Ended
|
||||||
|
(Shares in Millions)
|
October 1, 2017
|
October 2, 2016
|
|||||
|
Basic net earnings per share
|
$
|
4.46
|
|
4.64
|
|
||
|
Average shares outstanding — basic
|
2,694.4
|
|
2,744.9
|
|
|||
|
Potential shares exercisable under stock option plans
|
141.2
|
|
144.0
|
|
|||
|
Less: shares which could be repurchased under treasury stock method
|
(90.2
|
)
|
(93.7
|
)
|
|||
|
Convertible debt shares
|
1.0
|
|
1.4
|
|
|||
|
Average shares outstanding — diluted
|
2,746.4
|
|
2,796.6
|
|
|||
|
Diluted net earnings per share
|
$
|
4.37
|
|
4.55
|
|
||
The diluted net earnings per share calculation for both the
fiscal nine months
ended
October 1, 2017
and
October 2, 2016
included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.
The diluted net earnings per share calculation for both the
fiscal nine months
ended
October 1, 2017
and
October 2, 2016
included all shares related to stock options, as there were
no
options or other instruments which were anti-dilutive.
17
NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS
|
|
Fiscal Third Quarters Ended
|
|||||||||
|
(Dollars in Millions)
|
October 1,
2017 |
October 2,
2016 |
Percent
Change
|
|||||||
|
Consumer
|
|
|
|
|||||||
|
United States
|
$
|
1,285
|
|
1,291
|
|
(0.5
|
)%
|
|||
|
International
|
2,071
|
|
1,970
|
|
5.1
|
|
||||
|
Total
|
3,356
|
|
3,261
|
|
2.9
|
|
||||
|
Pharmaceutical
|
|
|
||||||||
|
United States
|
5,816
|
|
5,042
|
|
15.4
|
|
||||
|
International
|
3,879
|
|
3,358
|
|
15.5
|
|
||||
|
Total
|
9,695
|
|
8,400
|
|
15.4
|
|
||||
|
Medical Devices
|
|
|
||||||||
|
United States
|
3,189
|
|
3,048
|
|
4.6
|
|
||||
|
International
|
3,410
|
|
3,111
|
|
9.6
|
|
||||
|
Total
|
6,599
|
|
6,159
|
|
7.1
|
|
||||
|
Worldwide
|
|
|
|
|||||||
|
United States
|
10,290
|
|
9,381
|
|
9.7
|
|
||||
|
International
|
9,360
|
|
8,439
|
|
10.9
|
|
||||
|
Total
|
$
|
19,650
|
|
17,820
|
|
10.3
|
%
|
|||
|
|
Fiscal Nine Months Ended
|
|||||||||
|
(Dollars in Millions)
|
October 1,
2017 |
October 2,
2016 |
Percent
Change
|
|||||||
|
Consumer
|
|
|
|
|||||||
|
United States
|
$
|
4,186
|
|
4,033
|
|
3.8
|
%
|
|||
|
International
|
5,876
|
|
5,842
|
|
0.6
|
|
||||
|
Total
|
10,062
|
|
9,875
|
|
1.9
|
|
||||
|
Pharmaceutical
|
|
|
||||||||
|
United States
|
15,698
|
|
15,123
|
|
3.8
|
|
||||
|
International
|
10,877
|
|
10,109
|
|
7.6
|
|
||||
|
Total
|
26,575
|
|
25,232
|
|
5.3
|
|
||||
|
Medical Devices
|
|
|
||||||||
|
United States
|
9,510
|
|
9,118
|
|
4.3
|
|
||||
|
International
|
10,108
|
|
9,559
|
|
5.7
|
|
||||
|
Total
|
19,618
|
|
18,677
|
|
5.0
|
|
||||
|
Worldwide
|
|
|
|
|||||||
|
United States
|
29,394
|
|
28,274
|
|
4.0
|
|
||||
|
International
|
26,861
|
|
25,510
|
|
5.3
|
|
||||
|
Total
|
$
|
56,255
|
|
53,784
|
|
4.6
|
%
|
|||
18
INCOME BEFORE TAX BY SEGMENT
|
|
Fiscal Third Quarters Ended
|
|||||||||
|
(Dollars in Millions)
|
October 1,
2017 |
October 2,
2016 |
Percent
Change
|
|||||||
|
Consumer
(1)
|
$
|
878
|
|
679
|
|
29.3
|
%
|
|||
|
Pharmaceutical
(2)
|
2,857
|
|
3,309
|
|
(13.7
|
)
|
||||
|
Medical Devices
(3)
|
1,383
|
|
1,526
|
|
(9.4
|
)
|
||||
|
Segments operating profit
|
5,118
|
|
5,514
|
|
(7.2
|
)
|
||||
|
Less: Expense not allocated to segments
(4)
|
328
|
|
233
|
|
|
|||||
|
Worldwide income before tax
|
$
|
4,790
|
|
5,281
|
|
(9.3
|
)%
|
|||
|
Fiscal Nine Months Ended
|
||||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Percent
Change
|
|||||||
|
Consumer
(1)
|
$
|
2,132
|
|
1,816
|
|
17.4
|
%
|
|||
|
Pharmaceutical
(2)
|
9,934
|
|
10,340
|
|
(3.9
|
)
|
||||
|
Medical Devices
(3)
|
3,938
|
|
4,041
|
|
(2.5
|
)
|
||||
|
Segments operating profit
|
16,004
|
|
16,197
|
|
(1.2
|
)
|
||||
|
Less: Expense not allocated to segments
(4)
|
891
|
|
718
|
|
|
|||||
|
Worldwide income before taxes
|
$
|
15,113
|
|
15,479
|
|
(2.4
|
)%
|
|||
(1) Includes a gain of
$0.4 billion
from the divestiture of COMPEED
®
(2) Includes a positive adjustment of
$0.5 billion
to previous reserve estimates in the fiscal nine months of 2016. Includes acquisition costs related to the Actelion acquisition of
$0.4 billion
and
$0.6 billion
in the fiscal third quarter and fiscal nine months of 2017, respectively. Includes a gain of
$0.2 billion
related to monetization of future royalty receivables in the fiscal nine months of 2017. Includes a gain of
$0.3 billion
and
$0.2 billion
in the fiscal nine months of 2017 and 2016, respectively, related to the sale of certain investments in equity securities held by Johnson & Johnson Innovation - JJDC, Inc.
(3) Includes a restructuring related charge of
$0.2 billion
and
$0.1 billion
in the fiscal third quarters of 2017 and 2016, respectively. Includes a restructuring related charge of
$0.5 billion
and
$0.4 billion
in the fiscal nine months of 2017 and 2016, respectively. Includes litigation expense of
$0.1 billion
and
$0.1 billion
in the fiscal third quarter of 2017 and 2016, respectively. Includes litigation expense of
$0.5 billion
and
$0.7 billion
in the fiscal nine months of 2017 and 2016, respectively. Includes an asset impairment of
$0.2 billion
primarily related to the insulin pump business in the fiscal nine months of 2017.
(4) Amounts not allocated to segments include interest income/expense and general corporate income/expense.
19
SALES BY GEOGRAPHIC AREA
|
|
Fiscal Third Quarters Ended
|
|||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Percent
Change
|
|||||||
|
United States
|
$
|
10,290
|
|
9,381
|
|
9.7
|
%
|
|||
|
Europe
|
4,308
|
|
3,832
|
|
12.4
|
|
||||
|
Western Hemisphere, excluding U.S.
|
1,569
|
|
1,396
|
|
12.4
|
|
||||
|
Asia-Pacific, Africa
|
3,483
|
|
3,211
|
|
8.5
|
|
||||
|
Total
|
$
|
19,650
|
|
17,820
|
|
10.3
|
%
|
|||
|
|
Fiscal Nine Months Ended
|
|||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Percent
Change
|
|||||||
|
United States
|
$
|
29,394
|
|
28,274
|
|
4.0
|
%
|
|||
|
Europe
|
12,398
|
|
11,769
|
|
5.3
|
|
||||
|
Western Hemisphere, excluding U.S.
|
4,522
|
|
4,269
|
|
5.9
|
|
||||
|
Asia-Pacific, Africa
|
9,941
|
|
9,472
|
|
5.0
|
|
||||
|
Total
|
$
|
56,255
|
|
53,784
|
|
4.6
|
%
|
|||
NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES
Subsequent to the quarter, on October 2, 2017 the Company completed the divestiture of the Codman Neurosurgery business, to Integra LifeSciences Holdings Corporation for approximately
$1.0 billion
. As of October 1, 2017, the assets held for sale were
$63 million
of inventory, classified as prepaid expenses and other on the Consolidated Balance Sheet. The non-current assets classified as held for sale were
$33 million
of property, plant and equipment, net and
$106 million
of goodwill, classified as other assets on the Consolidated Balance Sheet.
