EX-13 4 ex13-form10xk20141228.htm EXHIBIT 13 Ex 13 - Form 10-K 2014 1228


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
 
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
SUPPORTING SCHEDULES



                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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Management’s Discussion and Analysis of Results of Operations and Financial Condition

Organization and Business Segments
Description of the Company and Business Segments
Johnson & Johnson and its subsidiaries (the Company) have approximately 126,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices (previously referred to as Medical Devices and Diagnostics). The Consumer segment includes a broad range of products used in the baby care, oral care, skin care, over-the-counter pharmaceutical, women’s health and wound care markets. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment is focused on five therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, and cardiovascular and metabolic diseases. Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. The Medical Devices segment includes a broad range of products used in the orthopaedic, surgical care, specialty surgery, cardiovascular care, diagnostics, diabetes care, and vision care markets, which are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, and clinics.
The Company’s structure is based upon the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the strategic operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices business segments.
In all of its product lines, the Company competes with companies both locally and globally, throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to the Company’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.

Management’s Objectives
The Company manages within a strategic framework with Our Credo as the foundation. The Company believes that our strategic operating principles: being broadly based in human health care, managing the business for the long term, a decentralized management approach and commitment to our people and values are required to successfully meet the demands of the rapidly evolving markets in which we compete. To this end, management is focused on our growth drivers: creating value through innovation, expanding our global reach with a local focus, excellence in execution and leading with purpose.
The Company engages in areas of human health care where there is an opportunity to make a meaningful difference, and is committed to creating value by developing broadly accessible, high quality, innovative products and services. New products introduced within the past five years accounted for approximately 25% of 2014 sales. In 2014, $8.5 billion, or 11.4% of sales, was invested in research and development, reflecting management’s commitment to delivering new and differentiated products and services to meet evolving health care needs and sustain the Company’s long-term growth.
Our diverse businesses with more than 265 operating companies located in 60 countries are the key drivers of the Company’s success. Maintaining the Company’s decentralized management approach, while at the same time leveraging the extensive resources of the enterprise, uniquely positions the Company to innovate, execute and reach markets globally, while focusing on the needs and challenges of the local markets.
In order to remain a leader in health care, the Company strives to maintain a purpose-driven organization and is committed to developing global business leaders who can achieve these growth objectives. Businesses are managed for the long-term in order to sustain market leadership positions and enable growth, which provides an enduring source of value to our shareholders.
Our Credo unifies all Johnson & Johnson employees in achieving these objectives, and provides a common set of values that serve as the foundation of the Company’s responsibilities to its customers, employees, communities and shareholders. The Company believes that these basic principles and growth drivers, along with its overall mission of improving the quality of life for people across the globe, will enable Johnson & Johnson to continue to be a leader in the health care industry.


                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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Results of Operations
Analysis of Consolidated Sales
In 2014, worldwide sales increased 4.2% to $74.3 billion, compared to increases of 6.1% in 2013 and 3.4% in 2012. These sales changes consisted of the following:
Sales increase/(decrease) due to:
 
2014
 
2013
 
2012
Volume
 
6.3
%
 
7.6

 
5.7

Price
 
(0.2
)
 
0.1

 
0.4

Currency
 
(1.9
)
 
(1.6
)
 
(2.7
)
Total
 
4.2
%
 
6.1

 
3.4


In 2014, sales of the Company's Hepatitis C products, OLYSIO®/SOVRIAD® (simeprevir) and INCIVO® (telaprevir), had a positive impact of 2.8%, and the divestiture of the Ortho-Clinical Diagnostics business had a negative impact of 1.4% on the worldwide operational growth. The acquisition of Synthes, Inc., net of the related divestiture, increased worldwide operational growth by 2.5% and 3.1% in 2013 and 2012, respectively.
Sales by U.S. companies were $34.8 billion in 2014, $31.9 billion in 2013 and $29.8 billion in 2012. This represents increases of 9.0% in 2014, 7.0% in 2013 and 3.2% in 2012. Sales by international companies were $39.5 billion in 2014, $39.4 billion in 2013 and $37.4 billion in 2012. This represents increases of 0.4% in 2014, 5.4% in 2013 and 3.5% in 2012.
The five-year compound annual growth rates for worldwide, U.S. and international sales were 3.7%, 2.4% and 5.0%, respectively. The ten-year compound annual growth rates for worldwide, U.S. and international sales were 4.6%, 2.3% and 7.3%, respectively.
Sales in Europe achieved growth of 1.9% as compared to the prior year, including operational growth of 2.6% partially offset by a negative currency impact of 0.7%. Sales in the Western Hemisphere (excluding the U.S.) experienced a decline of 3.5% as compared to the prior year, including operational growth of 5.2% offset by a negative currency impact of 8.7%. Sales in the Asia-Pacific, Africa region achieved growth of 0.4% as compared to the prior year, including operational growth of 4.4% and a negative currency impact of 4.0%.
In 2014, the Company had one wholesaler distributing products for all three segments that represented approximately 11.0% of the total consolidated revenues. In 2013 and 2012, the Company did not have a customer that represented 10% or more of total consolidated revenues.
U.S. Health Care Reform
Under the provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, beginning in 2013, the Company began paying a tax deductible 2.3% excise tax imposed on the sale of certain medical devices. The full-year impact of the excise tax was approximately $180 million in 2014 and $200 million in 2013.
On July 28, 2014, the Internal Revenue Service issued final regulations for the Branded Prescription Drug Fee, an annual non-tax deductible fee imposed on entities engaged in the business of manufacturing or importing branded prescription drugs (covered entities) enacted by section 9008 of the Patient Protection and Affordable Care Act. The final regulations accelerated the expense recognition criteria for the fee obligation by one year, from the year in which the fee is paid to the year in which the sales used to calculate the fee occur. This change impacted covered entities and resulted in the need for all entities to record an additional expense in 2014 for the fee that would have otherwise been expensed when paid in 2015. The Company accrued an additional $220 million in the fiscal third quarter of 2014 due to this change. The fee associated with this accelerated expense will be paid, as scheduled in 2015 and therefore had no cash impact in 2014.


