Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Organization and Business Segments

Description of the Company and Business Segments

Johnson & Johnson and its subsidiaries (the Company) have approximately 134,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.

The Company is organized into three business segments: Consumer Health (previously referred to as Consumer), Pharmaceutical and Medical Devices. The Consumer Health segment includes a broad range of products used in the baby care, oral care, skin health/beauty, over-the-counter pharmaceutical, women’s health and wound care markets. These products are marketed to the general public and sold online (eCommerce) and to retail outlets and distributors throughout the world. The Pharmaceutical segment is focused on six therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, pulmonary hypertension, and cardiovascular and metabolic diseases. Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. The Medical Devices segment includes a broad range of products used in the orthopaedic, surgery, interventional solutions (cardiovascular and neurovascular) and eye health fields. These products are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics.

The Executive Committee of Johnson & Johnson is the principal management group responsible for the strategic operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer Health, Pharmaceutical and Medical Devices business segments.

In all of its product lines, the Company competes with other companies both locally and globally, throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products, as well as protecting the underlying intellectual property of the Company's product portfolio, is important to the Company’s success in all areas of its business. The competitive environment requires substantial investments in continuing research. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.

Management’s Objectives

With “Our Credo” as the foundation, the Company’s purpose is to blend heart, science and ingenuity to profoundly change the trajectory of health for humanity. The Company is committed to bringing its full breadth and depth to ensure health for people today and for future generations. United around this common ambition, the Company is poised to fulfill its purpose and successfully meet the demands of the rapidly evolving markets in which it competes.

The Company is broadly based in human healthcare, and is committed to creating value by developing accessible, high quality, innovative products and services. New products introduced within the past five years accounted for approximately 25% of 2020 sales. In 2020, $12.2 billion was invested in research and development and $7.3 billion spent on acquisitions, reflecting management’s commitment to create life-enhancing innovations and to create value through partnerships that will profoundly change the trajectory of health for humanity.

A critical driver of the Company’s success is the 134,500 diverse employees worldwide. Employees are empowered and inspired to lead with the Company’s Our Credo and purpose as guides. This allows every employee to use the Company’s reach and size to advance the Company's purpose, and to also lead with agility and urgency. Leveraging the extensive resources across the enterprise enables the Company to innovate and execute with excellence. This ensures the Company can remain focused on addressing the unmet needs of society every day and invest for an enduring impact, ultimately delivering value to its patients, consumers and healthcare professionals, employees, communities and shareholders.

Results of Operations

Analysis of Consolidated Sales

For discussion on results of operations and financial condition pertaining to the fiscal years 2019 and 2018 see the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2019, Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.

In 2020, worldwide sales increased 0.6% to $82.6 billion as compared to an increase of 0.6% in 2019. These sales changes consisted of the following:

Sales increase/(decrease) due to: 2020 2019

The net impact of acquisitions and divestitures on the worldwide sales growth was a negative impact of 0.3% in 2020 and a negative impact of 1.7% in 2019.

Sales by U.S. companies were $43.1 billion in 2020 and $42.1 billion in 2019. This represents increases of 2.5% in 2020 and 0.5% in 2019. Sales by international companies were $39.5 billion in 2020 and $40.0 billion in 2019. This represents a decrease of 1.3% in 2020 and an increase of 0.7% in 2019.

The five-year compound annual growth rates for worldwide, U.S. and international sales were 3.3%, 3.9% and 2.8%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 3.0%, 3.9% and 2.1%, respectively.

In 2020, sales by companies in Europe achieved growth of 2.8% as compared to the prior year, which included operational growth of 2.0% and a positive currency impact of 0.8%. Sales by companies in the Western Hemisphere (excluding the U.S.) experienced a sales decline of 10.2% as compared to the prior year, which included operational growth of 0.4% offset by a negative currency impact of 10.6%. Sales by companies in the Asia-Pacific, Africa region experienced a sales decline of 2.7% as compared to the prior year, including an operational decline of 3.1% partially offset by a positive currency impact of 0.4%.

The 2020 results benefited from the inclusion of a 53rd week. (See Note 1 to the Consolidated Financial Statements for Annual Closing Date details). The Company estimated that the fiscal year 2020 sales growth rate was enhanced by approximately 1.0%. While the additional week added a few days to sales, it also added a full week's worth of operating costs; therefore, the net earnings impact was negligible.

In 2020, the Company utilized three wholesalers distributing products for all three segments that represented approximately 16.0%, 12.0% and 12.0% of the total consolidated revenues. In 2019, the Company had three wholesalers distributing products for all three segments that represented approximately 15.0%, 12.0% and 11.0% of the total consolidated revenues.

Note: values may have been rounded

Analysis of Sales by Business Segments

Consumer Health Segment

Consumer Health segment sales in 2020 were $14.1 billion, an increase of 1.1% from 2019, which included 3.0% operational growth and a negative currency impact of 1.9%. U.S. Consumer Health segment sales were $6.4 billion, an increase of 9.0%. International sales were $7.7 billion, a decrease of 4.6%, which included an operational decline of 1.3% and a negative currency impact of 3.3%. In 2020, acquisitions and divestitures had a net negative impact of 0.1% on the operational sales growth of the worldwide Consumer Health segment.

Major Consumer Health Franchise Sales*:

% Change

* Previously referred to as Consumer** Previously referred to as Beauty

The OTC franchise sales of $4.8 billion increased 8.5% as compared to the prior year. Growth was primarily attributable to sales from TYLENOL® driven by COVID-19 stocking demand, ZYRTEC® due to competitor product out of stock and PEPCID® due to competitive product withdrawal both in the U.S., and increased consumption in anti-smoking aids. International sales were negatively impacted by COVID-19 and low incidence of cough and flu.

The Skin Health/Beauty franchise sales were $4.5 billion in 2020, a decrease of 3.1% as compared to the prior year. The decline was primarily due to negative COVID-19 related impacts and SKU rationalization partially offset by growth in eCommerce and new product innovation.

The Oral Care franchise sales of $1.6 billion increased 7.4% as compared to the prior year primarily attributable to sales of LISTERINE® mouthwash due to U.S. eCommerce and club channel growth, increased stocking demand related to COVID-19 and new product launches in Asia Pacific.

The Baby Care franchise sales were $1.5 billion in 2020, a decrease of 9.4% compared to the prior year. The decline was primarily due to COVID-19 related impacts, SKU rationalization and the Baby Center divestiture in the U.S. partially offset by strength in AVEENO® baby.

The Women’s Health franchise sales were $0.9 billion in 2020, a decrease of 8.6% as compared to the prior year. The decline was primarily driven by COVID-19 impacts.

The Wound Care/Other franchise sales were $0.7 billion in 2020, an increase of 7.2% as compared to the prior year. Growth was due to strong performance of NEOSPORIN® andBAND-AID® Brand Adhesive Bandages and COVID-19 related demand in the Asia Pacific region.

Pharmaceutical Segment

Pharmaceutical segment sales in 2020 were $45.6 billion, an increase of 8.0% from 2019, which included operational growth of 8.2% and a negative currency impact of 0.2%. U.S. sales were $25.7 billion, an increase of 7.8%. International sales were $19.8 billion, an increase of 8.3%, which included 8.8% operational growth and a negative currency impact of 0.5%. In 2020, acquisitions and divestitures had a net negative impact of 0.2% on the operational sales growth of the worldwide Pharmaceutical segment. Adjustments to previous reserve estimates positively impacted the Pharmaceutical segment operational growth by approximately 1.0% in both fiscal years 2020 and 2019.

Major Pharmaceutical Therapeutic Area Sales*:

% Change

PREZISTA®/ PREZCOBIX®/REZOLSTA®/SYMTUZA® 2,184 2,110 3.5

INVEGA SUSTENNA®/XEPLION®/INVEGA TRINZA®/TREVICTA® 3,653 3,330 9.7

Total Cardiovascular / Metabolism / Other 4,878 5,192 (6.0)

*Certain prior year amounts have been reclassified to conform to current year presentation

** Percentage greater than 100% or not meaningful

(1) Previously included in Other Oncology

(2) Inclusive of TRACLEER® which was previously disclosed separately

Immunology products sales were $15.1 billion in 2020, representing an increase of 7.9% as compared to the prior year driven by strong uptake of STELARA® (ustekinumab) in Crohn's disease and Ulcerative Colitis and strength in TREMFYA® (guselkumab) in Psoriasis. This was partially offset by COVID-19 related demand and lower sales of REMICADE® (infliximab) due to increased discounts/rebates and biosimilar competition.

