JNJ Johnson & Johnson
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended March 29, 2020
or
☐ | 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
Johnson & Johnson
(Exact name of registrant as specified in its charter)
New Jersey | 22-1024240 | |
(State or other jurisdiction of incorporation or organization) | (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. ☑ Yes ☐ 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). ☑ Yes ☐ 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 | ☑ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, Par Value $1.00 | JNJ | New York Stock Exchange |
0.250% Notes Due January 2022 | JNJ | New York Stock Exchange |
0.650% Notes Due May 2024 | JNJ | New York Stock Exchange |
5.50% Notes Due November 2024 | JNJ | New York Stock Exchange |
1.150% Notes Due November 2028 | JNJ | New York Stock Exchange |
1.650% Notes Due May 2035 | JNJ | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On April 22, 2020, 2,634,594,535 shares of Common Stock, $1.00 par value, were outstanding.
JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
Page | ||
No. | ||
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 Healthcare 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
• | The risks associated with global operations, including the impact of global public health crises and pandemics, such as the outbreak of the novel coronavirus (COVID-19), on the Company and its customers and suppliers, including foreign governments in countries in which the Company operates. |
• | 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; |
• | 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; and |
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, including the Company's transaction with Jabil Inc., 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 29, 2019, 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.
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 29, 2020 | December 29, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 15,530 | 17,305 | ||||
Marketable securities | 2,494 | 1,982 | |||||
Accounts receivable, trade, less allowances for doubtful accounts and credit losses $234 (2019, $226) | 14,874 | 14,481 | |||||
Inventories (Note 2) | 8,868 | 9,020 | |||||
Prepaid expenses and other | 2,358 | 2,392 | |||||
Assets held for sale (Note 10) | 102 | 94 | |||||
Total current assets | 44,226 | 45,274 | |||||
Property, plant and equipment at cost | 43,247 | 43,332 | |||||
Less: accumulated depreciation | (25,846 | ) | (25,674 | ) | |||
Property, plant and equipment, net | 17,401 | 17,658 | |||||
Intangible assets, net (Note 3) | 47,338 | 47,643 | |||||
Goodwill (Note 3) | 33,471 | 33,639 | |||||
Deferred taxes on income (Note 5) | 7,539 | 7,819 | |||||
Other assets | 5,042 | 5,695 | |||||
Total assets | $ | 155,017 | 157,728 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Loans and notes payable | $ | 2,190 | 1,202 | ||||
Accounts payable | 7,411 | 8,544 | |||||
Accrued liabilities | 8,384 | 9,715 | |||||
Accrued rebates, returns and promotions | 11,608 | 10,883 | |||||
Accrued compensation and employee related obligations | 2,166 | 3,354 | |||||
Accrued taxes on income (Note 5) | 1,930 | 2,266 | |||||
Total current liabilities | 33,689 | 35,964 | |||||
Long-term debt (Note 4) | 25,393 | 26,494 | |||||
Deferred taxes on income (Note 5) | 5,766 | 5,958 | |||||
Employee related obligations (Note 6) | 10,529 | 10,663 | |||||
Long-term taxes payable (Note 5) | 7,402 | 7,444 | |||||
Other liabilities | 10,944 | 11,734 | |||||
Total liabilities | 93,723 | 98,257 | |||||
Commitments and Contingencies (Note 11) | |||||||
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) | (16,243 | ) | (15,891 | ) | |||
Retained earnings | 112,901 | 110,659 | |||||
Less: common stock held in treasury, at cost (487,451,000 and 487,336,000 shares) | 38,484 | 38,417 | |||||
Total shareholders’ equity | 61,294 | 59,471 | |||||
Total liabilities and shareholders' equity | $ | 155,017 | 157,728 |
1
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
Fiscal First Quarter Ended | ||||||||||||||
March 29, 2020 | Percent to Sales | March 31, 2019 | Percent to Sales | |||||||||||
Sales to customers (Note 9) | $ | 20,691 | 100.0 | % | $ | 20,021 | 100.0 | % | ||||||
Cost of products sold | 7,062 | 34.1 | 6,615 | 33.0 | ||||||||||
Gross profit | 13,629 | 65.9 | 13,406 | 67.0 | ||||||||||
Selling, marketing and administrative expenses | 5,203 | 25.1 | 5,219 | 26.1 | ||||||||||
Research and development expense | 2,580 | 12.5 | 2,858 | 14.3 | ||||||||||
In-process research and development | — | — | 890 | 4.4 | ||||||||||