                
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Analysis of Sales by Business Segments
Consumer Segment
Consumer segment sales in 2014 were $14.5 billion, a decrease of 1.4% from 2013, which included 1.0% operational growth offset by a negative currency impact of 2.4%. U.S. Consumer segment sales were $5.1 billion, a decrease of 1.3%. International sales were $9.4 billion, a decrease of 1.4%, which included 2.3% operational growth offset by a negative currency impact of 3.7%.
Major Consumer Franchise Sales:
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2014
 
2013
 
2012
 
’14 vs. ’13
 
’13 vs. ’12
OTC
 
$
4,106

 
4,028

 
3,766

 
1.9
 %
 
7.0

Skin Care
 
3,758

 
3,704

 
3,618

 
1.5

 
2.4

Baby Care
 
2,239

 
2,295

 
2,254

 
(2.4
)
 
1.8

Oral Care
 
1,647

 
1,622

 
1,624

 
1.5

 
(0.1
)
Wound Care/Other
 
1,444

 
1,480

 
1,560

 
(2.4
)
 
(5.1
)
Women’s Health
 
1,302

 
1,568

 
1,625

 
(17.0
)
 
(3.5
)
Total Consumer Sales
 
$
14,496

 
14,697

 
14,447

 
(1.4
)%
 
1.7


The Over-the-Counter (OTC) franchise achieved sales of $4.1 billion, an increase of 1.9% from 2013. Strong U.S. sales growth of 5.5% was driven by analgesics and upper respiratory products, primarily due to continued progress in returning a supply of products to the marketplace.
McNEIL-PPC, Inc. continues to operate under a consent decree, signed in 2011 with the U.S. Food and Drug Administration (FDA), which governs certain McNeil Consumer Healthcare manufacturing operations (the Consent Decree).  The Consent Decree requires McNEIL-PPC to remediate the facilities it operates in Lancaster, Pennsylvania, Fort Washington, Pennsylvania, and Las Piedras, Puerto Rico. The Fort Washington facility was voluntarily shut down in April 2010, however, many products previously made in Fort Washington have been transferred to other manufacturing sites and successfully reintroduced to the market. The Lancaster and Las Piedras facilities continue to manufacture and distribute drugs with third-party oversight.  Third-party oversight will cease once the FDA has determined that the facilities appear to be in compliance with applicable law.  In February 2015, the third-party overseer submitted written certification to the FDA for all three manufacturing sites. The timeline for completion of any FDA inspection is within the FDA’s discretion.
The Skin Care franchise achieved sales of $3.8 billion, an increase of 1.5% as compared to the prior year, primarily due to strong results from the AVEENO®, NEUTROGENA®, and DABAO™ product lines. The Baby Care franchise sales were $2.2 billion in 2014, a decrease of 2.4% from 2013. Sales growth in Latin America and Asia Pacific was offset by the impact of negative currency in all the regions outside the U.S. The Oral Care franchise sales were $1.6 billion, an increase of 1.5% as compared to the prior year. The growth was driven by increased sales of LISTERINE® products, as a result of new product launches and successful marketing campaigns. The Wound Care/Other franchise sales were $1.4 billion in 2014, a decrease of 2.4% from 2013, primarily due to lower sales of nutritionals outside the U.S. The Women’s Health franchise sales were $1.3 billion, a decrease of 17.0% primarily due to the divestiture of women's sanitary protection products in the U.S., Canada and Caribbean, which was completed in the fiscal fourth quarter of 2013.
Consumer segment sales in 2013 were $14.7 billion, an increase of 1.7% from 2012, which included 2.8% operational growth and a negative currency impact of 1.1%. U.S. Consumer segment sales were $5.2 billion, an increase of 2.3%. International sales were $9.5 billion, an increase of 1.4%, which included 3.1% operational growth and a negative currency impact of 1.7%.




                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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Pharmaceutical Segment
The Pharmaceutical segment achieved sales of $32.3 billion in 2014, representing an increase of 14.9% over the prior year, with strong operational growth of 16.5% and a negative currency impact of 1.6%. U.S. sales were $17.4 billion, an increase of 25.0%. International sales were $14.9 billion, an increase of 5.0%, which included 8.3% operational growth and a negative currency impact of 3.3%. In 2013, Pharmaceutical segment sales included a positive adjustment to previous estimates for Managed Medicaid rebates. This negatively impacted 2014 Pharmaceutical operational sales growth by 0.8% as compared to the prior year. In 2014, sales of the Company's Hepatitis C products, OLYSIO®/SOVRIAD® (simeprevir) and INCIVO® (telaprevir), had a positive impact of 6.9% on the operational growth of the Pharmaceutical segment.

Major Pharmaceutical Therapeutic Area Sales:*
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2014
 
2013
 
2012
 
’14 vs. ’13
 
’13 vs. ’12
Total Immunology
 
$
10,193

 
9,190

 
7,874

 
10.9
 %
 
16.7

     REMICADE®
 
6,868

 
6,673

 
6,139

 
2.9

 
8.7

     SIMPONI®/SIMPONI ARIA®
 
1,187

 
932

 
607

 
27.4

 
53.5

     STELARA®
 
2,072

 
1,504

 
1,025

 
37.8

 
46.7

     Other Immunology
 
66

 
81

 
103

 
(18.5
)
 
(21.4
)
Total Infectious Diseases
 
5,599

 
3,550

 
3,194

 
57.7

 
11.1

     EDURANT®
 
365

 
236

 
102

 
54.7

 
**

     INCIVO®
 
226

 
517

 
443

 
(56.3
)
 
16.7

     OLYSIO®/SOVRIAD®
 
2,302

 
23

 

 
**

 

     PREZISTA®
 
1,831

 
1,673

 
1,414

 
9.4

 
18.3

     Other Infectious Diseases
 
875

 
1,101

 
1,235

 
(20.5
)
 
(10.9
)
Total Neuroscience
 
6,487

 
6,667

 
6,718

 
(2.7
)
 
(0.8
)
     CONCERTA®/methylphenidate
 
599

 
782

 
1,073

 
(23.4
)
 
(27.1
)
     INVEGA®
 
640

 
583

 
550

 
9.8

 
6.0

     INVEGA® SUSTENNA®/XEPLION®
 
1,588

 
1,248

 
796

 
27.2

 
56.8

     RISPERDAL® CONSTA®
 
1,190

 
1,318

 
1,425

 
(9.7
)
 
(7.5
)
     Other Neuroscience
 
2,470

 
2,736

 
2,874

 
(9.7
)
 
(4.8
)
Total Oncology
 
4,457

 
3,773

 
2,629

 
18.1

 
43.5

     VELCADE®
 
1,618

 
1,660

 
1,500

 
(2.5
)
 
10.7

     ZYTIGA®
 
2,237

 
1,698

 
961

 
31.7

 
76.7

     Other Oncology
 
602

 
415

 
168

 
45.1

 
**

Total Other
 
5,577

 
4,945

 
4,936

 
12.8

 
0.2

     PROCRIT®/EPREX®
 
1,238

 
1,364

 
1,462

 
(9.2
)
 
(6.7
)
     XARELTO®
 
1,522

 
864

 
239

 
76.2

 
**

     Other
 
2,817

 
2,717

 
3,235

 
3.7

 
(16.0
)
Total Pharmaceutical Sales
 
$
32,313

 
28,125

 
25,351

 
14.9
 %
 
10.9

* Prior year amounts have been reclassified to conform to current year presentation.
** Percentage greater than 100%