During the fiscal third quarter of 2017, the Company completed the acquisitions of TearScience Inc., a manufacturer of products dedicated to treating meibomian gland dysfunction and 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. Additionally, during the fiscal third quarter of 2017, the Company completed the divestiture of COMPEED
®
to HRA Pharma.
On June 16, 2017, the Company completed the acquisition of Actelion Ltd through an all cash tender offer in Switzerland for
$280
per share, payable in U.S. dollars. As of October 1, 2017, the Company paid
$29.1 billion
, net of cash acquired, representing
98.4%
of the shares to which the offer was extended. The Company recorded a current liability of
$0.5 billion
for the shares not tendered as of October 1, 2017, which the Company expects to pay by the end of 2017 as it takes steps to acquire the remaining outstanding shares of Actelion. The liability decreased by approximately
$0.2 billion
from the second quarter based on the tendered shares in the third quarter. 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
ten
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 acquired an option 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 October 1, 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.
20
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 as of the acquisition date as well as the adjustments made up to October 1, 2017:
|
(Dollars in Millions)
|
June 16, 2017
|
|
October 1, 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
|
|
5,757
|
|
|
|
Intangible assets
|
25,010
|
|
25,010
|
|
|
|
Deferred Taxes
|
3
|
|
3
|
|
|
|
Other non-current assets
|
19
|
|
19
|
|
|
|
Total Assets Acquired
|
32,928
|
|
32,699
|
|
|
|
Current liabilities
|
531
|
|
531
|
|
|
|
Deferred Taxes
|
1,960
|
|
1,731
|
|
|
|
Other non-current liabilities
|
383
|
|
383
|
|
|
|
Total Liabilities Assumed
|
2,874
|
|
2,645
|
|
|
|
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 with the offset to goodwill.
The assets acquired are recorded in the Pharmaceutical segment. The acquisition of Actelion resulted in approximately
$5.8 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%
.
21
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. Total sales and a net loss for Actelion for the third quarter ended October 1, 2017 were
$670 million
and
$552 million
, respectively. Total sales and a net loss for Actelion since the date of acquisition were
$761 million
and
$668 million
, respectively.
The following table provides pro forma results of operations for the fiscal third quarters and the fiscal nine months ended October 1, 2017 and October 2, 2016, 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
|
|||||||||
|
Fiscal Nine Months Ended
|
Fiscal Third Quarters Ended
|
||||||||
|
(Dollars in Millions Except Per Share Data)
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
|||||
|
Net Sales
|
57,486
|
|
55,606
|
|
19,650
|
|
18,441
|
|
|
|
Net Earnings
|
11,909
|
|
10,760
|
|
4,019
|
|
3,885
|
|
|
|
Diluted Net Earnings per Common Share
|
4.34
|
|
3.85
|
|
1.47
|
|
1.39
|
|
|
In the fiscal third quarter and fiscal nine months of 2017, the Company recorded acquisition related costs, of approximately
$0.4 billion
and
$0.6 billion
before tax, which was recorded in Other (income)/expense and Cost of products sold.
Additionally, during the fiscal second quarter of 2017, the Company completed the acquisition of Neuravi Limited, a privately-held medical device company that develops and markets medical devices for neurointerventional therapy.
During the fiscal first quarter of 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
$1.8 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 preliminary purchase price allocation which is under review by the Company and is subject to change. The assets acquired were recorded in the Medical Devices segment.
Additionally, during the fiscal first quarter of 2017, the Company completed the acquisitions of 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.
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. Subsequent to the fiscal third 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 October 1, 2017 related to the announcement.
During the fiscal third quarter of 2016, the Company completed the acquisition of 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 for
$3.3 billion
in cash. The net purchase price 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 customer relationship asset values were determined to have definite
22
lives of
15 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.
During the fiscal second quarter of 2016, the Company completed the acquisitions of NeuWave Medical, Inc., a privately-held medical device company that manufactures and markets minimally invasive soft tissue microwave ablation systems and NeoStrata Company, Inc., a global leader in dermocosmetics. Additionally, during the fiscal second quarter of 2016, the Company completed the divestiture of its controlled substance raw material and active pharmaceutical ingredient (API) business. The proceeds from the divestiture were
$0.6 billion
.
NOTE 11 — LEGAL PROCEEDINGS
Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of their business.
The Company records accruals for 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
October 1, 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
October 1, 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;
9,900
with respect to the PINNACLE
®
Acetabular Cup System;
54,300
with respect to pelvic meshes;
13,900
with respect to RISPERDAL
®;
21,400
with respect to XARELTO
®;
5,500
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
23
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. 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 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 Southern District of West Virginia. 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 has commenced and a decision is expected in 2018. The Company has established an accrual 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.
24
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 U.S. 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.
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; 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 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.
25
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 9,578,590. 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.
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, which issued a decision in November 2016 upholding the examiner's rejection. JBI filed an appeal to the United States Court of Appeals for the Federal Circuit, and oral argument was heard in October, 2017.
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. This case has been designated a companion case to the appeal of the reexamination of the ’471 patent described above, and were heard by the same panel of judges at the Federal Circuit in October, 2017.
In June 2016, JBI filed two additional patent infringement lawsuits asserting the ’083 patent, one against Celltrion 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. The trial has been postponed pending resolution of these motions. 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
26
may infringe three of JBI’s patents. In July 2017, Samsung launched its biosimilar product (commercialized by Merck) in the United States.
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
®
before the expiration of United States Patent No. 8,822,438 (the ’438 patent). The generic companies currently include Actavis Laboratories, FL, Inc. (Actavis); 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). The October 2017 trial date has been postponed pending continued pretrial activities through the first quarter 2018.
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
®
before the expiration of the '438 patent.
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 have filed Petitions for Inter Partes Review (IPR) with the USPTO, seeking to invalidate the ’438 patent. The Company is awaiting final written decisions in all of the IPRs.
In October 2017, Janssen Inc. and Janssen Oncology, Inc. (collectively, Janssen) initiated a Notice 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 an Abbreviated New Drug Submission (ANDS) and seeking approval to market a generic version of ZYTIGA
®
before the expiration of Canadian Patent No. 2,661,422. Janssen is seeking an order prohibiting the Minister of Health from issuing a Notice of Compliance with respect to Teva's ANDS before the expiration of Janssen's patent.
27
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. A trial in the Delaware action has been scheduled for February 2018.
In each of these lawsuits, Janssen is seeking an order enjoining the defendants from marketing their generic versions of COMPLERA
®
before the expiration of the relevant patents.
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 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.
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. Janssen is also seeking an order enjoining Aurobindo from marketing its generic version of PREZISTA
®
before the expiration of the 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. A decision by the USPTO is expected in November 2017.
28
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.; Aurobindo Pharma USA Inc.; Macleods Pharmaceuticals Ltd.; 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) and Teva Pharmaceuticals USA, 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
®
. Janssen is the exclusive licensee of the asserted patents.
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.
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.
29
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 Mississippi, Missouri, New Mexico, Ohio and Oklahoma. Complaints against the manufacturers also have been filed in state or federal court by over 75 city, county and local government agencies in the following states: California; Connecticut; Illinois; Kentucky; Louisiana; Mississippi; Missouri; New Hampshire; New Mexico; New York; Ohio; Oklahoma; Oregon; Pennsylvania; 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.
Johnson & Johnson, JPI and other pharmaceutical companies have also received subpoenas or requests for information related to opioids marketing practices from four state Attorneys General: 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. 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. 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 for a total payment of
$4 million
to 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 44 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.
30
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. received a Civil Investigative Demand from the United States Department of Justice relating to allegations concerning the sales and marketing practices of OLYSIO
®
.
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 2017, Johnson & Johnson received a subpoena from the United States Attorney for the District of Massachusetts seeking documents broadly relating to pharmaceutical copayment support programs for OLYSIO
®
, SIMPONI
®
and STELARA
®
. The subpoena also seeks 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.
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. 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
31
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 there is currently no date set for that hearing. 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 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.
32
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 September 2017, National Employees Health Plan (NEHP) filed a putative class action against Johnson & Johnson and Janssen Biotech, Inc. (collectively Janssen) in United States District Court for the Eastern District of Pennsylvania. NEHP alleges that Janssen has violated federal and state antitrust and consumer laws through its contracting strategies for REMICADE
®
. The complaint seeks damages and injunctive relief. In October 2017, a second putative class action was filed against Janssen by UFCW Local 1500 Welfare Fund in United States District Court for the Eastern District of Pennsylvania. The second complaint also seeks damages and injunctive relief.
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.
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.
33
NOTE 12— 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 and other charges of approximately
$2.0 billion
to
$2.4 billion
. In the fiscal nine months of 2017, the Company recorded a pre-tax charge of
$476 million
, of which
$46 million
was included in cost of products sold and
$265 million
was included in other (income) expense. In the fiscal third quarter of 2017, the Company recorded a pre-tax charge of
$187 million
, of which
$29 million
was included in cost of products sold and
$89 million
was included in other (income) expense. In the fiscal second quarter of 2017, the Company recorded a
$90 million
accrual adjustment to the severance reserve due to higher voluntary separation than anticipated. See the following table for additional details. Total project costs of
$1.8 billion
have been recorded since the restructuring announcement.
