Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
 
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 2019
or
 
 
 
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from            to
Commission file number 1-3215
jnjlogoa03a01a01a01a01a12.jpg
(Exact name of registrant as specified in its charter)
NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
 
22-1024240
(I.R.S. Employer
Identification No.)

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 every Interactive Data File required to be submitted 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 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.
 
Large accelerated filer þ
 
Accelerated filer o
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
 
 
 

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). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On April 25, 2019, 2,655,055,987 shares of Common Stock, $1.00 par value, were outstanding.



JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
 
 
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10(a) JOHNSON & JOHNSON EXECUTIVE INCENTIVE PLAN (AS AMENDED)
 
 
 EX-31.1
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT




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 United States 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,” and other words of similar meaning in conjunction with, among other things: discussions of future operations, expected operating results, financial performance; impact of planned acquisitions and dispositions; impact and timing of restructuring initiatives including associated cost savings and other benefits; the Company's strategy for growth; product development activities; regulatory approvals; market position and expenditures.
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
•
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, additional analysis of existing clinical data, obtaining regulatory approvals, health plan coverage and customer access, and initial and continued commercial success;
•
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;
•
The impact of patent expirations, typically followed by the introduction of competing biosimilars and generics and resulting revenue and market share losses;
•
Increasingly aggressive and frequent challenges to the Company’s patents by competitors and others seeking to launch competing generic, biosimilar or other products and increased receptivity of courts, the United States Patent and Trademark Office and other decision makers to such challenges, potentially resulting in loss of market exclusivity and rapid decline in sales for the relevant product sooner than expected;
•
Competition in research and development of new and improved products, processes and technologies, which can result in product and process obsolescence;
•
Competition to reach agreement with third parties for collaboration, licensing, development and marketing agreements for products and technologies;
•
Competition based on cost-effectiveness, product performance, technological advances and patents attained by competitors; and
•
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.
Risks Related to Product Liability, Litigation and Regulatory Activity
•
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, reputational damage, increased litigation expense and share price impact;
•
Impact, including declining sales and reputational damage, of significant litigation or government action adverse to the Company, including product liability claims and allegations related to pharmaceutical marketing practices and contracting strategies;
•
Impact of an adverse judgment or settlement and the adequacy of reserves related to legal proceedings, including patent litigation, product liability, personal injury claims, securities class actions, government investigations, employment and other legal proceedings;


•
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;
•
Failure to meet compliance obligations in the McNEIL-PPC, Inc. Consent Decree or any other compliance agreements with governments or government agencies, which could result in significant sanctions;
•
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;
•
Compliance with local regulations and laws that may restrict the Company’s ability to manufacture or sell its products in relevant markets including, requirements to comply with medical device reporting regulations and other requirements such as the European Union's Medical Devices Regulation;
•
Changes in domestic and international tax laws and regulations, including changes related to The Tax Cuts and Jobs Act in the United States, the Federal Act on Tax Reform and AHV Financing in Switzerland, increasing audit scrutiny by tax authorities around the world and exposures to additional tax liabilities potentially in excess of existing reserves; and
•
Issuance of new or revised accounting standards by the Financial Accounting Standards Board and regulations by the Securities and Exchange Commission.
Risks Related to the Company’s Strategic Initiatives and Health Care Market Trends
•
Pricing pressures resulting from trends toward health care cost containment, including the continued consolidation among health care providers and other market participants, trends toward managed care, the shift toward governments increasingly becoming the primary payers of health care expenses, significant new entrants to the health care markets seeking to reduce costs and government pressure on companies to voluntarily reduce costs and price increases;
•
Restricted spending patterns of individual, institutional and governmental purchasers of health care products and services due to economic hardship and budgetary constraints;
•
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;
•
The potential that the expected strategic benefits and opportunities from any planned or completed acquisition or divestiture by the Company may not be realized or may take longer to realize than expected; and
•
The potential that the expected benefits and opportunities related to past and ongoing restructuring actions may not be realized or may take longer to realize than expected.
Risks Related to Economic Conditions, Financial Markets and Operating Internationally
•
Market conditions and the possibility that the Company’s share repurchase program may be delayed, suspended or discontinued;
•
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;
•
Potential changes in export/import and trade laws, regulations and policies of the United States and other countries, including any increased trade restrictions or tariffs and potential drug reimportation legislation;
•
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;
•
Changes to global climate, 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
•
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.



Risks Related to Supply Chain and Operations
•
Difficulties and delays in manufacturing, internally through third party providers or otherwise 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;
•
Interruptions and breaches of the Company's information technology systems or those of the Company's vendors which, could result in reputational, competitive, operational or other business harm as well as financial costs and regulatory action;
•
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; and
•
The potential that the expected benefits and opportunities related to restructuring actions contemplated for the global supply chain may not be realized or may take longer to realize than expected, including due to any required approvals from applicable regulatory authorities. Disruptions associated with the announced global supply chain actions may adversely affect supply and sourcing of materials used in the Company's products.
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 December 30, 2018, 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 predict or identify all such factors and should not consider the risks described above to be a complete statement of 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.