Interest income | (67 | ) | (0.3 | ) | (99 | ) | (0.5 | ) | ||||||
Interest expense, net of portion capitalized | 25 | 0.1 | 102 | 0.5 | ||||||||||
Other (income) expense, net | (679 | ) | (3.3 | ) | (22 | ) | (0.1 | ) | ||||||
Restructuring (Note 12) | 58 | 0.3 | 36 | 0.2 | ||||||||||
Earnings before provision for taxes on income | 6,509 | 31.5 | 4,422 | 22.1 | ||||||||||
Provision for taxes on income (Note 5) | 713 | 3.5 | 673 | 3.4 | ||||||||||
NET EARNINGS | $ | 5,796 | 28.0 | % | $ | 3,749 | 18.7 | % | ||||||
NET EARNINGS PER SHARE (Note 8) | ||||||||||||||
Basic | $ | 2.20 | $ | 1.41 | ||||||||||
Diluted | $ | 2.17 | $ | 1.39 | ||||||||||
AVG. SHARES OUTSTANDING | ||||||||||||||
Basic | 2,633.7 | 2,660.8 | ||||||||||||
Diluted | 2,671.0 | 2,698.8 |
See Notes to Consolidated Financial Statements
2
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)
Fiscal First Quarter Ended | |||||||
March 29, 2020 | March 31, 2019 | ||||||
Net earnings | $ | 5,796 | 3,749 | ||||
Other comprehensive income (loss), net of tax | |||||||
Foreign currency translation | (1,519 | ) | (258 | ) | |||
Securities: | |||||||
Unrealized holding gain (loss) arising during period | 2 | — | |||||
Reclassifications to earnings | — | — | |||||
Net change | 2 | — | |||||
Employee benefit plans: | |||||||
Prior service cost amortization during period | (6 | ) | (7 | ) | |||
Gain (loss) amortization during period | 201 | 176 | |||||
Net change | 195 | 169 | |||||
Derivatives & hedges: | |||||||
Unrealized gain (loss) arising during period | 832 | (302 | ) | ||||
Reclassifications to earnings | 138 | 96 | |||||
Net change | 970 | (206 | ) | ||||
Other comprehensive income (loss) | (352 | ) | (295 | ) | |||
Comprehensive income | $ | 5,444 | 3,454 | ||||
See Notes to Consolidated Financial Statements
The tax effects in other comprehensive income for the fiscal first quarter were as follows for 2020 and 2019, respectively: Foreign Currency Translation: $46 million and $61 million; Securities: $1 million in 2020, Employee Benefit Plans: $56 million and $1 million; Derivatives & Hedges: $256 million and $55 million. |
3
JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; Dollars in Millions)
Fiscal First Quarter Ended March 29, 2020
Total | Retained Earnings | Accumulated Other Comprehensive Income | Common Stock Issued Amount | Treasury Stock Amount | |||||||||||
Balance, December 29, 2019 | $ | 59,471 | 110,659 | (15,891 | ) | 3,120 | (38,417 | ) | |||||||
Net earnings | 5,796 | 5,796 | — | — | — | ||||||||||
Cash dividends paid ($0.95 per share) | (2,505 | ) | (2,505 | ) | — | — | — | ||||||||
Employee compensation and stock option plans | 595 | (1,049 | ) | — | — | 1,644 | |||||||||
Repurchase of common stock | (1,711 | ) | — | — | — | (1,711 | ) | ||||||||
Other comprehensive income (loss), net of tax | (352 | ) | — | (352 | ) | — | — | ||||||||
Balance, March 29, 2020 | $ | 61,294 | 112,901 | (16,243 | ) | 3,120 | (38,484 | ) |
Fiscal First Quarter Ended March 31, 2019
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 | ) | |||||||
See Notes to Consolidated Financial Statements
4
JOHNSON & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in Millions) | |||||||
Fiscal Three Months Ended | |||||||
March 29, 2020 | March 31, 2019 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net earnings | $ | 5,796 | 3,749 | ||||
Adjustments to reconcile net earnings to cash flows from operating activities: | |||||||
Depreciation and amortization of property and intangibles | 1,747 | 1,761 | |||||
Stock based compensation | 263 | 258 | |||||
Asset write-downs | 11 | 913 | |||||
Contingent consideration reversal | (983 | ) | — | ||||
Net gain on sale of assets/businesses | — | (72 | ) | ||||
Deferred tax provision | 54 | (362 | ) | ||||
Accounts receivable allowances and credit losses | 22 | (3 | ) | ||||
Changes in assets and liabilities, net of effects from acquisitions and divestitures: | |||||||
(Increase) / Decrease in accounts receivable | (812 | ) | 157 | ||||
Increase in inventories | (159 | ) | (369 | ) | |||
Decrease in accounts payable and accrued liabilities | (2,523 | ) | (1,833 | ) | |||
Decrease / (Increase) in other current and non-current assets | 271 | (488 | ) | ||||
Decrease in other current and non-current liabilities | (329 | ) | (168 | ) | |||
NET CASH FLOWS FROM OPERATING ACTIVITIES | 3,358 | 3,543 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Additions to property, plant and equipment | (625 | ) | (656 | ) | |||
Proceeds from the disposal of assets/businesses, net | 17 | 253 | |||||
Acquisitions, net of cash acquired | (939 | ) | (1,683 | ) | |||
