JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and Shares in Millions Except Per Share Amounts) (Note 1)* 2016 71,890 21,789 50.101 20,067 9.143 29 Sales to customers Cost of products sold Gross profit Selling, marketing and administrative expenses Research and development expense In-process research and development Interest income Interest expense, net of portion capitalized (Note 4) Other (income) expense, net Restructuring (Note 22) Eamings before provision for taxes on income Provision for taxes on income (Note 8) Net earnings 2018 81.581 27.091 54,490 22,540 10,775 1,126 (611) 1,005 1,405 251 17,999 2,702 15.297 2017 76,450 25,439 51,011 21,520 10,594 408 (385) 934 (42) 309 17,673 16,373 1,300 (368) 726 210 491 19,803 3,263 16,540 Net earnings per share (Notes 1 and 15) Basic Diluted 5.70 5.61 0.48 0.47 6.04 5.93 Average shares outstanding (Notes 1 and 15) Basic Diluted *Prior years amounts were reclassified to conform to current year presentation (adoption of ASU 2017-07) 2,681.5 2,728.7 2,692.0 2,745. 3 2 2,737.3 ,788.9 See Notes to Consolidated Financial Statements JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (Dollars in Millions) (Note 1) Accumulated Other Comprehensive Income (13,165) Retained Earnings 103.879 Total 71,150 Common Stock Issued Amount 3,120 Treasury Stock Amount (22.684) 16.540 (8,621) (1,181) 16,540 (8,621) 2,130 (8,979) (66) (1.736) 3,311 (8.979) (66) (1.736) (14,901) 70.418 3,120 (28,352) 110,551 1.300 (8.943) (1,079) Balance, January 3, 2016 Net earnings Cash dividends paid ($3.15 per share) Employee compensation and stock option plans Repurchase of common stock Other Other comprehensive income (loss), nct of tax Balance, January 1, 2017 Nct earnings Cash dividends paid ($3.32 per share) Employee compensation and stock option plans Repurchase of common stock Other Other comprehensive income (loss), net of tax Balance, December 31, 2017 Cumulative adjustment Net earnings Cash dividends paid ($3.54 per share) Employee compensation and stock option plans Repurchase of common stock Other Other comprehensive income (Loss), net of tax Balance, December 30, 2018 1.300 (8,943) 2,077 (6,358) (36) 1,702 60,160 3,156 (6,358) (36) 1,702 (13,199) (232) 3,120 (31,554) 101,793 (254) 15,297 (9.494) (1.111) (486) 15,297 (9,494) 1,949 (5,868) (15) (1.791) 59.752 3,060 (5.868) (15) (1,791) S 106,216 (15,222) = 3,120 (34,362) (1) See Note I to Consolidated Financial Statements for additional details on the effect of cumulative adjustments to retained earnings. See Notes to Consolidated Financial Statements (Dollars In millions) 2018 51 Cost of products sold Selling, marketing and administrative expenses Research and development expense Other (income) expense, net Eamings before provision for taxes on income Increase (Decrease) to Net Expense 2017 2016 85 100 40 (225) 104 122 48 21 (127) (274) - following table summarizes the cumulative effect adjustments made to the 2018 opening balance of retained camings upon adoption of the new ounting standards mentioned above: (Dollars in Millions) ASU 2014-09- Revenue from Contracts with Customers ASU 2016-01 - Financial Instruments ASU 2016-16 - Income Taxes: Intra-Entity Transfers Total Cumulative Effect Adjustment Increase (Decrease) to Retained Earnings (47) 232 (439) (254) 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Johnson & Johnson and its subsidiaries (the Company). Intercompany accounts and transactions are eliminated. Description of the Company and Business Segments The Company has approximately 135,100 employees worldwide engaged in the research and development, manufacture and sale of a broad range of product in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being. The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices. The Consumer segment includes a broad range of products used in the baby care, oral care, beauty, over-the-counter pharmaceutical, women's health and wound care markets. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment is focused on six therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, pulmonary hypertension, and cardiovascular and metabolic diseases. Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. The Medical Devices segment includes a broad range of products used in the orthopaedic, surgery, interventional solutions (cardiovascular and neurovascular), diabetes care (divested in the fiscal fourth quarter of 2018) and vision fields, which are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics. New Accounting Standards Recently Adopted Accounting Standards ASU 2014-09: Revenue from Contracts with Customers On January 1, 2018, the Company adopted the new accounting standard, ASC 606, Revenue from Contracts with Customers and all the related amendments (new revenue standard) to all contracts using the modified retrospective method. The cumulative effect of initially applying the new revenue standard was recognized as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new revenue standard has not had a material impact to either reported Sales to customers or Net camings. Additionally, the Company will continue to recognize revenue from product sales as goods are shipped or delivered to the customer, as control of goods transfers at the same time. In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company's Consolidated Statement of Eamings and Balance Sheet was as follows: Statement of Earnings - For the fiscal year ended December 30, 2018 (Dollars in millions) Sales to customers As Reported 81,581 Effect of change Balance without adoption of ASC 606 81,546 S (35) Net enmings 15,297 (28) 15,269 Balance Sheet - As of December 30, 2018 Effect of change As Reported 152,954 Balance without adoption of ASC 606 152,977 Assets Liabilities 93,202 93,206 Equity 59,752 19 59,771 The Company made a cumulative effect adjustment to the 2018 opening balance of retained carings upon adoption of ASU 2014-09, which decreased beginning retained camings by S47 million. As part of the adoption of ASC 606 see Note 18 to the Consolidated Financial Statements for further disaggregation of revenue. presented in the financial statements. The Company's operating leases will result in the recognition of additional assets and the corresponding liabilities on its Consolidated Balance Sheets. The adoption of this standard will not have a material impact on the Company's consolidated financial statements. Cash Equivalents The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating. The Company invests its cash primarily in govemment securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (RRAs). RRAs are collateralized by deposits in the form of Goverment Securities and Obligations for an amount not less than 102% of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an A (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities. Investments Investments classified as held to maturity investments are reported at amortized cost and realized gains or losses are reported in eamings. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Available-for-sale securities available for current operations are classified as current assets otherwise, they are classified as long term. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company reviews its investments in equity securities for impairment and adjusts these investments to fair value through camings, as required. Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets: Building and building equipment Land and leasehold improvements Machinery and equipment 20 - 30 years 10-20 years 2 - 13 years The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for intemal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 8 years. The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset's fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows. Revenue Recognition The Company recognizes revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers. The Company's global payment terms are typically between 30 to 90 days. Provisions for certain rebates, sales incentives, trade promotions, coupons, product retums and discounts to customers are accounted for as variable consideration and recorded as a reduction in sales. Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including consideration of competitor pricing. Rebates are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as intemally generated information. Sales returns are estimated and recorded based on historical sales and retums information. Products that exhibit unusual sales or retum pattems due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales retum accruals. Sales returns allowances represent a reserve for products that may be retumed due to expiration, destruction in the field, or in specific areas, product recall. The sales retums reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company's accounting policies, the Company generally issues credit to customers for retumed goods. The Company's sales retums reserves are accounted for in accordance with the U.S. GAAP guidance for revenue recognition when right of retum exists. Sales retums reserves are recorded at full sales value. Sales retums in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales retums for certain franchises in the Medical Devices segment are typically resalable but are not material. The Company infrequently exchanges products from inventory for retumed products. The sales retums reserve for the total Company has been approximately 1.0% of annual net trade sales during the fiscal reporting years 2018, 2017 and 2016. Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the same period as related sales. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of revenue. The Company also eams profit-share payments through collaborative arrangements for certain products, which are included in sales to customers. For all years presented, profit-share payments were less than 2.0% of the total revenues and are included in sales to customers. Shipping and Handling Shipping and handling costs incurred were $1,090 million, $1,042 million and $974 million in 2018, 2017 and 2016, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than 0.5% of sales to customers for all periods presented. Inventories Inventories are stated at the lower of cost or net realizable value determined by the first-in, first-out method. Intangible Assets and Goodwill The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed annually for impairment. The Company completed the annual impairment test for 2018 in the fiscal fourth quarter. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted. Purchased in-process research and development is accounted for as an indefinite lived intangible asset until the underlying project is completed, at which point the intangible asset will be accounted for as a definite lived intangible asset, or abandoned, at which point the intangible asset will be written off or partially impaired. Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill. Financial Instruments As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value, with Level 1 having the highest priority and Level 3 having the lowest. Changes in the fair value of derivatives are recorded each period in current eamings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction. The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure's impact on the Company's financial performance; (2) protect the Company's cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments, and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments. Product Liability Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information and actuarially determined estimates where applicable. The accruals are adjusted periodically as additional information becomes available. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated. 