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
2,200
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 related reserves and the associated spending under this initiative through the fiscal nine months of 2017:
|
(Dollars in Millions)
|
Severance
|
Asset Write-offs
|
Other**
|
Total
|
|||||
|
Reserve balance, January 1, 2017
|
$
|
380
|
|
—
|
|
1
|
|
381
|
|
|
Current year activity:
|
|
|
|
|
|||||
|
Charges
|
—
|
|
140
|
|
426
|
|
566
|
|
|
|
Cash payments
|
(45
|
)
|
—
|
|
(423
|
)
|
(468
|
)
|
|
|
Settled non cash
|
—
|
|
(140
|
)
|
—
|
|
(140
|
)
|
|
|
Accrual adjustment
|
(90
|
)
|
—
|
|
—
|
|
(90
|
)
|
|
|
Reserve balance, October 1, 2017*
|
$
|
245
|
|
—
|
|
4
|
|
249
|
|
*Cash outlays for severance are expected to be substantially paid out over the next 2 years 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.
34
Item 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Analysis of Consolidated Sales
For the
fiscal nine months
of
2017
, worldwide sales were $56.3 billion, a total increase of 4.6%, including operational growth of 4.8% as compared to
2016
fiscal nine months
sales of $53.8 billion. Currency fluctuations had a negative impact of 0.2% for the
fiscal nine months
of
2017
. In the
fiscal nine months
of 2017, the net impact of acquisitions and divestitures on worldwide operational sales growth was a positive 3.0%.
Sales by U.S. companies were $29.4 billion in the
fiscal nine months
of
2017
, which represented an increase of 4.0% as compared to the prior year. In the
fiscal nine months
of 2017, the net impact of acquisitions and divestitures on the U.S. operational sales growth was a positive 3.3%. Sales by international companies were $26.9 billion, an increase of 5.3%, including operational growth of 5.8%, partially offset by a negative currency impact of 0.5% as compared to the
fiscal nine months
sales of
2016
. In the
fiscal nine months
of 2017, the net impact of acquisitions and divestitures on the international operational sales growth was a positive 2.8%.
In the
fiscal nine months
of 2017, sales by companies in Europe achieved growth of 5.3%, which included operational growth of 6.2% and a negative currency impact of 0.9%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 5.9%, which included operational growth of 3.1%, and a positive currency impact of 2.8%. Sales by companies in the Asia-Pacific, Africa region achieved growth of 5.0%, including operational growth of 6.4% partially offset by a negative currency impact of 1.4%.
For the fiscal
third
quarter of
2017
, worldwide sales were $19.7 billion, a total increase of 10.3%, including operational growth of 9.5% as compared to
2016
fiscal
third
quarter sales of $17.8 billion. Currency fluctuations had a positive impact of 0.8% for the fiscal
third
quarter of
2017
. In the fiscal
third
quarter of 2017, the net impact of acquisitions and divestitures on worldwide operational sales growth was a positive 5.7%.
Sales by U.S. companies were $10.3 billion in the fiscal
third
quarter of
2017
, which represented an increase of 9.7% as compared to the prior year. In the fiscal
third
quarter of 2017, the net impact of acquisitions and divestitures on the U.S. operational sales growth was a positive 5.9%. Sales by international companies were $9.4 billion, an increase of 10.9%, including operational growth of 9.3%, and a positive currency impact of 1.6% as compared to the fiscal
third
quarter sales of
2016
. In the fiscal
third
quarter of 2017, the net impact of acquisitions and divestitures on the international operational sales growth was a positive 5.5%.
In the fiscal
third
quarter of 2017, sales by companies in Europe achieved growth of 12.4%, which included operational growth of 7.9% and a positive currency impact of 4.5%. Sales by companies in the Western Hemisphere, excluding the U.S., achieved growth of 12.4%, which included operational growth of 10.1%, and a positive currency impact of 2.3%. Sales by companies in the Asia-Pacific, Africa region achieved growth of 8.5%, including operational growth of 10.6% partially offset by a negative currency impact of 2.1%.
35
ANALYSIS OF SALES BY BUSINESS SEGMENTS
Consumer
Consumer segment sales in the
fiscal nine months
of 2017 were $10.1 billion, an increase of 1.9% as compared to the same period a year ago, including operational growth of 1.6% and a positive currency impact of 0.3%. U.S. Consumer segment sales increased by 3.8%. International Consumer segment sales increased by 0.6%, including an operational increase of 0.2% and a positive currency impact of 0.4%. In the
fiscal nine months
of 2017, the impact of acquisitions and divestitures on the Consumer segment operational sales growth was a positive 2.3%.
Major Consumer Franchise Sales* —
Fiscal Nine Months Ended
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Total
Change |
Operations
Change |
Currency
Change |
||||||||||||
|
Beauty
|
$
|
3,090
|
|
$
|
2,834
|
|
9.0
|
%
|
8.9
|
%
|
0.1
|
%
|
|||||
|
OTC
|
3,021
|
|
2,938
|
|
2.8
|
|
2.6
|
|
0.2
|
|
|||||||
|
Baby Care
|
1,426
|
|
1,508
|
|
(5.4
|
)
|
(5.4
|
)
|
0.0
|
|
|||||||
|
Oral Care
|
1,138
|
|
1,171
|
|
(2.8
|
)
|
(3.0
|
)
|
0.2
|
|
|||||||
|
Women’s Health
|
788
|
|
803
|
|
(1.9
|
)
|
(3.5
|
)
|
1.6
|
|
|||||||
|
Wound Care/Other
|
599
|
|
621
|
|
(3.5
|
)
|
(3.8
|
)
|
0.3
|
|
|||||||
|
Total Consumer Sales
|
$
|
10,062
|
|
$
|
9,875
|
|
1.9
|
%
|
1.6
|
%
|
0.3
|
%
|
|||||
*Prior year amounts have been reclassified to conform to current year presentation.
Consumer segment sales in the fiscal
third
quarter of
2017
were $3.4 billion, an increase of 2.9% as compared to the same period a year ago, including operational growth of 1.6% and a positive currency impact of 1.3%. U.S. Consumer segment sales decreased by 0.5%. International Consumer segment sales increased by 5.1%, including operational growth of 3.0% and a positive currency impact of 2.1%. In the fiscal
third
quarter of 2017, the net impact of acquisitions and divestitures on the Consumer segment operational sales growth was a positive 0.5%.
Major Consumer Franchise Sales* —
Fiscal Third Quarters Ended
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Total
Change |
Operations
Change |
Currency
Change |
||||||||||||
|
Beauty
|
$
|
1,033
|
|
$
|
979
|
|
5.5
|
%
|
4.4
|
%
|
1.1
|
%
|
|||||
|
OTC
|
1,002
|
|
943
|
|
6.3
|
|
4.4
|
|
1.9
|
|
|||||||
|
Baby Care
|
477
|
|
495
|
|
(3.6
|
)
|
(3.6
|
)
|
0.0
|
|
|||||||
|
Oral Care
|
382
|
|
383
|
|
(0.3
|
)
|
(1.3
|
)
|
1.0
|
|
|||||||
|
Women’s Health
|
270
|
|
269
|
|
0.4
|
|
(1.8
|
)
|
2.2
|
|
|||||||
|
Wound Care/Other
|
192
|
|
192
|
|
0.0
|
|
(1.2
|
)
|
1.2
|
|
|||||||
|
Total Consumer Sales
|
$
|
3,356
|
|
$
|
3,261
|
|
2.9
|
%
|
1.6
|
%
|
1.3
|
%
|
|||||
*Prior year amounts have been reclassified to conform to current year presentation.
The Beauty franchise achieved operational growth of 4.4% as compared to the prior year fiscal
third
quarter. Growth was primarily driven by inclusion of sales from the recent acquisitions, Vogue International LLC and Dr. Ci: Labo.
The OTC franchise achieved operational growth of 4.4% as compared to the prior year fiscal
third
quarter. Growth was primarily driven by sales of analgesics products and sales outside the U.S. from the recent acquisition of Rhinocort and anti-smoking aids.
The Baby Care franchise experienced an operational decline of 3.6% as compared to the prior year fiscal
third
quarter due to competitive pressure.
The Oral Care franchise experienced an operational decline of 1.3% as compared to the prior year fiscal
third
quarter primarily driven by category declines and competitive pressure.
36
The Women’s Health franchise and the Wound Care/Other franchise were relatively flat as compared to the prior year fiscal
third
quarter.
