Johnson and Johnson 2010 Annual Report Download - page 38

36 JOHNSON & JOHNSON 2010 ANNUAL REPORT
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 ongoing Common Stock repurchase program
announced on July 9, 2007.
Interest income in 2008 decreased by $91 million as compared
to 2007 due to lower rates of interest earned despite higher average
cash balances. The cash balance, including marketable securities,
was $12.8 billion at the end of 2008, and averaged $12.2 billion
as compared to the $6.6 billion average cash balance in 2007. The
increase in the average cash balance was primarily due to cash
generated from operating activities.
Interest expense in 2008 increased by $139 million as com-
pared to 2007 due to a higher debt balance. In the second half of
2007, the Company converted some of its short-term debt to fixed
long-term debt at higher interest rates. The net debt balance at the
end of 2008 was $11.9 billion as compared to $9.5 billion at the end
of 2007. The higher debt balance in 2008 was primarily due to
the purchase of the Company’s Common Stock under the ongoing
Common Stock repurchase program announced on July 9, 2007
and to fund acquisitions.
Provision for Taxes on Income: The worldwide effective income tax
rate was 21.3% in 2010, 22.1% in 2009 and 23.5% in 2008. 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. The
2009 tax rate decreased as compared to 2008 due to increases in
taxable income in lower tax jurisdictions relative to taxable income
in higher tax jurisdictions.
Liquidity and Capital Resources
LIQUIDITY & CASH FLOWS
Cash and cash equivalents were $19.4 billion at the end of 2010 as
compared with $15.8 billion at the end of 2009. The primary sources
of cash that contributed to the $3.6 billion increase versus the prior
year were $16.4 billion of cash generated from operating activities,
$2.4 billion net proceeds from long and short-term debt and
$0.5 billion proceeds from the disposal of assets. The major uses of
cash were capital spending of $2.4 billion, acquisitions of $1.3 bil-
lion, net investment purchases of $4.7 billion, dividends to share-
holders of $5.8 billion, and the repurchase of Common Stock, net of
proceeds from the exercise of options, of $1.6 billion.
Cash flows from operations were $16.4 billion in 2010. The
major sources of cash flow were net income of $13.3 billion,
adjusted for non-cash charges for depreciation, amortization, stock
based compensation and deferred tax provision of $3.9 billion.
The remaining changes to operating cash flow were increases in
accounts receivable, inventories and other assets.
In 2010, 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 2011.
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 2, 2011 market rates would increase the
unrealized value of the Company’s forward contracts by $239 mil-
lion. Conversely, a 10% depreciation of the U.S. Dollar from the
January 2, 2011 market rates would decrease the unrealized value of
the Company’s forward contracts by $292 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
foreign currency, by entering into currency swap contracts. A 1%
change in the spread between U.S. and foreign interest rates on the
Company’s interest rate sensitive financial instruments would either
increase or decrease the unrealized value of the Company’s swap
contracts by approximately $212 million. In either scenario, at matu-
rity, the gain or loss on the swap contract would be offset by the gain
or loss on the underlying transaction, and therefore, would have no
impact on future anticipated cash flows.
The Company does not enter into financial instruments for
trading or speculative purposes. Further, the Company has a policy
of only entering into contracts with parties that have at least an “A”
(or equivalent) credit rating. The counterparties to these contracts
are major financial institutions and there is no significant concentra-
tion of exposure with any one counterparty. Management believes
the risk of loss is remote.
The Company has access to substantial sources of funds at
numerous banks worldwide. In September 2010, the Company
secured a new 364-day Credit Facility. Total credit available to the
Company approximates $10 billion, which expires September 22,
2011. Interest charged on borrowings under the credit line agree-
ment is based on either bids provided by banks, the prime rate or
London Interbank Offered Rates (LIBOR), plus applicable margins.
Commitment fees under the agreement are not material.
Total borrowings at the end of 2010 and 2009 were $16.8 bil-
lion and $14.5 billion, respectively. The increase in borrowings
between 2010 and 2009 was a result of financing for general corpo-
rate purposes and the continuation of the Company’s Common
Stock repurchase program announced in 2007. In 2010, net cash
(cash and current marketable securities, net of debt) was $10.9 bil-
lion compared to net cash of $4.9 billion in 2009. Total debt repre-
sented 22.9% of total capital (shareholders’ equity and total debt)
in 2010 and 22.3% of total capital in 2009. Shareholders’ equity
12
18
9
6
3
0
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