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 As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated 2,200 Goodwill as of December 30, 2018 and December 31, 2017, as allocated by segment of business, was as follows: (Dollars in Millions) Consumer Pharmaceutical Medical Devices Goodwill at January 1, 2017 $ 8,263 2,840 11,702 Goodwill, related to acquisitions() 102 6,161 Goodwill, related to divestitures (74) (1) (102) Currency translation/other 584 109 122 Goodwill at December 31, 2017 $ 8,875 9,109 13,922 Goodwill, related to acquisitions 168 51 Goodwill, related to divestitures (1,348) (2) Currency translation/other (373) (97) (38) Goodwill at December 30, 2018 8,670 9.063 12,720 Total 22,805 8,463 (177) 815 31,906 403 (1,348) (508) 30,453 184 (1) Goodwill of $6.2 billion related to the Actelion acquisition acquired in the fiscal second quarter of 2017, within the Pharmaceutical segment and $1.7 billion related to the AMO acquisition acquired in the fiscal first quarter of 2017, within the Medical Devices segment. (Goodwill of $1.0 billion is related to the divestiture of the LifeScan business. Goodwill of $0.3 billion is related to the divestiture of the Advanced Sterilization Products business, which was pending and classified as assets held for sale on the Consolidated Balance Sheet as of December 30, 2018 The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are 11 years and 22 years, respectively. The amortization expense of amortizable assets included in cost of products sold was $4.4 billion, $3.0 billion and $1.2 billion before tax, for the fiscal years ended December 30, 2018, December 31, 2017 and January 1, 2017, 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. See Note 20 to the Consolidated Financial Statements for additional details related to acquisitions and divestitures. 6. Fair Value Measurements The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany products and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both 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 cross currency interest rate swaps and 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 eamings effect of the related foreign currency assets and liabilities. The Company carly adopted ASU 2017-12: Targeted Improvements to Accounting for Hedge Activities effective as of the beginning of fiscal second quarter of 2018. The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features. During the fiscal second quarter of 2017, the Company entered into credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of December 30, 2018, the total amount of collateral paid under the credit support agreements (CSA) amounted to $182 million net. On an ongoing basis, the Company monitors counter-party credit ratings. The Company considers credit non-performance risk to be low, because the Company primarily enters into agreements with commercial institutions that have at least an investment grade credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this footnote for receivables and payables with these commercial institutions. As of December 30, 2018, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $41.1 billion, $7.3 billion, and $0.5 billion respectively. As of December 31, 2017, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $34.5 billion, $2.3 billion, and $1.1 billion respectively. Other Cost of BAD (Income) The following table is a summary of the activity related to derivatives and hedges for the fiscal years ended December 30, 2018 and December 31, 2017: December 30, 2018 December 31, 2017 Cost of Interest Other Interest Other Products R&D (Income) (Income) Products R&D (Income) (Income) (Dollars in Millions) Sales Sold E xpense Expense Expense Sales Sold Expense Expense Expense The effects of fair value, net investment and cash flow hedging: Gain (Loss) on fair value hedging relationship: Interest rate swaps contracts: $ - - - - - - - 5 - Hedged items Derivatives designated as hedging instruments Gain (Loss) on net investment hedging relationship: Cross currency interest rate swaps contracts: Amount of gain or (loss) recognized in income on derivative amount excluded from effectiveness testing Amount of gain or loss) recognized in AOCI - - - - - - 56 56 - - - - - - Gain (Loss) on cash flow hedging relationship: Forward foreign exchange contracts: Amount of gain or loss) reclassified from AOCI in to income - (24) (31) (159) (165) - (87) 47 (32) 200 (17) (220) (193) Amount of pain or (loss) recognized in AOCI (4) 49 9 6 (199) (60) Cross currency interest rate swaps contracts: Amount of gain or loss) reclassified from AOCI into income Amount of gain or loss) recognized in AOCI - - - - - - - - 83 110 - - $ - 117 (1) Includes equity collar contracts. The equity collar contracts expired in December of 2017. For the fiscal years ended December 30, 2018 and December 31, 2017, the following amounts were recorded on the Consolidated Balance Sheet Carrying Amount of the Hedged Liability Line item in the Consolidated Balance Sheet in which the hedged item is included (Dollars in Millions) Current Portion of Long-term Debt Long-term Debt Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability December 30, 2018 December 31, 2017 December 30, 2018 494 $ December 31, 2017 597 496 Question 11 1.25 points Save Ansv Calculate Johnson & Johnson's return on assets ratio (net earnings / total assets) for the last two reporting periods. Round to two decimal places. Based on the company's return on assets ratio, the company's management: a used its assets more efficiently to generate earnings. b used its assets less efficiently to generate earnings. used earnings more efficiently to generate assets. d used earnings less efficiently to generate assets. Question 12 Johnson & Johnson increased which account when it originally issued shares of its stock for cash? a. Retained earnings b. Short-term investments oc Common stock d. Long-term investments Question 13 At the most recent balance sheet date, Johnson & Johnson's shareholder claims to the company's assets totaled (in millions): 0 a. $59,752 b.$106,216 c$152,954 0 0 d. $3,120 Question 14 At the most recent balance sheet date, Johnson & Johnson's contributed capital totaled (in millions): a. $3,120 0 O b. $106,216 O $34.362 d. $94.114 Question 15 Johnson & Johnson's undistributed earnings at the most recent balance sheet date was (in millions): a $94.114 b. $106.216 c. $3,120 d. $59,752