Immunology products achieved sales of $10.2 billion in 2014, representing an increase of 10.9% as compared to the prior year. The increased sales of STELARA® (ustekinumab) and SIMPONI®/SIMPONI ARIA® (golimumab) were primarily due to market growth and market share gains. REMICADE® (infliximab) growth was primarily due to market growth.
The patents for REMICADE® in certain countries in Europe (Germany, Spain, United Kingdom, Sweden, Austria, Belgium, Switzerland, Denmark, France, Greece, Italy, Luxembourg and the Netherlands) expire in February 2015. Loss of exclusivity will likely result in a reduction in sales as biosimilar versions are introduced to the market. See Note 21 to the Consolidated Financial Statements for legal matters regarding the REMICADE® patents.
Infectious disease products achieved sales of $5.6 billion in 2014, representing an increase of 57.7% as compared to the prior year. Major contributors to the growth were the launch of OLYSIO®/SOVRIAD® (simeprevir); PREZISTA® (darunavir), due to market growth; and sales of EDURANT® (rilpivirine). This was partially offset by lower sales of INCIVO® (telaprevir),

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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due to competitive pressures, and lower sales of vaccine products. The approval of competitive products to OLYSIO®/SOVRIAD® (simeprevir) had a negative impact in the fourth quarter of 2014 and is expected to continue to have a significant negative impact on future sales of OLYSIO®/SOVRIAD® (simeprevir).
Neuroscience products sales were $6.5 billion, a decline of 2.7% as compared to the prior year. Strong sales of INVEGA® SUSTENNA®/XEPLION® (paliperidone palmitate) and INVEGA® (paliperidone palmitate) were partially offset by lower sales of RISPERDAL® CONSTA®. Additionally, a decline in sales of CONCERTA®/methylphenidate and TOPAMAX® (topiramate) were due to continued generic competition.
Oncology products achieved sales of $4.5 billion in 2014, representing an increase of 18.1% as compared to the prior year. Major contributors to the growth were strong sales of ZYTIGA®(abiraterone acetate), as well as the recent launch of IMBRUVICA® (ibrutinib). Sales growth of VELCADE® (bortezomib) was more than offset by negative currency.
Other Pharmaceutical sales were $5.6 billion, an increase of 12.8% as compared to the prior year. Strong sales of XARELTO® (rivaroxaban) and INVOKANA®/INVOKAMET™ (canagliflozin) were partially offset by lower sales of ACIPHEX®/PARIET® (rabeprazole sodium) and PROCRIT®/EPREX® (Epoetin alfa).
During 2014, the Company received several regulatory approvals including: the U.S. Food and Drug Administration (FDA) granted approval of IMBRUVICA® (ibrutinib) capsules, which is being jointly developed and commercialized by Pharmacyclics, Inc. for the treatment of patients with chronic lymphocytic leukemia (CLL) who have received at least one prior therapy; the European Commission (EC) granted conditional approval for SIRTURO® (bedaquiline) in the European Union, for use as part of an appropriate combination regimen for pulmonary multi-drug resistant tuberculosis in adult patients; the FDA and the EC granted approval of SYLVANT ® (siltuximab) for the treatment of patients with multicentric Castleman’s disease who are human immunodeficiency virus negative and human herpesvirus-8 negative; the EC granted approval for VOKANAMET ® (canagliflozin/metformin HCl), a fixed-dose therapy combining canagliflozin and immediate release metformin hydrochloride in a single tablet for the treatment of adults with type 2 diabetes; OLYSIO ® (simeprevir) for the treatment of adult patients with genotype 1 or 4 chronic hepatitis C; and for INVEGA® (paliperidone ER) to extend its adult indication of schizophrenia to include adolescents aged 15 years and older; the FDA granted approval for a third indication for IMBRUVICA® (ibrutinib), for the treatment of patients with CLL who have the genetic mutation 17p deletion (del 17p) and also granted IMBRUVICA® (ibrutinib) full approval for the treatment of patients with CLL who have received at least one prior therapy; FDA granted approval for INVOKAMETTM (canagliflozin/metformin HCl) for the treatment of adults with type 2 diabetes; The EC approved IMBRUVICA ® (ibrutinib) for the treatment of adult patients with relapsed or refractory mantle cell lymphoma and adult patients with chronic lymphocytic leukemia who have received at least one prior therapy, or in first-line in the presence of 17p deletion or TP53 mutation in patients unsuitable for chemo-immunotherapy. The EC also approved REZOLSTA ® (darunavir/cobicistat) in combination with other antiretroviral medicinal products for the treatment of human immunodeficiency virus-1 infection in adults aged 18 years or older.
The Company submitted several New Drug Applications (NDAs) to the FDA, including an NDA seeking approval for a once-daily fixed-dose antiretroviral combination tablet containing darunavir, a protease inhibitor developed by Janssen R&D Ireland and marketed as PREZISTA® in the U.S., with cobicistat, an investigational pharmacokinetic enhancer or boosting agent, developed by Gilead Sciences, Inc. for use in combination with other human immunodeficiency virus medicines; an NDA for three-month atypical antipsychotic paliperidone palmitate as a treatment for schizophrenia in adults; and an NDA for YONDELIS ® (trabectedin) for the treatment of patients with advanced soft tissue sarcoma, including liposarcoma and leiomyosarcoma subtypes, who have received prior chemotherapy including an anthracycline.
In addition, a supplemental New Drug Application (sNDA) was approved by the FDA for OLYSIO® in combination with the nucleotide analog NS5B polymerase inhibitor sofosbuvir developed by Gilead Sciences, Inc. for the treatment of chronic hepatitis C. Additional sNDA’s were also submitted to the FDA for OLYSIO® for the treatment of adult patients in genotype 4 chronic hepatitis C and patients co-infected with HIV; once-monthly atypical long-acting antipsychotic INVEGA® SUSTENNA® (paliperidone palmitate) was approved to treat schizoaffective disorder as either monotherapy or adjunctive therapy; and a Type II variation application was submitted to the European Medicines Agency (EMA) for an additional indication of IMBRUVICA® (ibrutinib) for the treatment of patients with Waldenström’s macroglobulinemia, a rare type of B-cell lymphoma.
A Marketing Authorization Application was submitted to the European Medicines Agency to expand the label for VELCADE® (bortezomib) to include its use, in combination with rituximab, cyclophosphamide, doxorubicin and prednisone, for the treatment of adult patients with previously untreated mantle cell lymphoma.
Pharmaceutical segment sales in 2013 were $28.1 billion, representing an increase of 10.9% over the prior year, with strong operational growth of 12.0% and a negative currency impact of 1.1%. U.S. sales were $13.9 billion, an increase of 12.3%. International sales were $14.2 billion, an increase of 9.6%, which included 11.8% operational growth and a negative currency impact of 2.2%. The Pharmaceutical segment operational growth was impacted by 0.8% in 2013 due to a positive adjustment to previous estimates for Managed Medicaid rebates.