Table of Contents

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)

 
 
March 31, 2019
 
December 30, 2018
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
14,734

 
18,107

Marketable securities
 
602

 
1,580

Accounts receivable, trade, less allowances for doubtful accounts $244 (2018, $248)
 
14,115

 
14,098

Inventories (Note 2)
 
9,086

 
8,599

Prepaid expenses and other
 
2,599

 
2,699

Assets held for sale (Note 10)
 
851

 
950

Total current assets
 
41,987

 
46,033

Property, plant and equipment at cost
 
42,262

 
41,851

Less: accumulated depreciation
 
(25,262
)
 
(24,816
)
Property, plant and equipment, net
 
17,000

 
17,035

Intangible assets, net (Note 3)
 
46,898

 
47,611

Goodwill (Note 3)
 
31,450

 
30,453

Deferred taxes on income
 
7,533

 
7,640

Other assets
 
5,159

 
4,182

Total assets
 
$
150,027

 
152,954

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Loans and notes payable
 
$
1,708

 
2,796

Accounts payable
 
6,923

 
7,537

Accrued liabilities
 
7,946

 
7,601

Accrued rebates, returns and promotions
 
9,523

 
9,380

Accrued compensation and employee related obligations
 
1,986

 
3,098

Accrued taxes on income
 
1,025

 
818

Total current liabilities
 
29,111

 
31,230

Long-term debt (Note 4)
 
27,660

 
27,684

Deferred taxes on income
 
7,394

 
7,506

Employee related obligations
 
9,905

 
9,951

Long-term taxes payable
 
8,074

 
8,242

Other liabilities
 
8,928

 
8,589

Total liabilities
 
91,072

 
93,202

Shareholders’ equity:
 
 
 
 
Common stock — par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
 
$
3,120

 
3,120

Accumulated other comprehensive income (loss) (Note 7)
 
(15,517
)
 
(15,222
)
Retained earnings
 
106,650

 
106,216

Less: common stock held in treasury, at cost (464,207,000 and 457,519,000 shares)
 
35,298

 
34,362

Total shareholders’ equity
 
58,955

 
59,752

Total liabilities and shareholders' equity
 
$
150,027

 
152,954

See Notes to Consolidated Financial Statements

1
Table of Contents

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal First Quarters Ended
 
 
March 31,
2019
 
Percent
to Sales
 
April 1,
2018
 
Percent
to Sales
Sales to customers (Note 9)
 
$
20,021

 
100.0
 %
 
$
20,009

 
100.0
 %
Cost of products sold
 
6,615

 
33.0

 
6,614

 
33.1

Gross profit
 
13,406

 
67.0

 
13,395

 
66.9

Selling, marketing and administrative expenses
 
5,219

 
26.1

 
5,263

 
26.3

Research and development expense
 
2,858

 
14.3

 
2,404

 
12.0

In-process research and development
 
890

 
4.4

 
—

 
—

Interest income
 
(99
)
 
(0.5
)
 
(114
)
 
(0.6
)
Interest expense, net of portion capitalized
 
102

 
0.5

 
259

 
1.3

Other (income) expense, net
 
(22
)
 
(0.1
)
 
60

 
0.3

Restructuring (Note 12)
 
36

 
0.2

 
42

 
0.2

Earnings before provision for taxes on income
 
4,422

 
22.1

 
5,481

 
27.4

Provision for taxes on income (Note 5)
 
673

 
3.4

 
1,114

 
5.6

NET EARNINGS
 
$
3,749

 
18.7
 %
 
$
4,367

 
21.8
 %
 
 
 
 
 
 
 
 
 
NET EARNINGS PER SHARE (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
1.41

 
 
 
$
1.63

 
 
Diluted
 
$
1.39

 
 
 
$
1.60

 
 
 
 
 
 
 
 
 
 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,660.8

 
 
 
2,682.2

 
 
Diluted
 
2,698.8

 
 
 
2,731.9

 
 



 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements


2
Table of Contents

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)

 
Fiscal First Quarters Ended
 
March 31, 2019
 
April 1, 2018
Net earnings
$
3,749

 
4,367

 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation
(258
)
 
623

 
 
 
 
Securities:
 
 
 
  Unrealized holding gain (loss) arising during period
—

 
—

  Reclassifications to earnings
—

 
—

  Net change
—

 
—

 
 
 
 
Employee benefit plans:
 
 
 
  Prior service cost amortization during period
(7
)
 
(6
)
  Gain (loss) amortization during period
176

 
192

  Net change
169

 
186

 
 
 
 
Derivatives & hedges:
 
 
 
  Unrealized gain (loss) arising during period
(302
)
 
(164
)
  Reclassifications to earnings
96

 
178

  Net change
(206
)
 
14

 
 
 
 
Other comprehensive income (loss)
(295
)
 
823

 
 
 
 
Comprehensive income
$
3,454

 
5,190

 
 
 
 
See Notes to Consolidated Financial Statements

The tax effects in other comprehensive income for the fiscal first quarters were as follows for 2019 and 2018, respectively: Foreign Currency Translation: $61 million and $163 million; Employee Benefit Plans: $1 million and $52 million; Derivatives & Hedges: $55 million and $4 million.
 