The patents for REMICADE® (infliximab)in certain countries in Europe expired in February 2015. Biosimilar versions of REMICADE® have been introduced in certain markets outside the United States, resulting in a reduction in sales of REMICADE® in those markets. Additional biosimilar competition will likely result in a further reduction in sales of REMICADE® in markets outside the United States. In the United States, a biosimilar version of REMICADE® was introduced in 2016, and additional competitors continue to enter the market. Continued infliximab biosimilar competition in the U.S. market will result in a further reduction in U.S. sales of REMICADE®.

Infectious disease products sales were $3.6 billion in 2020, representing an increase of 4.7% as compared to the prior year primarily due to strong sales of SYMTUZA® and JULUCA®. This was partially offset by lower sales of PREZISTA® and PREZCOBIX®/REZOLSTA® due to increased competition and loss of exclusivity of PREZISTA® in certain countries outside the U.S.

Neuroscience products sales were $6.5 billion, representing an increase of 3.5% as compared to the prior year. Paliperidone long-acting injectables growth driven by sales of INVEGA SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA TRINZA®/TREVICTA® from new patient starts and persistence. The growth was partially offset by migration from RISPERDAL CONSTA® (risperidone) and declines in CONCERTA® (methylphenidate) due to competitive entrants.

Oncology products achieved sales of $12.4 billion in 2020, representing an increase of 15.7% as compared to the prior year. Contributors to the growth were strong sales of DARZALEX® (daratumumab) driven by patient uptake in all lines of therapy and the launch of a subcutaneous formulation in the U.S. and E.U.; IMBRUVICA® (ibrutinib) due to market growth globally and maintaining strong share and the continued global launch uptake and share gains of ERLEADA® (apalutamide). Additionally, the growth was negatively impacted by declining sales of ZYTIGA® (abiraterone acetate) and VELCADE® (bortezomib) due to generic competition.

Pulmonary Hypertension products achieved sales of $3.1 billion, representing an increase of 20.0% as compared to the prior year. Sales growth of OPSUMIT® (macitentan) and UPTRAVI® (selexipag) were due to continued share gains and market growth. Additionally, sales of TRACLEER® (bosentan) were negatively impacted by generics and migration to OPSUMIT®.

Cardiovascular/Metabolism/Other products sales were $4.9 billion, a decline of 6.0% as compared to the prior year. Sales growth of INVOKANA®/INVOKAMET® (canagliflozin) were due to market growth and favorable channel mix dynamics in the U.S. and strength in the European region partially offset by U.S. share declines due to competitive pressures. The growth of XARELTO® (rivaroxaban) was due to demand growth partially offset by higher rebates. Lower sales of PROCRIT®/ EPREX® (epoetin alfa) were due to biosimilar competition.

During 2020, the Company advanced its pipeline with several regulatory submissions and approvals for new drugs and additional indications for existing drugs as follows:

INVOKANA® (canagliflozin) Treatment of Diabetic Kidney Disease •

Paliperidone Pamitate 6-month Treatment of Schizophrenia • •

Ponesimod Treatment of adults with Relapsed Multiple Sclerosis • •

TREMFYA® (guselkumab) Treatment of Adults with Active Psoriatic Arthritis • •

Uptravi® IV Pulmonary arterial hypertension •

ZABDENO (Ad26.ZEBOV) and MVABEA (MVA-BN-Filo) Preventive Ebola Vaccine •

Medical Devices Segment

The Medical Devices segment sales in 2020 were $23.0 billion, a decrease of 11.6% from 2019, which included an operational decrease of 11.4% and a negative currency impact of 0.2%. U.S. sales were $11.0 billion, a decrease of 10.9% as compared to the prior year. International sales were $11.9 billion, a decrease of 12.2% as compared to the prior year, with an operational decrease of 11.8% and a negative currency impact of 0.4%. In 2020, the net impact of acquisitions and divestitures on the Medical Devices segment worldwide operational sales growth was a negative 0.9% of which, the divestiture of Advanced Sterilization Products (ASP) had an impact of approximately 0.8%. Growth was negatively impacted by COVID-19 and associated deferral of medical procedures.

Major Medical Devices Franchise Sales*:

% Change

*Certain prior year amounts have been reclassified to conform to current year presentation

(1) IncludesSpecialty Surgery which was previously disclosed separately

(2) Previously referred to as Spine & Other

The Surgery franchise sales were $8.2 billion in 2020, a decrease of 13.4% from 2019. The decline in Advanced Surgery was primarily driven by the negative impact of COVID-19 and competitive pressures in the U.S. This was partially offset by the success of new products outside the U.S. and the recovery of an isolated supply disruption in the prior year related to SURGIFLO® . The decline in General Surgery was primarily driven by the negative impact of COVID-19 and the ASP divestiture.

The Orthopaedics franchise sales were $7.8 billion in 2020, a decrease of 12.2% from 2019. The decline in hips was driven by the negative impact of COVID-19 partially offset by a leadership position in the Anterior approach, strong market demand for the ACTIS® stem and enabling technologies – KINCISETM and VELYSTM Hip Navigation. The decline in knees was driven by the negative impact of COVID-19. The decline in Trauma was driven by the negative impact of COVID-19 partially offset by strength from new products. The decline in Spine, Sports & Other was driven by the negative impact of COVID-19 partially offset by the uptake of new products.

The Vision franchise sales were of $3.9 billion in 2020, a decrease of 15.2% from 2019. The Contact Lenses/Other operational decline was due to the negative impact of COVID-19. The Surgical operational decline was primarily driven by the negative impact of COVID-19 and competitive pressures in the U.S.

The Interventional Solutions franchise achieved sales of $3.0 billion in 2020, an increase of 1.6% from 2019. Growth in the electrophysiology business was driven by Atrial Fibrillation procedure growth coupled with strength from new products and market recovery offsetting negative impacts from COVID-19.

Analysis of Consolidated Earnings Before Provision for Taxes on Income

Consolidated earnings before provision for taxes on income was $16.5 billion and $17.3 billion for the years 2020 and 2019, respectively. As a percent to sales, consolidated earnings before provision for taxes on income was 20.0% and 21.1%, in 2020 and 2019, respectively.

(Dollars in billions. Percentages in chart are as a percent to total sales)

Cost of Products Sold and Selling, Marketing and Administrative Expenses:

(Dollars in billions. Percentages in chart are as a percent to total sales)

Cost of products sold increased as a percent to sales driven by:

•Medical Device idle capacity costs associated with COVID-19 related production slow downs

•Establishment of obsolescence reserves and fixed cost deleveraging associated with the impact of COVID-19 in the Medical Devices business

•Supply chain costs associated with the development of the COVID-19 vaccine in the Pharmaceutical business

partially offset by:

•Favorable mix within the Pharmaceutical business

•Favorable product mix with a higher percentage of sales coming from the Pharmaceutical business

The intangible asset amortization expense included in cost of products sold was $4.7 billion and $4.5 billion, for the years 2020 and 2019, respectively.

Selling, Marketing and Administrative Expenses decreased as a percent to sales driven by:

•Leveraging in the Pharmaceutical and Consumer Health businesses

•Portfolio and investment optimization including execution of the ongoing SKU rationalization program in the Consumer Health business

•Favorable segment mix with a higher percentage of sales coming from the Pharmaceutical business

partially offset by:

•The negative impact on sales resulting from COVID-19 in the Medical Devices business

Research and Development Expense:

Research and development expense by segment of business was as follows:

(Dollars in Millions) Amount % of Sales* Amount % of Sales*

Percent increase/(decrease) over the prior year 7.1 % 5.4 %

*As a percent to segment sales

Research and development activities represent a significant part of the Company's business. These expenditures relate to the processes of discovering, testing and developing new products, upfront payments and developmental milestones, improving existing products, as well as ensuring product efficacy and regulatory compliance prior to launch. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products.

Research and Development increased as a percent to sales primarily driven by:

•Segment mix driven by a higher percentage of sales generated by the Pharmaceutical business versus the prior year

•The negative COVID-19 impact on Medical Devices sales

•Increased investment in the Medical Devices business related to robotics and digital programs

•Portfolio progression including the COVID-19 vaccine in the Pharmaceutical business, net of governmental reimbursements

Research facilities are located in the U.S., Belgium, Brazil, China, France, Germany, India, Israel, the Netherlands, Poland, Singapore, Sweden, Switzerland and the United Kingdom with additional R&D support in over 30 other countries.