Purchases of investments | (2,064 | ) | (730 | ) | |||
Sales of investments | 1,544 | 1,495 | |||||
Proceeds from credit support agreements, net | 1,743 | — | |||||
Other | (257 | ) | (96 | ) | |||
NET CASH USED BY INVESTING ACTIVITIES | (581 | ) | (1,417 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Dividends to shareholders | (2,505 | ) | (2,396 | ) | |||
Repurchase of common stock | (1,711 | ) | (2,206 | ) | |||
Proceeds from short-term debt | 10 | 13 | |||||
Repayment of short-term debt | (18 | ) | (16 | ) | |||
Repayment of long-term debt | (11 | ) | (1,002 | ) | |||
Proceeds from the exercise of stock options/employee withholding tax on stock awards, net | 332 | 94 | |||||
Other | (412 | ) | (3 | ) | |||
NET CASH USED BY FINANCING ACTIVITIES | (4,315 | ) | (5,516 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (237 | ) | 17 | ||||
Decrease in cash and cash equivalents | (1,775 | ) | (3,373 | ) | |||
Cash and Cash equivalents, beginning of period | 17,305 | 18,107 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 15,530 | 14,734 | ||||
Acquisitions | |||||||
Fair value of assets acquired | $ | 1,136 | 2,154 | ||||
Fair value of liabilities assumed and noncontrolling interests | (197 | ) | (471 | ) | |||
Net cash paid for acquisitions | $ | 939 | 1,683 |
See Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019. 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.
Use of Estimates
The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact worldwide macroeconomic conditions including interest rates, employment rates and health insurance coverage, the speed of the anticipated recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts COVID-19 as of March 29, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of the goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended March 29, 2020, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
New Accounting Standards
The Company assesses the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board on the Company's financial statements and below describes the impacts from newly adopted standards, as well as material updates to previous assessments, if any, from the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
Recently Adopted Accounting Standards
ASU 2018-18: Collaborative Arrangements
The Company adopted this standard as of the beginning of the fiscal year 2020. 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. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
ASU 2016-13: Financial Instruments - Credit Losses
The Company adopted this standard as of the beginning of the fiscal year 2020. This update introduces the current expected credit loss (CECL) model, which requires 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 is 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. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Reclassification
Certain prior period amounts have been reclassified to conform to current year presentation.
6
NOTE 2 — INVENTORIES
(Dollars in Millions) | March 29, 2020 | December 29, 2019 | |||||
Raw materials and supplies | $ | 1,213 | 1,117 | ||||
Goods in process | 2,252 | 1,832 | |||||
Finished goods | 5,403 | 6,071 | |||||
Total inventories (1) | $ | 8,868 | 9,020 |
(1) See Note 10 to the Consolidated Financial Statements for details on assets held for sale and the related divestitures.
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 2019. 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 29, 2020 | December 29, 2019 | |||||
Intangible assets with definite lives: | |||||||
Patents and trademarks — gross | $ | 36,214 | 36,634 | ||||
Less accumulated amortization | 13,857 | 13,154 | |||||
Patents and trademarks — net | 22,357 | 23,480 | |||||
Customer relationships and other intangibles — gross | 22,084 | 22,056 | |||||
Less accumulated amortization | 9,728 | 9,462 | |||||
Customer relationships and other intangibles — net* | 12,356 | 12,594 | |||||
Intangible assets with indefinite lives: | |||||||
Trademarks | 6,829 | 6,922 | |||||
Purchased in-process research and development (1) | 5,796 | 4,647 | |||||
Total intangible assets with indefinite lives | 12,625 | 11,569 | |||||
Total intangible assets — net | $ | 47,338 | 47,643 |
*The majority is comprised of customer relationships
(1) In the fiscal first quarter of 2020, the Company completed the acquisition of bermekimab and certain related assets from XBiotech Inc. as well as the acquisition of all outstanding shares in Verb Surgical Inc. and recorded in-process research and development intangible assets of $0.8 billion and $0.4 billion, respectively.
