Johnson and Johnson 2011 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 33
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 $232 million. In either scenario, at
maturity, 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 counter-parties to these contracts
are major financial institutions and there is no significant concentra-
tion of exposure with any one counter-party. Management believes
the risk of loss is remote.
The Company has access to substantial sources of funds at
numerous banks worldwide. In September 2011, the Company
secured a new 364-day Credit Facility. Total credit available to the
Company approximates $10 billion, which expires September 20,
2012. 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 2011 and 2010 were $19.6 billion
and $16.8 billion, respectively. The increase in borrowings between
2011 and 2010 was a result of financing for general corporate pur-
poses. In 2011, net cash (cash and current marketable securities, net
of debt) was $12.6 billion compared to net cash of $10.9 billion in
2010. Total debt represented 25.6% of total capital (shareholders’
equity and total debt) in 2011 and 22.9% of total capital in 2010.
Shareholders’ equity per share at the end of 2011 was $20.95
compared with $20.66 at year-end 2010, an increase of 1.4%.
A summary of borrowings can be found in Note 7 to the
Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company’s contractual obligations are primarily for leases, debt
and unfunded retirement plans, with no other significant obliga-
tions. To satisfy these obligations, the Company will use cash from
operations. The following table summarizes the Company’s contrac-
tual obligations and their aggregate maturities as of January 1, 2012
(see Notes 7, 10 and 16 to the Consolidated Financial Statements for
further details):
Long-term Interest on Unfunded
Debt Debt Retirement Operating
(Dollars in Millions) Obligations Obligations Plans Leases Total
2012 $ 616 560 61 188 1,425
2013 1,545 527 62 162 2,296
2014 1,816 508 64 131 2,519
2015 —501 69 104 674
2016 898 496 77 82 1,553
After 2016 8,710 4,765 455 65 13,995
Total $13,585 7,357 788 732 22,462
For tax matters, see Note 8 to the Consolidated Financial Statements.
SHARE REPURCHASE AND DIVIDENDS
On July 9, 2007, the Company announced that its Board of Directors
approved a stock repurchase program authorizing the Company to
buy back up to $10.0 billion of the Company’s Common Stock. As
of January 2, 2011, the Company repurchased an aggregate of
158.3 million shares of Johnson & Johnson Common Stock at a cost
of $10.0 billion and the stock repurchase program was completed.
The Company funded the share repurchase program through a
combination of available cash and debt. In addition, the Company
has an annual program to repurchase shares for use in employee
stock and incentive plans.
The Company increased its dividend in 2011 for the 49th con-
secutive year. Cash dividends paid were $2.25 per share in 2011
compared with dividends of $2.11 per share in 2010, and $1.93 per
share in 2009. The dividends were distributed as follows:
2011 2010 2009
First quarter $0.54 0.49 0.46
Second quarter 0.57 0.54 0.49
Third quarter 0.57 0.54 0.49
Fourth quarter 0.57 0.54 0.49
Total $2.25 2.11 1.93
On January 3, 2012, the Board of Directors declared a regular quar-
terly cash dividend of $0.57 per share, payable on March 13, 2012,
to shareholders of record as of February 28, 2012. The Company
expects to continue the practice of paying regular cash dividends.
Other Information
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of results of operations
and financial condition are based on the Company’s consolidated
financial statements that have been prepared in accordance with
accounting principles generally accepted in the U.S. (GAAP). The
preparation of these financial statements requires that management
make estimates and assumptions that affect the amounts reported
for revenues, expenses, assets, liabilities and other related disclo-
sures. Actual results may or may not differ from these estimates. The
Company believes that the understanding of certain key accounting
policies and estimates are essential in achieving more insight into
the Company’s operating results and financial condition. These key
accounting policies include revenue recognition, income taxes, legal
and self-insurance contingencies, valuation of long-lived assets,
assumptions used to determine the amounts recorded for pensions
and other employee benefit plans and accounting for stock options.
Revenue Recognition: The Company recognizes revenue from
product sales when goods are shipped or delivered, and title and
risk of loss pass to the customer. Provisions for certain rebates, sales
incentives, trade promotions, coupons, product returns and dis-
counts to customers are accounted for as reductions in sales in the
same period the related sales are recorded.
Product discounts granted are based on the terms of arrange-
ments with direct, indirect and other market participants, as well
as market conditions, including prices charged by competitors.
Rebates, the largest being the Medicaid rebate provision, are esti-
mated based on contractual terms, historical experience, trend
analysis and projected market conditions in the various markets
served. The Company evaluates market conditions for products or
groups of products primarily through the analysis of wholesaler and
other third-party sell-through and market research data, as well as
internally generated information.
Sales returns are generally estimated and recorded based on
historical sales and returns information. Products that exhibit
unusual sales or return patterns due to dating, competition or other
marketing matters are specifically investigated and analyzed as part
of the accounting for sales return accruals.
Sales returns allowances represent a reserve for products that
may be returned due to expiration, destruction in the field, or in
specific areas, product recall. The returns reserve is based on his-
torical return trends by product and by market as a percent to gross
sales. In accordance with the Company’s accounting policies, the