JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and Shares in Millions Except Per Share Amounts) (Note 1) 2018 2017 2016 Sales to customers 24 81,581 76,450 71,890 Cost of products sold Gross profit Selling, marketing and administrative expenses Research and development expense 27,091 25,439 21,789 50,101 54,490 51,011 22,540 21,520 20,067 10,594 9,143 10,775 408 1,126 29 In-process research and development (368) (611) 1,005 (385) Interest income 726 934 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) (42) 210 1,405 491 309 251 19,803 17,673 17,999 3,263 16,373 2,702 16,540 1,300 15,297 Net earnings Net earnings per share (Notes I and 15) 0.48 6.04 5.70 Basic 5.93 0.47 5.61 Diluted Average shares outstanding (Notes I and 15) 2,737.3 2,692.0 2,681.5 Basic 2,745.3 2,788.9 2,728.7 Diluted *Prior years amounts were reclassified to confom to cumrent year presentation (adoption of ASU 2017-07) See Notes to Consolidated Financial Statements JOHNSON A JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AI December 3e, 2018 and December 31, 2017 (Dollars in Millios Except Share and Per Share Amoun (Nete 1) 2018 2017 Assets Curreat asets Cash and cash equivalents (Notes I and 2) Marketable securities (Notes I and 2) 18107 17824 1580 472 Accounts receivable trade, less allowances for doubtful accousts $248 (2017, 5291) 14.098 13,490 Inventories (Notes I and 3) 8599 8.765 Prepaid expenses and other receivables 2,699 2,537 Assets held for sale (Note 20) 950 46.033 Tetal current assets 43,a88 17.035 47611 Property, plant and equipment, net (Notes I and 4) Intangible assets, net (Notes I and 5) 17.005 53.228 31906 30,453 Goodwill (Notes I and 5) 7,105 Defemed taxes on income (Note 8) 7,640 4,182 4,971 Other assets 152954 157,303 Tetal assets Liabilities and Shareholders' Equity Carreat liabilities Loans and notes payable Note 7) Accounts payable Accrued liabilities Accrued rebates, retums and promotions 3.906 2,796 7537 7310 7,601 7304 7210 9,380 2953 L354 3,098 Accrued compensation and employee elated obligations Aconied taxes on income (NoteR) S18 30537 31.230 Total cerrent liabilides 30675 27,684 Long-em debt (Note 7) Defemed taxes en income (Note 8) 7.506 10,074 9,951 Employee elated obligations (Notes 9 and 10) Long-tem tases payable (Note 8) Other liabilities Tetal liabilides 8472 8242 9017 97.143 93.202 Sharehelders' equity Prefered stock-without par value (authorized and unissued 2.000,000 shares) Common stock-par value SI00 per share (Note 12) (muthorized4320.000.000 hares issed 3,119,843,000 shares) Accumulated otcher comprehensive income (loss) (Note 13) Retained eamings 3,120 (13,199) 101,793 3,120 15222) 106216 91714 31.554 94114 34,362 Less: common stock held in treasury, at cost (Note 12)(457,519,000 shares and 437.JI8000 sham 59,752 Tetal shareholders' equity 157303 152,954 Tetal liabilides and shareholders' equity See Notes to Consolidated Financial Satements JOHNSON A JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dellars in Mallen te 2017 Cash ews frm prg tde Net ings 16540 Mjte ncle net mings h f on oping vte Depreciion ndoriion of propeny d Stock hased compnsaon 3.754 Asset wredow 1258 79 Gain on sale of t n Defed provi Acelt ble awan Chnge ed , of effoc fom aquiitons d divet 10.a1) 2406 04 Increase o ovale (433) (LMS) dsrt ein iv e (644) Increse om eyeed wned Incree ine o do (Decreytoo er Net ch tremp g the Cash fes e g 2725 456 (275) (19 Enm-comehios a,340 (5 18747 Addion propeny, pland opupennt Proed tem he dpal of te, et Acquisi Punha Sales of invest 1, 1.267 et of cash acquend (Ne 20 OS1S) (4,50 33,9 35.T (464 (234 Oer irily ntgbien Net ch edby ng 14.76) Cash flew fre feng te Dividende to shatede Rapundaeof comm Prood f hon em d Rutran ofhened Praced fe kong , et of iance costs Re Pred fm e ce of k opt wihhelding te e GAN (130) 12.04 (177) k , et (4) (I Oher TATN (ILSI Ne c edby fiencing acte Efst ef nchang changen on bdc IomtD chnd ce ogual le 0,148 fyor Ne) I734 I8972 Cahnd ch uiva 1T14 Cash nd c qalva,df year Nete Sepplmtl eh few dat Cah paid during he yo for Taountald 2343 JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (Dollars in Millions) (Note 1) Accumulated Other Treasury Stock Amount Retained Comprehensive Income Common Stock Total Earnings Issued Amount Balance, January 3, 2016 Net camings (13,165) 71,150 103,879 3,120 (22,684) 16,540 16,540 (8,621) Cash dividends paid (S3.15 per share) (8,621) 3,311 Employee compensation and stock option plans Repurchase of common stock (1,181) 2,130 (8,979) (8,979) (66) (66) Other (1,736) (1,736) Other