 

3
Table of Contents

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; Dollars in Millions)
 
Total
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Common Stock
Issued Amount
 
Treasury
Stock
Amount
Balance, December 30, 2018
$
59,752

 
106,216

 
(15,222
)
 
3,120

 
(34,362
)
Net earnings
3,749

 
3,749

 
—

 
—

 
—

Cash dividends paid ($0.90 per share)
(2,396
)
 
(2,396
)
 
—

 
—

 
—

Employee compensation and stock option plans
351

 
(919
)
 
—

 
—

 
1,270

Repurchase of common stock
(2,206
)
 
—

 
—

 
—

 
(2,206
)
Other
—

 
—

 
—

 
—

 
—

Other comprehensive income (loss), net of tax
(295
)
 
—

 
(295
)
 
—

 
—

Balance, March 31, 2019
$
58,955

 
106,650

 
(15,517
)
 
3,120

 
(35,298
)
 
 
 
 
 
 
 
 
 
 


 
Total
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Common Stock
Issued Amount
 
Treasury
Stock
Amount
Balance, December 31, 2017
$
60,160

 
101,793

 
(13,199
)
 
3,120

 
(31,554
)
Cumulative Adjustment to retained earnings
1,264

 
1,496

 
(232
)
 
—

 
—

Net earnings
4,367

 
4,367

 
—

 
—

 
—

Cash dividends paid ($0.84 per share)
(2,253
)
 
(2,253
)
 
—

 
—

 
—

Employee compensation and stock option plans
351

 
(1,051
)
 
—

 
—

 
1,402

Repurchase of common stock
(1,444
)
 
—

 
—

 
—

 
(1,444
)
Other
(13
)
 
(13
)
 
—

 
—

 
—

Other comprehensive income (loss), net of tax
823

 
—

 
823

 
—

 
—

Balance, April 1, 2018
$
63,255

 
104,339

 
(12,608
)
 
3,120

 
(31,596
)
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements


4
Table of Contents

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal First Quarters Ended
 
 
March 31,
2019
 
April 1,
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
3,749

 
4,367

Adjustments to reconcile net earnings to cash flows from operating activities:
 
 
 
 
Depreciation and amortization of property and intangibles
 
1,761

 
1,746

Stock based compensation
 
258

 
268

Asset write-downs
 
913

 
—

Net gain on sale of assets
 
(72
)
 
—

Deferred tax provision
 
(362
)
 
44

Accounts receivable allowances
 
(3
)
 
(20
)
Changes in assets and liabilities, net of effects from acquisitions and divestitures:
 
 
 
 
Decrease/(Increase) in accounts receivable
 
157

 
(479
)
Increase in inventories
 
(369
)
 
(322
)
Decrease in accounts payable and accrued liabilities
 
(1,833
)
 
(1,686
)
Increase in other current and non-current assets
 
(488
)
 
(907
)
(Decrease)/Increase in other current and non-current liabilities
 
(168
)
 
595

 
 
 
 
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
 
3,543

 
3,606

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Additions to property, plant and equipment
 
(656
)
 
(658
)
Proceeds from the disposal of assets/businesses, net
 
253

 
20

Acquisitions, net of cash acquired
 
(1,683
)
 
(82
)
Purchases of investments
 
(730
)
 
(548
)
Sales of investments
 
1,495

 
341

Other
 
(96
)
 
2

 
 
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
 
(1,417
)
 
(925
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends to shareholders
 
(2,396
)
 
(2,253
)
Repurchase of common stock
 
(2,206
)
 
(1,444
)
Proceeds from short-term debt
 
13

 
26

Retirement of short-term debt
 
(16
)
 
(2,484
)
Proceeds from long-term debt, net of issuance costs
 
—

 
2

Retirement of long-term debt
 
(1,002
)
 
(8
)
Proceeds from the exercise of stock options/employee withholding tax on stock awards, net
 
94

 
66

Other
 
(3
)
 
125

 
 
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
 
(5,516
)
 
(5,970
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
17

 
104

Decrease in cash and cash equivalents
 
(3,373
)
 
(3,185
)
Cash and Cash equivalents, beginning of period
 
18,107

 
17,824

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
14,734

 
14,639

 
 
 
 
 
Acquisitions
 
 
 
 
Fair value of assets acquired
 
$
2,154

 
119

Fair value of liabilities assumed and noncontrolling interests
 
(471
)
 
(37
)
Net cash paid for acquisitions
 
$
1,683

 
82


See Notes to Consolidated Financial Statements

5
Table of Contents

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 December 30, 2018. 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.

Columns and rows within tables may not add due to rounding. Percentages have been calculated using actual, non-rounded figures.

New Accounting Standards
Recently Adopted Accounting Standards
ASU 2016-02: Leases
The Company adopted this standard as of the beginning of fiscal year 2019, on a prospective basis. 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 arrangements that are classified as operating leases. The Company’s operating leases resulted in the recognition of additional assets and the corresponding liabilities on its Consolidated Balance Sheet, however it did not have a material impact on the consolidated financial statements.

