Johnson and Johnson 2011 Annual Report Download - page 34

32 JOHNSON & JOHNSON 2011 ANNUAL REPORT
Interest expense in 2010 was relatively flat as compared to
2009duetoaloweraverageratedespiteahigherdebtbalance.The
total debt balance at the end of 2010 was $16.8 billion as compared
to $14.5 billion at the end of 2009. The higher average debt balance
of $15.7 billion in 2010 versus $13.5 billion in 2009 was due to
increased borrowings. The Company increased borrowings, capital-
izing on favorable terms in the capital markets. The proceeds of the
borrowings were used for general corporate purposes.
Interest income in 2009 decreased by $271 million as com-
pared to 2008 due to lower rates of interest earned despite higher
average cash balances. The cash balance, including marketable
securities, was $19.4 billion at the end of 2009, and averaged
$15.6 billion as compared to the $12.2 billion average cash balance
in 2008. The increase in the average cash balance was primarily
due to cash generated from operating activities.
Interest expense in 2009 increased by $16 million as compared
to 2008 due to a higher debt balance. The net debt balance at the
end of 2009 was $14.5 billion as compared to $11.9 billion at the end
of 2008. The higher average debt balance of $13.5 billion in 2009
versus $12.9 billion in 2008 was primarily related to funding acquisi-
tions and investments and the purchase of the Company’s Common
Stock under the Common Stock repurchase program announced
on July 9, 2007.
Provision for Taxes on Income: The worldwide effective income tax
rate was 21.8% in 2011, 21.3% in 2010 and 22.1% in 2009. The 2011
tax rate increased as compared to 2010 due to certain U.S. expenses
which are not fully tax deductible and higher U.S. state taxes par-
tially offset by increases in taxable income in lower tax jurisdictions
relative to higher tax jurisdictions. The 2010 tax rate decreased as
compared to 2009 due to decreases in taxable income in higher tax
jurisdictions relative to taxable income in lower tax jurisdictions and
certain U.S. tax adjustments.
Liquidity and Capital Resources
LIQUIDITY & CASH FLOWS
Cash and cash equivalents were $24.5 billion at the end of 2011 as
compared with $19.4 billion at the end of 2010. The primary sources
of cash that contributed to the $5.1 billion increase versus the prior
year were $14.3 billion of cash generated from operating activities,
$3.0 billion net proceeds from long and short-term debt, $1.3 billion
proceeds from the disposal of assets and proceeds from net invest-
ment sales of $0.5 billion. The major uses of cash were dividends
to shareholders of $6.2 billion, capital spending of $2.9 billion,
acquisitions of $2.8 billion, the repurchase of Common Stock, net
of proceeds from the exercise of options of $1.3 billion and other of
$0.8 billion primarily related to intangible assets.
Cash flows from operations were $14.3 billion in 2011. The major
sources of cash flow were net income of $9.7 billion, adjusted for
non-cash charges for depreciation and amortization, stock based
compensation and deferred tax provision of $2.9 billion. The remain-
ing change to operating cash flow of $1.7 billion was primarily due to
an increase in other current and non-current liabilities related to
accruals recorded for litigation matters, product liability and
employee benefit plans.
In 2011, the Company continued to have access to liquidity
through the commercial paper market. For additional details on
borrowings, see Note 7 to the Consolidated Financial Statements.
The Company anticipates that operating cash flows, existing
credit facilities and access to the commercial paper markets will
provide sufficient resources to fund operating needs in 2012.
CONCENTRATION OF CREDIT RISK
Global concentration of credit risk with respect to trade accounts
receivables continues to be limited due to the large number of cus-
tomers globally and adherence to internal credit policies and credit
limits. Recent economic challenges in Italy, Spain, Greece and Portu-
gal (the Southern European Region) have impacted certain payment
patterns, which have historically been longer than those experi-
enced in the U.S. and other international markets. The total net
trade accounts receivable balance in the Southern European Region
was approximately $2.4 billion as of January 1, 2012 and approxi-
mately $2.3 billion as of January 2, 2011. Approximately $1.4 billion
as of January 1, 2012 and approximately $1.3 billion as of January 2,
2011 of the Southern European Region net trade accounts receivable
balance related to the Company’s Consumer, Vision Care and
Diabetes Care businesses as well as certain Pharmaceutical and
Medical Devices and Diagnostics customers which are in line with
historical collection patterns.
The remaining balance of net trade accounts receivable in the
Southern European Region has been negatively impacted by the
timing of payments from certain government owned or supported
ceutical and Medical Devices and Diagnostics local affiliates. The
total net trade accounts receivable balance for these customers
were approximately $1.0 billion at January 1, 2012 and January 2,
2011. The Company continues to receive payments from these cus-
tomers and in some cases late payment premiums. For customers
where payment is expected over periods of time longer than one
year, revenue and trade receivables have been discounted over the
estimated period of time for collection. Allowances for doubtful
accounts have been increased for these customers, but have been
immaterial to date. The Company will continue to work closely
with these customers, monitor the economic situation and take
appropriate actions as necessary.
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 prod-
uct 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 1, 2012 market rates would increase the
unrealized value of the Company’s forward contracts by $235 mil-
lion. Conversely, a 10% depreciation of the U.S. Dollar from the
January 1, 2012 market rates would decrease the unrealized value of
the Company’s forward contracts by $287 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
Capital Expenditures
Operating Cash Flow
12
18
9
6
3
0
15
Operating
Cash Flow and
Capital Expenditures
(in billions of dollars)
’09 ’10 ’11
health care customers as well as certain distributors of the Pharma-