comprehensive income (loss), net of tax (14,901) 3,120 (28.352) 110,551 70,418 Balance, January 1, 2017 1,300 1,300 Net eamings (8,943) Cash dividends paid (53.32 per share) Employee compensation and stock option plans Repurchase of common stock (8,943) 3,156 (1,079) 2,077 (6,358) (6,358) (36) (36) Other 1.702 1,702 Other comprehemsive income (loss), net of tax (31,554) (13,199) 3,120 101,793 60,160 Balance, December 31, 2017 (232) (486) Cumulative adjustment 15.297 15,297 Net eamings Cash dividends paid ($3.54 per share) Employee compensation and stock option plans Repurchase of common stock (9494) (9,494) 3,060 (1,111) 1,949 (5,868) (5,868) (15) (15) Other (1,791) (1,791) Other comprehensive income (loss), net of tax (34,362) 3,120 (15,222) 106,216 59,752 Balance, December 30, 2018 I to Consolidated Financial Statements for additional details on the effect of cumulative adjustments to retained carnings ) See Note See Notes to Consolidated Financial Statements 38 customers for retumed goods. The Company's sales retums reserves are accounted for in accordance with the US. 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 returms 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 returms 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 amangements, 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 amangements are evaluated to determine the appropriate amounts to be deferred or reconded as a reduction of revenue. The Company also eams profit-share payments through collaborative amangements for certain products, which are included in sales to customens. 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 incured 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 detemined by the fint-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 impaiment. The Company completed the annual impairment test for 2018 in the fiscal fourth quarter. Future impaiment tests will be performed annually in the fiscal fourth quarter, or sooner if wamanted. 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 impaiment when waranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill. Financial Instruments As required by US. 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 litemture establishes a three-level hierarchy to prioritize the inputs used in measuring fair value, with Level I having the highest priority and Level 3 having the lowest. Changes in the fair value of derivatives are reconded each period in cumrent 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 cumency exposure's impact on the Company's financial perfomance; (2) protect the Company's cash flow from advene 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 infomation 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 amodent of the liability can be reasonably estimated based on existing infomation and actuarially determined estimates where applicable. The accruals ae 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 detemmined 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 selfinsurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, elaims that exceed the insurance covernage are accrued when losses are probable and amounts can be reasonably estimated. 45 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 cumrent 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, corponte debt securities, money market funds and reverse repurchase agreements (RRAS). RRAS are collateralized by deposits in the fom of Govemment 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 pemitted 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 collateml 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 tem. 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 impaiment and adjusts these investments to fair value through eamings, 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: 20-30 years 10-20 yean 2-13 years Building and building equipment Land and leasehold improvements Machinery and equipment The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incured in connection with developing or obtaining computer software for intemal use. Capitalized software colts are amortized over the estimated useful lives of the software, which genemally range firom 3 to 8 years. The Company reviews long-lived assets to assess ecoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impaiment assessment may be perfomed 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 canrying 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 tems are typically between 30 to 90 days. Provisions for certain rebates, sales