The Company determines whether an arrangement is a lease at contract inception by establishing if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.
Right of Use (ROU) Assets and Lease Liabilities for operating leases are included in Other assets, Accrued liabilities, and Other liabilities on the consolidated balance sheet. The ROU Assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Commitments under finance leases are not significant, and are included in Property, plant and equipment, Loans and notes payable, and Long-term debt on the consolidated balance sheet.
ROU Assets and Lease Liabilities are recognized at the lease commencement date based on the present value of all minimum lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, when the implicit rate is not readily determinable. Lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company has elected the following policy elections on adoption: use of portfolio approach on leases of assets under master service agreements, exclusion of short term leases on the balance sheet, and not separating lease and non-lease components.
The Company primarily has operating leases for space, vehicles, manufacturing equipment, and data processing equipment. Leases have remaining lease terms ranging from 1 year to 37 years, some of which could include options to extend the leases when they are reasonably certain.
As noted in the Company’s 2018 10-K, the approximate minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year at December 30, 2018 were:
(Dollars in Millions)
2019
 
2020
 
2021
 
2022
 
2023
 
After 2023
 
Total
$223
 
188
 
154
 
116
 
76
 
139
 
896

Commitments under finance leases are not significant.
Maturity of Lease Liabilities related to Operating Lease
The minimum rental payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year as of March 31, 2019 are:

6
Table of Contents

 (Dollars in Millions)
Operating Leases
2019 (excluding the fiscal first quarter ended March 31, 2019)
$
198

2020
222

2021
177

2022
126

2023
81

After 2023
194

Total lease payments
998

Less: Interest
93

Present Value of lease liabilities
$
905


The Weighted Average Remaining Lease Term and discount rate:
Operating leases                        5.8 years
Weighted Average Discount Rate                3%
For the fiscal quarter ended March 31, 2019, the operating lease costs were $74 million. Cash paid for amounts included in the measurement of lease liabilities were $71 million. Other supplemental information related to these leases are as follows:
Supplemental balance sheet information (for the fiscal first quarter ended March 31, 2019):
(Dollars in Millions)
 
 
Non-current operating lease right-of-use assets
 
$
879

Current operating lease liabilities
 
249

Non-current Operating lease liabilities
 
656

       Total operating lease liabilities
 
$
905

 
 
 
        
ASU 2018-02: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This update allows a Company to elect to reclassify stranded tax effects resulting from the Tax Cuts and Job Act enacted in December 2017 from accumulated other comprehensive income to retained earnings. The Company has elected not to reclassify the income tax effects of this standard and therefore this standard will not impact the Company's consolidated financial statements.

ASU 2018-16: Derivatives and Hedging (Topic ASC 815)
This update adds the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as an eligible benchmark interest rate permitted in the application of hedge accounting. The guidance was effective for the Company as of the fiscal fourth quarter of 2018, due to the previous adoption of ASU 2017-12. The impact of the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures. The standard may have an impact in the future as the market for SOFR derivatives develops over time and if SOFR is used to hedge the Company’s financial instruments.

Recently Issued Accounting Standards
Not Adopted as of March 31, 2019
ASU 2018-18: Collaborative Arrangements
This update clarifies the interaction between ASC 808, Collaborative Arrangements and ASC 606, Revenue from Contracts with Customers. The update clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. This update will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. ASU 2018-18 should be applied retrospectively to the date of initial application of ASC 606 and early adoption is permitted. The Company is currently assessing the impact of this update on the Company’s consolidated financial statements and related disclosures.


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ASU 2016-13: Financial Instruments - Credit Losses
This update introduces the current expected credit loss (CECL) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This update will be effective for the Company for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this update on the Company’s consolidated financial statements and related disclosures.


NOTE 2 — INVENTORIES
(Dollars in Millions)
 
March 31, 2019
 
December 30, 2018
Raw materials and supplies
 
$
1,177

 
1,114

Goods in process
 
2,081

 
2,109

Finished goods
 
5,828

 
5,376

Total inventories(1)
 
$
9,086

 
8,599

(1) Net of assets held for sale on the Consolidated Balance Sheet for approximately $0.2 billion related to the divestiture of the Advanced Sterilization Products business and $0.2 billion related to the strategic collaboration with Jabil Inc., both of which were pending as of March 31, 2019. Net of assets held for sale of approximately $0.2 billion related to the divestiture of the Advanced Sterilization Products business and $0.3 billion related to the strategic collaboration with Jabil Inc., both of which were pending as of December 30, 2018.

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 2018. 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)
 
March 31, 2019
 
December 30, 2018
Intangible assets with definite lives:
 
 
 
 
Patents and trademarks — gross
 
$
35,963

 
35,194

Less accumulated amortization
 
10,548

 
9,784

Patents and trademarks — net
 
25,415

 
25,410

Customer relationships and other intangibles — gross
 
21,766

 
21,334

Less accumulated amortization
 
8,586

 
8,323

Customer relationships and other intangibles — net
 
13,180

 
13,011

Intangible assets with indefinite lives:
 
 
 
 
Trademarks
 
6,912

 
6,937

Purchased in-process research and development (1)
 
1,391

 
2,253

Total intangible assets with indefinite lives
 
8,303

 
9,190

Total intangible assets — net
 
$
46,898

 
47,611


(1)In the fiscal first quarter of 2019, the Company recorded an IPR&D impairment charge of $0.9 billion for the remaining intangible asset value related to the development program of AL-8176, an investigational drug for the treatment of Respiratory Syncytial Virus (RSV) and human metapneumovirus (hMPV) acquired with the 2014 acquisition of Alios Biopharma Inc. The impairment charge was based on additional information, including clinical data, which became available and led to the Company's decision to abandon the development of AL-8176. A partial impairment charge of $0.8 billion was previously recorded in the fiscal third quarter of 2018 related to the development program of AL-8176.