Medical Devices Segment
The Medical Devices segment sales in 2014 were $27.5 billion, a decrease of 3.4% from 2013, which included an operational decline of 1.6% and a negative currency impact of 1.8%. U.S. sales were $12.3 billion, a decrease of 4.3% as compared to the

                
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prior year. International sales were $15.3 billion, a decline of 2.7% as compared to the prior year, with operational growth of 0.5% offset by a negative currency impact of 3.2%. In 2014, the divestiture of the Ortho-Clinical Diagnostics business had a negative impact of 3.2% on the operational growth of the Medical Devices segment.
Major Medical Devices Franchise Sales:*
 
 
 
 
 
 
 
 
% Change
(Dollars in Millions)
 
2014
 
2013
 
2012
 
’14 vs. ’13
 
’13 vs. ’12
Orthopaedics
 
$
9,675

 
9,509

 
7,799

 
1.7
 %
 
21.9

Surgical Care
 
6,176

 
6,269

 
6,483

 
(1.5
)
 
(3.3
)
Specialty Surgery/Other
 
3,541

 
3,504

 
3,478

 
1.1

 
0.7

Vision Care
 
2,818

 
2,937

 
2,996

 
(4.1
)
 
(2.0
)
Cardiovascular Care
 
2,208

 
2,077

 
1,985

 
6.3

 
4.6

Diabetes Care
 
2,142

 
2,309

 
2,616

 
(7.2
)
 
(11.7
)
Diagnostics
 
962

 
1,885

 
2,069

 
(49.0
)
 
(8.9
)
Total Medical Devices Sales
 
$
27,522

 
28,490

 
27,426

 
(3.4
)%
 
3.9

* Previously referred to as Medical Devices and Diagnostics. Prior year amounts have been reclassified to conform to current year presentation. Infection Prevention is included in Specialty Surgery/Other.

The Orthopaedics franchise achieved sales of $9.7 billion in 2014, a 1.7% increase over the prior year. Growth was primarily driven by sales of trauma, sports medicine, knee and hip products. Growth was negatively impacted by continued pricing pressures.
The Surgical Care franchise sales were $6.2 billion in 2014, a decrease of 1.5% from the prior year. U.S. pricing pressure, lower sales of women's health and urology products due to the Company's decision to exit from certain women's health products, and the impact from negative currency were partially offset by worldwide sales growth of sutures and the success of the ECHELON FLEX powered ENDOPATH® Stapler outside the U.S.
The Specialty Surgery/Other franchise sales were $3.5 billion in 2014, a 1.1% increase over the prior year. Contributors to the growth were strong sales from biosurgical products, sales of energy products outside the U.S. and Mentor products due to new product launches and market growth.
The Vision Care franchise sales were $2.8 billion in 2014, a decrease of 4.1% from the prior year. The decline was primarily due to increased competition and pricing pressures in the U.S. and the Asia Pacific region, partially offset by sales growth in Europe.
The Cardiovascular Care franchise achieved sales of $2.2 billion, a 6.3% increase over the prior year. The increased sales were driven by strong growth of Biosense Webster products in all regions.
The Diabetes Care franchise sales were $2.1 billion, a decrease of 7.2% versus the prior year. In the U.S., lower prices were partially offset by volume growth.
The Diagnostics franchise sales were $1.0 billion, a decline of 49.0% versus the prior year. The decline was due to the divestiture of the Ortho-Clinical Diagnostics business (the Diagnostics franchise) to The Carlyle Group on June 30, 2014.
Medical Devices segment sales in 2013 were $28.5 billion, representing an increase of 3.9% over the prior year, with operational growth of 6.1% and a negative currency impact of 2.2%. U.S. sales were $12.8 billion, an increase of 3.5% as compared to the prior year. International sales were $15.7 billion, an increase of 4.2% over the prior year, with operational growth of 8.3% and a negative currency impact of 4.1%. The acquisition of Synthes, Inc., net of the related trauma business divestiture, increased both total sales growth and operational growth for the Medical Devices segment by 6.0% and 7.9% in 2013 and 2012, respectively.



                
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Analysis of Consolidated Earnings Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income increased to $20.6 billion in 2014 as compared to $15.5 billion in 2013, an increase of 32.9%. Earnings before provision for taxes on income were favorable due to strong sales volume growth, particularly sales of OLYSIO®/SOVRIAD® (simeprevir), positive mix from higher sales of higher margin products in the Pharmaceutical business, divestitures of lower margin businesses and cost reduction efforts across many of the businesses. Additionally, 2014 included higher net gains on divestitures of $2.3 billion, primarily the divestiture of the Ortho-Clinical Diagnostics business, lower litigation expense of $1.0 billion, lower in-process research and development costs of $0.4 billion and lower expenses of $0.1 billion related to the DePuy ASR™ Hip program as compared to the fiscal year 2013. This was partially offset by the inclusion of an additional year of the Branded Prescription Drug Fee of $0.2 billion and $0.1 billion of higher Synthes integration/transaction costs in 2014. The fiscal year 2013 included a net gain of $0.4 billion on equity investment transactions, primarily the sale of Elan American Depositary Shares. 
Consolidated earnings before provision for taxes on income increased by $1.7 billion to $15.5 billion in 2013 as compared to $13.8 billion in 2012, an increase of 12.3%. Earnings before provision for taxes on income were favorable due to increased gross profit of $3.4 billion resulting from higher sales of higher margin products and cost containment initiatives and a $0.4 billion net gain on equity investment transactions, primarily from the sale of Elan American Depositary Shares. This was partially offset by higher litigation expenses of $1.1 billion and higher expenses of $0.1 billion related to the DePuy ASR™ Hip program as compared to 2012. The fiscal year 2012 included $1.5 billion of higher write-downs of intangible assets and in-process research and development and higher costs of $0.3 billion related to the Synthes acquisition partially offset by higher gains of $0.8 billion related to divestitures.

As a percent to sales, consolidated earnings before provision for taxes on income in 2014 was 27.7% versus 21.7% in 2013.
Cost of Products Sold and Selling, Marketing and Administrative Expenses:  Cost of products sold and selling, marketing and administrative expenses as a percent to sales were as follows:
% of Sales
 
2014
 
2013
 
2012
Cost of products sold
 
30.6
%
 
31.3

 
32.2

Percent point (decrease)/increase over the prior year
 
(0.7
)
 
(0.9
)
 
0.9

Selling, marketing and administrative expenses
 
29.5
%
 
30.6

 
31.0

Percent point (decrease)/increase over the prior year
 
(1.1
)
 
(0.4
)
 
(1.3
)

In 2014, cost of products sold as a percent to sales decreased compared to the prior year. This was primarily the result of positive mix from higher sales of higher margin products in the Pharmaceutical business, divestitures of lower margin businesses and cost improvements across many of the businesses. This was partially offset by pricing and the impact of negative transactional currency. In addition, 2013 included an inventory step-up charge of $0.1 billion related to the Synthes acquisition. Intangible asset amortization expense included in cost of products sold for both 2014 and 2013 was $1.4 billion. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2014 compared to the prior year primarily due to leveraged costs resulting from growth in the Pharmaceutical business, particularly sales of OLYSIO®/SOVRIAD® (simeprevir), and cost containment initiatives across many of the businesses. This was partially offset by the inclusion of an additional year of the Branded Prescription Drug Fee of $220 million in the fiscal third quarter of 2014.
In 2013, cost of products sold as a percent to sales decreased compared to the prior year. This was primarily the result of positive mix resulting from higher sales of higher margin products, lower costs associated with strong volume growth in the Pharmaceutical business and cost reduction efforts across many of the businesses. The decrease was partially offset by incremental intangible asset amortization expense primarily related to Synthes, the Medical Device Excise tax and increased amortization expense as a result of the royalty buyout agreement with Vertex for INCIVO®. Intangible asset amortization expense for 2013 and 2012 was $1.4 billion and $1.1 billion, respectively. Additionally, 2012 included $0.2 billion higher amortization of the inventory step-up charge related to the Synthes, Inc. acquisition. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2013 compared to the prior year primarily due to cost containment initiatives across many of the businesses.