Goodwill as of March 29, 2020 was allocated by segment of business as follows:
(Dollars in Millions) | Consumer Health | Pharmaceutical | Medical Devices | Total | |||||||||
Goodwill at December 29, 2019 | $ | 9,736 | 9,169 | 14,734 | 33,639 | ||||||||
Goodwill, related to acquisitions | — | 1 | 156 | 157 | |||||||||
Currency translation/Other | (223 | ) | (96 | ) | (6 | ) | (325 | ) | |||||
Goodwill at March 29, 2020 | $ | 9,513 | 9,074 | 14,884 | 33,471 |
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 for each of the fiscal first quarters ended March 29, 2020 and March 31, 2019. Intangible asset write-downs are included in Other (income) expense, net.
The estimated amortization expense for approved products, before tax, for the five succeeding years is approximately:
7
(Dollars in Millions) | ||||||||
2020 | 2021 | 2022 | 2023 | 2024 | ||||
$4,500 | 4,300 | 4,100 | 4,100 | 4,000 |
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 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 29, 2020, the total amount of cash collateral held by the Company under the credit support agreements (CSA) amounted to $2.0 billion, 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 29, 2020, the Company had notional amounts outstanding for forward foreign exchange contracts, and cross currency interest rate swaps of $44.0 billion, and $20.1 billion respectively. As of December 29, 2019, the Company had notional amounts outstanding for forward foreign exchange contracts, and cross currency interest rate swaps of $45.3 billion and $20.1 billion respectively.
All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. 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 29, 2020, the balance of deferred net gain on derivatives included in accumulated other comprehensive income was $675 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
8
time over which the Company is hedging transaction exposure is 18 months, excluding interest rate contracts, net investment hedges and equity collar contracts. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.
The following table is a summary of the activity related to derivatives and hedges for the fiscal first quarters ended in 2020 and 2019, net of tax:
March 29, 2020 | March 31, 2019 | ||||||||||||||||||||
(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 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 | — | — | — | 40 | — | — | — | — | 38 | — | |||||||||||
Amount of gain or (loss) recognized in AOCI | — | — | — | 40 | — | — | — | — | 38 | — | |||||||||||
Gain (Loss) on cash flow hedging relationship: | |||||||||||||||||||||
Forward foreign exchange contracts: | |||||||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into income | 9 | (173 | ) | (110 | ) | — | (2 | ) | (21 | ) | (35 | ) | (139 | ) | — | 6 | |||||
Amount of gain or (loss) recognized in AOCI | 11 | 302 | (110 | ) | — | (36 | ) | (6 | ) | (296 | ) | (110 | ) | — | (13 | ) | |||||
Cross currency interest rate swaps contracts: | |||||||||||||||||||||
Amount of gain or (loss) reclassified from AOCI into income | — | — | — | 98 | — | — | — | 55 | — | ||||||||||||
Amount of gain or (loss) recognized in AOCI | $ | — | — | — | 625 | — | — | — | — | 59 | — | ||||||||||
The following table is the effect of derivatives not designated as hedging instruments for the fiscal first quarters 2020 and 2019:
Gain/(Loss) Recognized In Income on Derivative | |||||||||
(Dollars in Millions) | Location of Gain /(Loss) Recognized in Income on Derivative | Fiscal First Quarter Ended | |||||||
Derivatives Not Designated as Hedging Instruments | March 29, 2020 | March 31, 2019 | |||||||
Foreign Exchange Contracts | Other (income) expense | $ | 89 | (38 | ) |
9
The following table is the effect of net investment hedges for the fiscal first quarters ended in 2020 and 2019
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 29, 2020 | March 31, 2019 | March 29, 2020 | March 31, 2019 | |||||||||||
Debt | $ | 46 | 71 | Interest (income) expense | — | — | |||||||||
Cross Currency interest rate swaps | $ | 827 | 370 | Interest (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 29, 2019 | March 29, 2020 | ||||||||||||||
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 | $ | 1,148 | (327 | ) | 5 | 826 | 826 | |||||||||
Equity Investments without readily determinable value | $ | 712 | (33 | ) | 15 | 694 | 694 |
(1) Recorded in Other Income/Expense
(2) Other includes impact of currency
For equity investments without readily determinable market values, $33 million of the decrease in the fair value reflected in net income were the result of impairments.