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Goodwill as of March 31, 2019 was allocated by segment of business as follows:
(Dollars in Millions)
 
Consumer
 
Pharm
 
Med Devices
 
Total
Goodwill, net at December 30, 2018
 
$
8,670

 
9,063

 
12,720

 
30,453

Goodwill, related to acquisitions
 
1,176

 
—

 
23

 
1,199

Goodwill, related to divestitures
 
—

 
—

 
—

 
—

Currency translation/Other
 
(116
)
 
(75
)
 
(11
)
 
(202
)
Goodwill, net at March 31, 2019
 
$
9,730

 
8,988

 
12,732

 
31,450

Goodwill is net of approximately $0.3 billion 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 March 31, 2019.

The weighted average amortization period for patents and trademarks is 12 years. The weighted average amortization period for customer relationships and other intangible assets is 21 years. The amortization expense of amortizable intangible assets included in cost of products sold was $1.1 billion and $1.1 billion for the fiscal first quarters ended ended March 31, 2019 and April 1, 2018, respectively. The estimated amortization expense for the five succeeding years approximates $4.4 billion, before tax, per year. Intangible asset write-downs, other than in-process research and development are included in Other (income) expense, net.

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 product 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 earnings effect of the related foreign currency assets and liabilities.

The Company early 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. The Company maintains credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. As of March 31, 2019, the total amount of collateral paid under the credit support agreements (CSA) amounted to $60 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 March 31, 2019, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $44.0 billion, $11.3 billion and $0.5 billion, respectively. 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.

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.


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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. Foreign exchange contracts designated as cash flow hedges are accounted for under the forward method and all gains/losses associated with these contracts will be recognized in the income statement when the hedged item impacts earnings. Changes in the fair value of these derivatives 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 within accumulated other comprehensive income. The portion excluded from effectiveness testing is recorded through interest (income) expense using the spot method. 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.

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.

As of March 31, 2019, the balance of deferred net loss on derivatives included in accumulated other comprehensive income was $401 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.



 
 
 
 
 
 
 
 
 
 
 












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The following table is a summary of the activity related to derivatives and hedges for the fiscal first quarters ended in 2019 and 2018:
 
March 31, 2019
April 1, 2018
(Dollars in Millions)
Sales
Cost of Products Sold
R&D Expense
Interest (Income) Expense
Other (Income) Expense
Sales
Cost of Products Sold
R&D Expense
Interest (Income) Expense
Other (Income) Expense
The effects of fair value, net investment and cash flow hedging:
 
 
 
 
 
 
 
 
 
 
Gain (Loss) on fair value hedging relationship:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps contracts:
 
 
 
 
 
 
 
 
 
 
 Hedged items
$
—

—

—

1

—

—

—

—

5

—

 Derivatives designated as hedging instruments
—

—

—

(1
)
—

—

—

—

(5
)
—

 
 
 
 
 
 
 
 
 
 
 
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
—

—

—

38

—

—

—

—

—

—

   Amount of gain or (loss) recognized in AOCI
—

—

—

38

—

—

—

—

—

—

 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) on cash flow hedging relationship:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
   Amount of gain or (loss) reclassified from AOCI into income
(21
)
(35
)
(139
)
—

6

29

2

(238
)
—

(11
)
 
 
 
 
 
 
 
 
 
 
 
   Amount of gain or (loss) recognized in AOCI
(6
)
(296
)
(110
)
—

13

31

3

(237
)
—

(18
)
 
 
 
 
 
 
 
 
 
 
 
Cross currency interest rate swaps contracts:
 
 
 
 
 
 
 
 
 
 
   Amount of gain or (loss) reclassified from AOCI into income
—

—

—

55

—

—

—

—

40

—

   Amount of gain or (loss) recognized in AOCI
$
—

—

—

59

—

—

—

—

57

—

 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2019 and December 30, 2018, the following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustment for fair value hedges:
Line item in the Consolidated Balance Sheet in which the hedged item is included
 
Carrying Amount of the Hedged Liability

 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
(Dollars in Millions)
 
March 31, 2019
 
December 30, 2018
 
March 31, 2019
 
December 30, 2018
Current Portion of Long-term Debt
 
$
499

 
494

 
1

 
5

Long-term Debt
 
—

 
—

 
—

 
—



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The following table is the effect of derivatives not designated as hedging instrument for the fiscal first quarters in 2019 and 2018:
 
 
 
 
Gain/(Loss)
Recognized In
Income on Derivative
(Dollars in Millions)
 
Location of Gain /(Loss) Recognized in Income on Derivative
 
Fiscal First Quarters Ended
Derivatives Not Designated as Hedging Instruments
 
 
 
March 31, 2019
 
April 1, 2018
Foreign Exchange Contracts
 
Other (income) expense
 
(38
)
 
(19
)
 
 
 
 
 
 
 
 
 
 
 

The following table is the effect of net investment hedges for the fiscal first quarters ended in 2019 and 2018:

 
 
Gain/(Loss)
Recognized In
Accumulated OCI
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income Into Income
 
