Johnson and Johnson 2013 Annual Report Download - page 21

Medical Devices and Diagnostics Segment: In 2013, Medical Devices and Diagnostics segment pre-tax profit as a
percent to sales was 18.5% versus 26.2% in 2012. The Medical Devices and Diagnostics segment pre-tax profit was
unfavorably impacted by higher costs of $1.4 billion for litigation expense and $0.1 billion related to the DePuy ASR™ Hip
program as well as the Medical Device Excise tax. In addition, 2012 included higher gains of $0.4 billion on divestitures
partially offset by higher write-downs of intangible assets and in-process research and development of $0.1 billion and
higher costs of $0.1 billion related to the Synthes acquisition. In 2012, Medical Devices and Diagnostics segment pre-tax
profit as a percent to sales was 26.2% versus 20.4% in 2011. The Medical Devices and Diagnostics segment pre-tax
profit was favorably impacted by profits from Synthes sales, lower expenses of $1.4 billion for litigation and the DePuy
ASR™ Hip program and $0.1 billion for research & development primarily due to the discontinuation of its clinical
development program for the NEVO™ Sirolimus-Eluting Coronary Stent. This was partially offset by an increase in
integration costs and amortization of the inventory step-up of $0.8 billion associated with the acquisition of Synthes, Inc.
and $0.1 billion attributed to the write-down of intangible assets. In addition, 2012 included higher gains on divestitures
versus the prior year due to the divestitures of the Therakos business and RhoGAM®. Included in 2011 was a $0.7 billion
restructuring charge related to the discontinuation of the clinical development program for the NEVO™ Sirolimus-Eluting
Coronary Stent.
Provision for Taxes on Income: The worldwide effective income tax rate was 10.6% in 2013, 23.7% in 2012 and
21.8% in 2011. The decrease in the 2013 effective tax rate of 13.1% as compared to 2012 was attributable to a tax
benefit associated with the write-off of assets for tax purposes associated with Scios Inc., increased taxable income in
lower tax jurisdictions relative to higher tax jurisdictions and the inclusion of two years of benefit of the U.S. Research and
Development (R&D) tax credit and the Controlled Foreign Corporation (CFC) look-through provisions. The R&D tax credit
and the CFC look-through provisions were enacted into law in January 2013 and were retroactive to January 1, 2012.
During 2013, the Company reached a settlement agreement related to certain issues regarding the U.S. Internal Revenue
Service audit related to tax years 2006-2009. As a result of this settlement, the Company adjusted the unrecognized tax
benefits relating to these matters which lowered tax expense. In addition, the Company recorded additional U.S. tax
expense related to increased dividends of foreign earnings. The above items resulted in a net gain of $180 million. Also
included in 2013 results were incremental tax expenses associated with the establishment of a valuation allowance of
$187 million related to the Company’s Belgian foreign affiliate. The above items had no net impact on the effective income
tax rate for the fiscal year ended 2013.
The increase in the 2012 effective tax rate of 1.9% as compared to 2011 was due to lower tax benefits on the impairment
of in-process research and development intangible assets in low tax jurisdictions, increases in taxable income in higher tax
jurisdictions relative to lower tax jurisdictions and the exclusion of the benefit of the U.S. R&D tax credit and the CFC look-
through provisions from the 2012 fiscal year financial results.
Noncontrolling Interest: A charge of $0.7 billion for the impairment of the IPR&D related to the discontinuation of the
Phase III clinical development of bapineuzumab IV was recorded in 2012. Of the $0.7 billion impairment, $0.3 billion was
attributable to noncontrolling interest.
Liquidity and Capital Resources
Liquidity & Cash Flows
Cash and cash equivalents were $20.9 billion at the end of 2013 as compared with $14.9 billion at the end of 2012. The
primary sources of cash that contributed to the $6.0 billion increase versus the prior year were approximately $17.4 billion
of cash generated from operating activities partially offset by $5.1 billion net cash used by investing activities and $6.1
billion net cash used by financing activities.
Cash flow from operations of $17.4 billion was the result of $13.8 billion of net earnings and $4.5 billion of non-cash
charges and other adjustments related to depreciation and amortization, stock-based compensation, the Venezuela
currency devaluation, asset write-downs (primarily in-process research and development), net gain on equity investment
transactions and deferred tax provision reduced by $0.9 billion related to changes in assets and liabilities, net of effects
from acquisitions.
Investing activities use of $5.1 billion was primarily for net purchases of investments in marketable securities of $0.9
billion, additions to property, plant and equipment of $3.6 billion, acquisitions, net of cash acquired of $0.8 billion and
other, primarily intangibles of $0.3 billion partially offset by $0.5 billion of proceeds from the disposal of assets.
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