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 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 holds acquisition related contingent liabilities based upon certain regulatory and commercial events, which are classified as Level 3, whose values are determined using discounted cash flow methodologies or similar techniques for which the determination of fair value requires significant judgment or estimations.
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.
10
The Company’s significant financial assets and liabilities measured at fair value as of March 29, 2020 and December 29, 2019 were as follows:
March 29, 2020 | December 29, 2019 | |||||||||||||||
(Dollars in Millions) | Level 1 | Level 2 | Level 3 | Total | Total(1) | |||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Assets: | ||||||||||||||||
Forward foreign exchange contracts | $ | — | 941 | — | 941 | 209 | ||||||||||
Interest rate contracts (2)(3) | — | 1,569 | — | 1,569 | 693 | |||||||||||
Total | — | 2,510 | — | 2,510 | 902 | |||||||||||
Liabilities: | ||||||||||||||||
Forward foreign exchange contracts | — | 530 | — | 530 | 426 | |||||||||||
Interest rate contracts (3) | — | 247 | — | 247 | 193 | |||||||||||
Total | — | 777 | — | 777 | 619 | |||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Assets: | ||||||||||||||||
Forward foreign exchange contracts | — | 120 | — | 120 | 23 | |||||||||||
Liabilities: | ||||||||||||||||
Forward foreign exchange contracts | — | 106 | — | 106 | 33 | |||||||||||
Other Investments: | ||||||||||||||||
Equity investments (4) | 826 | — | — | 826 | 1,148 | |||||||||||
Debt securities(5) | $ | — | 5,673 | — | 5,673 | 4,368 | ||||||||||
Other Liabilities | ||||||||||||||||
Contingent consideration (6) | 784 | 784 | 1,715 |
Gross to Net Derivative Reconciliation | March 29, 2020 | December 29, 2019 | |||||
(Dollars in Millions) | |||||||
Total Gross Assets | $ | 2,630 | 925 | ||||
Credit Support Agreement (CSA) | (2,530 | ) | (841 | ) | |||
Total Net Asset | 100 | 84 | |||||
Total Gross Liabilities | 883 | 652 | |||||
Credit Support Agreement (CSA) | (531 | ) | (586 | ) | |||
Total Net Liabilities | $ | 352 | 66 | ||||
11
Summarized information about changes in liabilities for contingent consideration is as follows:
Fiscal first quarter ended | ||||||||
March 29, 2020 | March 31, 2019 | |||||||
(Dollars in Millions) | ||||||||
Beginning Balance | $ | 1,715 | $ | 397 | ||||
Changes in estimated fair value (7) | (977 | ) | 32 | |||||
Additions | 106 | 23 | ||||||
Payments | (60 | ) | — | |||||
Ending Balance | $ | 784 | $ | 452 |
(1) | December 30, 2019 assets and liabilities are all classified as Level 2 with the exception of equity investments of $1,148 million, which are classified as Level 1 and contingent consideration of $1,715 million, classified as Level 3. |
(2) | Includes $1 million of non-current other assets as of March 29, 2020 and December 29, 2019. |
(3) | Includes cross currency interest rate swaps and interest rate swaps. |
(4) | Classified as non-current other assets. |
(5) | Classified within cash equivalents and current marketable securities. |
(6) | Includes $759 million and $1,631 million (primarily related to Auris Health), classified as non-current other liabilities as of March 29, 2020 and December 29, 2019, respectively. Includes $25 million and $84 million classified as current liabilities as of March 29, 2020 and December 29, 2019, respectively. |
(7) | Ongoing fair value adjustment amounts are primarily recorded in Research and Development expense. |
During the fiscal first quarter of 2020, the Company recorded a contingent consideration reversal of $983 million related to the timing of certain developmental milestones associated with the Auris Health acquisition. The one-time reversal of the contingent consideration was recorded in Other income and expense. As of March 29, 2020 the estimated fair value of the remaining contingent consideration is $165 million. For additional details see Note 10 to the Consolidated Financial Statements.