In-Process Research and Development (IPR&D): In fiscal year 2020, the Company recorded an IPR&D charge of $0.2 billion primarily related to a partial impairment due to timing and progression of one of the digital surgery platforms acquired with the Auris Health acquisition. In the fiscal year 2019, the Company recorded an IPR&D 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.

Other (Income) Expense, Net: Other (income) expense, net is the account where the Company records gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Innovation - JJDC, Inc. (JJDC), unrealized gains and losses on investments, gains and losses on divestitures, certain transactional currency gains and losses, acquisition-related costs, litigation accruals and settlements, as well as royalty income.

Other (income) expense, net for the fiscal year 2020 was unfavorable by $0.4 billion as compared to the prior year primarily due to the following:

(Dollars in Billions)(Income)/Expense 2020 2019 Change

Litigation expense(1) $ 5.1 5.1 —

Acquisition and Integration related(2) (1.1) 0.3 (1.4)

Unrealized (gains)/losses on securities (0.5) (0.6) 0.1

Equity step-up gain related to DR. CI:LABO 0.0 (0.3) 0.3

Divestiture Gains(3) (0.2) (2.2) 2.0

Restructuring related 0.1 0.2 (0.1)

Total Other (Income) Expense, Net $ 2.9 2.5 0.4

(1)2020 litigation expense primarily associated with Talc related reserves and certain settlements ($4.0 billion). 2019 litigation expense primarily related to the agreement in principle to settle opioid litigation ($4.0 billion).

(2)2020 is primarily driven by a contingent consideration reversal of approximately $1.1 billion related to the timing of certain developmental milestones associated with the Auris Health acquisition.

(3) 2019 included the divestiture of ASP

Interest (Income) Expense: The fiscal year 2020 included net interest expense of $90 million as compared to income of $39 million in the fiscal year 2019. This was primarily due to reduced interest income resulting from lower rates of interest earned on cash balances and a higher average debt balance. This was partially offset by a lower average debt interest rate and a higher average cash balance. Cash, cash equivalents and marketable securities totaled $25.2 billion at the end of 2020, and averaged $22.2 billion as compared to the cash, cash equivalents and marketable securities total of $19.3 billion and $19.5 billion average cash balance in 2019. The total debt balance at the end of 2020 was $35.3 billion with an average debt balance of $31.5 billion as compared to $27.7 billion at the end of 2019 and an average debt balance of $29.1 billion. In the fiscal third quarter of 2020, the Company issued approximately $5.0 billion of commercial paper, with approximately $0.8 billion outstanding at year end. In the fiscal third quarter of 2020, the Company issued senior unsecured notes for a total of $7.5 billion.

Income Before Tax by Segment

Income (loss) before tax by segment of business were as follows:

Income Before Tax Segment Sales Percent of Segment Sales

Less: Net expense not allocated to segments (2) 945 835

(1)See Note 17 to the Consolidated Financial Statements for more details.

(2)Amounts not allocated to segments include interest (income) expense and general corporate (income) expense.

Consumer Health Segment:

In 2020, the Consumer Health segment loss before tax as a percent of sales was (7.6)% versus income before tax of 14.8% in 2019. The decrease in the income before tax as a percent of sales was primarily driven by the following:

•Higher litigation expense of $3.9 billion in 2020 vs. $0.4 billion in 2019 (primarily associated with talc related reserves and certain settlements)

•The fiscal year 2019 included a gain of $0.3 billion related to the Company's previously held equity investment in DR. CI:LABO

partially offset by:

•Portfolio and investment optimization including execution of the ongoing SKU rationalization program

Pharmaceutical Segment:

In 2020, the Pharmaceutical segment income before tax as a percent to sales was 33.9% versus 20.9% in 2019. The increase in the income before tax as a percent of sales was primarily driven by the following:

•Lower litigation expense of $0.8 billion in 2020 vs. $4.3 billion in 2019 (primarily related to the agreement in principle to settle opioid litigation, of which $1.0 billion is in 2020 and $4.0 billion is in 2019)

•An in-process research and development charge of $0.9 billion in fiscal 2019 related to Alios

•Lower acquisition and integration related costs in fiscal 2020

•Leveraging in selling, marketing and administrative expense

Medical Devices Segment: In 2020, the Medical Devices segment income before tax as a percent to sales was 13.3% versus 28.1% in 2019. The decrease in the income before tax as a percent to sales was primarily driven by the following:

•A gain of $2.0 billion related to the ASP divestiture recorded in the fiscal 2019

•Idle capacity costs associated with COVID-19 related production slow downs in fiscal 2020

•Establishment of obsolescence reserves and fixed cost deleveraging associated with the impact of COVID-19 in fiscal 2020

•The negative impact of COVID-19 on sales in fiscal 2020

•An in-process research and development charge of $0.2 billion in fiscal 2020 primarily related to the Auris Health acquisition

partially offset by:

•A contingent consideration reversal of approximately $1.1 billion in fiscal 2020 related to the timing of certain developmental milestones associated with the Auris Health acquisition

•Litigation expense was $0.3 billion in 2020 vs. $0.4 billion in 2019

Restructuring: In the fiscal second quarter of 2018, the Company announced plans to implement actions across its global supply chain that are intended to enable the Company to focus resources and increase investments in critical capabilities, technologies and solutions necessary to manufacture and supply its product portfolio of the future, enhance agility and drive growth. The Company expects these supply chain actions will include expanding its use of strategic collaborations, and bolstering its initiatives to reduce complexity, improving cost-competitiveness, enhancing capabilities and optimizing its network. Discussions regarding specific future actions are ongoing and are subject to all relevant consultation requirements before they are finalized. In total, the Company expects these actions to generate approximately $0.6 to $0.8 billion in annual pre-tax cost savings that will be substantially delivered by 2022. The Company expects to record pre-tax restructuring charges of approximately $1.9 to $2.3 billion. The Company estimates that approximately 70% of the cumulative pre-tax costs will result in cash outlays. In 2020, the Company recorded a pre-tax charge of $0.4 billion, which is included on the following lines of the Consolidated Statement of Earnings, $0.2 billion in restructuring, $0.1 billion in other (income) expense and $0.1 billion in cost of products sold. Total project costs of approximately $1.3 billion have been recorded since the restructuring was announced.

See Note 20 to the Consolidated Financial Statements for additional details related to the restructuring programs.

Provision for Taxes on Income: The worldwide effective income tax rate was 10.8% in 2020 and 12.7% in 2019. During the fiscal first quarter of 2021, the Internal Revenue Service published final regulations addressing the requirements for tax deductibility of settlement payments. The Company recorded a pre-tax reserve for $4.0 billion in the fiscal year 2019 based on the agreement in principle to settle opioid litigation and recorded an additional pre-tax $1.0 billion in the fiscal third quarter of 2020 upon which an effective rate of 21.4% has been applied.

For discussion related to the fiscal 2020 provision for taxes refer to Note 8 to the Consolidated Financial Statements.

Liquidity and Capital Resources

Liquidity & Cash Flows

Cash and cash equivalents were $14.0 billion at the end of 2020 as compared to $17.3 billion at the end of 2019.

The primary sources and uses of cash that contributed to the $3.3 billion decrease were:

(Dollars In Billions)

$ 17.3 Q4 2019 Cash and cash equivalents balance

23.5 cash generated from operating activities

(20.8) net cash used by investing activities

(6.1) net cash used by financing activities

0.1 effect of exchange rate and rounding

$ 14.0 Q4 2020 Cash and cash equivalents balance

In addition, the Company had $11.2 billion in marketable securities at the end of fiscal year 2020 and $2.0 billion at the end of fiscal year 2019. See Note 1 to the Consolidated Financial Statements for additional details on cash, cash equivalents and marketable securities.