Pharmaceutical
Pharmaceutical segment sales in the
fiscal nine months
of 2017 were $26.6 billion, an increase of 5.3% as compared to the same period a year ago, with an operational increase of 5.6% and a negative currency impact of 0.3%. U.S. Pharmaceutical sales increased 3.8% as compared to the same period a year ago. International Pharmaceutical sales increased by 7.6%, including operational growth of 8.4% partially offset by a negative currency impact of 0.8%. In the
fiscal nine months
of 2017, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a positive 2.5%. Adjustments to previous reserve estimates, as compared to the prior year, negatively impacted the reported Pharmaceutical segment operational growth for the
fiscal nine months
of 2017, by approximately 2.0%, primarily in the Immunology and Cardiovascular/Metabolism/Other therapeutic areas.
Major Pharmaceutical Therapeutic Area Sales* —
Fiscal Nine Months Ended
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Total
Change
|
Operations
Change
|
Currency
Change
|
||||||||||||
|
Total Immunology
|
$
|
9,158
|
|
$
|
9,032
|
|
1.4
|
%
|
1.4
|
%
|
0.0
|
%
|
|||||
|
REMICADE
®
|
4,849
|
|
5,342
|
|
(9.2
|
)
|
(9.4
|
)
|
0.2
|
|
|||||||
|
SIMPONI
®
/ SIMPONI ARIA
®
|
1,343
|
|
1,319
|
|
1.8
|
|
1.9
|
|
(0.1
|
)
|
|||||||
|
STELARA
®
|
2,930
|
|
2,353
|
|
24.5
|
|
24.8
|
|
(0.3
|
)
|
|||||||
|
Other Immunology
|
36
|
|
18
|
|
100.0
|
|
98.3
|
|
1.7
|
|
|||||||
|
Total Infectious Diseases
|
2,354
|
|
2,447
|
|
(3.8
|
)
|
(3.8
|
)
|
0.0
|
|
|||||||
|
EDURANT
®
/rilpivirine
|
522
|
|
408
|
|
27.9
|
|
27.7
|
|
0.2
|
|
|||||||
|
PREZISTA
®
/ PREZCOBIX
®
/REZOLSTA
®
|
1,351
|
|
1,404
|
|
(3.8
|
)
|
(3.7
|
)
|
(0.1
|
)
|
|||||||
|
Other Infectious Diseases
|
481
|
|
635
|
|
(24.3
|
)
|
(24.5
|
)
|
0.2
|
|
|||||||
|
Total Neuroscience
|
4,462
|
|
4,615
|
|
(3.3
|
)
|
(2.7
|
)
|
(0.6
|
)
|
|||||||
|
CONCERTA
®
/methylphenidate
|
588
|
|
659
|
|
(10.8
|
)
|
(10.5
|
)
|
(0.3
|
)
|
|||||||
|
INVEGA SUSTENNA
®
/XEPLION
®
/TRINZA
®
|
1,876
|
|
1,629
|
|
15.2
|
|
15.6
|
|
(0.4
|
)
|
|||||||
|
RISPERDAL CONSTA
®
|
608
|
|
683
|
|
(11.0
|
)
|
(10.4
|
)
|
(0.6
|
)
|
|||||||
|
Other Neuroscience
|
1,390
|
|
1,644
|
|
(15.5
|
)
|
(14.5
|
)
|
(1.0
|
)
|
|||||||
|
Total Oncology
|
5,219
|
|
4,345
|
|
20.1
|
|
20.8
|
|
(0.7
|
)
|
|||||||
|
DARZALEX
®
|
871
|
|
372
|
|
**
|
**
|
**
|
||||||||||
|
IMBRUVICA
®
|
1,371
|
|
905
|
|
51.5
|
|
52.1
|
|
(0.6
|
)
|
|||||||
|
VELCADE
®
|
843
|
|
950
|
|
(11.3
|
)
|
(9.8
|
)
|
(1.5
|
)
|
|||||||
|
ZYTIGA
®
|
1,750
|
|
1,741
|
|
0.5
|
|
1.0
|
|
(0.5
|
)
|
|||||||
|
Other Oncology
|
384
|
|
377
|
|
1.9
|
|
2.6
|
|
(0.7
|
)
|
|||||||
|
Pulmonary Hypertension
|
761
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
OPSUMIT
®
|
304
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
TRACLEER
®
|
236
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
UPTRAVI
®
|
133
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
Other
|
88
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
Cardiovascular / Metabolism / Other
|
4,621
|
|
4,793
|
|
(3.6
|
)
|
(3.1
|
)
|
(0.5
|
)
|
|||||||
|
XARELTO
®
|
1,790
|
|
1,690
|
|
5.9
|
|
5.9
|
|
—
|
|
|||||||
|
INVOKANA
®
/ INVOKAMET
®
|
844
|
|
1,036
|
|
(18.5
|
)
|
(18.3
|
)
|
(0.2
|
)
|
|||||||
|
PROCRIT
®
/EPREX
®
|
740
|
|
846
|
|
(12.5
|
)
|
(12.4
|
)
|
(0.1
|
)
|
|||||||
|
Other
|
1,247
|
|
1,221
|
|
2.1
|
|
3.8
|
|
(1.7
|
)
|
|||||||
|
Total Pharmaceutical Sales
|
$
|
26,575
|
|
$
|
25,232
|
|
5.3
|
%
|
5.6
|
%
|
(0.3
|
)%
|
|||||
*Prior year amounts have been reclassified to conform to current year product disclosure.
**Percentage greater than 100% or not meaningful
***On June 16, 2017, the Company acquired Actelion.
37
Pharmaceutical segment sales in the fiscal
third
quarter of
2017
were $9.7 billion, an increase of 15.4% as compared to the same period a year ago, with an operational increase of 14.6% and a positive currency impact of 0.8%. U.S. Pharmaceutical sales increased 15.4% as compared to the same period a year ago. International Pharmaceutical sales increased by 15.5%, including operational growth of 13.5% and a positive currency impact of 2.0%. In the fiscal
third
quarter of 2017, the net impact of acquisitions and divestitures on the Pharmaceutical segment operational sales growth was a positive 7.9%.
Major Pharmaceutical Therapeutic Area Sales* —
Fiscal Third Quarters Ended
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Total
Change
|
Operations
Change
|
Currency
Change
|
||||||||||||
|
Total Immunology
|
$
|
3,269
|
|
$
|
3,084
|
|
6.0
|
%
|
5.3
|
%
|
0.7
|
%
|
|||||
|
REMICADE
®
|
1,647
|
|
1,783
|
|
(7.6
|
)
|
(8.2
|
)
|
0.6
|
|
|||||||
|
SIMPONI
®
/ SIMPONI ARIA
®
|
476
|
|
481
|
|
(1.0
|
)
|
(1.4
|
)
|
0.4
|
|
|||||||
|
STELARA
®
|
1,124
|
|
814
|
|
38.1
|
|
37.0
|
|
1.1
|
|
|||||||
|
Other Immunology
|
22
|
|
6
|
|
**
|
**
|
0.0
|
|
|||||||||
|
Total Infectious Diseases
|
813
|
|
842
|
|
(3.4
|
)
|
(5.3
|
)
|
1.9
|
|
|||||||
|
EDURANT
®
/rilpivirine
|
194
|
|
149
|
|
30.2
|
|
25.1
|
|
5.1
|
|
|||||||
|
PREZISTA
®
/ PREZCOBIX
®
/ REZOLSTA
®
|
467
|
|
493
|
|
(5.3
|
)
|
(6.7
|
)
|
1.4
|
|
|||||||
|
Other Infectious Diseases
|
152
|
|
200
|
|
(24.0
|
)
|
(24.5
|
)
|
0.5
|
|
|||||||
|
Total Neuroscience
|
1,498
|
|
1,464
|
|
2.3
|
|
2.0
|
|
0.3
|
|
|||||||
|
CONCERTA
®
/ methylphenidate
|
198
|
|
190
|
|
4.2
|
|
3.8
|
|
0.4
|
|
|||||||
|
INVEGA SUSTENNA
®
/XEPLION
®
/TRINZA
®
|
643
|
|
556
|
|
15.6
|
|
14.3
|
|
1.3
|
|
|||||||
|
RISPERDAL CONSTA
®
|
194
|
|
222
|
|
(12.6
|
)
|
(13.5
|
)
|
0.9
|
|
|||||||
|
Other Neuroscience
|
463
|
|
496
|
|
(6.7
|
)
|
(5.6
|
)
|
(1.1
|
)
|
|||||||
|
Total Oncology
|
1,898
|
|
1,517
|
|
25.1
|
|
23.8
|
|
1.3
|
|
|||||||
|
DARZALEX
®
|
317
|
|
163
|
|
94.5
|
|
92.0
|
|
2.5
|
||||||||
|
IMBRUVICA
®
|
512
|
|
349
|
|
46.7
|
|
44.7
|
|
2.0
|
|
|||||||
|
VELCADE
®
|
273
|
|
304
|
|
(10.2
|
)
|
(11.2
|
)
|
1.0
|
|
|||||||
|
ZYTIGA
®
|
669
|
|
582
|
|
14.9
|
|
14.2
|
|
0.7
|
|
|||||||
|
Other Oncology
|
127
|
|
119
|
|
6.7
|
|
5.1
|
|
1.6
|
|
|||||||
|
Pulmonary Hypertension
|
670
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
OPSUMIT
®
|
259
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
TRACLEER
®
|
210
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
UPTRAVI
®
|
124
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
Other
|
77
|
|
—
|
|
***
|
***
|
—
|
|
|||||||||
|
Cardiovascular / Metabolism / Other
|
1,547
|
|
1,493
|
|
3.6
|
|
3.3
|
|
0.3
|
|
|||||||
|
XARELTO
®
|
635
|
|
529
|
|
20.0
|
|
20.0
|
|
—
|
|
|||||||
|
INVOKANA
®
/ INVOKAMET
®
|
265
|
|
328
|
|
(19.2
|
)
|
(19.3
|
)
|
0.1
|
|
|||||||
|
PROCRIT
®
/ EPREX
®
|
238
|
|
250
|
|
(4.8
|
)
|
(5.8
|
)
|
1.0
|
|
|||||||
|
Other
|
409
|
|
386
|
|
6.0
|
|
5.6
|
|
0.4
|
|
|||||||
|
Total Pharmaceutical Sales
|
$
|
9,695
|
|
$
|
8,400
|
|
15.4
|
%
|
14.6
|
%
|
0.8
|
%
|
|||||
*Prior year amounts have been reclassified to conform to current year product disclosure.