12
The Company's cash, cash equivalents and current marketable securities as of March 29, 2020 comprised:
(Dollars in Millions) | Carrying Amount | Unrecognized Gain | Unrecognized Loss | Estimated Fair Value | Cash & Cash Equivalents | Current Marketable Securities | ||||||||||||
Cash | $ | 2,499 | — | — | 2,499 | 2,499 | ||||||||||||
Non-U.S. sovereign securities(1) | 90 | — | — | 90 | 90 | — | ||||||||||||
U.S. reverse repurchase agreements | 3,965 | — | — | 3,965 | 3,965 | — | ||||||||||||
Other reverse repurchase agreements | 473 | — | — | 473 | 473 | |||||||||||||
Corporate debt securities(1) | 2,135 | 1 | (1 | ) | 2,135 | 1,039 | 1,096 | |||||||||||
Money market funds | 2,424 | — | — | 2,424 | 2,424 | |||||||||||||
Time deposits(1) | 765 | — | — | 765 | 765 | |||||||||||||
Subtotal | 12,351 | 1 | (1 | ) | 12,351 | 11,255 | 1,096 | |||||||||||
Unrealized Gain | Unrealized Loss | |||||||||||||||||
U.S. Gov't securities | 5,418 | 4 | — | 5,422 | 4,260 | 1,162 | ||||||||||||
Corporate debt securities | 253 | — | (2 | ) | 251 | 15 | 236 | |||||||||||
Subtotal available for sale debt(2) | $ | 5,671 | 4 | (2 | ) | 5,673 | 4,275 | 1,398 | ||||||||||
Total cash, cash equivalents and current marketable securities | $ | 18,022 | 5 | (3 | ) | 18,024 | 15,530 | 2,494 |
(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 year ended December 29, 2019 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 to fund current operations and are classified as cash equivalents and current marketable securities.
The contractual maturities of the available for sale securities as of March 29, 2020 are as follows:
(Dollars in Millions) | Cost Basis | Fair Value | |||||
Due within one year | $ | 5,632 | 5,635 | ||||
Due after one year through five years | 39 | 38 | |||||
Due after five years through ten years | — | — | |||||
Total debt securities | $ | 5,671 | 5,673 |
13
Financial Instruments not measured at Fair Value:
The following financial liabilities are held at carrying amount on the consolidated balance sheet as of March 29, 2020:
(Dollars in Millions) | Carrying Amount | Estimated Fair Value | |||||
Financial Liabilities | |||||||
Current Debt | $ | 2,190 | 2,234 | ||||
Non-Current Debt | |||||||
3.55% Notes due 2021 | 449 | 463 | |||||
2.45% Notes due 2021 | 350 | 356 | |||||
0.250% Notes due 2022 (1B Euro 1.0980) | 1,097 | 1,096 | |||||
2.25% Notes due 2022 | 998 | 1,019 | |||||
6.73% Debentures due 2023 | 250 | 301 | |||||
3.375% Notes due 2023 | 804 | 875 | |||||
2.05% Notes due 2023 | 499 | 512 | |||||
0.650% Notes due 2024 (750MM Euro 1.0980) | 821 | 826 | |||||
5.50% Notes due 2024 (500 MM GBP 1.2023) | 597 | 697 | |||||
2.625% Notes due 2025 | 748 | 796 | |||||
2.45% Notes due 2026 | 1,993 | 2,112 | |||||
2.95% Notes due 2027 | 997 | 1,074 | |||||
2.90% Notes due 2028 | 1,494 | 1,640 | |||||
1.150% Notes due 2028 (750MM Euro 1.0980) | 817 | 833 | |||||
6.95% Notes due 2029 | 297 | 419 | |||||
4.95% Debentures due 2033 | 498 | 661 | |||||
4.375% Notes due 2033 | 856 | 1,099 | |||||
1.650% Notes due 2035 (1.5B Euro 1.0980) | 1,631 | 1,699 | |||||
3.55% Notes due 2036 | 989 | 1,172 | |||||
5.95% Notes due 2037 | 992 | 1,477 | |||||
3.625% Notes due 2037 | 1,487 | 1,719 | |||||
3.40% Notes due 2038 | 991 | 1,144 | |||||
5.85% Debentures due 2038 | 696 | 1,072 | |||||
4.50% Debentures due 2040 | 539 | 689 | |||||
4.85% Notes due 2041 | 297 | 432 | |||||
4.50% Notes due 2043 | 495 | 696 | |||||
3.70% Notes due 2046 | 1,973 | 2,406 | |||||
3.75% Notes due 2047 | 991 | 1,230 | |||||
3.50% Notes due 2048 | 742 | 890 | |||||
Other | 5 | 5 | |||||
Total Non-Current Debt | $ | 25,393 | 29,410 |
The weighted average effective interest rate on non-current debt is 3.26%.