                
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Research and Development Expense: Research and development expense by segment of business was as follows:
 
 
2014
 
2013
 
2012
(Dollars in Millions)
 
Amount
 
% of Sales*
 
Amount
 
% of Sales*
 
Amount
 
% of Sales*
Consumer
 
$
629

 
4.3
%
 
$
590

 
4.0

 
622

 
4.3

Pharmaceutical
 
6,213

 
19.2

 
5,810

 
20.7

 
5,362

 
21.2

Medical Devices
 
1,652

 
6.0

 
1,783

 
6.3

 
1,681

 
6.1

Total research and development expense
 
$
8,494

 
11.4
%
 
8,183

 
11.5

 
7,665

 
11.4

Percent increase/(decrease) over the prior year
 
3.8
%
 
 

 
6.8

 
 

 
1.6

 
 

As a percent to segment sales
Research and development activities represent a significant part of the Company's business. These expenditures relate to the processes of discovering, testing and developing new products, improving existing products, as well as ensuring product efficacy and regulatory compliance prior to launch. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products. In 2014, worldwide costs of research and development activities increased by 3.8% compared to 2013. The reduction as a percent to sales was primarily due to strong sales growth in the Pharmaceutical business. Research spending in the Pharmaceutical segment increased in absolute dollars to $6.2 billion as compared to $5.8 billion primarily due to higher levels of spending to advance the Company's Pharmaceutical pipeline. In 2013, worldwide costs of research and development activities increased by 6.8% compared to 2012. The increase in the Pharmaceutical segment was primarily due to higher levels of spending to advance the Company's Pharmaceutical pipeline.

In-Process Research and Development (IPR&D): In 2014, the Company recorded charges of $0.2 billion for the impairment of various IPR&D projects related to RespiVert, Crucell, Mentor and Synthes for the delay or discontinuation of certain development projects. In 2013, the Company recorded charges of $0.6 billion primarily for the impairment of various IPR&D projects related to Crucell, CorImmun and Acclarent for the delay or discontinuation of certain development projects. In 2012, the Company recorded charges of $1.2 billion, which included $0.7 billion for the impairment of the IPR&D related to the discontinuation of the Phase III clinical development of bapineuzumab IV and the partial impairment of the IPR&D related to the Crucell vaccine business in the amount of $0.4 billion. Of the $0.7 billion impairment of the IPR&D related to the discontinuation of the Phase III clinical development of bapineuzumab IV, $0.3 billion is attributable to noncontrolling interest. The 2012 charges relate to development projects which have been discontinued or delayed.

Other (Income) Expense, Net: Other (income) expense, net includes royalty income; gains and losses related to the sale and write-down of certain investments in equity securities held by Johnson & Johnson Development Corporation; gains or losses on divestitures; currency gains and losses; and litigation accruals and settlements. The change in other (income) expense, net for the fiscal year 2014 was a favorable change of $2.6 billion as compared to the prior year. The fiscal year 2014 included higher net gains on divestitures of $2.3 billion, primarily the divestiture of the Ortho-Clinical Diagnostics business, lower litigation expense of $1.0 billion and lower costs of $0.1 billion related to the DePuy ASR Hip program as compared to 2013. This was partially offset by higher Synthes integration/transaction costs of $0.2 billion and higher intangible asset write-downs of $0.1 billion primarily related to INCIVO® (telaprevir) in 2014. Additionally, the fiscal year 2013 included a higher net gain of $0.5 billion as compared to 2014 on equity investment transactions, primarily the sale of Elan American Depositary Shares.
The change in other (income) expense, net for the fiscal year 2013, was an unfavorable change of $0.9 billion as compared to the prior year. The fiscal year 2013 included a net gain of $0.4 billion on equity investment transactions, primarily the sale of Elan American Depositary Shares, offset by higher litigation expenses of $1.1 billion, higher expenses of $0.1 billion related to the DePuy ASR™ Hip program and higher currency losses of $0.1 billion. The fiscal year 2012 included higher write-downs of intangible assets of $0.8 billion, primarily related to the Crucell vaccine business and higher costs of $0.1 billion related to the Synthes acquisition. Additionally, 2012 included higher gains of $0.8 billion related to divestitures.
Interest (Income) Expense:  Interest income in 2014 was comparable to the prior year. A higher balance in cash, cash equivalents and marketable securities was offset by lower interest rates. Cash, cash equivalents and marketable securities totaled $33.1 billion at the end of 2014, and averaged $31.1 billion as compared to the $25.2 billion average cash balance in 2013. The increase in the year-end cash balance was primarily due to cash generated from operating activities.
Interest expense in 2014 increased by $51 million as compared to 2013 due to a higher average debt balance. The average debt balance was $18.5 billion in 2014 versus $17.2 billion in 2013. The total debt balance at the end of 2014 was $18.8 billion as compared to $18.2 billion at the end of 2013. The higher debt balance of approximately $0.6 billion was due to increased borrowings in November 2014. The Company increased borrowings, capitalizing on favorable terms in the capital markets. The proceeds of the borrowings will be used for general corporate purposes.

                
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Interest income in 2013 increased by $10 million as compared to the prior year. Cash, cash equivalents and marketable securities totaled $29.2 billion at the end of 2013, and averaged $25.2 billion as compared to the $26.7 billion average cash balance in 2012. The increase in the year end cash balance was due to cash generated from operating activities.
Interest expense in 2013 decreased by $50 million as compared to 2012 due to a lower average debt balance. The average debt balance was $17.2 billion in 2013 versus $17.9 billion in 2012. The total debt balance at the end of 2013 was $18.2 billion as compared to $16.2 billion at the end of 2012. The higher debt balance of approximately $2.0 billion was due to increased borrowings in December 2013. The Company increased borrowings, capitalizing on favorable terms in the capital markets. The proceeds of the borrowings were used for general corporate purposes.
Segment Pre-Tax Profit
Pre-tax profits by segment of business were as follows:
 
 
 
 
 
 
Percent of Segment Sales
(Dollars in Millions)
 
2014
 
2013
 
2014
 
2013
Consumer
 
$
1,941

 
1,973

 
13.4
%
 
13.4
Pharmaceutical
 
11,696

 
9,178

 
36.2

 
32.6
Medical Devices
 
7,953

 
5,261

 
28.9

 
18.5
Total (1)
 
21,590

 
16,412

 
29.0

 
23.0
Less: Expenses not allocated to segments (2)
 
1,027

 
941

 
 