**Percentage greater than 100% or not meaningful
***On June 16, 2017, the Company acquired Actelion.
Immunology products achieved operational growth of 5.3% as compared to the same period a year ago driven by strong uptake of STELARA
®
(ustekinumab) and the U.S. launch of TREMFYA
®
(guselkumab). Immunology was negatively impacted by modest share loss and increased discounts/rebates of REMICADE
®
(infliximab) due to biosimilar competition.
38
The patents for REMICADE
®
(infliximab)
in certain countries in Europe expired in February 2015. Biosimilar versions of REMICADE
®
have been introduced in certain markets outside the United States, resulting in a reduction in sales of REMICADE
®
in those markets. Additional biosimilar competition will likely result in a further reduction in REMICADE
®
sales in markets outside the United States. The introduction of a biosimilar version of REMICADE
®
in the United States is subject to enforcement of patent rights, approval by the U.S. Food and Drug Administration (FDA) and compliance with the 180-day notice provisions of the Biologics Price Competition and Innovation Act. In April 2016, the FDA approved for sale in the United States an infliximab biosimilar to be marketed by a subsidiary of Pfizer Inc., which was launched in the United States in late 2016. In addition in April 2017, the FDA approved for sale in the United States an infliximab biosimilar to be marketed by Merck, which was launched in July 2017. Continued infliximab biosimilar competition in the U.S. market will result in a further reduction in U.S. sales of REMICADE
®
. The Company continues to assert REMICADE
®
related patent rights. See Note 11 to the Consolidated Financial Statements for a description of legal matters regarding the REMICADE
®
patents.
Infectious disease products experienced an operational decline of 5.3% as compared to the same period a year ago. Lower sales of OLYSIO
®
(simeprevir), vaccines and PREZISTA
®
/PREZCOBIX
®
/REZOLSTA
®
(darunavir/cobicistat) were partially offset by sales of EDURANT
®
/rilpivirine.
Neuroscience products achieved operational growth of 2.0% as compared to the same period a year ago. Strong sales of INVEGA SUSTENNA
®
/XEPLION
®
/ TRINZA
®
(paliperidone palmitate) were partially offset by lower sales of RISPERDAL CONSTA
®
(risperidone).
Oncology products achieved strong operational sales growth of 23.8% as compared to the same period a year ago. Contributors to the growth were strong sales of IMBRUVICA
®
(ibrutinib) and DARZALEX
®
(daratumumab) due to increased patient uptake and sales of ZYTIGA
®
(abiraterone acetate) driven by market growth. Several generic companies have filed petitions seeking to invalidate the ’438 patent for ZYTIGA
®
. If there is a launch of a generic version of ZYTIGA
®
following FDA approval it will likely result in a reduction in U.S. sales. See Note 11 to the Consolidated Financial Statements for a description of legal matters regarding ZYTIGA
®
.
Pulmonary Hypertension is a new therapeutic area which was established with the acquisition of Actelion on June 16, 2017. See Note 10 to the Consolidated Financial Statements for additional details regarding the acquisition.
Cardiovascular / Metabolism / Other products achieved operational growth of 3.3% as compared to the same period a year ago. Sales growth of XARELTO
®
(rivaroxaban) due to increased market share was partially offset by lower sales of INVOKANA
®
/INVOKAMET
®
(canagliflozin) in the U.S. primarily due to an increase in price discounts and market share decline driven by competitive pressure.
39
Medical Devices
The Medical Devices segment sales in the
fiscal nine months
of 2017 were $19.6 billion, an increase of 5.0% as compared to the same period a year ago, with operational growth of 5.3% and a negative currency impact of 0.3%. U.S. Medical Devices sales increased 4.3%. International Medical Devices sales increased by 5.7%, including an operational increase of 6.3% and a negative currency impact of 0.6%. In the
fiscal nine months
of 2017, the net impact of acquisitions and divestitures on the Medical Devices segment operational sales growth was a positive 4.0%.
Major Medical Devices Franchise Sales —
Fiscal Nine Months Ended
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Total
Change
|
Operations
Change
|
Currency
Change
|
||||||||||||
|
Surgery
|
$
|
7,001
|
|
$
|
6,909
|
|
1.3
|
%
|
1.7
|
%
|
(0.4
|
)%
|
|||||
|
Advanced
|
2,733
|
|
2,609
|
|
4.8
|
|
5.3
|
|
(0.5
|
)
|
|||||||
|
General
|
3,293
|
|
3,260
|
|
1.0
|
|
1.4
|
|
(0.4
|
)
|
|||||||
|
Specialty
|
975
|
|
1,040
|
|
(6.3
|
)
|
(6.4
|
)
|
0.1
|
|
|||||||
|
Orthopaedics
|
6,919
|
|
6,947
|
|
(0.4
|
)
|
(0.2
|
)
|
(0.2
|
)
|
|||||||
|
Hips
|
1,030
|
|
1,011
|
|
1.9
|
|
2.2
|
|
(0.3
|
)
|
|||||||
|
Knees
|
1,126
|
|
1,129
|
|
(0.3
|
)
|
0.0
|
|
(0.3
|
)
|
|||||||
|
Trauma
|
1,947
|
|
1,915
|
|
1.7
|
|
1.8
|
|
(0.1
|
)
|
|||||||
|
Spine & Other
|
2,816
|
|
2,892
|
|
(2.6
|
)
|
(2.3
|
)
|
(0.3
|
)
|
|||||||
|
Vision Care
|
2,944
|
|
2,064
|
|
42.6
|
|
43.2
|
|
(0.6
|
)
|
|||||||
|
Contact Lenses/Other
|
2,236
|
|
2,064
|
|
8.3
|
|
8.9
|
|
(0.6
|
)
|
|||||||
|
Surgical
|
708
|
|
—
|
|
*
|
*
|
—
|
|
|||||||||
|
Cardiovascular
|
1,528
|
|
1,364
|
|
12.0
|
|
12.7
|
|
(0.7
|
)
|
|||||||
|
Diabetes Care
|
1,225
|
|
1,327
|
|
(7.7
|
)
|
(7.7
|
)
|
0.0
|
|
|||||||
|
Diagnostics
|
1
|
|
66
|
|
**
|
**
|
**
|
||||||||||
|
Total Medical Devices Sales
|
$
|
19,618
|
|
$
|
18,677
|
|
5.0
|
%
|
5.3
|
%
|
(0.3
|
)%
|
|||||
*On February 27, 2017, the Company acquired Abbott Medical Optics (AMO)
**On June 30, 2014, the Company divested the Ortho-Clinical Diagnostics business (the Diagnostics franchise)
The Medical Devices segment sales in the fiscal
third
quarter of
2017
were $6.6 billion, an increase of 7.1% as compared to the same period a year ago, with operational growth of 6.6% and a positive currency impact of 0.5%. U.S. Medical Devices sales increased 4.6%. International Medical Devices sales increased by 9.6%, including an operational increase of 8.6.% and a positive currency impact of 1.0%. In the fiscal
third
quarter of 2017, the net impact of acquisitions and divestitures on the Medical Devices segment operational sales growth was a positive 5.4%.