The excess of the estimated fair value over the carrying value of debt was $3.0 billion at December 29, 2019.
Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.
14
NOTE 5 — INCOME TAXES
The worldwide effective income tax rates for the fiscal first quarters of 2020 and 2019 were 11.0% and 15.2%, respectively. In the third fiscal quarter of 2019, Switzerland enacted the Federal Act on Tax Reform and AHV Financing (TRAF), which became effective on January 1, 2020. More information on the provisions of TRAF can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019. During the first fiscal quarter of 2020, the final canton where the Company maintains significant operations enacted TRAF legislation and, accordingly, the Company recorded an estimated deferred tax benefit of approximately $0.3 billion for the remeasurement of existing deferred tax liabilities offset by a related $0.2 billion increase in U.S. GILTI deferred taxes (or 1.3% net impact on the Q1 2020 effective tax rate). The Company is currently assessing and awaiting the approval for certain elective transition provisions in several cantons which include discussions with federal and cantonal tax authorities on the application of the new law. The Company has recorded the estimated impact of the transitional provisions based on the best available information for cantons where enactment has occurred, but the Company has not yet received final tax rulings in all cantons. Further, authoritative guidance from the relevant Swiss tax authorities may be issued in the future and additional revisions may be required in the fiscal period they are issued.
In the first fiscal quarter of 2020, the Company reduced a contingent consideration liability related to the 2019 Auris Health acquisition that benefited the overall effective tax rate by 1.9% (see Note 10 to the Consolidated Financial Statements for more details). Additionally, the Company had more income in higher tax jurisdictions relative to lower tax jurisdictions as compared to the same period in the prior fiscal year, driven primarily by the one-time charges in the first fiscal quarter of 2019 related to the impairment of the Alios in-process research and development intangible asset taxed in the U.S. at 21.0% and additional tax benefits received from stock based compensation that were either exercised or vested during the fiscal first quarter.
As of March 29, 2020, the Company had approximately $3.2 billion of liabilities from unrecognized tax benefits. The Company conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of jurisdictions. 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 completion of this audit and settlement of the related tax liabilities in the fiscal year 2020. As of March 29, 2020, the Company has classified unrecognized tax benefits and related interest of approximately $0.2 billion as a current liability on the “Accrued taxes on Income” line of the Consolidated Balance Sheet. This is the amount expected to be paid over the next 12 months with respect to the IRS audit. During the first fiscal quarter of 2020, the Company made a payment of approximately $0.6 billion to the U.S. Treasury with respect to the 2010-2012 tax audit in anticipation of a final settlement later in the fiscal year 2020. The completion of this tax audit may result in additional adjustments to the Company’s unrecognized tax benefit liability.
In other major jurisdictions where the Company conducts business, the years that remain open to tax audit go back to the year 2006. The Company believes it is possible that tax audits may be completed over the next twelve months by taxing authorities in some jurisdictions outside of the United States. However, the Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.
NOTE 6 — PENSIONS AND OTHER BENEFIT PLANS
Components of Net Periodic Benefit Cost
Net periodic benefit costs for the Company’s defined benefit retirement plans and other benefit plans for the fiscal first quarters of 2020 and 2019 include the following components:
15
Retirement Plans | Other Benefit Plans | ||||||||||||
(Dollars in Millions) | March 29, 2020 | March 31, 2019 | March 29, 2020 | March 31, 2019 | |||||||||
Service cost | $ | 326 | 276 | 72 | 68 | ||||||||
Interest cost | 240 | 275 | 33 | 46 | |||||||||
Expected return on plan assets | (614 | ) | (583 | ) | (2 | ) | (2 | ) | |||||
Amortization of prior service cost/(credit) | — | 1 | (8 | ) | (8 | ) | |||||||
Recognized actuarial losses | 223 | 144 | 36 | 32 | |||||||||
Curtailments and settlements | 19 | (1 | ) | — | — | ||||||||
Net periodic benefit cost | $ | 194 | 112 | 131 | 136 | ||||||||
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 29, 2020, the Company contributed $23 million and $9 million to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
Foreign | Gain/(Loss) | Employee | Gain/(Loss) | Total Accumulated | ||||||||||||
Currency | On | Benefit | On Derivatives | Other Comprehensive | ||||||||||||
(Dollars in Millions) | Translation | Securities | Plans | & Hedges | Income (Loss) | |||||||||||
December 29, 2019 | $ | (8,705 | ) | — | (6,891 | ) | (295 | ) | (15,891 | ) | ||||||
Net change | (1,519 | ) | 2 | 195 | 970 | (352 | ) | |||||||||
March 29, 2020 | $ | (10,224 | ) | 2 | (6,696 | ) | 675 | (16,243 | ) |
Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes where it relates to permanent investments in international subsidiaries. For additional details on comprehensive income see the Consolidated Statements of Comprehensive Income.