Cash flow from operations of $23.5 billion was the result of:

(Dollars In Billions)

$ 14.7 Net Earnings

0.8 decrease in accounts receivable

(4.0) an increase in inventories and other current and non-current assets

$ 23.5 Cash Flow from operations

Investing activities use of $20.8 billion of cash was primarily used for:

(Dollars In Billions)

(3.3) additions to property, plant and equipment

(9.0) net purchases of investments

(1.0) Credit support agreements activity, net

0.3 proceeds from the disposal of assets/businesses, net

(0.5) other (primarily licenses and milestones)

$ (20.8) Net cash used for investing activities

Financing activities use of $6.1 billion of cash was primarily used for:

(Dollars In Billions)

$ (10.5) dividends to shareholders

(3.2) repurchase of common stock

7.1 net proceeds from short and long term debt

(0.3) Credit support agreements activity, net

(0.3) other

$ (6.1) Net cash used for financing activities

As of January 3, 2021, the Company's notes payable and long-term debt was in excess of cash, cash equivalents and marketable securities. As of January 3, 2021, the net debt position was $10.1 billion as compared to the prior year of $8.4 billion. There was an increase in the net debt position due to increased borrowings in the fiscal third quarter of 2020. The debt balance at the end of 2020 was $35.3 billion as compared to $27.7 billion in 2019. Considering recent market conditions and the on-going COVID-19 crisis, the Company has evaluated its operating cash flows and liquidity profile and does not foresee any significant incremental risk. The Company anticipates that operating cash flows, the ability to raise funds from external sources, borrowing capacity from existing committed credit facilities and access to the commercial paper markets will continue to provide sufficient resources to fund operating needs, including the talc litigation and agreement in principle to settle opioid litigation of which the majority may be paid over the next two to three years. In addition, the Company monitors the global capital markets on an ongoing basis and from time to time may raise capital when market conditions are favorable. In the fiscal

third quarter of 2020, the Company issued approximately $5.0 billion of commercial paper, with approximately $0.8 billion outstanding at year end. In the fiscal third quarter of 2020, the Company issued senior unsecured notes for a total of $7.5 billion. For additional details on borrowings, see Note 7 to the Consolidated Financial Statements. The net proceeds from this offering were used to fund the Momenta Pharmaceuticals, Inc. acquisition which closed on October 1, 2020 and for general corporate purposes. Additionally, as a result of the Tax Cuts and Jobs Act (TCJA), the Company has access to its cash outside the U.S. at a significantly reduced cost.

The following table summarizes the Company’s material contractual obligations and their aggregate maturities as of January 3, 2021: To satisfy these obligations, the Company intends to use cash from operations.

For tax matters, see Note 8 to the Consolidated Financial Statements. The table does not include activity related to business combinations or the Company’s approximate $0.9 billion in contractual supply commitments associated with its development of a COVID-19 vaccine.

Financing and Market Risk

The Company uses financial instruments to manage the impact of foreign exchange rate changes on cash flows. Accordingly, the Company enters into forward foreign exchange contracts to protect the value of certain foreign currency assets and liabilities and to hedge future foreign currency transactions primarily related to product costs. Gains or losses on these contracts are offset by the gains or losses on the underlying transactions. A 10% appreciation of the U.S. Dollar from the January 3, 2021 market rates would increase the unrealized value of the Company’s forward contracts by $121 million. Conversely, a 10% depreciation of the U.S. Dollar from the January 3, 2021 market rates would decrease the unrealized value of the Company’s forward contracts by $148 million. In either scenario, the gain or loss on the forward contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated earnings and cash flows.

The Company hedges the exposure to fluctuations in currency exchange rates, and the effect on certain assets and liabilities in foreign currency, by entering into currency swap contracts. A 1% change in the spread between U.S. and foreign interest rates on the Company’s interest rate sensitive financial instruments would either increase or decrease the unrealized value of the Company’s swap contracts by approximately $1,667 million. In either scenario, at maturity, the gain or loss on the swap contract would be offset by the gain or loss on the underlying transaction, and therefore, would have no impact on future anticipated cash flows.

The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with parties that have at least an investment grade credit rating. The counterparties to these contracts are major financial institutions and there is no significant concentration of exposure with any one counterparty. Management believes the risk of loss is remote. The Company entered into credit support agreements (CSA) with certain derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. See Note 6 to the Consolidated Financial Statements for additional details on credit support agreements.

The Company invests in both fixed rate and floating rate interest earning securities which carry a degree of interest rate risk. The fair market value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. A 1% (100 basis points) change in spread on the Company’s interest rate sensitive investments would either increase or decrease the unrealized value of cash equivalents and current marketable securities by approximately $36 million.

The Company has access to substantial sources of funds at numerous banks worldwide. In September 2020, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 9, 2021. Interest charged on borrowings under the credit line agreement is based on either bids provided by banks, London Interbank Offered Rates (LIBOR), Secured Overnight Financing Rate (SOFR) Swap Curve or other applicable market

rate as allowed plus applicable margins. Commitment fees under the agreement are not material.

Total borrowings at the end of 2020 and 2019 were $35.3 billion and $27.7 billion, respectively. The increase in borrowings was the issuance of notes in 2020 when market conditions were favorable. In 2020, net debt (cash and current marketable securities, net of debt) was $10.1 billion compared to net debt of $8.4 billion in 2019. Total debt represented 35.8% of total capital (shareholders’ equity and total debt) in 2020 and 31.8% of total capital in 2019. Shareholders’ equity per share at the end of 2020 was $24.04 compared to $22.59 at year-end 2019.

A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements.

Dividends

The Company increased its dividend in 2020 for the 58th consecutive year. Cash dividends paid were $3.98 per share in 2020 and $3.75 per share in 2019.

On January 4, 2021, the Board of Directors declared a regular cash dividend of $1.01 per share, payable on March 9, 2021 to shareholders of record as of February 23, 2021.

Other Information

Critical Accounting Policies and Estimates

Management’s discussion and analysis of results of operations and financial condition are based on the Company’s consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The preparation of these financial statements requires that management make estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. The Company believes that the understanding of certain key accounting policies and estimates are essential in achieving more insight into the Company’s operating results and financial condition. These key accounting policies include revenue recognition, income taxes, legal and self-insurance contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock based awards.

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 of COVID-19 as of January 3, 2021 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, accrued rebates and associated 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 year ended January 3, 2021, 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.

Revenue Recognition: The Company recognizes revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers. The Company's global payment terms are typically between 30 to 90 days. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as variable consideration and recorded as a reduction in sales.

Sales returns are estimated and recorded based on historical sales and returns information. Products that exhibit unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals.

Sales returns allowances represent a reserve for products that may be returned due to expiration, destruction in the field, or in specific areas, product recall. The sales returns reserve is based on historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales returns reserves are accounted for in accordance with the U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer Health and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices segment are typically resalable but are not material. The Company infrequently exchanges products from inventory for returned products. The sales returns reserve for the total Company has been approximately 1.0% of annual net trade sales during the fiscal years 2020 and 2019.

Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the same period as related sales. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of revenue. The Company also earns profit-share payments through collaborative arrangements of certain products, which are included in sales to customers. For all years presented, profit-share payments were less than 3.0% of the total revenues and are included in sales to customers.

In addition, the Company enters into collaboration arrangements that contain multiple revenue generating activities. Amounts due from collaborative partners for these arrangements are recognized as each activity is performed or delivered, based on the relative selling price. Upfront fees received as part of these arrangements are deferred and recognized over the performance period. See Note 1 to the Consolidated Financial Statements for additional disclosures on collaborations.

Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.

Below are tables that show the progression of accrued rebates, returns, promotions, reserve for doubtful accounts and reserve for cash discounts by segment of business for the fiscal years ended January 3, 2021 and December 29, 2019.

Consumer Health Segment

Reserve for doubtful accounts 35 7 (3) 39

Reserve for doubtful accounts 32 21 (18) 35

(1)Includes reserve for customer rebates of $66 million at January 3, 2021 and $54 million at December 29, 2019, recorded as a contra asset.

Pharmaceutical Segment

Accrued promotions 5 10 (9) 6

Reserve for doubtful accounts 36 24 (8) 52

Reserve for doubtful accounts 47 2 (13) 36

(1)Includes reserve for customer rebates of $174 million at January 3, 2021 and $93 million at December 29, 2019, recorded as a contra asset.

(2)Includes adjustments

Medical Devices Segment

Reserve for cash discounts 10 88 (89) 9

Reserve for cash discounts — 106 (96) 10

(1)Includes reserve for customer rebates of $707 million at January 3, 2021 and $499 million at December 29, 2019, recorded as a contra asset.

Income Taxes: Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on enacted tax regulations and rates. Future changes in tax laws and rates may affect recorded deferred tax assets and liabilities.