40
Major Medical Devices Franchise Sales —
Fiscal Third Quarters Ended
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
Total
Change
|
Operations
Change
|
Currency
Change
|
||||||||||||
|
Surgery
|
$
|
2,346
|
|
$
|
2,284
|
|
2.7
|
%
|
2.1
|
%
|
0.6
|
%
|
|||||
|
Advanced
|
923
|
|
884
|
|
4.4
|
|
3.9
|
|
0.5
|
|
|||||||
|
General
|
1,105
|
|
1,063
|
|
4.0
|
|
3.2
|
|
0.8
|
|
|||||||
|
Specialty
|
318
|
|
337
|
|
(5.6
|
)
|
(5.9
|
)
|
0.3
|
|
|||||||
|
Orthopaedics
|
2,251
|
|
2,251
|
|
0.0
|
|
(0.8
|
)
|
0.8
|
|
|||||||
|
Hips
|
328
|
|
320
|
|
2.5
|
|
1.5
|
|
1.0
|
|
|||||||
|
Knees
|
343
|
|
355
|
|
(3.4)
|
(4.4
|
)
|
1.0
|
|
||||||||
|
Trauma
|
662
|
|
637
|
|
3.9
|
|
3.1
|
|
0.8
|
|
|||||||
|
Spine & Other
|
918
|
|
939
|
|
(2.2
|
)
|
(2.8
|
)
|
0.6
|
|
|||||||
|
Vision Care
|
1,091
|
|
739
|
|
47.6
|
|
48.4
|
|
(0.8
|
)
|
|||||||
|
Contact Lenses/Other
|
800
|
|
739
|
|
8.3
|
|
9.1
|
|
(0.8
|
)
|
|||||||
|
Surgical
|
291
|
|
—
|
|
*
|
*
|
—
|
|
|||||||||
|
Cardiovascular
|
506
|
|
451
|
|
12.2
|
|
12.5
|
|
(0.3
|
)
|
|||||||
|
Diabetes Care
|
405
|
|
427
|
|
(5.2
|
)
|
(6.9
|
)
|
1.7
|
|
|||||||
|
Diagnostics
|
—
|
|
7
|
|
**
|
**
|
**
|
||||||||||
|
Total Medical Devices Sales
|
$
|
6,599
|
|
$
|
6,159
|
|
7.1
|
%
|
6.6
|
%
|
0.5
|
%
|
|||||
*On February 27, 2017, the Company acquired Abbott Medical Optics (AMO)
**On June 30, 2014, the Company divested the Ortho-Clinical Diagnostics business (the Diagnostics Franchise)
The Surgery franchise achieved operational sales growth of 2.1% as compared to the prior year fiscal
third
quarter. Operational growth in Advanced Surgery was primarily driven by endocutter, energy, including recent acquisitions, and biosurgery products. Operational growth in General Surgery was primarily driven by strong growth in sutures. Sales growth was partially offset by declines in mechanical products. The operational sales decline in Specialty Surgery was primarily driven by Advanced Sterilization, Sterilmed and aesthetic products.
The Orthopaedics franchise experienced an operational sales decline of 0.8% as compared to the prior year fiscal
third
quarter.
The decline was primarily due to share loss in U.S. Spine, pricing and competitive pressures. This was partially offset by sales growth of trauma, sports medicine products and U.S. hips.
The Vision Care franchise achieved operational sales growth of 48.4% as compared to the prior year fiscal
third
quarter. Operational growth was driven by sales from the recent acquisition of AMO, with the majority of AMO sales in the surgical category, and new product launches in the contact lenses category.
The Cardiovascular franchise achieved strong operational sales growth of 12.5% as compared to the prior year fiscal
third
quarter. Strong operational growth in the electrophysiology business was driven by market growth and continued uptake of the THERMOCOOL SMARTTOUCH
®
Contact Force
Sensing Catheter.
The Diabetes Care franchise experienced an operational sales decline of 6.9% as compared to the prior year fiscal
third
quarter primarily due to price declines and competitive pressure. Subsequent to the fiscal third quarter of 2017, the Company announced its decision to exit the Animas insulin pump business. Animas has selected Medtronic plc to facilitate a seamless transition for patients, caregivers and healthcare providers. The 2016 annual sales for Animas were approximately $0.2 billion. 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.
ANALYSIS OF CONSOLIDATED EARNINGS BEFORE PROVISION FOR TAXES ON INCOME
Consolidated earnings before provision for taxes on income for the
fiscal nine months
of
2017
was $15.1 billion representing 26.9% of sales as compared to $15.5 billion in the
fiscal nine months
of 2016, representing 28.8% of sales. Consolidated earnings before provision for taxes on income for the fiscal
third
quarter of
2017
was $4.8 billion representing 24.4% of sales as compared to $5.3 billion in the fiscal
third
quarter of 2016, representing 29.6% of sales. The decrease as a percent to sales
41
in both periods was primarily due to higher amortization and other costs related to the recent acquisitions, primarily Actelion and AMO, higher investment spend and a higher restructuring charge of $0.1 billion. The fiscal nine months of 2017 also included an asset impairment charge of $0.2 billion primarily related to the insulin pump business. This was partially offset by favorable product mix and higher gains on divestitures of $0.4 billion and $0.3 billion, primarily related to the COMPEED
®
divestiture, in the fiscal third quarter and fiscal nine months of 2017, respectively, as compared to the same period a year ago. Additionally, the fiscal nine months of 2017 included a gain of $0.2 billion related to monetization of future royalty receivables and a higher gain of $0.2 billion related to the sale of certain investments in equity securities.
Cost of Products Sold
Consolidated costs of products sold for the
fiscal nine months
of
2017
increased to 32.2% from 30.0% of sales as compared to the same period a year ago. Consolidated costs of products sold for the fiscal
third
quarter of
2017
increased to 35.1% from 30.8% of sales as compared to the same period a year ago. The unfavorable increase in both periods was primarily driven by higher amortization expense and charges for inventory step-up related to the recent acquisitions partially offset by favorable currency impacts and product mix. The intangible asset amortization expense for the
fiscal nine months
of 2017 and 2016 was $1,886 million and $895 million, respectively.
Selling, Marketing and Administrative Expenses
Consolidated selling, marketing and administrative expenses for the
fiscal nine months
of
2017
increased slightly to 27.4% from 27.2% of sales as compared to the same period a year ago. Consolidated selling, marketing and administrative expenses for the fiscal
third
quarter of
2017
increased to 27.5% from 26.8% of sales as compared to the same period a year ago primarily due to the investment in new products partially offset by favorable mix.
Research and Development Expense
Worldwide costs of research and development activities for the
fiscal nine months
of
2017
increased to 12.3% of sales from 12.0% of sales as compared to the same period a year ago. Worldwide costs of research and development activities for the fiscal
third
quarter of
2017
increased to 13.1% from 12.2% of sales as compared to the same period a year ago. The increase in both periods in 2017 was primarily due to increased investment spending in the Pharmaceutical segment to advance the pipeline.
In-Process Research and Development (IPR&D)
During the fiscal nine months of 2016, the Company recorded a charge of $29 million for the discontinuation of a development program related to Crucell.
Interest (Income) Expense
Interest income in the
fiscal nine months
was higher than the same period a year ago due to higher average interest rates partially offset by lower cash, cash equivalents and marketable securities balances during the period. Interest income in the fiscal
third
quarter of 2017 was lower than the same period a year ago due to lower cash, cash equivalents and marketable securities balances during the period partially offset by higher average interest rates. The ending balance of cash, cash equivalents and current marketable securities was $16.2 billion at the end of the fiscal
third
quarter of
2017
, which is a decrease of $24.2 billion as compared to the same period a year ago. The decrease in the balance of cash, cash equivalents and marketable securities was due to the use of cash for general corporate purposes including, acquisitions, primarily, the Actelion acquisition for $29.1 billion, net of cash acquired.
Interest expense in the
fiscal nine months
and fiscal
third
quarter of
2017
was higher as compared to the same periods a year ago. At the end of the fiscal
third
quarter of
2017
, the Company’s debt position was $35.2 billion as compared to $27.0 billion the same period a year ago. The higher debt balance of approximately $8.2 billion was primarily due to increased borrowings. The Company increased borrowings, capitalizing on favorable terms in the capital markets. The proceeds of the borrowings were used for general corporate purposes, primarily the stock repurchase program.
Other (Income) Expense, Net
Other (income) expense, net for the
fiscal nine months
of 2017 was favorable by $0.3 billion as compared to the same period a year ago. The
fiscal nine months
of 2017 included higher gains on divestitures, primarily COMPEED
®
, of $0.3 billion, a gain of $0.2 billion related to monetization of future royalty receivables, a higher gain of $0.2 billion related to the sale of certain
42
investments in equity securities and lower litigation expense of $0.1 billion as compared to the same period a year ago. This was partially offset by $0.3 billion of acquisition costs related to Actelion and AMO, an asset impairment charge of $0.2 billion primarily related to the insulin pump business and a higher restructuring related charge of $0.2 billion as compared to the same period a year ago.
