JOHNSON & JOHNSON (JNJ) FY 2022 MD&A

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 141,700 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the healthcare 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, 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, distributors, hospitals and healthcare 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 Vision 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 2021 sales. In 2021, $14.7 billion was invested in research and development 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 diversity of its 141,700 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 2020 and 2019 see the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2021, Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.

In 2021, worldwide sales increased 13.6% to $93.8 billion as compared to an increase of 0.6% in 2020. These sales changes consisted of the following:

The net impact of acquisitions and divestitures on the worldwide sales growth was a negative impact of 0.6% in 2021 and a negative impact of 0.3% in 2020.

Sales by U.S. companies were $47.2 billion in 2021 and $43.1 billion in 2020. This represents increases of 9.3% in 2021 and 2.5% in 2020. Sales by international companies were $46.6 billion in 2021 and $39.5 billion in 2020. This represents an increase of 18.2% in 2021 and a decrease of 1.3% in 2020.

The five-year compound annual growth rates for worldwide, U.S. and international sales were 5.5%, 4.5% and 6.5%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 3.7%, 5.0% and 2.6%, respectively.

In 2021, sales by companies in Europe achieved growth of 24.3% as compared to the prior year, which included operational growth of 20.7% and a positive currency impact of 3.6%. Sales by companies in the Western Hemisphere (excluding the U.S.) achieved growth of 7.8% as compared to the prior year, which included operational growth of 7.3% and a positive currency impact of 0.5%. Sales by companies in the Asia-Pacific, Africa region achieved growth of 14.1% as compared to the prior year, including operational growth of 11.4% and a positive currency impact of 2.7%.

The Company estimated that the inclusion of a 53rd week in the fiscal year 2020 results negatively impacted the 2021 comparative sales growth by approximately 1.0%. (See Note 1 to the Consolidated Financial Statements for Annual Closing Date details). 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 2021, the Company utilized three wholesalers distributing products for all three segments that represented approximately 14.0%, 11.0% and 11.0% of the total consolidated revenues. In 2020, the Company had three wholesalers distributing products for all three segments that represented approximately 16.0%, 12.0% and 12.0% 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 2021 were $14.6 billion, an increase of 4.1% from 2020, which included 2.8% operational growth and a positive currency impact of 1.3%. U.S. Consumer Health segment sales were $6.5 billion, an increase of 2.4%. International sales were $8.1 billion, an increase of 5.6%, which included 3.1% operational growth and a positive currency impact of 2.5%. In 2021, acquisitions and divestitures had a net negative impact of 1.0% on the operational sales growth of the worldwide Consumer Health segment.

Major Consumer Health Franchise Sales:

The OTC franchise sales of $5.2 billion increased 8.4% as compared to the prior year. Growth was primarily attributable to Analgesics, TYLENOL® and MOTRIN®, digestive health and the hydration benefit offering (ORSL).

The Skin Health/Beauty franchise sales of $4.5 billion increased 2.0% as compared to the prior year. Growth was primarily due to COVID-19 recovery, strong performance of NEUTROGENA® and AVEENO®, and eCommerce acceleration partially offset by the divestiture of DR. CI:LABO - Sedona business in Asia Pacific and external supply constraints.

The Oral Care franchise sales of $1.6 billion increased 0.2% as compared to the prior year. Market growth in the U.S. along with strong performance in the Asia Pacific region due to successful brand building and promotional campaigns and the positive impact of currency offset the negative impact of the floss divestiture and U.S. external supply constraints.

The Baby Care franchise sales of $1.6 billion increased 3.2% compared to the prior year. Growth was driven by AVEENO® Asia Pacific eCommerce strength, innovation and COVID-19 recovery.

The Women’s Health franchise sales of $0.9 billion increased 1.8% as compared to the prior year primarily driven by COVID-19 market recovery, favorable price and strong brand building in Asia Pacific partially offset by disruptions in Europe due to flooding.

The Wound Care/Other franchise sales of $0.7 billion increased 2.6% as compared to the prior year. Growth was due to strong performance of BAND-AID® Brand Adhesive Bandages in the U.S. partially offset by product discontinuations and competitive pressures in Asia Pacific.

In November 2021, the Company announced its intention to separate the Company’s Consumer Health business, with the intention to create a new, publicly traded company. The Company is targeting completion of the planned separation in 18 to 24 months after initial announcement.

