Johnson and Johnson 2011 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 35
MEDICAL DEVICES AND DIAGNOSTICS SEGMENT
Balance at Balance at
Beginning Payments/ End
(Dollars in Millions) of Period Accruals Credits of Period
2011
Accrued rebates(1) $495 3,253 (3,251) 497
Accrued returns 201 352 (369) 184
Accrued promotions 50 67 (44) 73
Subtotal $746 3,672 (3,664) 754
Reserve for doubtful accounts 138 54 (31) 161
Reserve for cash discounts 35 342 (345) 32
Total $919 4,068 (4,040) 947
2010
Accrued rebates(1)(2) $454 3,271 (3,230) 495
Accrued returns 220 334 (353) 201
Accrued promotions 73 111 (134) 50
Subtotal $747 3,716 (3,717) 746
Reserve for doubtful accounts 143 33 (38) 138
Reserve for cash discounts 32 484 (481) 35
Total $922 4,233 (4,236) 919
(1) Includes reserve for customer rebates of $324 million at January 1, 2012 and $331 million
at January 2, 2011, recorded as a contra asset.
(2) Accruals and Payments/Credits for 2010 have been revised by $908 million to appropriately
reflect non-cash credits/adjustments, consistent with current year presentation related to
the Ethicon franchise, previously reported net in the Accruals column.
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 current tax regulations
and rates. Changes in tax laws and rates may affect recorded
deferred tax assets and liabilities in the future. 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.
At January 1, 2012 and January 2, 2011, the cumulative
amounts of undistributed international earnings were approximately
$41.6 billion and $37.0 billion, respectively. At January 1, 2012 and
January 2, 2011, the Company’s foreign subsidiaries held balances
of cash and cash equivalents in the amounts of $24.5 billion and
$18.7 billion, respectively. The Company intends to continue to
reinvest its undistributed international earnings to expand its
international operations; therefore, no U.S. tax expense has been
recorded with respect to the undistributed portion not intended
for repatriation.
See Note 8 to the Consolidated Financial Statements for
further information regarding income taxes.
LegalandSelfInsuranceContingencies:The Company records
accruals for various contingencies including legal proceedings and
product liability claims as these arise in the normal course of busi-
ness. The accruals are based on management’s judgment as to the
probability of losses and, where applicable, actuarially determined
estimates. Additionally, the Company records insurance receivable
amounts from third-party insurers when recovery is probable. As
appropriate, reserves against these receivables are recorded for esti-
mated amounts that may not be collected from third-party insurers.
The Company follows the provisions of U.S. GAAP when record-
ing 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.
Long-Lived and Intangible Assets: The Company assesses changes
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, expected salary increases and
health care cost trend rates. See Note 10 to the Consolidated Finan-
cial Statements for further details on these rates and the effect a
rate change would have on the Company’s results of operations.
Stock Based Compensation: The Company recognizes compensa-
tion expense associated with the issuance of equity instruments to
employees for their services. The fair value of each award is esti-
mated on the date of grant using the Black-Scholes option valuation
model and is expensed in the financial statements over the vesting
period. The input assumptions used in determining fair value are
the expected life, expected volatility, risk-free rate and the dividend
yield. See Note 17 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 account-
ing pronouncements not yet adopted as of January 1, 2012.
ECONOMIC AND MARKET FACTORS
The Company is aware that its products are used in an environment
where, for more than a decade, policymakers, consumers and busi-
nesses 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 2001–2011, in
the United States, 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).
Inflation rates continue to have an effect on worldwide
economies and, consequently, on the way companies operate. The
Company accounted for operations in Venezuela as highly inflation-
ary in 2010 and 2011, as the prior three-year cumulative inflation
rate surpassed 100%. In the face of increasing costs, the Company
strives to maintain its profit margins through cost reduction pro-
grams, 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 2011 would have increased or decreased the translation
of foreign sales by approximately $350 million and income by
$75 million.
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 which has
become increasingly hostile to intellectual property rights. Generic
drug firms have filed Abbreviated New Drug Applications (ANDAs)