 
 
Earnings before provision for taxes on income
 
$
20,563

 
15,471

 
27.7
%
 
21.7

(1) 
See Note 18 to the Consolidated Financial Statements for more details.
(2) 
Amounts not allocated to segments include interest (income) expense, noncontrolling interests, and general corporate (income) expense.
Consumer Segment:  In 2014, Consumer segment pre-tax profit as a percent to sales was 13.4%, flat to the prior year. In 2013, Consumer segment pre-tax profit as a percent to sales was 13.4% versus 11.7% in 2012. The favorable pre-tax profit in 2013 versus 2012 was primarily due to a gain of $55 million on the sale of intangible and other assets as well as cost containment initiatives. Included in 2012 were intangible asset write-downs of $0.3 billion. In addition, 2012 included higher gains on divestitures of $0.1 billion.
Pharmaceutical Segment: In 2014, Pharmaceutical segment pre-tax profit as a percent to sales was 36.2% versus 32.6% in 2013. The favorable pre-tax profit was attributable to strong sales volume growth, particularly sales of OLYSIO®/SOVRIAD® (simeprevir), positive sales mix of higher margin products and cost containment initiatives realized in selling, marketing and administrative expenses. This was partially offset by $0.2 billion for an additional year of the Branded Prescription Drug Fee and a $0.1 billion intangible asset write-down related to INCIVO® (telaprevir). Additionally, 2013 included a net gain of $0.4 billion on equity investment transactions, primarily the sale of Elan American Depositary Shares, and a positive adjustment of $0.2 billion to previous estimates for Managed Medicaid rebates, partially offset by higher write-downs of $0.4 billion for the impairment of IPR&D as compared to 2014. In 2013, Pharmaceutical segment pre-tax profit as a percent to sales was 32.6% versus 24.0% in 2012. The favorable pre-tax profit was attributable to positive sales mix of higher margin products, lower costs associated with strong volume growth, a net gain of $0.4 billion on equity investment transactions, primarily the sale of Elan American Depositary Shares, a positive adjustment of $0.2 billion to previous estimates for Managed Medicaid rebates and cost containment initiatives. This was partially offset by increased amortization expense as a result of the royalty buyout agreement with Vertex for INCIVO®. Additionally, 2012 included higher net litigation expense of $0.4 billion and higher write-downs of intangible assets and in-process research and development of $0.9 billion. This was partially offset by higher gains on divestitures of $0.3 billion.
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

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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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 billion has been repurchased under the program. Share repurchases will take place on the open market from time to time based on market conditions. The repurchase program has no time limit and may be suspended for periods or discontinued at any time. Any shares acquired will be available for general corporate purposes. The Company intends to finance the share repurchase program through available cash.
In 2014, 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 2015.
Concentration of Credit Risk
Global concentration of credit risk with respect to trade accounts receivables continues to be limited due to the large number of customers globally and adherence to internal credit policies and credit limits. Economic challenges in Italy, Spain, Greece and Portugal (the Southern European Region) have impacted certain payment patterns, which have historically been longer than those experienced in the U.S. and other international markets. The total net trade accounts receivable balance in the Southern European Region was approximately $1.8 billion as of December 28, 2014 and $2.3 billion as of December 29, 2013. Approximately $1.1 billion as of December 28, 2014 and approximately $1.3 billion as of December 29, 2013 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices customers which are in line with historical collection patterns.
The remaining balance of net trade accounts receivable in the Southern European Region has been negatively impacted by the timing of payments from certain government owned or supported health care customers as well as certain distributors of the

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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Pharmaceutical and Medical Devices local affiliates. The total net trade accounts receivable balance for these customers were approximately $0.7 billion at December 28, 2014 and $1.0 billion at December 29, 2013. The Company continues to receive payments from these customers and in some cases late payment premiums. For customers where payment is expected over periods of time longer than one year, revenue and trade receivables have been discounted over the estimated period of time for collection. Allowances for doubtful accounts have been increased for these customers, but have been immaterial to date. The Company will continue to work closely with these customers on payment plans, monitor the economic situation and take appropriate actions as necessary.

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 product 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 December 28, 2014 market rates would increase the unrealized value of the Company’s forward contracts by $31 million. Conversely, a 10% depreciation of the U.S. Dollar from the December 28, 2014 market rates would decrease the unrealized value of the Company’s forward contracts by $38 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 $145 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 concentration 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 2014, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 17, 2015. Interest charged on borrowings under the credit line agreement 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 2014 and 2013 were $18.8 billion and $18.2 billion, respectively. The increase in borrowings between 2014 and 2013 was a result of financing for general corporate purposes. In 2014, net cash (cash and current marketable securities, net of debt) was $14.3 billion compared to net cash of $11.0 billion in 2013. Total debt represented 21.2% of total capital (shareholders’ equity and total debt) in 2014 and 19.7% of total capital in 2013. Shareholders’ equity per share at the end of 2014 was $25.06 compared to $26.25 at year-end 2013, a decrease of 4.5%.
A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements.

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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Contractual Obligations and Commitments
The Company’s contractual obligations are primarily for leases, debt and unfunded retirement plans. There are no other significant obligations. To satisfy these obligations, the Company will use cash from operations. The following table summarizes the Company’s contractual obligations and their aggregate maturities as of December 28, 2014 (see Notes 7, 10 and 16 to the Consolidated Financial Statements for further details):

(Dollars in Millions)
 
Long-Term
Debt Obligations
 
Interest on
Debt Obligations
 
Unfunded
Retirement Plans
 
Operating Leases
 
Total
2015
 
$
7

 
603

 
74

 
200

 
884

2016
 
2,152

 
597

 
75

 
157

 
2,981

2017
 
1,722

 
557

 
78

 
111

 
2,468

2018
 
1,496

 
493

 
84

 
80

 
2,153

2019
 
1,713

 
448

 
89

 
66

 
2,316

After 2019
 
8,039

 
4,679

 
531

 
77

 
13,326

Total
 
$
15,129

 
7,377

 
931

 
691

 
24,128


For tax matters, see Note 8 to the Consolidated Financial Statements.
Dividends
The Company increased its dividend in 2014 for the 52nd consecutive year. Cash dividends paid were $2.76 per share in 2014 compared with dividends of $2.59 per share in 2013, and $2.40 per share in 2012. The dividends were distributed as follows:
 
2014
 
2013
 
2012
First quarter
$
0.66

 
$
0.61

 
$
0.57

Second quarter
0.70

 
0.66

 
0.61

Third quarter
0.70

 
0.66

 
0.61

Fourth quarter
0.70

 
0.66

 
0.61

Total
$
2.76

 
$
2.59

 
2.40

On January 5, 2015, the Board of Directors declared a regular quarterly cash dividend of $0.70 per share, payable on March 10, 2015, to shareholders of record as of February 24, 2015. 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 disclosures. 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 based awards.