Gain/(Loss) Reclassified From
Accumulated OCI
Into Income
(Dollars in Millions)
 
March 31, 2019
 
April 1, 2018
 
 
 
March 31, 2019
 
April 1, 2018
Debt
 
$
71

 
(150
)
 
Other (income) expense

 
—

 
—

Cross Currency interest rate swaps
 
$
370

 
—

 
Other (income) expense
 
—

 
—



The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The following table is a summary of the activity related to equity investments:
(Dollars in Millions)
 
December 30, 2018
 
 
 
 
 
March 31, 2019
 
 
 
 
Carrying Value
 
Changes in Fair Value Reflected in Net Income (1)
 
Sales/ Purchases/Other (2)
 
Carrying Value
 
Non Current Other Assets
Equity Investments with readily determinable value
 
$
511

 
143

 
176

 
830

 
830

 
 
 
 
 
 
 
 
 
 
 
Equity Investments without readily determinable value
 
$
681

 
4

 
13

 
698

 
698

(1) Recorded in Other Income/Expense
(2) Other includes impact of currency

For equity investments without readily determinable market values, $11 million of the decreases in fair value reflected in net income were the result of impairments. There were $15 million of increases in fair value reflected in net income due to changes in observable prices.

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. In accordance with ASC 820, a three-level hierarchy was established to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 inputs having the highest priority and Level 3 inputs having the lowest.

The fair value of a derivative financial instrument (i.e., forward foreign exchange contracts, interest rate contracts) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. Dollar at the current spot foreign exchange rate. The Company does not believe that fair

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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 March 31, 2019 and December 30, 2018 were as follows:
 
 
March 31, 2019
 
 
 
December 30, 2018
(Dollars in Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total(1)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts
 
$
—

 
280

 
—

 
280

 
501

Interest rate contracts (2)(4)
 
—

 
383

 
—

 
383

 
161

Total
 
—

 
663

 
—

 
663

 
662

Liabilities:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts
 
—

 
571

 
—

 
571

 
548

Interest rate contracts (3)(4)
 
—

 
295

 
—

 
295

 
292

Total
 
—

 
866

 
—

 
866

 
840

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts
 
—

 
33

 
—

 
33

 
32

Liabilities:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts
 
—

 
26

 
—

 
26

 
32

Other Investments:
 
 
 
 
 
 
 
 
 
 
Equity investments (5)
 
830

 
—

 
—

 
830

 
511

Debt securities(6)
 
$
—

 
4,673

 
—

 
4,673

 
9,734


Gross to Net Derivative Reconciliation
 
March 31, 2019
 
December 30, 2018
(Dollars in Millions)
 
 
 
 
Total Gross Assets
 
$
696

 
694

Credit Support Agreement (CSA)
 
(592
)
 
(423
)
Total Net Asset
 
104

 
271

 
 
 
 
 
Total Gross Liabilities
 
892

 
872

Credit Support Agreement (CSA)
 
(652
)
 
(605
)
Total Net Liabilities
 
$
240

 
267

 
 
 
 
 

(1) 
December 30, 2018 assets and liabilities are all classified as Level 2 with the exception of equity investments of $511 million, which are classified as Level 1.
(2) 
Includes $6 million of non-current other assets for December 30, 2018.
(3) 
Includes $2 million and $3 million of non-current other liabilities for March 31, 2019 and December 30, 2018, respectively.
(4) 
Includes cross currency interest rate swaps and interest rate swaps.

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(5) 
Classified as non-current other assets. The carrying amount of the equity investments were $830 million and $511 million as of March 31, 2019 and December 30, 2018, respectively.
(6) 
Classified within cash equivalents and current marketable securities.

The Company's cash, cash equivalents and current marketable securities as of March 31, 2019 comprised:
 
March 31, 2019
(Dollars in Millions)
Carrying Amount
 
Estimated Fair Value
 
Cash & Cash Equivalents
 
Current Marketable Securities
Cash
$
2,778

 
2,778

 
2,778

 
 
Other sovereign securities(1)
190

 
190

 
190

 


U.S. reverse repurchase agreements
2,068

 
2,068

 
2,068

 

Other reverse repurchase agreements
350

 
350

 
350

 
 
Corporate debt securities(1)
549

 
549

 
449

 
100

Money market funds
4,195

 
4,195

 
4,195

 
 
Time deposits(1)
533

 
533

 
533

 
 
   Subtotal
10,663

 
10,663

 
10,563

 
100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
4,412

 
4,412

 
4,143

 
269

Other sovereign securities
—

 
—

 
—

 
—

Corporate debt securities
261

 
261

 
28

 
233

   Subtotal available for sale debt(2)
$
4,673

 
4,673

 
4,171

 
502

Total cash, cash equivalents and current marketable securities


 


 
14,734

 
602

(1) Held to maturity investments are reported at amortized cost and gains or losses are reported in earnings.
(2) Available for sale debt securities are reported at fair value with unrealized gains and losses reported net of taxes in other comprehensive income.

In the fiscal first quarter ended March 31, 2019 and the fiscal year ended December 30, 2018 the carrying amount was the same as the estimated fair value.