The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.

The Company has recorded deferred tax liabilities on all undistributed earnings prior to December 31, 2017 from its international subsidiaries. The Company has not provided deferred taxes on the undistributed earnings subsequent to January 1, 2018 from certain international subsidiaries where the earnings are considered to be indefinitely reinvested. The Company intends to continue to reinvest these earnings in those international operations. If the Company decides at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company estimates that the total tax effect of this repatriation would be approximately $0.7 billion under current enacted tax laws and regulations and at current currency exchange rates.

During the fiscal first quarter of 2021, the Internal Revenue Service published final regulations addressing the requirements for tax deductibility of settlement payments. The Company recorded a pre-tax reserve for $4.0 billion in fiscal 2019 based on the agreement in principle to settle opioid litigation and recorded an additional pre-tax $1.0 billion in the fiscal third quarter of 2020 upon which an effective rate of 21.4% has been applied.

See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.

Legal and Self Insurance Contingencies: The Company records accruals for various contingencies, including legal proceedings and product liability claims as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated.

The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated.

See Notes 1 and 19 to the Consolidated Financial Statements for further information regarding product liability and legal proceedings.

Long-Lived and Intangible Assets: The Company assesses changes, both qualitatively and quantitatively, in economic conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges.

Employee Benefit Plans: The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on assumptions for the discount rate, expected return on plan assets, mortality rates, expected salary increases, health care cost trend rates and attrition rates. See Note 10 to the Consolidated Financial Statements for further details on these rates.

Stock Based Compensation: The Company recognizes compensation expense associated with the issuance of equity instruments to employees for their services. Based on the type of equity instrument, the fair value is estimated on the date of grant using either the Black-Scholes option valuation model or a combination of both the Black-Scholes option valuation model and Monte Carlo valuation model, and is expensed in the financial statements over the service period. The input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and expected dividend yield. Prior to fiscal 2020, for performance share units, the fair market value was calculated for each of the three component goals at the date of grant: operational sales, adjusted operational earnings per share and relative total shareholder return. Beginning in fiscal 2020, for performance share units, the fair market value is calculated for the two component goals at the date of grant: adjusted operational earnings per share and relative total shareholder return. The fair values for the earnings per share goal of each performance share unit was estimated on the date of grant using the fair market value of the shares at the time of the award, discounted for dividends, which are not paid on the performance share units during the vesting period. The fair value for the relative total shareholder return goal of each performance share unit was estimated on the date of grant using the Monte Carlo valuation model. See Note 16 to the Consolidated Financial Statements for additional information.

New Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of January 3, 2021.

Economic and Market Factors

COVID-19 considerations and business continuity

The Company has considered various internal and external factors in assessing the potential impact of COVID-19 on its business and financial results based upon information available at this time, as follows:

•Operating Model: The Company has a diversified business model across the healthcare industry with flexibility designed into its manufacturing, research and development clinical operations and commercial capabilities.

•Supply Chain: The Company continues to leverage its global manufacturing footprint and dual-source capabilities while closely monitoring and maintaining critical inventory at major distribution centers away from high-risk areas to ensure adequate and effective distribution.

•Business Continuity: The robust, active business continuity plans across the Company's network have been instrumental in preparing the Company for events like COVID-19 and the ability to meet the majority of patient and consumer needs remains uninterrupted.

•Workforce: The Company has put procedures in place to protect its essential workforce in manufacturing, distribution, commercial and research operations while ensuring appropriate remote working protocols have been established for other employees.

•Liquidity: The Company's high-quality credit rating allows the Company superior access to the financial capital markets for the foreseeable future. In the fiscal third quarter of 2020, the Company issued approximately $5.0 billion of commercial paper, with approximately $0.8 billion outstanding at year end, for additional liquidity. Additionally, in the fiscal third quarter of 2020, the Company issued senior unsecured notes for a total of $7.5 billion. The net proceeds from this offering were used to fund the Momenta Pharmaceuticals, Inc. acquisition on October 1, 2020 and for general corporate purposes.

•Domestic and Foreign Legislation: The Company will continue to assess and evaluate the on-going global legislative efforts to combat the COVID-19 impact on economies and the sectors in which it participates. Currently, the recent legislative acts put in place are not expected to have a material impact on the Company’s operations.

In fiscal 2020, the Company entered into a series of contract manufacturing arrangements for vaccine production with third party contract manufacturing organizations. These arrangements provide the Company with future supplemental commercial capacity for vaccine production and potentially transferable rights to such production if capacity is not required. Amounts paid and contractually obligated to be paid to these contract manufacturing organizations of approximately $0.9 billion are reflected in the prepaid expenses and other, other assets, accrued liabilities and other liabilities accounts in the Company's consolidated balance sheet upon execution of each agreement. Additionally, the Company has entered into certain vaccine development cost sharing arrangements with government related organizations.

The Company is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concerns about the rising cost of health care. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 2010 - 2020, in the U.S., the weighted average compound annual growth rate of the Company’s net price increases for health care products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI).

The Company operates in certain countries where the economic conditions continue to present significant challenges. The Company continues to monitor these situations and take appropriate actions. Inflation rates continue to have an effect on worldwide economies and, consequently, on the way companies operate. The Company has accounted for operations in Argentina (beginning in the fiscal third quarter of 2018) and Venezuela as highly inflationary, as the prior three-year cumulative inflation rate surpassed 100%. This did not have a material impact to the Company's results in the period. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.

In June 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit”. The U.K. officially exited the E.U. on January 31, 2020, however, there was a transition period to allow time to agree the terms of a new trade deal. On December 30, 2020, the U.K., E.U. and the European Atomic Energy Community (Euratom) signed the EU–UK Trade and Cooperation Agreement (TCA). Over the last few years, Brexit has created global political and economic uncertainty and has led to volatility in exchange rates and interest rates, additional cost containment by third-party payors and changes in regulations. While the UK and EU have now agreed on a future trade and cooperation agreement, it is still unclear what the ultimate financial, trade, regulatory and legal implications the withdrawal of the U.K. from the E.U. will have. However, the Company currently does not believe that these and other related effects will have a material impact on the Company’s consolidated financial position or operating results. As of January 3, 2021, the business of the Company’s U.K. subsidiaries represented less than 6% of the Company’s consolidated assets and less than 3% of the Company's fiscal twelve months revenues.

The Company is exposed to fluctuations in currency exchange rates. A 1% change in the value of the U.S. Dollar as compared to all foreign currencies in which the Company had sales, income or expense in 2020 would have increased or decreased the translation of foreign sales by approximately $384 million and net income by approximately $115 million.

Governments around the world consider various proposals to make changes to tax laws, which may include increasing or decreasing existing statutory tax rates. A change in statutory tax rate in any country would result in the revaluation of the Company’s deferred tax assets and liabilities related to that particular jurisdiction in the period in which the new tax law is enacted. This change would result in an expense or benefit recorded to the Company’s Consolidated Statement of Earnings. The Company closely monitors these proposals as they arise in the countries where it operates. Changes to the statutory tax rate may occur at any time, and any related expense or benefit recorded may be material to the fiscal quarter and year in which the law change is enacted.

The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement of health care products.

Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn, may continue to impact the Company’s businesses.

The Company also operates in an environment increasingly hostile to intellectual property rights. Firms have filed Abbreviated New Drug Applications or Biosimilar Biological Product Applications with the FDA or otherwise challenged the coverage and/or validity of the Company's patents, seeking to market generic or biosimilar forms of many of the Company’s key pharmaceutical products prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in the resulting lawsuits, generic or biosimilar versions of the products at issue will be introduced to the market, resulting in the potential for substantial market share and revenue losses for those products, and which may result in a non-cash impairment charge in any associated intangible asset. There is also a risk that one or more competitors could launch a generic or biosimilar version of the product at issue following regulatory approval even though one or more valid patents are in place.

Legal Proceedings

Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of business.

The Company records accruals for loss contingencies associated with these legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of January 3, 2021, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated. The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals as might be warranted based on new information and further developments in accordance with ASC 450-20-25. For these and other litigation and regulatory matters discussed below for which a loss is probable or reasonably possible, the Company is unable to estimate the possible loss or range of loss beyond the amounts accrued. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions including timing of related payments. The ability to make such estimates and judgments can be affected by various factors including, among other things, whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; procedural or jurisdictional issues; the uncertainty and unpredictability of the number of potential claims; ability to achieve comprehensive multi-party settlements; complexity of related cross-claims and counterclaims; and/or there are numerous parties involved. To the extent adverse verdicts have been rendered against the Company, the Company does not record an accrual until a loss is determined to be probable and can be reasonably estimated.