Pharmaceutical Segment

Pharmaceutical segment sales in 2021 were $52.1 billion, an increase of 14.3% from 2020, which included operational growth of 13.1% and a positive currency impact of 1.2%. U.S. sales were $28.0 billion, an increase of 8.6%. International sales were $24.1 billion, an increase of 21.6%, which included 18.8% operational growth and a positive currency impact of 2.8%. In 2021, acquisitions and divestitures had a net negative impact of 0.5% on the operational sales growth of the worldwide Pharmaceutical segment. Adjustments to previous sales reserve estimates were approximately $0.7 billion and $0.6 billion in fiscal years 2021 and 2020, respectively.

Major Pharmaceutical Therapeutic Area Sales*:

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

** Percentage greater than 100% or not meaningful

(1) Inclusive of VELCADE® which was previously disclosed separately

Immunology products achieved sales of $16.8 billion in 2021, representing an increase of 11.3% 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 and uptake in Psoriatic Arthritis. This was partially offset by lower sales of REMICADE® (infliximab) due to biosimilar competition.

Biosimilar versions of REMICADE® have been introduced in the United States and certain markets outside the United States and additional competitors continue to enter the market. Continued infliximab biosimilar competition will result in a further reduction in sales of REMICADE®.

The latest expiring United States patent for STELARA® (ustekinumab) will expire in September 2023. STELARA® (ustekinumab) U.S. sales in fiscal 2021 were approximately $5.9 billion. The expiration of a product patent or loss of market exclusivity is likely to result in a reduction in sales.

Infectious disease products achieved sales of $5.9 billion in 2021, representing an increase of 64.0% as compared to the prior year. Growth was primarily driven by the contribution of the COVID-19 vaccine. This was partially offset by lower sales of PREZISTA® and PREZCOBIX®/REZOLSTA® (darunavir/cobicistat) due to increased competition and loss of exclusivity of PREZISTA® in certain countries outside the U.S.

Neuroscience products achieved sales of $7.0 billion, representing an increase of 7.1% as compared to the prior year. Paliperidone long-acting injectables growth was driven by sales of INVEGA SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA TRINZA®/TREVICTA® from new patient starts and persistence as well as the launch of INVEGA HAFYERA™.

Oncology products achieved sales of $14.5 billion in 2021, representing an increase of 17.6% as compared to the prior year. Contributors to the growth were strong sales of DARZALEX® (daratumumab) driven by continued strong market growth, share gains in all regions and solid uptake of the subcutaneous formulation launched in 2020; the continued global launch uptake of ERLEADA® (apalutamide) and IMBRUVICA® (ibrutinib) growth primarily driven by market and continued share leadership. The growth of IMBRUVICA® (ibrutinib) was partially offset by competitive pressures from novel oral agents and COVID-19 related market dynamics including delays in new patient starts.

Pulmonary Hypertension products achieved sales of $3.5 billion, representing an increase of 9.6% as compared to the prior year. Sales growth of OPSUMIT® (macitentan) and UPTRAVI® (selexipag) were due to continued share gains and market growth.

Cardiovascular/Metabolism/Other products sales were $4.5 billion, a decline of 8.6% as compared to the prior year. The decline was primarily attributable to lower sales of INVOKANA®/INVOKAMET® (canagliflozin) due to share erosion and PROCRIT®/ EPREX® (epoetin alfa) due to biosimilar competition.

During 2021, the Company advanced its pipeline with several regulatory submissions and approvals for new drugs and additional indications for existing drugs as follows:

Medical Devices Segment

The Medical Devices segment sales in 2021 were $27.1 billion, an increase of 17.9% from 2020, which included operational growth of 16.2% and a positive currency impact of 1.7%. U.S. sales were $12.7 billion, an increase of 14.9% as compared to the prior year. International sales were $14.4 billion, an increase of 20.6% as compared to the prior year, which included operational growth of 17.3% and a positive currency impact of 3.3%. In 2021, the net impact of acquisitions and divestitures on the Medical Devices segment worldwide operational sales growth was a negative 0.6% primarily due to the divestiture of Advanced Sterilization Products (ASP). The Company has seen a market recovery in global procedural volumes in the Medical Devices segment as compared to the prior year which had significant negative impacts from COVID-19. This procedural volume recovery is the primary driver of sales and earnings growth as compared to the prior year.

Major Medical Devices Franchise Sales:

The Surgery franchise achieved sales of $9.8 billion in 2021 representing an increase of 19.2% from 2020. The growth in Advanced Surgery was primarily driven by Endocutter, Biosurgery and Energy products attributable to market recovery, market expansion and the success of new products offsetting competitive pressures in the U.S. The growth in General Surgery was primarily driven by market recovery and the continued strength of the suture portfolio partially offset by the impact of the ASP divestiture in the prior year.