Other (income) expense, net for the fiscal
third
quarter of 2017 was favorable by $0.2 billion as compared to the same period a year ago. The fiscal third quarter of 2017 included higher gains on divestitures, primarily COMPEED
®
, of $0.4 billion. This was partially offset by $0.1 billion of acquisition costs related to Actelion and AMO and higher litigation expense of $0.1 billion as compared to the same period a year ago.
INCOME BEFORE TAX BY SEGMENT
Income before tax by segment of business for the
fiscal nine months
were as follows:
|
|
Income Before Tax
|
Segment Sales
|
Percent of Segment Sales
|
|||||||||||||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
||||||||||||||||
|
Consumer
|
$
|
2,132
|
|
$
|
1,816
|
|
$
|
10,062
|
|
$
|
9,875
|
|
21.2
|
%
|
18.4
|
%
|
||||||
|
Pharmaceutical
|
9,934
|
|
10,340
|
|
26,575
|
|
25,232
|
|
37.4
|
|
41.0
|
|
||||||||||
|
Medical Devices
|
3,938
|
|
4,041
|
|
19,618
|
|
18,677
|
|
20.1
|
|
21.6
|
|
||||||||||
|
Segment total
|
16,004
|
|
16,197
|
|
56,255
|
|
53,784
|
|
28.4
|
|
30.1
|
|
||||||||||
|
Less: Expenses not allocated to segments
(1)
|
891
|
|
718
|
|
|
|
|
|
||||||||||||||
|
Worldwide total
|
$
|
15,113
|
|
$
|
15,479
|
|
$
|
56,255
|
|
$
|
53,784
|
|
26.9
|
%
|
28.8
|
%
|
||||||
(1)
Amounts not allocated to segments include interest (income) expense and general corporate (income) expense.
Income before tax by segment of business for the fiscal
third
quarters were as follows:
|
|
Income Before Tax
|
Segment Sales
|
Percent of Segment Sales
|
|||||||||||||||||||
|
(Dollars in Millions)
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
October 1, 2017
|
October 2, 2016
|
||||||||||||||||
|
Consumer
|
$
|
878
|
|
$
|
679
|
|
$
|
3,356
|
|
$
|
3,261
|
|
26.2
|
%
|
20.8
|
%
|
||||||
|
Pharmaceutical
|
2,857
|
|
3,309
|
|
9,695
|
|
8,400
|
|
29.5
|
|
39.4
|
|
||||||||||
|
Medical Devices
|
1,383
|
|
1,526
|
|
6,599
|
|
6,159
|
|
21.0
|
|
24.8
|
|
||||||||||
|
Segment operating profit
|
5,118
|
|
5,514
|
|
19,650
|
|
17,820
|
|
26.0
|
|
30.9
|
|
||||||||||
|
Less: Expenses not allocated to segments
(1)
|
328
|
|
233
|
|
|
|
|
|
||||||||||||||
|
Worldwide income before tax
|
$
|
4,790
|
|
$
|
5,281
|
|
$
|
19,650
|
|
$
|
17,820
|
|
24.4
|
%
|
29.6
|
%
|
||||||
(1)
Amounts not allocated to segments include interest (income) expense and general corporate (income) expense.
Consumer Segment
The Consumer segment income before tax as a percent of sales in the
fiscal nine months
of
2017
was 21.2% versus 18.4% for the same period a year ago. The increase in the income before tax as a percent of sales in the fiscal nine months of 2017 as compared to 2016 was attributable to higher gains on divestitures, primarily the divestiture of COMPEED
®
in 2017. Additionally, the fiscal nine months of 2016 were negatively impacted by operations in Venezuela. This was partially offset by higher selling, marketing and administrative expenses as compared to the prior year due to increased advertising and promotional spending and higher amortization expense in 2017 related to acquisitions.
The Consumer segment income before tax as a percent of sales in the fiscal
third
quarter of
2017
was 26.2% versus 20.8% for the same period a year ago. The increase in the income before tax as a percent of sales in the fiscal third quarter of 2017 as compared to 2016 was attributable to higher gains on divestitures, primarily the divestiture of COMPEED
®
in 2017. This was partially offset by higher selling, marketing and administrative expenses as compared to the prior year due to increased advertising and promotional spending.
Pharmaceutical Segment
43
The Pharmaceutical segment income before tax as a percent of sales in the
fiscal nine months
of
2017
was 37.4% versus 41.0% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal nine months of 2017 was primarily due to higher amortization expense and other costs related to the Actelion acquisition, lower gains on divestitures as compared to the prior year and a positive adjustment of $0.5 billion to previous reserve estimates in the fiscal nine months of 2016. This was partially offset by a gain of $0.2 billion in fiscal nine months of 2017 related to monetization of future royalty receivables and favorable product mix.
The Pharmaceutical segment income before tax as a percent of sales in the fiscal
third
quarter of
2017
was 29.5% versus 39.4% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal third quarter of 2017 was primarily due to higher amortization expense and other costs related to the Actelion acquisition. This was partially offset by favorable product mix.
Medical Devices Segment
The Medical Devices segment income before tax as a percent of sales in the
fiscal nine months
of
2017
was 20.1% versus 21.6% for the same period a year ago. The Medical Devices segment income before tax as a percent of sales in the fiscal third quarter of 2017 was 21.0% versus 24.8% for the same period a year ago. The decrease in the income before tax as a percent of sales for the fiscal nine months of 2017 as compared to 2016 was primarily due to an asset impairment charge of $0.2 billion primarily related to the insulin pump business, $0.2 billion of higher amortization expense and other acquisition costs related to AMO, $0.1 billion of higher restructuring and unfavorable transactional currency as compared to the fiscal nine months of 2016. This was partially offset by $0.2 billion of lower litigation expense in 2017. The decrease in the income before tax as a percent to sales for the fiscal third quarter of 2017 as compared to 2016 was primarily due to $0.1 billion of higher litigation expense, $0.1 billion of higher amortization expense and other acquisition costs related to AMO and $0.1 billion of higher restructuring as compared to the fiscal third quarter of 2016. Additionally, the fiscal third quarter of 2017 included higher investment spending to support new product launches.
Restructuring
The Company announced restructuring actions in its Medical Devices segment that are expected to result in annualized pre-tax cost savings of $800 million to $1.0 billion, the majority of which is expected to be realized by the end of 2018. Approximately $250 million in savings were realized in 2016 and approximately $200 million additional savings is expected in 2017. The savings will provide the Company with added flexibility and resources to fund investment in new growth opportunities and innovative solutions for customers and patients. 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, most of which are expected to be incurred by the end of 2017. In the fiscal
third
quarter of 2017, the Company recorded a pre-tax charge of $187 million, of which $29 million is included in cost of products sold and $89 million is included in other (income) expense. In the
fiscal nine months
of 2017, the Company recorded a pre-tax charge of $476 million, of which $46 million is included in cost of products sold and $265 million is included in other (income) expense. Restructuring charges of $1.8 billion have been recorded since the restructuring was announced. See Note 12 to the Consolidated Financial Statements for additional details related to the restructuring.
Provision for Taxes on Income
The worldwide effective income tax rates for the fiscal nine months of
2017
and
2016
were 20.5% and 17.8%, respectively. The Company completed its acquisition of AMO in the first fiscal quarter of 2017, and incurred incremental tax costs that were discretely recorded in the first quarter, which has increased the effective tax rate by 1.4% for the first nine months of 2017 compared to the same period in 2016. Additionally, the Company had more income in higher tax jurisdictions relative to lower tax jurisdictions as compared to 2016. These increases to the effective tax rate were partially offset by additional tax benefits received from stock-based compensation that either vested or were exercised during the fiscal nine months of 2017 and 2016, which reduced the effective tax rate by 2.1% and 2.2%, respectively.
As of October 1, 2017, the Company had approximately $3.3 billion of liabilities from unrecognized tax benefits. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months. The Company is not able to provide a reasonably reliable estimate of the timing of any future tax payments relating to uncertain tax positions.
See Note 8 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended
January 1, 2017
for more detailed information regarding unrecognized tax benefits.
44
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash and cash equivalents were $15.7 billion at the end of the fiscal
third
quarter of
2017
as compared with $19.0 billion at the end of fiscal year
2016
. The primary sources of cash were approximately $15.0 billion net cash generated from operating activities offset by $14.4 billion used by investing activities and $4.1 billion used by financing activities. In addition, the Company had $0.5 billion in marketable securities at the end of the fiscal third quarter of 2017 and $22.9 billion at the end of 2016.
Cash flow from operations of $15.0 billion was the result of $12.0 billion of net earnings, $4.8 billion of non-cash charges and other adjustments for depreciation and amortization, stock-based compensation and asset write-downs and a $0.3 billion increase in accounts payable and accrued liabilities. Cash flow from operations was reduced by $1.0 billion related to an increase in accounts receivable, inventories and of other assets, a decrease of $0.3 billion in other current and non current liabilities, a decrease in the deferred tax provision of $0.4 billion and $0.5 billion for the net gain on sale of assets/businesses.