In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution of, or increase in accruals for, one or more of these matters in any reporting period may have a material adverse effect on the Company's results of operations and cash flows for that period.

See Note 19 to the Consolidated Financial Statements for further information regarding legal proceedings.

Common Stock

The Company’s Common Stock is listed on the New York Stock Exchange under the symbol JNJ. As of February 16, 2021, there were 132,376 record holders of Common Stock of the Company.

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is incorporated herein by reference to “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources - Financing and Market Risk” of this Report; and Note 1 “Summary of Significant Accounting Policies - Financial Instruments” of the Notes to Consolidated Financial Statements included in Item 8 of this Report.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Audited Consolidated Financial Statements

39 Consolidated Balance Sheets

40 Consolidated Statements of Earnings

41 Consolidated Statements of Comprehensive Income

42 Consolidated Statements of Equity

43 Consolidated Statements of Cash Flows

45 Notes to Consolidated Financial Statements

101 Report of Independent Registered Public Accounting Firm

104 Management’s Report on Internal Control Over Financial Reporting

JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

At January 3, 2021 and December 29, 2019

(Dollars in Millions Except Share and Per Share Amounts) (Note 1)

Assets

Current assets

Prepaid expenses and other receivables 3,132 2,392

Assets held for sale (Note 18) — 94

Property, plant and equipment, net (Notes 1 and 4) 18,766 17,658

Liabilities and Shareholders’ Equity

Current liabilities

Loans and notes payable (Note 7) $ 2,631 1,202

Accrued rebates, returns and promotions 11,513 10,883

Accrued compensation and employee related obligations 3,484 3,354

Commitments and Contingencies (Note 19)

Shareholders’ equity

Accumulated other comprehensive income (loss) (Note 13) (15,242) (15,891)

See Notes to Consolidated Financial Statements

JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars and Shares in Millions Except Per Share Amounts) (Note 1)

In-process research and development (Note 5) 181 890 1,126

Interest expense, net of portion capitalized (Note 4) 201 318 1,005

Net earnings per share (Notes 1 and 15)

Average shares outstanding (Notes 1 and 15)

See Notes to Consolidated Financial Statements

JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Millions) (Note 1)

Other comprehensive income (loss), net of tax

Securities:

Unrealized holding gain (loss) arising during period 1 — (1)

Reclassifications to earnings — — 1

Net change 1 — —

Employee benefit plans:

Prior service credit (cost), net of amortization 1,298 (18) (44)

Gain (loss), net of amortization (1,135) (714) (56)

Effect of exchange rates (229) (1) 92

Derivatives & hedges:

Unrealized gain (loss) arising during period 1,000 (107) (73)

Reclassifications to earnings (53) 7 (192)

Other comprehensive income (loss) 649 (669) (1,791)

See Notes to Consolidated Financial Statements

JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in Millions) (Note 1)

Employee compensation and stock option plans 1,949 (1,111) 3,060

Repurchase of common stock (5,868) (5,868)

Other comprehensive income (loss), net of tax (1,791) (1,791)

Employee compensation and stock option plans 1,933 (758) 2,691

Repurchase of common stock (6,746) (6,746)

Other (1) (1)

Other comprehensive income (loss), net of tax (669) (669)

Employee compensation and stock option plans 2,217 (931) 3,148

Repurchase of common stock (3,221) (3,221)

Other comprehensive income (loss), net of tax 649 649

(1) See Note 1 to Consolidated Financial Statements for additional details on the effect of cumulative adjustments to retained earnings.

See Notes to Consolidated Financial Statements

JOHNSON & JOHNSON AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Millions) (Note 1)

Cash flows from operating activities

Adjustments to reconcile net earnings to cash flows from operating activities:

Depreciation and amortization of property and intangibles 7,231 7,009 6,929

Contingent consideration reversal (1,148) — —

Net gain on sale of assets/businesses (111) (2,154) (1,217)

Credit losses and accounts receivable allowances 63 (20) (31)

Decrease/(Increase) in accounts receivable 774 (289) (1,185)

Increase in accounts payable and accrued liabilities 5,141 4,060 3,951

Increase in other current and non-current assets (3,704) (1,054) (275)

Cash flows from investing activities

Additions to property, plant and equipment (3,347) (3,498) (3,670)

Proceeds from the disposal of assets/businesses, net 305 3,265 3,203

Acquisitions, net of cash acquired (Note 18) (7,323) (5,810) (899)

Credit support agreements activity, net (987) 338 —

Other (primarily licenses and milestones) (521) 44 (464)

Cash flows from financing activities

Proceeds from short-term debt 3,391 39 80

Proceeds from long-term debt, net of issuance costs 7,431 3 5

Credit support agreements activity, net (333) 100 25

Effect of exchange rate changes on cash and cash equivalents 89 (9) (241)

(Decrease)/Increase in cash and cash equivalents (3,320) (802) 283

Supplemental cash flow data

Cash paid during the year for:

Interest, net of amount capitalized 841 925 963

Supplemental schedule of non-cash investing and financing activities

Conversion of debt 27 1 6

Acquisitions

See Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Johnson & Johnson and its subsidiaries (the Company). Intercompany accounts and transactions are eliminated. Columns and rows within tables may not add due to rounding. Percentages have been calculated using actual, non-rounded figures.

Description of the Company and Business Segments

The Company has approximately 134,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being.

The Company is organized into three business segments: Consumer Health (previously referred to as Consumer), Pharmaceutical and Medical Devices. The Consumer Health segment includes a broad range of products used in the baby care, oral care, skin health/beauty, over-the-counter pharmaceutical, women’s health and wound care markets. These products are marketed to the general public and sold online (eCommerce) and to retail outlets and distributors throughout the world. The Pharmaceutical segment is focused on six therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, pulmonary hypertension, and cardiovascular and metabolic diseases. Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. The Medical Devices segment includes a broad range of products used in the orthopaedic, surgery, interventional solutions (cardiovascular and neurovascular) and eye health fields, which are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics.

New Accounting Standards

Recently Adopted Accounting Standards

ASU 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.

ASU 2018-14: Compensation - Defined Benefit Plans

The Company adopted this standard in the fiscal year ended 2020. This standard revised the financial statement note disclosure requirements of ASC 715-20 for defined benefit plan sponsors. The adoption of this standard had no impact on the Company's consolidated financial statements. See Note 10 to the Consolidated Financial Statements for defined benefit plan disclosures.

Accounting Standards adopted in the fiscal 2018 with a cumulative effect to the 2018 opening balance of Retained Earnings

The following table summarizes the cumulative effect adjustments made to the 2018 opening balance of retained earnings upon adoption of these accounting standards in 2018:

ASU 2014-09 - Revenue from Contracts with Customers $ (47)

ASU 2016-16 - Income Taxes: Intra-Entity Transfers (439)

Recently Issued Accounting Standards

Not Adopted as of January 3, 2021

The Company assesses the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board on the Company's financial statements 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. There were no new material accounting standards issued in fiscal 2020 that impacted the Company.

Cash Equivalents

The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating. The Company invests its cash primarily in government securities and obligations, corporate debt securities, money market funds and reverse repurchase agreements (RRAs).

RRAs are collateralized by deposits in the form of Government Securities and Obligations for an amount not less than 102% of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an A (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities.

Investments

Investments classified as held to maturity investments are reported at amortized cost and realized gains or losses are reported in earnings. Investments classified as available-for-sale debt securities are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Available-for-sale securities available for current operations are classified as current assets otherwise, they are classified as long term. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company reviews its investments for impairment and adjusts these investments to fair value through earnings, as required.

Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:

Building and building equipment 20 - 30 years

Land and leasehold improvements 10 - 20 years

Machinery and equipment 2 - 13 years

The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 8 years.

The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between

the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows.

Revenue Recognition

The Company recognizes revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers. The Company's global payment terms are typically between 30 to 90 days. Provisions for certain rebates, sales incentives, trade promotions, coupons, product returns and discounts to customers are accounted for as variable consideration and recorded as a reduction in sales. The liability is recognized within Accrued Rebates, Returns, and Promotions on the consolidated balance sheet.

Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including consideration of competitor pricing. Rebates are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. A significant portion of the liability related to rebates is from the sale of the Company's pharmaceutical products within the U.S., primarily the Managed Care, Medicare and Medicaid programs, which amounted to $7.2 billion and $7.0 billion as of January 3, 2021 and December 29, 2019, respectively. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.

Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the same period as related sales. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. These arrangements are evaluated to determine the appropriate amounts to be deferred or recorded as a reduction of revenue. The Company also earns profit-share payments through collaborative arrangements for certain products, which are included in sales to customers. For all years presented, profit-share payments were less than 3.0% of the total revenues and are included in sales to customers.

See Note 17 to the Consolidated Financial Statements for further disaggregation of revenue.

Shipping and Handling

Shipping and handling costs incurred were $1.0 billion, $1.0 billion and $1.1 billion in fiscal years 2020, 2019 and 2018, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than 0.5% of sales to customers for all periods presented.

Inventories

Inventories are stated at the lower of cost or net realizable value determined by the first-in, first-out method.

Intangible Assets and Goodwill

The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed annually for impairment. The Company completed its annual impairment test for 2020 in the fiscal fourth quarter. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted. Purchased in-process research and development is accounted for as an indefinite lived intangible asset until the underlying project is completed, at which point the intangible asset will be accounted for as a definite lived intangible asset, or abandoned, at which point the intangible asset will be written off or partially impaired.

Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill.

Financial Instruments

As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value, with Level 1 having the highest priority and Level 3 having the lowest. Changes in the fair value of derivatives are recorded each period in current 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 Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments.

Leases

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 lease for space, vehicles, manufacturing equipment and data processing equipment. The ROU asset pertaining to operating leases was $1.0 billion and $1.0 billion in 2020 and 2019, respectively. The lease liability was $1.1 billion and $1.0 billion in 2020 and 2019, respectively. The operating lease costs were $0.3 billion, $0.3 billion and $0.3 billion in 2020, 2019 and 2018, respectively. Cash paid for amounts included in the measurement of lease liabilities were $0.3 billion and $0.3 billion in 2020 and 2019, respectively.

Product Liability

Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information and actuarially determined estimates where applicable. The accruals are adjusted periodically as additional information becomes available. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated. To the extent adverse verdicts have been rendered against the Company, the Company does not record an accrual until a loss is determined to be probable and can be reasonably estimated.

The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated.

Research and Development

Research and development expenses are expensed as incurred in accordance with ASC 730, Research and Development. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.

The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development.

Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. In general, the income statement presentation for these collaborations is as follows:

Nature/Type of Collaboration Statement of Earnings Presentation

Third-party sale of product & profit share payments received Sales to customers

Royalties received from collaborative partner Other income (expense), net

For all years presented, there was no individual project that represented greater than 5% of the total annual consolidated research and development expense.

The Company has a number of products and compounds developed in collaboration with strategic partners including XARELTO®, co-developed with Bayer HealthCare AG and IMBRUVICA®, developed in collaboration and co-marketed with Pharmacyclics LLC, an AbbVie company.

Separately, the Company has a number of licensing arrangements for products and compounds including DARZALEX®, licensed from Genmab A/S.

Advertising

Costs associated with advertising are expensed in the year incurred and are included in selling, marketing and administrative expenses. Advertising expenses worldwide, which comprised television, radio, print media and Internet advertising, were $2.1 billion, $2.2 billion and $2.6 billion in fiscal years 2020, 2019 and 2018, respectively.

Income Taxes

Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on enacted tax regulations and rates. Future changes in tax laws and rates may affect recorded deferred tax assets and liabilities in the future.

The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.

In 2017, the United States enacted into law new U.S. tax legislation, the U.S. Tax Cuts and Jobs Act (TCJA). This law included provisions for a comprehensive overhaul of the corporate income tax code, including a reduction of the statutory corporate tax rate from 35% to 21%, effective on January 1, 2018. The TCJA included a provision for a tax on all previously undistributed earnings of U.S. companies located in foreign jurisdictions. Undistributed earnings in the form of cash and cash equivalents were taxed at a rate of 15.5% and all other earnings were taxed at a rate of 8.0%. This tax is payable over 8 years and will not accrue interest. These payments began in 2018 and will continue through 2025. The remaining balance at the end of the 2020 was approximately $7.7 billion, of which $6.9 billion is classified as noncurrent and reflected as “Long-term taxes payable” on the Company’s balance sheet. The balance of this account is related to receivables from tax authorities not expected to be received in the next 12 months.

The TCJA also includes provisions for a tax on global intangible low-taxed income (GILTI). GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets, as provided by the TCJA. In January 2018, the FASB issued guidance that allows companies to elect as an accounting policy whether to record the tax effects of GILTI in the period the tax liability is generated (i.e., “period cost”) or provide for deferred tax assets and liabilities related to basis differences that exist and are expected to effect the amount of GILTI inclusion in future years upon reversal (i.e., “deferred method”). In 2018, the Company elected to account for GILTI under the deferred method. The deferred tax amounts recorded are based on the evaluation of temporary differences that are expected to reverse as GILTI is incurred in future periods.

intends to continue to reinvest these earnings in those international operations. If the Company decides at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company estimates that the total tax effect of this repatriation would be approximately $0.7 billion under current enacted tax laws and regulations and at current currency exchange rates.

See Note 8 to the Consolidated Financial Statementsfor further information regarding income taxes.

Net Earnings Per Share

Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock using the treasury stock method.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, rebates, allowances and incentives, product liabilities, income taxes, withholding taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. Actual results may or may not differ from those estimates.

The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.

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 of COVID-19 as of January 3, 2021 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, accrued rebates and associated 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 fiscal year ended January 3, 2021, 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.

Annual Closing Date

The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, and therefore includes additional shipping days, as was the case in fiscal year 2020, and will be the case again in fiscal year 2026.

Reclassification

Certain prior period amounts have been reclassified to conform to current year presentation.

2.Cash, Cash Equivalents and Current Marketable Securities

At the end of the fiscal year 2020 and 2019, cash, cash equivalents and current marketable securities were comprised of:

(Dollars in Millions) 2020

Other Sovereign Securities 14 — 14 — 14

Total cash, cash equivalents and current marketable securities $ 13,985 11,200

(Dollars in Millions) 2019

Carrying Amount Cash & Cash Equivalents Current Marketable Securities

U.S. Reverse repurchase agreements 6,375 6,375 —

Other Reverse repurchase agreements 375 375 —

Total cash, cash equivalents and current marketable securities $ 17,305 1,982

(1) Held to maturity investments are reported at amortized cost and realized 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.

At the end of fiscal year 2019, the carrying amount was the same as the estimated fair value.

Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices and significant other observable inputs.

The contractual maturities of the available for sale debt securities at January 3, 2021 are as follows:

(Dollars in Millions) Cost Basis Fair Value

Due after one year through five years 15 15

Due after five years through ten years — —

The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an investment grade credit rating.

3.Inventories

At the end of fiscal years 2020 and 2019, inventories were comprised of:

(1)See Note 18 to the Consolidated Financial Statements for details on assets held for sale and the related divestitures for the fiscal year ended December 29, 2019. There were no assets held for sale at January 3, 2021.

4.Property, Plant and Equipment

At the end of fiscal years 2020 and 2019, property, plant and equipment at cost and accumulated depreciation were:

Land and land improvements $ 882 854

Total property, plant and equipment, gross $ 46,804 43,332

Total property, plant and equipment, net(1) $ 18,766 17,658

The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in fiscal years 2020, 2019 and 2018 was $63 million, $70 million and $86 million, respectively.

Depreciation expense, including the amortization of capitalized interest in fiscal years 2020, 2019 and 2018 was $2.6 billion, $2.5 billion and $2.6 billion, respectively.

Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings.

5.Intangible Assets and Goodwill

At the end of fiscal years 2020 and 2019, the gross and net amounts of intangible assets were:

Intangible assets with definite lives:

Customer relationships and other intangibles — gross $ 22,898 22,056

Customer relationships and other intangibles — net* $ 11,986 12,594

Intangible assets with indefinite lives:

Purchased in-process research and development(1) 11,849 4,647

Total intangible assets with indefinite lives $ 19,044 11,569

*The majority is comprised of customer relationships

(1) In fiscal year 2020, the Company completed multiple acquisitions and recorded in-process research and development intangible assets of $6.0 billion from Momenta Pharmaceuticals, Inc., $0.8 billion for bermekimab and certain related assets from XBiotech, Inc., and $0.4 billion from the acquisition of all outstanding shares in Verb Surgical, Inc.

