Johnson and Johnson 2011 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 31
continued growth of the core businesses, and provide flexibility to
adjust to the changed and evolving global environment. In the fiscal
fourth quarter of 2009, the Company recorded a pre-tax charge of
$1.2 billion, of which $113 million was included in cost of products sold.
See Note 22 to the Consolidated Financial Statements for
additional details related to the restructuring.
Other (Income) Expense, Net: Other (income) expense, net
includes royalty income; gains and losses related to the sale and
write-down of certain investments in equity securities held by
Johnson & Johnson Development Corporation; gains and losses on
the disposal of property, plant and equipment; currency gains and
losses; non-controlling interests and litigation settlements. In 2011,
the unfavorable change of $3.5 billion in other (income) expense,
net, was primarily due to litigation expenses of $1.7 billion in 2011 as
compared to a $1.0 billion net gain from litigation settlements in
2010. Additionally, 2011 as compared to 2010 included higher
expenses of $1.0 billion related to product liability, $0.2 billion for
costs related to the DePuy ASR™ Hip recall program and an adjust-
ment of $0.5 billion to the value of the currency option and deal
costs related to the planned acquisition of Synthes, Inc. Included
in 2011 were higher gains on the divestitures of businesses of
$0.6 billion as compared to 2010.
In 2010, the favorable change of $0.2 billion in other (income)
expense, net as compared to 2009, was primarily due to a net gain
from litigation settlements and gains on the divestiture of businesses
partially offset by product liability expense. In 2009, other (income)
expense, net included net litigation settlements of $0.4 billion.
OPERATING PROFIT BY SEGMENT
Operating profits by segment of business were as follows:
Percent of
Segment Sales
(Dollars in Millions) 2011 2010 2011 2010
Consumer $ 2,096 2,342 14.1% 16.1
Pharmaceutical 6,406 7,086 26.3 31.6
Medical Devices and
Diagnostics 5,263 8,272 20.4 33.6
Total (1) 13,765 17,700 21.2 28.7
Less: Expenses not allocated
to segments(2) 1,404 753
Earnings before provision
for taxes on income $12,361 16,947 19.0% 27.5
(1) See Note 18 to the Consolidated Financial Statements for more details.
(2) Amounts not allocated to segments include interest (income) expense, non-controlling
interests, and general corporate (income) expense. Included in 2011, was a $0.5 billion
expense for the adjustment to the value of the currency option related to the planned
acquisition of Synthes, Inc.
Consumer Segment: In 2011, Consumer segment operating profit
decreased 10.5% from 2010. The primary drivers of the decline in
operating profit were unfavorable product mix and remediation
Operating Profit
by Segment
(in billions of dollars)
Consumer
Pharmaceutical
Medical Devices
and Diagnostics
18
12
15
9
6
3
0’09 ’10 ’11
costs associated with the recall of certain OTC products partially
offset by the gain on the divestiture of MONISTAT®. In 2010,
Consumer segment operating profit decreased 5.4% from 2009.
The primary reasons for the decrease in the operating profit were
lower sales and higher costs associated with the recall of certain
OTC products and the suspension of production at McNeil
Consumer Healthcare’s Fort Washington, Pennsylvania facility.
Pharmaceutical Segment: In 2011, Pharmaceutical segment
operating profit decreased 9.6% from 2010. The primary drivers of
the decrease in the operating profit margin were higher litigation
expenses recorded in 2011, the impact of the U.S. health care
reform fee, and lower margins and integration costs, including an
inventory step-up charge, associated with the Crucell acquisition.
This was partially offset by gains on the divestitures of the Animal
Health Business and Ortho Dermatologics, the gain related to the
Company’s earlier investment in Crucell, and lower manufacturing
costs. In 2010, Pharmaceutical segment operating profit increased
10.5% from 2009. The primary reasons for the increase in operating
profit were lower manufacturing costs, the gain on a divestiture, and
benefits from cost improvement initiatives related to the restruc-
turing plan implemented in 2009, partially offset by $333 million
of expense related to litigation matters, increased product liability
expense and the impact of the newly enacted U.S. health care
reform legislation.
Medical Devices and Diagnostics Segment: In 2011, Medical
Devices and Diagnostics segment operating profit decreased 36.4%
from 2010. The primary drivers of the decline in the operating profit
margin in the Medical Devices and Diagnostics segment were prod-
uct liability and litigation expenses, costs associated with the DePuy
ASR™ Hip recall program, restructuring expense, costs incurred
related to the planned acquisition of Synthes, Inc. and increased
investment spending. In 2010, Medical Devices and Diagnostics
segment operating profit increased 7.5% from 2009. The improved
operating profit was due to a gain of $1.3 billion from net litigation
matters and the gain on the divestiture of the Breast Care business
recorded in 2010. This was partially offset by increased product
liability expense, $280 million of costs associated with the DePuy
ASR™ Hip recall program and price reductions in certain Medical
Devices and Diagnostics businesses.
Interest (Income) Expense: Interest income in 2011 decreased by
$16 million as compared to the prior year due to lower rates of inter-
est earned despite higher average cash balances. Cash, cash equiva-
lents and marketable securities totaled $32.3 billion at the end of
2011, and averaged $30.0 billion as compared to the $23.6 billion
average cash balance in 2010. The increase in the average cash bal-
ance was primarily due to cash generated from operating activities
and net cash proceeds from divestitures.
Interest expense in 2011 increased by $116 million as compared
to 2010 due to a higher average debt balance. The total debt balance
at the end of 2011 was $19.6 billion as compared to $16.8 billion at
the end of 2010. The higher average debt balance of $18.2 billion in
2011 versus $15.7 billion in 2010 was due to increased borrowings.
The Company increased borrowings, capitalizing on favorable terms
in the capital markets. The proceeds of the borrowings were used
for general corporate purposes.
Interest income in 2010 increased by $17 million over the prior
year due to higher average cash balances. Cash, cash equivalents
and marketable securities totaled $27.7 billion at the end of 2010,
and averaged $23.6 billion as compared to the $15.6 billion average
cash balance in 2009. The increase in the average cash balance was
primarily due to cash generated from operating activities and net
cash proceeds from litigation matters and divestitures.