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 discounts 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 arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, which include the Medicaid rebate provision, are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. The Company evaluates market conditions for products or groups of products primarily through

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.
Sales returns are 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 historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales returns reserves are accounted for in accordance with the U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices segment are typically resalable but are not material. The Company infrequently exchanges products from inventory for returned products. The sales returns reserve for the total Company has been approximately 1.0% of annual net trade sales during the fiscal reporting years 2014, 2013 and 2012.
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products. For all years presented, service revenues were less than 2% of total revenues and are included in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred.
In addition, the Company enters into collaboration arrangements that contain multiple revenue generating activities. Amounts due from collaborative partners for these arrangements are recognized as each activity is performed or delivered, based on the relative fair value. Upfront fees received as part of these arrangements are deferred and recognized over the performance period. See Note 1 to the Consolidated Financial Statements for additional disclosures on collaborations.
Reasonably likely changes to assumptions used to calculate the accruals for rebates, returns and promotions are not anticipated to have a material effect on the financial statements. The Company currently discloses the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.

                
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Below are tables that show the progression of accrued rebates, returns, promotions, reserve for doubtful accounts and reserve for cash discounts by segment of business for the fiscal years ended December 28, 2014 and December 29, 2013.

Consumer Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2014
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
137

 
619

 
(634
)
 
122

Accrued returns
 
80

 
102

 
(105
)
 
77

Accrued promotions
 
321

 
1,850

 
(1,930
)
 
241

Subtotal
 
$
538

 
2,571

 
(2,669
)
 
440

Reserve for doubtful accounts
 
25

 
5

 
(12
)
 
18

Reserve for cash discounts
 
24

 
215

 
(217
)
 
22

Total
 
$
587

 
2,791

 
(2,898
)
 
480

 
 
 
 
 
 
 
 
 
2013
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
132

 
524

 
(519
)
 
137

Accrued returns
 
108

 
94

 
(122
)
 
80

Accrued promotions
 
281

 
1,478

 
(1,438
)
 
321

Subtotal
 
$
521

 
2,096

 
(2,079
)
 
538

Reserve for doubtful accounts
 
38

 
8

 
(21
)
 
25

Reserve for cash discounts
 
21

 
232

 
(229
)
 
24

Total
 
$
580

 
2,336

 
(2,329
)
 
587

(1) 
Includes reserve for customer rebates of $37 million at December 28, 2014 and $32 million at December 29, 2013, recorded as a contra asset.
Pharmaceutical Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2014
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
1,985

 
7,652

 
(6,920
)
 
2,717

Accrued returns
 
372

 
83

 
(33
)
 
422

Accrued promotions
 
96

 
34

 
(96
)
 
34

Subtotal
 
$
2,453

 
7,769

 
(7,049
)
 
3,173

Reserve for doubtful accounts
 
95

 
4

 
(58
)
 
41

Reserve for cash discounts
 
61

 
576

 
(586
)
 
51

Total
 
$
2,609

 
8,349

 
(7,693
)
 
3,265

 
 
 
 
 
 
 
 
 
2013
 
 

 
 

 
 

 
 

Accrued rebates (1)
 
$
1,767

 
5,774

 
(5,556
)
 
1,985

Accrued returns
 
397

 
30

 
(55
)
 
372

Accrued promotions
 
94

 
89

 
(87
)
 
96

Subtotal
 
$
2,258

 
5,893

 
(5,698
)
 
2,453

Reserve for doubtful accounts
 
191

 
26

 
(122
)
 
95

Reserve for cash discounts
 
62

 
471

 
(472
)
 
61

Total
 
$
2,511

 
6,390

 
(6,292
)
 
2,609

(1) 
Includes reserve for customer rebates of $297 million at December 28, 2014 and $295 million at December 29, 2013, recorded as a contra asset.

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
15
                                



Medical Devices Segment
(Dollars in Millions)
 
Balance at
Beginning of Period
 
Accruals
 
Payments/Credits
 
Balance at
End of Period
2014
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
801

 
4,663

 
(4,620
)
 
844

Accrued returns
 
180

 
395

 
(387
)
 
188

Accrued promotions
 
66

 
35

 
(48
)
 
53

Subtotal
 
$
1,047

 
5,093

 
(5,055
)
 
1,085

Reserve for doubtful accounts
 
213

 
62

 
(59
)
 
216

Reserve for cash discounts
 
18

 
815

 
(817
)
 
16

Total
 
$
1,278

 
5,970

 
(5,931
)
 
1,317

 
 
 
 
 
 
 
 
 
2013
 
 

 
 

 
 

 
 

Accrued rebates(1)
 
$
567

 
4,261

 
(4,027
)
 
801

Accrued returns
 
205

 
356

 
(381
)
 
180

Accrued promotions
 
60

 
52

 
(46
)
 
66

Subtotal
 
$
832

 
4,669

 
(4,454
)
 
1,047

Reserve for doubtful accounts
 
237

 
19

 
(43
)
 
213

Reserve for cash discounts
 
22

 
394

 
(398
)
 
18

Total
 
$
1,091

 
5,082

 
(4,895
)
 
1,278

(1) 
Includes reserve for customer rebates of $354 million at December 28, 2014 and $403 million at December 29, 2013, recorded as a contra asset.

Income Taxes:  Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any difference between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates deferred tax assets and liabilities based on enacted tax regulations and rates. Future changes in tax laws and rates may affect recorded deferred tax assets and liabilities.
The Company has unrecognized tax benefits for uncertain tax positions. The Company follows U.S. GAAP, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position.
At December 28, 2014 and December 29, 2013, the cumulative amounts of undistributed international earnings were approximately $53.4 billion and $50.9 billion, respectively. At December 28, 2014 and December 29, 2013, the Company's foreign subsidiaries held balances of cash and cash equivalents in the amounts of $14.3 billion and $18.6 billion, respectively. The Company has not provided deferred taxes on the undistributed earnings from certain international subsidiaries where the earnings are considered to be permanently reinvested. The Company intends to continue to reinvest these earnings in international operations. If the Company decided at a later date to repatriate these earnings to the U.S., the Company would be required to provide for the net tax effects on these amounts. The Company does not determine the deferred tax liability associated with these undistributed earnings, as such determination is not practical.
See Note 8 to the Consolidated Financial Statements for further information regarding income taxes.
Legal and Self Insurance Contingencies:  The Company records accruals for various contingencies, including legal proceedings and product liability claims as these arise in the normal course of business. The accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated. Additionally, the Company records insurance receivable amounts from third-party insurers when recovery is probable. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from third-party insurers.
The Company follows the provisions of U.S. GAAP when recording litigation related contingencies. A liability is recorded when a loss is probable and can be reasonably estimated. The best estimate of a loss within a range is accrued; however, if no estimate in the range is better than any other, the minimum amount is accrued.