Goodwill as of January 3, 2021 and December 29, 2019, as allocated by segment of business, was as follows:

(Dollars in Millions) Consumer Health Pharmaceutical Medical Devices Total

Currency translation/other (122) 31 (4) (95)

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 assets included in cost of products sold was $4.7 billion, $4.5 billion and $4.4 billion before tax, for the fiscal years ended January 3, 2021, December 29, 2019 and December 30, 2018, respectively. 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:

(Dollars in Millions)

See Note 18 to the Consolidated Financial Statements for additional details related to acquisitions and divestitures.

6.Fair Value Measurements

The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany products and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges.

Additionally, the Company uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate borrowings. These derivatives are designated as fair value hedges. The Company uses cross currency interest rate swaps and forward foreign exchange contracts designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward foreign exchange contracts are not designated as hedges and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current 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 January 3, 2021, the total amount of cash collateral paid by the Company under the CSA amounted to $1.1 billion net, related to net investment and cash flow hedges. 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 January 3, 2021, the Company had notional amounts outstanding for forward foreign exchange contracts, and cross currency interest rate swaps of $37.8 billion and $30.6 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. The effect of which are immaterial for the fiscal years ended January 3, 2021 and December 29, 2019. Gains and losses on net investment hedge are accounted 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 January 3, 2021, the balance of deferred net gain on derivatives included in accumulated other comprehensive income was $652 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 13. 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. 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 years ended January 3, 2021 and December 29, 2019, net of tax:

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 AOCI — — — 153 — — — — 159 —

Gain (Loss) on cash flow hedging relationship:

Forward foreign exchange contracts:

Cross currency interest rate swaps contracts:

Amount of gain or (loss) recognized in AOCI $ — — — 748 — — — — 417 —

The following table is the effect of derivatives not designated as hedging instrument for the fiscal years ended January 3, 2021 and December 29, 2019:

Foreign Exchange Contracts Other (income) expense $ 24 (144)

The following table is the effect of net investment hedges for the fiscal years ended January 3, 2021 and December 29, 2019:

Debt $ (473) 121 Interest (income) expense — —

Cross Currency interest rate swaps $ 65 488 Interest (income) expense — —

The Company holds equity investments with readily determinable fair values and equity investments without readily determinable fair values. The Company measures 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 for the fiscal years ended January 3, 2021 and December 29, 2019:

Equity Investments without readily determinable value $ 712 (55) 81 738 738

Equity Investments without readily determinable value $ 681 (38) 69 712 712

(1)Recorded in Other Income/Expense

(2)Other includes impact of currency

For the fiscal years ended January 3, 2021 and December 29, 2019 for equity investments without readily determinable market values, $76 million and $57 million, respectively, of the changes in fair value reflected in net income were the result of impairments. There were $21 million and $19 million, respectively, of changes 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 to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.

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.

The Company’s significant financial assets and liabilities measured at fair value as of the fiscal year ended January 3, 2021 and December 29, 2019 were as follows:

(Dollars in Millions) Level 1 Level 2 Level 3 Total Total (1)

Derivatives designated as hedging instruments:

Assets:

Forward foreign exchange contracts $ — 849 — 849 209

Liabilities:

Forward foreign exchange contracts — 702 — 702 426

Derivatives not designated as hedging instruments:

Assets:

Forward foreign exchange contracts $ — 49 — 49 23

Liabilities:

Forward foreign exchange contracts — 38 — 38 33

Available For Sale Other Investments:

Other Liabilities

Gross to Net Derivative Reconciliation 2020 2019

(Dollars in Millions)

Credit Support Agreement (CSA) (1,107) (841)

Total Net Asset 31 84

Credit Support Agreement (CSA) (2,172) (586)

Total Net Liabilities $ 137 66

Summarized information about changes in liabilities for contingent consideration is as follows:

(Dollars in Millions)

(1)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 assets as of December 29, 2019.

(3)Includes cross currency interest rate swaps and interest rate swaps.

(4)Classified as non-current other assets.

(5)Classified as cash equivalents and current marketable securities.

(6)Includes $594 million, $1,631 million (primarily related to Auris Health) and $397 million, classified as non-current other liabilities as of January 3, 2021, December 29, 2019 and December 30, 2018, respectively. Includes $39 million and $84 million classified as current liabilities as of January 3, 2021 and December 29, 2019, respectively.

(7)Ongoing fair value adjustment amounts are recorded primarily in Research and Development expense. The Company recorded a contingent consideration reversal of $1,148 million in 2020 related to the timing of certain developmental milestones associated with the Auris Health acquisition. The reversal of the contingent consideration was recorded in Other income and expense

See Notes 2 and 7 for financial assets and liabilities held at carrying amount on the Consolidated Balance Sheet.

7.Borrowings

The components of long-term debt are as follows:

(Dollars in Millions) 2020 Effective Rate % 2019 Effective Rate %

3% Zero Coupon Convertible Subordinated Debentures due 2020 $ — — 51 3.00

(1)Weighted average effective rate.

(2)Translation rate at January 3, 2021.

(3)Translation rate at December 29, 2019.

(4)The excess of the fair value over the carrying value of debt was $5.4 billion at the end of fiscal year 2020 and $3.0 billion at the end of fiscal year 2019.

(5)In the fiscal third quarter of 2020, the Company issued senior unsecured notes for a total of $7.5 billion.

Fair value of the long-term debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.

Throughout fiscal year 2020, the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately $2.6 billion at the end of fiscal year 2020, of which $1.8 billion is the current portion of the long-term debt, and the remainder is commercial paper and local borrowings by international subsidiaries.

Throughout fiscal year 2019, the Company continued to have access to liquidity through the commercial paper market. Short-term borrowings and the current portion of long-term debt amounted to approximately $1.2 billion at the end of fiscal year 2019, of which $1.1 billion is the current portion of the long term debt, and the remainder principally represents local borrowing by international subsidiaries.

Aggregate maturities of long-term debt obligations commencing in 2021 are:

(Dollars in Millions)

8.Income Taxes

The provision for taxes on income consists of:

Currently payable:

Deferred:

(1)Includes $1.4 billion of deferred tax expense for the adoption of the deferred method to account for GILTI.

A comparison of income tax expense at the U.S. statutory rate of 21% in fiscal years 2020, 2019 and 2018, to the Company’s effective tax rate is as follows:

Tax rates:

International operations (1) (9.9) (5.9) (3.7)

U.S. taxes on international income (2) 2.7 1.8 1.4

Tax benefits on Capital Loss (1.2) (0.3) (4) —

Tax benefits on share-based compensation (1.5) (0.5) (1.5)

TCJA and related impacts 0.7 (3.9) (3) (1.9) (3)

(1) For all periods presented the Company has subsidiaries operating in Puerto Rico under various tax incentives. International operations reflects the impacts of operations in jurisdictions with statutory tax rates different than the U.S., particularly Ireland, Switzerland and Puerto Rico, which is a favorable impact on the effective tax rate as compared with the U.S. statutory rate. The 2020 and 2019 amounts include the impact of the new tax legislation enactment in Switzerland, which is further described below.

(2) Includes the impact of the GILTI tax, the Foreign-Derived Intangible Income deduction and other foreign income that is taxable under the U.S. tax code.

(3) Represents impact of adjustments to balances originally recorded as part of the 2017 TCJA provisional tax charge. Further information provided below.

(4) Certain prior year amounts have been reclassified to conform to current year presentation.

The fiscal year 2020 tax rate decreased by 1.9% compared to the fiscal year 2019 tax rate, which was primarily driven by the following items. In fiscal year 2019, Switzerland enacted the Federal Act on Tax Reform and AHV Financing (TRAF) which became effective on January 1, 2020. The Federal transitional provisions of TRAF allow companies, under certain conditions, to adjust the tax basis in certain assets to fair value (i.e., “step-up”) to be depreciated and amortized resulting in an incremental Swiss tax deduction over the transitional period.

JNJ US Equity

JNJ · 10-K · period ended 2021-01-03

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

JNJ US Equity☆

JNJ · 10-K · period ended 2021-01-03

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

JNJ US Equity