Johnson and Johnson 2015 Annual Report Download - page 32

recorded in 2014 for the divestiture of the Ortho-Clinical Diagnostics business. The 2015 income before tax was favorably
impacted by lower net litigation expense of $0.9 billion, which included a gain from the litigation settlement agreement of
$0.6 billion with Guidant, and lower Synthes integration costs of $0.6 billion in 2015 as compared to 2014.
In 2014, Medical Devices segment income before tax as a percent to sales was 28.9% versus 18.5% in 2013. The
favorable income before tax was attributable to the net gain of $1.9 billion on the divestiture of the Ortho-Clinical
Diagnostics business in 2014 and lower litigation expense of $1.1 billion as compared to 2013.
Restructuring: The Company announced restructuring actions in its Medical Devices segment that are expected to result
in annualized pre-tax cost savings of $800 million to $1.0 billion, the majority of which is expected to be realized by the
end of 2018, including approximately $200 million savings in 2016. The savings will provide the Company with added
flexibility and resources to fund investment in new growth opportunities and innovative solutions for customers and
patients. The Company estimates that, in connection with its plans, it will record pre-tax restructuring charges of
approximately $2.0 billion to $2.4 billion, most of which are expected to be incurred by 2017. In the fiscal fourth quarter of
2015, the Company recorded a pre-tax charge of $0.6 billion, of which $81 million is included in cost of products sold.
See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring.
Provision for Taxes on Income: The worldwide effective income tax rate was 19.7% in 2015, 20.6% in 2014 and
10.6% in 2013. The 2015 effective tax rate decrease of 0.9% as compared to 2014 was primarily attributable to the
increases in taxable income in lower tax jurisdictions relative to higher tax jurisdictions and a tax benefit resulting from a
restructuring of international affiliates. Additionally, the 2014 effective tax rate was affected by the items mentioned below.
The increase in the 2014 effective tax rate, as compared to 2013, was attributable to the following: the divestiture of the
Ortho-Clinical Diagnostics business at an approximate 44% effective tax rate, litigation accruals at low tax rates, the mix of
earnings into higher tax jurisdictions, primarily the U.S., the accrual of an additional year of the Branded Prescription Drug
Fee, which is not tax deductible, and additional U.S. tax expense related to a planned increase in dividends from current
year foreign earnings as compared to the prior year. These increases to the 2014 effective tax rate were partially offset by
a tax benefit of $0.4 billion associated with the Conor Medsystems divestiture.
The 2014 effective tax rate was also reduced as the Company adjusted its unrecognized tax benefits as a result of (i) the
federal appeals court’s decision in OMJ Pharmaceuticals, Inc.’s litigation regarding credits under former Section 936 of the
Internal Revenue Code (see Note 21 to the Consolidated Financial Statements for additional information), and (ii) a
settlement of substantially all issues related to the Company’s U.S. Internal Revenue Service audit of tax years 2006 - 2009.
The 2013 effective tax rate was reduced by a tax benefit associated with the write-off of assets for tax purposes
associated with Scios, Inc., and the inclusion of both the 2013 and 2012 benefit from the Research and Development tax
credit and the Controlled Foreign Corporation look-through provisions, because those provisions were enacted into law in
January 2013 and were retroactive to January 1, 2012.
Liquidity and Capital Resources
Liquidity & Cash Flows
Cash and cash equivalents were $13.7 billion at the end of 2015 as compared to $14.5 billion at the end of 2014. The
primary sources and uses of cash that contributed to the $0.8 billion decrease were approximately $19.3 billion of cash
generated from operating activities offset by $7.7 billion net cash used by investing activities, and $10.8 billion net cash
used by financing activities, and $1.5 billion due to the effect on exchange rate changes on cash and cash equivalents. In
addition, the Company had $24.6 billion in marketable securities at the end of 2015 and $18.6 billion at the end of 2014.
See Note 1 to the Consolidated Financial Statements for additional details on cash, cash equivalents and marketable
securities.
Cash flow from operations of $19.3 billion was the result of $15.4 billion of net earnings and $5.4 billion of non-cash
charges and other adjustments for depreciation and amortization, stock-based compensation and assets write-downs,
primarily related to Acclarent and Venezuela write-downs, reduced by $2.6 billion from net gains on sale of assets/
businesses, and $1.2 billion related to deferred taxes, accounts receivable and inventories. Additional sources of operating
cash flow of $2.2 billion resulted from a decrease in other current and non-current assets and an increase in other current
and non-current liabilities.
Investing activities use of $7.7 billion was primarily for net purchases of investments in marketable securities of $6.7
billion, additions to property, plant and equipment of $3.5 billion, and acquisitions, net of cash acquired of $1.0 billion,
partially offset by $3.5 billion of proceeds from the disposal of assets/businesses.
20 •Johnson & Johnson 2015 Annual Report