The Orthopaedics franchise achieved sales of $8.6 billion in 2021, representing an increase of 10.6% from 2020. The growth in hips reflects the market recovery combined with continued strength of the portfolio including the ACTIS® stem and enabling technologies – KINCISE™ and VELYS™ Hip Navigation. The growth in knees was primarily driven by procedure recovery and new product introductions. The growth in Trauma was driven by global market recovery and uptake of new products. The growth in Spine, Sports & Other was primarily driven by procedure recovery and new product introductions.

The Vision franchise achieved sales of $4.7 billion in 2021, representing an increase of 19.6% from 2020. The Contact Lenses/Other operational growth was due to market recovery and market share gains from new products. Surgical Vision operational growth was primarily due to market recovery and uptake of recently launched products.

The Interventional Solutions franchise achieved sales of $4.0 billion in 2021, an increase of 30.4% from 2020. Growth in the electrophysiology and stroke businesses were driven by market recovery and success of new products and commercial strategies.

Beginning in the fiscal first quarter of 2022, the Medical Devices segment will be referred to as the MedTech segment.

Analysis of Consolidated Earnings Before Provision for Taxes on Income

Consolidated earnings before provision for taxes on income was $22.8 billion and $16.5 billion for the years 2021 and 2020, respectively. As a percent to sales, consolidated earnings before provision for taxes on income was 24.3% and 20.0%, in 2021 and 2020, 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 decreased as a percent to sales driven by:

•Non-recurring prior year COVID-19 production related slow-downs and related inventory impacts

•Fixed cost deleveraging in the Medical Devices business in the fiscal 2020

•Favorable mix within the Pharmaceutical business as well as at the enterprise level with a higher percentage of sales coming from the Pharmaceutical business

•Supply chain efficiencies in the Consumer Health segment

The intangible asset amortization expense included in cost of products sold was $4.7 billion for both fiscal years 2021 and 2020.

28

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

•Leveraging in the Medical Devices business resulting from the recovery of sales from the prior years impact of COVID-19

Partially offset by:

•Increased brand marketing expenses in the Consumer Health business

Research and Development Expense:

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

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:

•General portfolio progression in the Pharmaceutical business

•COVID-19 vaccine expenses, net of governmental reimbursements

In-Process Research and Development (IPR&D): In fiscal year 2021, the Company recorded a partial IPR&D charge of $0.9 billion primarily related to expected development delays in the general surgery digital robotics platform (Ottava) acquired with the Auris Health acquisition in 2019. The impairment charge was calculated based on revisions to the discounted cash flow valuation model reflecting a delay of first in human procedures of approximately two years from the initial acquisition model assumption of the second half of 2022. The Company will continue to monitor the remaining $1.5 billion Ottava platform intangible asset as development program activities are ongoing. 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.

On January 28, 2022, subsequent to the fiscal year 2021, additional information regarding efficacy became available which led the Company to the decision to terminate the development of bermekimab for Atopic Dermatitis (AD). The Company recorded an intangible asset impairment charge of approximately $0.6 billion related to an in-process research and development asset, bermekimab (JnJ-77474462), an investigational drug for the treatment of AD and Hidradenitis Suppurativa (HS). The impairment charge is related to the AD indication and is a nonrecognized subsequent event and will be reflected in the first quarter 2022 financial statements. The Company acquired all rights to bermekimab from XBiotech, Inc. in fiscal year 2020.

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, income and losses associated with certain employee benefit programs, 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 2021 was favorable by $2.4 billion as compared to the prior year primarily due to the following:

(1)2021 is primarily related to talc and Risperdal. 2020 is primarily related to talc and the opioid litigation settlement.

(2)2021 is primarily related to divestiture gains of two pharmaceutical brands outside the U.S.

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)2021 includes Consumer Health separation costs of $0.1 billion. Costs in future years are expected to be significantly higher.

Interest (Income) Expense: The fiscal year 2021 included net interest expense of $130 million as compared to $90 million net interest expense in the fiscal year 2020. This was primarily due to lower rates of interest earned on cash balances and a higher average debt balance, partially offset by the benefit from net investment hedging. Cash, cash equivalents and marketable securities totaled $31.6 billion at the end of 2021, and averaged $28.4 billion as compared to the cash, cash equivalents and marketable securities total of $25.2 billion and $22.2 billion average cash balance in 2020. The total debt balance at the end of 2021 was $33.8 billion with an average debt balance of $34.5 billion as compared to $35.3 billion at the end of 2020 and an average debt balance of $31.5 billion.