incentives, trade promotions, coupons, product retums and discounts to customens are accounted for as variable consideration and reconded as a reduction in sales. Product discounts granted are based on the tems of aangements with direct, indirect and other market participants, as well as market conditions, including consideration of competitor pricing. Rebates are estimated based on contractual tems, 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 infomation. Sales retums 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 accnuals Sales retums 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 retuns reserve is based on historical retum trends by product and by market as a percent to grosss sales In accondance with the Company's waliaier th Company generally issues credit to 4. Preperty, Plant and Equipment At the end of 2018 and 2017. property, plant and equipment at cost and accumulated depeeciatioe were (Dellars in Mitien 2018 2017 Land and land improvements Buildings and building equipment Machinery and equipment Construction in progres Total property. plant and equipment, gross Less accumulated depreciation Total property.plant and equipment, net (0 Net of asets held for sale on the Consolidated Balance Sheet for pprimately $0.1 llien reled to the divestiture of he Advancol Seriliaion Product buins and S0.1 billion related o the sttegic collaboration with Jabil Ine, hoth of which were pmding of Decber 30, 2018. 807 829 11,176 11.240 25,992 25,949 3,876 3,448 41,851 41,466 24816 24,461 17.035 00 17,00s The Company capitalizes interest expense as part of the cost of construction of facilities and equipment Inteet expense capitalized in 2018, 2017 and 2016 was S86 million, $94 million and S102 million, respectively. Depreciation expense, including the amotization of capitalized interest in 2018, 2017 and 2016 was $2.6 billion, $26 billion and $25 billion, respectively. Upon retirement or other disposal of property.plant and equipment, the costs and related amounts of accuulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, ifany, between the net asset value and the peceeds are recorded in eamings 5. Intangibde Assets and Goodwill At the end of 2018 and 2017, the gross and net amounts of intangible assets were: 2018 2017 (Dellars in Milen Intangible asets with definite lives Patents and tmdemarksgross Less accumulated amortization 36,427 35,194 9,784 7223 25,410 29,204 Patents and trademarksnet 21,334 20.204 Customer relationships and other intangibles-gross 8323 7463 Less accumulated amortization Customer relationships and other intangihlesnet Intangible asets with indeflaite lives 13011 12,741 6,937 Trademarks 4,201 2,253 Purchased in process reseanch and development Total intangible assets with indefinite lives 11J83 9,190 47411 Total intangible asets net The decee wa prinly bublehe wrie down of S.INo latedthe s uired in the ices of A ehaa In (A dXOI Lid (XOI ore SLI lin, the Coepany ordeda partal p charge of S0 len d he devpe pgrn of ALI metof Repirory Synyel Vina (RSV) nd hun ine MPV) d wih he 2014 aiof Als. The ipeemt charge w c d based on updaled ch lew pejtons dio d hehemi rk in he t devptd relehept of the phase 2h dp n de e pobability of m fas and the ongn alysi of aet devep nn impme eof 50 en we rded ed of he development projet for ronbin bodysd wth defe ived itanglet pon c ln veienal dg fthe IPRAD d RLEADAM wa relsifed lly, S n of XO1. A 2015 Question 1 Johnson & Johnson's most recent balance sheet is a picture of the company's financial position: O a. For year ended December 30, 2018. At December 30, 2018. Ob. At December 31, 2018. C. For the year ended December 31, 2018. d. Question 2 At the most recent balance sheet date, Johnson & Johnson's accounting equation was (in millions): Assets $152,954 - Liabilities $93.202 Shareholders' equity $59,752 a. b. Assets $152,954 - Liabilities $93,202 + Stockholders' equity $59,752 Assets $46,033 - Liabilities $31,230 + Shareholders' Equity $59,752 O c. Assets $152.954 = Liabilities and Stockholders' equity $152.954 O d. Question 3 How much did Johnson & Johnson have in total economic resources (in millions) at the most recent balance sheet? $46,033 a. $59,752 be $152,954 C. d. $14.803 Question 4 How much in total did Johnson & Johnson owe its creditors at the most recent balance sheet date (in millions)? $93.202 $124,432 $31,230 $59,752 Question 5 At the most recent balance sheet date, Johnson & Johnson's largest current asset was: Cash and cash equivalents. a. Accounts receivable,net. b. Inventories. O C. Prepaid expenses. d