Johnson and Johnson 2014 Annual Report Download - page 21

Medical Devices Segment: In 2014, Medical Devices segment pre-tax profit as a percent to sales was 28.9% versus
18.5% in 2013. The favorable pre-tax profit 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. In 2013,
Medical Devices segment pre-tax profit as a percent to sales was 18.5% versus 26.2% in 2012. The Medical Devices
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 as compared to 2012. 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.
Provision for Taxes on Income: The worldwide effective income tax rate was 20.6% in 2014, 10.6% in 2013 and
23.7% in 2012. 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 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.
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.
Noncontrolling Interest: In 2012, a charge of $0.7 billion was recorded for the impairment of the IPR&D related to the
discontinuation of the Phase III clinical development of bapineuzumab IV. 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 $14.5 billion at the end of 2014 as compared with $20.9 billion at the end of 2013. The
primary sources and uses of cash that contributed to the $6.4 billion decrease versus the prior year were approximately
$18.5 billion of cash generated from operating activities offset by $12.3 billion net cash used by investing activities and
$12.3 billion net cash used by financing activities. See Note 1 to the Consolidated Financial Statements for additional
details on cash. In addition, the Company had $18.6 billion in marketable securities at the end of 2014 and $8.3 billion at
the end of 2013.
Cash flow from operations of $18.5 billion was the result of $16.3 billion of net earnings and $5.2 billion of non-cash
charges and other adjustments for depreciation and amortization, stock-based compensation, asset write-downs,
Venezuela adjustments and $1.8 billion related to deferred taxes, accounts payable and accrued liabilities and current and
non-current assets. Cash flow from operations was reduced by $4.8 billion related to current and non-current liabilities,
inventories, accounts receivable and net gains on sale of assets/businesses.
Investing activities use of $12.3 billion was primarily for net purchases of investments in marketable securities of $10.8
billion, additions to property, plant and equipment of $3.7 billion, acquisitions, net of cash acquired of $2.1 billion and
other, primarily intangibles of $0.3 billion, partially offset by $4.6 billion of proceeds from the disposal of assets/
businesses.
Financing activities use of $12.3 billion was primarily for dividends to shareholders of $7.8 billion and $7.1 billion for the
repurchase of common stock. Financing activities also included a source of $0.8 billion from net proceeds of short and
long-term debt and $1.8 billion of net proceeds from stock options exercised and associated tax benefits.
On July 21, 2014, the Company announced that its Board of Directors approved a share repurchase program, authorizing
the Company to purchase up to $5.0 billion of the Company’s shares of common stock. As of December 28, 2014, $3.5
Johnson & Johnson 2014 Annual Report •11