Details on reclassifications out of Accumulated Other Comprehensive Income:
Gain/(Loss) On Securities - reclassifications released to Other (income) expense, net.
Employee Benefit Plans - reclassifications are included in net periodic benefit cost. See Note 6 for additional details.
Gain/(Loss) On Derivatives & Hedges - reclassifications to earnings are recorded in the same account as the underlying transaction. See Note 4 for additional details.
16
NOTE 8 — EARNINGS PER SHARE
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal first quarters ended March 29, 2020 and March 31, 2019:
Fiscal First Quarter Ended | |||||||
(Shares in Millions) | March 29, 2020 | March 31, 2019 | |||||
Basic net earnings per share | $ | 2.20 | 1.41 | ||||
Average shares outstanding — basic | 2,633.7 | 2,660.8 | |||||
Potential shares exercisable under stock option plans | 126.0 | 136.7 | |||||
Less: shares which could be repurchased under treasury stock method | (89.4 | ) | (99.4 | ) | |||
Convertible debt shares | 0.7 | 0.7 | |||||
Average shares outstanding — diluted | 2,671.0 | 2,698.8 | |||||
Diluted net earnings per share | $ | 2.17 | 1.39 |
The diluted net earnings per share calculation for both the fiscal first quarters ended March 29, 2020 and March 31, 2019 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 fiscal first quarter ended March 29, 2020 excluded 10 million shares related to stock options, as the exercise price of these options was greater than their average market value. The diluted net earnings per share calculation for the fiscal first quarter ended March 31, 2019 included all shares related to stock options, as there were 0 options or other instruments which were anti-dilutive.
17
NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS
Fiscal First Quarter Ended | ||||||||||
(Dollars in Millions) | March 29, 2020 | March 31, 2019 | Percent Change | |||||||
Consumer Health* | ||||||||||
Baby Care | ||||||||||
U.S. | $ | 92 | 87 | 6.7 | % | |||||
International | 269 | 307 | (12.4 | ) | ||||||
Worldwide | 361 | 394 | (8.2 | ) | ||||||
Skin Health/Beauty | ||||||||||
U.S. | 659 | 588 | 12.1 | |||||||
International | 458 | 502 | (8.8 | ) | ||||||
Worldwide | 1,117 | 1,090 | 2.5 | |||||||
Oral Care | ||||||||||
U.S. | 176 | 151 | 16.2 | |||||||
International | 219 | 216 | 1.5 | |||||||
Worldwide | 395 | 367 | 7.6 | |||||||
OTC | ||||||||||
U.S. | 689 | 507 | 35.9 | |||||||
International | 659 | 580 | 13.7 | |||||||
Worldwide | 1,348 | 1,087 | 24.1 | |||||||
Women's Health | ||||||||||
U.S. | 4 | 3 | 32.0 | |||||||
International | 228 | 222 | 2.5 | |||||||
Worldwide | 232 | 225 | 2.9 | |||||||
Wound Care/Other | ||||||||||
U.S. | 119 | 102 | 17.0 | |||||||
International | 52 | 53 | (1.2 | ) | ||||||
Worldwide | 171 | 155 | 10.7 | |||||||
TOTAL Consumer Health | ||||||||||
U.S. | 1,740 | 1,438 | 21.0 | |||||||
International | 1,885 | 1,880 | 0.3 | |||||||
Worldwide | 3,625 | 3,318 | 9.2 | |||||||
* Previously referred to as Consumer | ||||||||||
18
PHARMACEUTICAL | ||||||||||
Immunology | ||||||||||
U.S. | 2,410 | 2,163 | 11.4 | |||||||
International | 1,228 | 1,088 | 12.8 | |||||||
Worldwide | 3,638 | 3,251 | 11.9 | |||||||
REMICADE® | ||||||||||
U.S. | 625 | 774 | (19.3 | ) | ||||||
U.S. Exports |