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 contractual maturities of the available for sale securities at March 31, 2019 are as follows:
(Dollars in Millions)
 
Cost Basis
 
Fair Value
Due within one year
 
$
4,613

 
4,613

Due after one year through five years
 
60

 
60

Due after five years through ten years
 
—

 
—

Total debt securities
 
$
4,673

 
4,673



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Table of Contents


Financial Instruments not measured at Fair Value:
The following financial liabilities are held at carrying amount on the consolidated balance sheet as of March 31, 2019:
(Dollars in Millions)
 
Carrying Amount
 
Estimated Fair Value
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Current Debt
 
$
1,708

 
1,708

 
 
 
 
 
Non-Current Debt
 
 
 
 
3% Zero Coupon Convertible Subordinated Debentures due in 2020
 
51

 
98

1.950% Notes due 2020
 
499

 
496

2.95% Debentures due 2020
 
548

 
553

3.55% Notes due 2021
 
449

 
460

2.45% Notes due 2021
 
349

 
350

1.65% Notes due 2021
 
999

 
985

0.250% Notes due 2022 (1B Euro 1.1222)
 
1,120

 
1,135

2.25% Notes due 2022
 
997

 
993

6.73% Debentures due 2023
 
250

 
298

3.375% Notes due 2023
 
805

 
838

2.05% Notes due 2023
 
498

 
492

0.650% Notes due 2024 (750MM Euro 1.1222)
 
838

 
866

5.50% Notes due 2024 (500 MM GBP 1.3114)
 
651

 
795

2.625% Notes due 2025
 
748

 
748

2.45% Notes due 2026
 
1,992

 
1,947

2.95% Notes due 2027
 
996

 
1,001

2.90% Notes due 2028
 
1,493

 
1,485

1.150% Notes due 2028 (750MM Euro 1.1222)
 
834

 
885

6.95% Notes due 2029
 
297

 
397

4.95% Debentures due 2033
 
498

 
587

4.375% Notes due 2033
 
856

 
961

1.650% Notes due 2035 (1.5B Euro 1.1222)
 
1,667

 
1,809

3.55% Notes due 2036
 
988

 
996

5.95% Notes due 2037
 
991

 
1,294

3.625% Notes due 2037
 
1,486

 
1,510

3.40% Notes due 2038
 
990

 
978

5.85% Debentures due 2038
 
696

 
908

4.50% Debentures due 2040
 
538

 
605

4.85% Notes due 2041
 
297

 
351

4.50% Notes due 2043
 
495

 
563

3.70% Notes due 2046
 
1,972

 
2,005

3.75% Notes due 2047
 
991

 
1,017

3.50% Notes due 2048
 
742

 
731

Other
 
39

 
39

Total Non-Current Debt
 
$
27,660

 
29,176


The weighted average effective interest rate on non-current debt is 3.19%.


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Table of Contents

The excess of the estimated fair value over the carrying value of debt was $0.3 billion at December 30, 2018.

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 first quarters of 2019 and 2018 were 15.2% and 20.3%, respectively. The U.S. Tax Cuts and Jobs Act (TCJA) was enacted into law on December 22, 2017 with a January 1, 2018 effective date for most provisions. This law reduced the U.S. statutory corporate tax rate from 35% to 21%, eliminated or reduced certain corporate income tax deductions and introduced a tax on global intangible low-taxed income (GILTI) and a Base Erosion and Anti Abuse Tax (BEAT). During the first fiscal quarter of 2018, the Company estimated the impact of the tax law change based on the best information and guidance available at that time. Subsequent U.S. Treasury guidance on the application of these provisions allowed the Company to better refine these calculations for fiscal year 2018 and when combined with the election to account for GILTI under the deferred method reduced the first fiscal quarter of 2019 effective income tax rate by approximately 4.0% versus the first fiscal quarter of 2018. Additionally, in the fiscal first quarter of 2019, the Company had less income in higher tax jurisdictions relative to lower tax jurisdictions, driven primarily by the one-time charges in the U.S. related to the impairment of the Alios in-process research and development intangible asset and litigation expense as compared to the same period in 2018.

As of March 31, 2019, the Company had approximately $3.4 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. With respect to the United States, the IRS has completed its audit for the tax years through 2009 and is currently auditing the tax years 2010 through 2012. The Company currently expects substantial completion of this audit within the next 12 months. The outcome from this tax audit may result in adjustments to the Company’s current estimates that may have a material impact on the Company’s current and future operating results or cash flows in the period that the audit is substantially completed.


NOTE 6 — PENSIONS AND OTHER BENEFIT PLANS

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 first quarters of 2019 and 2018 include the following components:
 
 
 
Retirement Plans
 
Other Benefit Plans
(Dollars in Millions)
 
 
March 31, 2019
 
April 1, 2018
 
March 31, 2019
 
April 1, 2018
Service cost
 
 
276

 
309

 
68

 
67

Interest cost
 
 
275

 
252

 
46

 
37

Expected return on plan assets
 
 
(583
)
 
(560
)
 
(2
)
 
(2
)
Amortization of prior service cost/(credit)
 
 
1

 
1

 
(8
)
 
(8
)
Recognized actuarial losses
 
 
144

 
215

 
32

 
30

Curtailments and settlements
 
 
(1
)
 
(2
)
 
—

 
—

Net periodic benefit cost
 
 
112

 
215

 
136

 
124

 
 
 
 
 
 
 
 
 
 

The service cost component of net periodic benefit cost is presented in the same line items on the Consolidated Statement of Earnings where other employee compensation costs are reported. All other components of net periodic benefit cost are presented as part of Other (income) expense, net on the Consolidated Statement of Earnings.