Income Before Tax by Segment

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

(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 2021, the Consumer Health segment income before tax as a percent of sales was 8.8% versus a loss before tax of 7.6% in 2020. The increase in the income before tax as a percent of sales was primarily driven by the following:

•2021 litigation expense includes $1.6 billion of talc expenses; 2020 includes $3.9 billion of talc expenses

•Supply chain efficiencies

partially offset by:

•Increased brand marketing expenses and commodity inflation

Pharmaceutical Segment:

In 2021, the Pharmaceutical segment income before tax as a percent to sales was 34.9% versus 33.9% in 2020. The increase in the income before tax as a percent of sales was primarily driven by the following:

•Divestiture gains of $0.6 billion related to two pharmaceutical brands outside the U.S. in fiscal 2021

•2021 litigation expense includes $0.6 billion primarily related to Risperdal; 2020 includes $0.8 billion primarily related to the opioid litigation settlement

partially offset by:

•Research & Development investment in the COVID-19 vaccine net of governmental reimbursements and general portfolio progression

Medical Devices Segment: In 2021, the Medical Devices segment income before tax as a percent to sales was 16.2% versus 13.3% in 2020. The increase in the income before tax as a percent to sales was primarily driven by the following:

•Recovery of prior year COVID-19 production related slow downs and related inventory impacts

•Overall expense leveraging resulting from the Medical Devices sales recovery

•Litigation expense of $0.1 billion in 2021 vs. $0.3 billion in 2020

partially offset by:

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

•A higher IPR&D charge of $0.7 billion ($0.9 billion in 2021 related to the general surgery offering in digital robotics (Ottava) acquired with the Auris Health acquisition 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 the end of 2022. The Company expects to record pre-tax restructuring charges of approximately $2.1 to $2.3 billion. The Company estimates that approximately 70% of the cumulative pre-tax costs will result in cash outlays. In 2021, the Company recorded a pre-tax charge of $0.5 billion, which is included on the following lines of the Consolidated Statement of Earnings, $0.3 billion in restructuring, $0.1 billion in other (income) expense and $0.1 billion in cost of products sold. Total project costs of approximately $1.8 billion have been recorded since the restructuring was announced. The program is set to be completed at the end of 2022.

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 8.3% in 2021 and 10.8% in 2020.

For discussion related to the fiscal 2021 provision for taxes refer to Note 8 to the Consolidated Financial Statements.

Liquidity and Capital Resources

Liquidity & Cash Flows

Cash and cash equivalents were $14.5 billion at the end of 2021 as compared to $14.0 billion at the end of 2020.

The primary sources and uses of cash that contributed to the $0.5 billion increase were:

In addition, the Company had $17.1 billion in marketable securities at the end of fiscal year 2021 and $11.2 billion at the end of fiscal year 2020. See Note 1 to the Consolidated Financial Statements for additional details on cash, cash equivalents and marketable securities.

Cash flow from operations of $23.4 billion was the result of:

Investing activities use of $8.7 billion of cash was primarily used for:

Financing activities use of $14.0 billion of cash was primarily used for:

As of January 2, 2022, the Company's notes payable and long-term debt was in excess of cash, cash equivalents and marketable securities. As of January 2, 2022, the net debt position was $2.1 billion as compared to the prior year of $10.1 billion. There was a decrease in the net debt position due to repayment of debt and an increase in cash, cash equivalents, and marketable securities generating from operations. The debt balance at the end of 2021 was $33.8 billion as compared to $35.3 billion in 2020. 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 Company's approximate $1.1 billion in contractual supply commitments associated with its development of the COVID-19 vaccine, the opioid litigation settlement for $5.0 billion and the establishment of the $2.0 billion trust for talc related liabilities (See Note 19 to the Consolidated Financial Statements for additional details). 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. Effective beginning in fiscal 2022, the U.S. Tax Cuts and Job Act of 2017 currently requires the Company to deduct U.S. and international research and development expenditures for tax purposes over 5 to 15 years, instead of in the current fiscal year. As a result, the Company is expecting an increase in annual cash tax payments to the U.S Treasury of an incremental $1.0 to 1.5 billion beginning in fiscal 2022. The Company will concurrently record a deferred tax benefit for the future amortization of the research and development (R&D) for tax purposes and therefore, the Company is not expecting a significant impact to its effective tax rate related to this change. The requirement to expense R&D as incurred is unchanged for U.S. GAAP purposes and the impact to pre-tax R&D expense is not affected by this provision. 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. During the fiscal third quarter of

2021, in accordance with the terms of the agreement associated with the acquisition of Actelion, the Company's undrawn credit facility with Idorsia was terminated.

