Johnson and Johnson 2006 Annual Report Download - page 46

Consumer Segment: Consumer segment operating profit in
2006 decreased 13.7% from 2005. As a percent to sales, 2006
operating profit declined to 14.1% resulting from $320 million of
IPR&D expenses as well as expenses associated with the Pfizer
Consumer Healthcare integration recorded during 2006. Con-
sumer segment operating profit in 2005 increased 10.2% over
the prior year. As a percent to sales, 2005 operating profit
increased slightly to 17.5%, despite increases in investment
spending in advertising and research and development.
Pharmaceutical Segment: In 2006, Pharmaceutical segment
operating profit increased 8.3% and as a percent to sales
increased to 29.6%. This increase was the result of $302 million
of IPR&D recorded during 2005 partially offset by increases in
research and development spending and lower gross margins
in 2006. In 2005, Pharmaceutical segment operating profit
decreased 13.7%, and as a percent to sales declined 4.8% from
2004 to 28.5%. This change was primarily due to increased
investment in research and development spending, as well as
the impact of $302 million of IPR&D expenses in 2005.
Medical Devices and Diagnostics Segment: In 2006, the oper-
ating profit in the Medical Devices and Diagnostics segment
increased 16.9%, and as a percent to sales increased 2.8%.
The primary driver of the improved operating profit was the
Guidant acquisition agreement termination fee, less associated
expenses, of $622 million recorded during 2006. This was par-
tially offset by increases in IPR&D charges. In addition, advertis-
ing and promotional expense leveraging were offset in part by
increases in research and development spending.
In 2005, the Medical Devices and Diagnostics segment
operating profit increased 33.5%, and as a percent to sales
increased 4.2% from 2004 to 27.4%. This increase was driven
by improved gross margins due to cost reduction programs and
product mix, primarily related to the CYPHER®Sirolimus-eluting
Stent. This was partially offset by an increased investment in
research and development spending.
Interest income in 2005 increased by $292 million due
primarily to higher rates of interest, as well as a higher average
cash balance. The cash balance, including current marketable
securities, was $16.1 billion at the end of 2005 and averaged
$14.3billion, as compared to the $11.3billion average cash balance
in 2004.
Interest expense in 2005 decreased as compared to 2004
due in part to a decrease in the average debt balance, from $3.5
billion in 2004 to $2.6 billion in 2005.
Provision for Taxes on Income: The worldwide effective income
tax rate was 24.2% in 2006, 23.3% in 2005 and 33.7% in 2004.
The 2006 tax rate benefited from a reversal of tax allowances of
$134 million associated with the Tibotec business, partially
offset by the Guidant acquisition agreement termination fee
recorded at a 40.8% rate. The 2005 effective tax rate included
abenefit of $225 million, due to the reversal of a tax liability pre-
viously recorded during the fiscal fourth quarter of 2004, related
to a technical correction to the American Jobs Creation Act
of 2004.
Liquidity and Capital Resources
CASH FLOWS
In 2006, cash flow from operations was $14.2 billion, an increase
of $2.4 billion over 2005. The increase in cash generated from
operations was a result of a net income increase of $1.2 billion,
net of the non-cash impact of IPR&D charges. The major changes
in assets and liabilities were a $2.7 billion increase in accounts
payable and accrued liabilities partially offset by a $0.9 billion
increase in deferred taxes and a $0.8 billion increase in other
current and non-current assets.
Net cash used by financing activities increased by $1.7 bil-
lion. This was due to the $5.0 billion used for the common
stock repurchase program which was publicly announced on
March 8, 2006 and completed early in the fiscal fourth quarter
of 2006. This was partially offset by $3.3 billion of net proceeds
from short term debt.
Cash and current marketable securities were $4.1 billion
at the end of 2006 as compared with $16.1 billion at the end
of 2005, primarily due to the acquisition of the Consumer
Healthcare business of Pfizer Inc. on December 20, 2006.
Cash generated from operations amounted to $11.8 billion in
2005, which was $0.7 billion more than the cash generated from
operations in 2004 of $11.1 billion. The major factors contributing
to the increase were a net income increase of $2.2 billion, net of
the non-cash impact of IPR&D charges. A $1.0 billion decrease
in other current and non-current assets also contributed to this
increase. This was partially offset by a $1.5 billion decrease in
accounts payable and accrued liabilities. Additionally, cash pay-
ments of approximately $0.5 billion were made for previously
accrued taxes on the repatriation of undistributed international
earnings in accordance with the American Jobs Creation Act of
2004. There was also an increase of approximately $0.2 billion
in pension funding in 2005 as compared to 2004.
44 JOHNSON & JOHNSON 2006 ANNUAL REPORT
Operating Profit
by Segment
(in billions of dollars)
Consumer
Pharmaceutical
Medical Devices
and Diagnostics
15
12
9
6
3
0
04 05 06
Interest (Income) Expense: Interest income in 2006 increased
by $342 million due primarily to higher rates of interest, as well as
a higher average cash balance despite the $5.0 billion common
stock repurchase program and an increase in acquisition activity.
The cash balance, including current marketable securities was
$4.1 billion at the end of 2006 and averaged $15.7 billion, as
compared to the $14.3 billion average cash balance in 2005.
Interest expense in 2006 increased slightly as compared to
2005 due to a higher average debt balance, from $2.6 billion in
2005 to$3.1 billion in 2006. This was partially offset by a
decrease in interest rates.
Net cash used by investing activities increased by $20.0 bil-
lion. This was primarily due to a $17.0 billion increase in acquisi-
tion activity most of which occurred late in the fiscal fourth
quarter. For a more detailed discussion on mergers and acquisi-
tions, see Note 17. There was also a $3.6 billion net decrease in
sales of investments. Capital expenditures were $2.7 billion, $2.6
billion and $2.2 billion in 2006, 2005 and 2004, respectively.