Company Contributions
For the fiscal first quarter ended March 31, 2019, the Company contributed $21 million and $79 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.


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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)
December 30, 2018
 
$
(8,869
)
 
—

 
(6,158
)
 
(195
)
 
(15,222
)
Net change
 
(258
)
 
—

 
169

 
(206
)
 
(295
)
March 31, 2019
 
$
(9,127
)
 
—

 
(5,989
)
 
(401
)
 
(15,517
)

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.

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 first quarters ended March 31, 2019 and April 1, 2018:
(Shares in Millions)
 
March 31, 2019
 
April 1, 2018
Basic net earnings per share
 
1.41

 
1.63

Average shares outstanding — basic
 
2,660.8

 
2,682.2

Potential shares exercisable under stock option plans
 
136.7

 
139.5

Less: shares which could be repurchased under treasury stock method
 
(99.4
)
 
(90.6
)
Convertible debt shares
 
0.7

 
0.8

Average shares outstanding — diluted
 
2,698.8

 
2,731.9

Diluted net earnings per share
 
1.39

 
1.60


The diluted net earnings per share calculation for both the fiscal first quarters ended March 31, 2019 and April 1, 2018 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 the both the fiscal first quarters ended March 31, 2019 and April 1, 2018 included all shares related to stock options, as there were no options or other instruments which were anti-dilutive.






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NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS

SALES BY SEGMENT OF BUSINESS
 
 
 
Fiscal First Quarters Ended
(Dollars in Millions)
 
 
March 31,
2019
 
April 1,
2018
 
Percent Change
 
 
 
 
 
 
 
 
CONSUMER
 
 
 
 
 
 
 
Baby Care
 
 
 
 
 
 
 
     U.S.
 
 
$
87

 
97

 
(10.9
)%
     International
 
 
307

 
360

 
(14.8
)
     Worldwide
 
 
394

 
457

 
(14.0
)
Beauty
 
 
 
 
 
 
 
     U.S.
 
 
588

 
611

 
(3.8
)
     International
 
 
502

 
473

 
6.2

     Worldwide
 
 
1,090

 
1,084

 
0.6

Oral Care
 
 
 
 
 
 
 
     U.S.
 
 
151

 
157

 
(3.5
)
     International
 
 
216

 
222

 
(2.8
)
     Worldwide
 
 
367

 
379

 
(3.1
)
OTC
 
 
 
 
 
 
 
     U.S.
 
 
507

 
465

 
9.1

     International
 
 
580

 
607

 
(4.6
)
     Worldwide
 
 
1,087

 
1,072

 
1.3

Women's Health
 
 
 
 
 
 
 
     U.S.
 
 
3

 
3

 
4.2

     International
 
 
222

 
240

 
(7.5
)
     Worldwide
 
 
225

 
243

 
(7.3
)
Wound Care/Other
 
 
 
 
 
 
 
     U.S.
 
 
102

 
103

 
(0.9
)
     International
 
 
53

 
60

 
(11.6
)
     Worldwide
 
 
155

 
163

 
(4.8
)
TOTAL CONSUMER
 
 
 
 
 
 
 
     U.S.
 
 
1,438

 
1,436

 
0.2

     International
 
 
1,880

 
1,962

 
(4.2
)
     Worldwide
 
 
3,318

 
3,398

 
(2.4
)
 
 
 
 
 
 
 
 

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Table of Contents

PHARMACEUTICAL
 
 
 
 
 
 
 
Immunology
 
 
 
 
 
 
 
     U.S.
 
 
2,163

 
2,000

 
8.1

     International
 
 
1,088

 
1,042

 
4.5

     Worldwide
 
 
3,251

 
3,042

 
6.9

     REMICADE®
 
 
 
 
 
 
 
     U.S.
 
 
774

 
916

 
(15.5
)
     U.S. Exports
 
 
76

 
142

 
(46.4
)
     International
 
 
252

 
331

 
(23.6
)
     Worldwide
 
 
1,102

 
1,389

 
(20.6
)
     SIMPONI / SIMPONI ARIA®
 
 
 
 
 
 
 
     U.S.
 
 
263

 
224

 
17.0

     International
 
 
261

 
294

 
(11.1
)
     Worldwide
 
 
524

 
518

 
1.0

     STELARA®
 
 
 
 
 
 
 
     U.S.
 
 
882

 
652

 
35.2

     International
 
 
523

 
409

 
27.9

     Worldwide
 
 
1,405

 
1,061

 
32.4

     TREMFYA®
 
 
 
 
 
 
 
     U.S.
 
 
168

 
66

 
*
     International
 
 
49

 
6

 
*
     Worldwide
 
 
217

 
72

 
*
     OTHER IMMUNOLOGY
 
 
 
 
 
 
 
     U.S.
 
 
—

 
—

 
—
     International
 
 
3

 
2

 
19.5
     Worldwide
 
 
3

 
2

 
19.5