The following table summarizes the Company’s material contractual obligations and their aggregate maturities as of January 2, 2022: 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 $1.1 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 2, 2022 market rates would increase the unrealized value of the Company’s forward contracts by $0.1 billion. Conversely, a 10% depreciation of the U.S. Dollar from the January 2, 2022 market rates would decrease the unrealized value of the Company’s forward contracts by $0.1 billion. 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 $2.2 billion. 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 $0.1 billion.

The Company has access to substantial sources of funds at numerous banks worldwide. In September 2021, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 8, 2022. Interest charged on borrowings under the credit line agreement is based on either Secured Overnight Financing Rate (SOFR) Reference Rate or other applicable market rate as allowed plus applicable margins. Commitment fees under the agreement are not material.

Total borrowings at the end of 2021 and 2020 were $33.8 billion and $35.3 billion, respectively. The decrease in borrowings was due to the repayment of debt. In 2021, net debt (cash and current marketable securities, net of debt) was $2.1 billion compared to net debt of $10.1 billion in 2020. Total debt represented 31.3% of total capital (shareholders’ equity and total debt) in 2021 and 35.8% of total capital in 2020. Shareholders’ equity per share at the end of 2021 was $28.16 compared to $24.04 at year-end 2020.

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

Dividends

The Company increased its dividend in 2021 for the 59th consecutive year. Cash dividends paid were $4.19 per share in 2021 and $3.98 per share in 2020.

On January 4, 2022, the Board of Directors declared a regular cash dividend of $1.06 per share, payable on March 8, 2022 to shareholders of record as of February 22, 2022.

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 2, 2022 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 2, 2022, 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, discounts to customers and governmental clawback provisions are accounted for as variable consideration and recorded as a reduction in sales.

Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including consideration of competitor pricing. Rebates are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.

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 2021 and 2020.

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 2, 2022 and January 3, 2021.

Consumer Health Segment

(1)Includes reserve for customer rebates of $80 million at January 2, 2022 and $66 million at January 3, 2021, recorded as a contra asset.

Pharmaceutical Segment

(1)Includes reserve for customer rebates of $218 million at January 2, 2022 and $174 million at January 3, 2021, recorded as a contra asset.

(2)Includes prior period adjustments

Medical Devices Segment

(1)Includes reserve for customer rebates of $845 million at January 2, 2022 and $707 million at January 3, 2021, 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 tax effect of this repatriation would be approximately $0.7 billion under currently enacted tax laws and regulations and at current currency exchange rates. This amount does not include the possible benefit of U.S. foreign tax credits, which may substantially offset this cost.

See Note 1 and 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, healthcare 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 2, 2022.

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 help 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.

•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 and 2021, 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 for services to be delivered and contractually obligated to be paid to these contract manufacturing organizations of approximately $1.1 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 continues to evaluate and monitor both its internal and external supply arrangements, including its contract with Emergent BioSolutions and related production activities at its Bayview, Maryland facility. The Company has established a global vaccine supply network, where, in addition to its internal manufacturing site in Leiden, the Netherlands, ten other manufacturing sites will be involved in the production of vaccine across different countries and continents. The Company does not believe that a disruption at a vaccine manufacturing site, or the resulting delay would have a material financial impact on the Company’s consolidated financial statements or results.

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 healthcare. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 2011 - 2021, in the U.S., the weighted average compound annual growth rate of the Company’s net price increases for healthcare 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 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.

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 2021 would have increased or decreased the translation of foreign sales by approximately $0.5 billion and net income by approximately $0.2 billion.

Governments around the world consider various proposals to make changes to tax laws, which may include increasing or decreasing existing statutory tax rates. In connection with various government initiatives, companies are required to disclose more information to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in other countries. 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 healthcare changes that may continue to result in pricing pressures that include healthcare cost containment and government legislation relating to sales, promotions and reimbursement of healthcare products.

Changes in the behavior and spending patterns of purchasers of healthcare products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing healthcare 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 U.S. 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, employment, indemnification 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 2, 2022, 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 awards, judgments or 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 included in Item 8 of this report 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 10, 2022, there were 127,899 record holders of Common Stock of the Company.