Investing activities use of $14.4 billion of cash was primarily used for acquisitions of $34.7 billion and additions to property, plant and equipment of $2.0 billion. Investing activities also included a source of $21.7 billion from the net sales of investments in marketable securities and $0.7 billion of proceeds from the disposal of assets/businesses, net, primarily the divestiture of COMPEED
®
.
Financing activities use of $4.1 billion of cash was primarily used for dividends to shareholders of $6.7 billion and repurchase of common stock of $5.5 billion. Financing activities also included a source of $7.3 billion from the net proceeds of short and long-term debt and $0.9 billion of proceeds from stock options exercised/employee withholding tax on stock awards, net.
During the fiscal second quarter of 2017, the Company acquired Actelion Ltd. As of October 1, 2017, the Company paid
$29.1 billion
, net of cash acquired, representing
98.4%
of the shares to which the offer was extended. The Company recorded a current liability of
$0.5 billion
for the shares not tendered as of October 1, 2017, which the Company expects to pay by the end of 2017 as it takes steps to acquire the remaining outstanding shares of Actelion. The Company used cash held by its foreign subsidiaries to pay for the acquisition.
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 under the facility, which expires September 13, 2018, approximates $10.0 billion. Interest charged on borrowings under the credit line agreement is based on either bids provided by banks, the prime rate or London Interbank Offered Rates (LIBOR), plus applicable margins. Commitment fees under the agreement are not material.
In the fiscal
third
quarter of
2017
, the Company's notes payable and long-term debt was in excess of cash, cash equivalents and marketable securities. The Company anticipates that operating cash flows, the ability to raise funds from external sources, borrowing capacity from existing committed credit facilities and access to the commercial paper markets will continue to provide sufficient resources to fund operating needs. The Company monitors the global capital markets on an ongoing basis and from time to time may raise capital when market conditions are favorable. The Company filed a new shelf registration on February 27, 2017. In the fiscal first quarter of 2017, the Company issued bonds for a total of $4.5 billion for general corporate purposes.
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. As of July 2, 2017, $10.0 billion was repurchased under the program and the program was completed. Shares acquired are available for general corporate purposes. The Company financed the share repurchase program through available cash and access to the capital markets.
Dividends
On July 17, 2017, the Board of Directors declared a regular cash dividend of $0.84 per share, payable on September 12, 2017 to shareholders of record as of August 29, 2017.
45
On October 19, 2017, the Board of Directors declared a regular cash dividend of $0.84 per share, payable on December 12, 2017 to shareholders of record as of November 28, 2017. The Company expects to continue the practice of paying regular quarterly cash dividends.
OTHER INFORMATION
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for new accounting pronouncements.
Economic and Market Factors
The Company operates in certain countries where the economic conditions continue to present significant challenges. The Company continues to monitor these situations and take appropriate actions. Inflation rates and currency exchange rates continue to have an effect on worldwide economies and, consequently, on the way the Company operates. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.
In June 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit” and in March 2017 the U.K. formally started the process for the U.K. to leave the E.U. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the withdrawal of the U.K. from the E.U. will have. Brexit creates global political and economic uncertainty, which may cause, among other consequences, volatility in exchange rates and interest rates, additional cost containment by third-party payors and changes in regulations. However, the Company currently does not believe that these and other related effects will have a material impact on the Company’s consolidated financial position or operating results. As of October 1, 2017, the business of the Company’s U.K. subsidiaries represented less than 3% of both the Company’s consolidated assets and fiscal nine months revenues, respectively.
The Belgian government will propose a change to its corporate tax code to Parliament, including a proposal to lower its statutory tax rate. If enacted, the proposed change would result in revaluation of the Company's deferred tax assets, with a corresponding charge to tax expense that may have a material effect on the Company’s results of operations for the period. Based on the deferred tax asset balances and foreign currency exchange rates as of October 1, 2017, the Company estimates for every 1% that the statutory tax is lowered there will be additional one-time tax expense of approximately $80-90 million.
The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement of health care products.
Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, may continue to impact the Company’s businesses.
The Company also operates in an environment increasingly hostile to intellectual property rights. Firms have filed Abbreviated New Drug Applications or Biosimilar Biological Product Applications with the FDA, initiated inter partes review proceedings in the United States Patent and Trademark Office, or otherwise challenged the coverage and/or validity of the Company's patents, seeking to market generic or biosimilar forms of many of the Company’s key pharmaceutical products prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in these actions, generic or biosimilar versions of the products at issue may be introduced 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. For further information, see the discussion on “REMICADE
®
Related Cases” and “Litigation Against Filers of Abbreviated New Drug Applications” in Note 11 to the Consolidated Financial Statements.
Item 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in its Annual Report on Form 10-K for the fiscal year ended
January 1, 2017
.
46
Item 4 — CONTROLS AND PROCEDURES
Disclosure controls and procedures. At the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Alex Gorsky, Chairman and Chief Executive Officer, and Dominic J. Caruso, Executive Vice President, Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Gorsky and Caruso concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Internal control. During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is implementing a multi-year, enterprise-wide initiative to integrate, simplify and standardize processes and systems for the human resources, information technology, procurement, supply chain and finance functions. These are enhancements to support the growth of the Company’s financial shared service capabilities and standardize financial systems. This initiative is not in response to any identified deficiency or weakness in the Company’s internal control over financial reporting. In response to this initiative, the Company has and will continue to align and streamline the design and operation of its financial control environment.
Part II — OTHER INFORMATION
Item 1 — LEGAL PROCEEDINGS
The information called for by this item is incorporated herein by reference to Note 11 included in Part I, Item 1, Financial Statements (unaudited) — Notes to Consolidated Financial Statements.
Item 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
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. As of July 2, 2017, $10.0 billion was repurchased under the program and the program was completed.
The following table provides information with respect to Common Stock purchases by the Company during the fiscal third quarter of 2017. The repurchases below also include the stock-for-stock option exercises that settled in the fiscal third quarter.
|
Period
|
Total Number
of Shares Purchased
(1)
|
Avg. Price
Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
(3)
|
|||||||
|
July 3, 2017 through July 30, 2017
|
2,074,038
|
|
133.16
|
|
—
|
|
—
|
||||
|
July 31, 2017 through August 27, 2017
|
280,632
|
|
132.35
|
|
—
|
|
—
|
||||
|
August 28, 2017 through October 1, 2017
|
3,456
|
|
133.13
|
|
—
|
|
—
|
||||
|
Total
|
2,358,126
|
|
—
|
|
|
||||||
(1) During the fiscal third quarter of 2017, the Company repurchased an aggregate of 2,358,126 shares of Johnson & Johnson Common Stock in open-market transactions as part of a systematic plan to meet the needs of the Company’s compensation programs.
47
(2) As of July 2, 2017, an aggregate of 86,592,946 shares were purchased for a total of $10.0 billion since the inception of the repurchase program announced on October 13, 2015.
(3) As of July 2, 2017 the repurchase program was completed.
Item 6 — EXHIBITS
Exhibit 31.1
Certification of Chief Executive Officer under Rule 13a-14(a) of the Securities Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Filed with this document.
Exhibit 31.2
Certification of Chief Financial Officer under Rule 13a-14(a) of the Securities Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Filed with this document.
Exhibit 32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Furnished with this document.
Exhibit 32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Furnished with this document.
Exhibit 101 XBRL (Extensible Business Reporting Language) The following materials from Johnson & Johnson’s Quarterly Report on Form 10-Q for the quarter ended
October 1, 2017
, formatted in Extensive Business Reporting Language (XBRL), (i) consolidated balance sheets, (ii) consolidated statements of earnings, (iii) consolidated statements of comprehensive income (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
JOHNSON & JOHNSON
(Registrant)
|
|
Date: November 2, 2017
|
By /s/ D. J. CARUSO
|
|
D. J. CARUSO
|
|
|
|
Executive Vice President, Chief Financial Officer (Principal Financial Officer)
|
|
|
|
|
Date: November 2, 2017
|
By /s/ R. A. KAPUSTA
|
|
|
R. A. KAPUSTA
|
|
|
Controller (Principal Accounting Officer)
|
49
TABLE OF CONTENTS
Part I Financial InformationprintItem 1 Financial StatementsprintNote 2 InventoriesprintNote 3 Intangible Assets and GoodwillprintNote 4 Fair Value MeasurementsprintNote 5 Income TaxesprintNote 6 Pensions and Other Postretirement BenefitsprintNote 7 Accumulated Other Comprehensive IncomeprintNote 8 Earnings Per ShareprintNote 9 Segments Of Business and Geographic AreasprintNote 10 Business Combinations and DivestituresprintNote 11 Legal ProceedingsprintNote 12 RestructuringprintItem 2 Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3 Quantitative and Qualitative Disclosures About Market RiskprintItem 4 Controls and ProceduresprintPart II Other InformationprintItem 1 Legal ProceedingsprintItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6 Exhibitsprint