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
16
                                



Long-Lived and Intangible Assets:  The Company assesses changes in economic conditions and makes assumptions regarding estimated future cash flows in evaluating the value of the Company’s property, plant and equipment, goodwill and intangible assets. As these assumptions and estimates may change over time, it may or may not be necessary for the Company to record impairment charges.
Employee Benefit Plans:  The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. These plans are based on assumptions for the discount rate, expected return on plan assets, mortality rates, expected salary increases and health care cost trend rates. See Note 10 to the Consolidated Financial Statements for further details on these rates and the effect a rate change to the health care cost trend would have on the Company’s results of operations.
Stock Based Compensation:  The Company recognizes compensation expense associated with the issuance of equity instruments to employees for their services. Based on the type of equity instrument, the fair value is estimated on the date of grant using either the Black-Scholes option valuation model or a combination of both the Black-Scholes option valuation model and Monte Carlo valuation model, and is expensed in the financial statements over the vesting period. The input assumptions used in determining fair value are the expected life, expected volatility, risk-free rate and the dividend yield. See Note 17 to the Consolidated Financial Statements for additional information.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 28, 2014.
Economic and Market Factors
The Company is aware that its products are used in an environment where, for more than a decade, policymakers, consumers and businesses have expressed concerns about the rising cost of health care. In response to these concerns, the Company has a long-standing policy of pricing products responsibly. For the period 2004 - 2014, in the United States, the weighted average compound annual growth rate of the Company’s net price increases for health care products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI).
The Company operates in certain countries where the economic conditions continue to present significant challenges. The Company continues to monitor these situations and take appropriate actions. Inflation rates continue to have an effect on worldwide economies and, consequently, on the way companies operate. The Company has accounted for operations in Venezuela as highly inflationary as the prior three-year cumulative inflation rate surpassed 100%. In the face of increasing costs, the Company strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.
The Venezuelan government has established or is in the process of establishing alternative systems and offerings of various foreign currency exchanges. In 2014, the Company continued to have access to an official government rate of 6.3 Bolivares Fuertes to one U.S. dollar to settle imports of various products into Venezuela. Through the fourth quarter of 2014, the Company has primarily utilized the official government rate of 6.3 Bolivares Fuertes to one U.S. dollar in preparing its financial statements. During the second fiscal quarter, the Company applied to settle an outstanding dividend payable at one of the alternative foreign exchange rates. As a result, the Company has applied this alternative exchange rate to translate certain transactions, as appropriate. As of December 28, 2014, the Company’s Venezuelan subsidiaries represented less than 0.5% of the Company's consolidated assets, liabilities, revenues and profits; therefore, the effect of a change in the exchange rate is not expected to have a material adverse effect on the Company's 2015 full-year results.
The Company is exposed to fluctuations in currency exchange rates. A 1% change in the value of the U.S. Dollar as compared to all foreign currencies in which the Company had sales, income or expense in 2014 would have increased or decreased the translation of foreign sales by approximately $390 million and income by $100 million.
The Company faces various worldwide health care changes that may continue to result in pricing pressures that include health care cost containment and government legislation relating to sales, promotions and reimbursement of health care products.
Changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and foregoing health care insurance coverage, as a result of the current global economic downturn, may continue to impact the Company’s businesses.
The Company also operates in an environment increasingly hostile to intellectual property rights. Firms have filed Abbreviated New Drug Applications or Biosimilar Biological Product Applications with the FDA or otherwise challenged the coverage and/or validity of the Company's patents, seeking to market generic or biosimilar forms of many of the Company’s key pharmaceutical products prior to expiration of the applicable patents covering those products. In the event the Company is not successful in defending the patent claims challenged in the resulting lawsuits, generic or biosimilar versions of the products at issue will be introduced to the market, resulting in the potential for substantial market share and revenue losses for those products, and which may result in a non-cash impairment charge in any associated intangible asset. For further information, see

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
17
                                



the discussion on “REMICADE® Related Cases” and “Litigation Against Filers of Abbreviated New Drug Applications” in Note 21 to the Consolidated Financial Statements.
Legal Proceedings
Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of business.
The Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. The Company has accrued for certain litigation matters and continues to monitor each related legal issue and adjust accruals for new information and further developments in accordance with Accounting Standards Codification (ASC) 450-20-25. For these and other litigation and regulatory matters currently disclosed for which a loss is probable or reasonably possible, the Company is unable to determine an estimate of the possible loss or range of loss beyond the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.
In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution in any reporting period of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on the Company's results of operations and cash flows for that period.

See Note 21 to the Consolidated Financial Statements for further information regarding legal proceedings.
Common Stock Market Prices
The Company’s Common Stock is listed on the New York Stock Exchange under the symbol JNJ. As of February 17, 2015, there were 162,062 record holders of Common Stock of the Company. The composite market price ranges for Johnson & Johnson Common Stock during 2014 and 2013 were:

 
2014
 
2013
 
High
 
Low
 
High
 
Low
First quarter
$
98.47

 
86.09

 
$
81.59

 
69.18

Second quarter
105.97

 
96.05

 
89.99

 
80.31

Third quarter
108.77

 
98.80

 
94.42

 
85.50

Fourth quarter
109.49

 
95.10

 
95.99

 
85.50

Year-end close
$105.06
 
92.35

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
18
                                



Cautionary Factors That May Affect Future Results
This Annual Report contains forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts and anticipate results based on management’s plans that are subject to uncertainty. Forward-looking statements may be identified by the use of words such as “plans,” “expects,” “will,” “anticipates,” “estimates” and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company’s strategy for growth, product development, regulatory approval, market position and expenditures.
Forward-looking statements are based on current expectations of future events. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that known or unknown risks or uncertainties materialize, actual results could vary materially from the Company’s expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.
Risks and uncertainties include, but are not limited to: economic factors, such as interest rate and currency exchange rate fluctuations; competition, including technological advances, new products and patents attained by competitors; challenges inherent in new product development, including obtaining regulatory approvals; challenges to patents; the impact of patent expirations; uncertainty of commercial success of new and existing products; significant adverse litigation or government action, including related to product liability claims; impact of business combinations and divestitures; significant changes in customer relationships or changes in behavior and spending patterns or financial distress of purchasers of health care products and services; changes to laws and regulations and global health care reforms; trends toward health care cost containment; increased scrutiny of the health care industry by government agencies; financial instability of international economies and sovereign risk; manufacturing difficulties or delays; complex global supply chains with increasing regulatory requirements; product efficacy or safety concerns resulting in product recalls or regulatory action; disruptions due to natural disasters; and the potential failure to meet obligations in compliance agreements with government bodies.
A discussion of these and other factors that could cause actual results to differ materially from expectations can be found in this Annual Report on Form 10-K for the fiscal year ended December 28, 2014, including in Exhibit 99. The Company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995.




                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
19
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 28, 2014 and December 29, 2013
(Dollars in Millions Except Share and Per Share Amounts) (Note 1)
 
2014
 
2013
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents (Notes 1 and 2)
$
14,523

 
20,927

Marketable securities (Notes 1 and 2)
18,566

 
8,279

Accounts receivable trade, less allowances for doubtful accounts $275 (2013, $333)
10,985

 
11,713

Inventories (Notes 1 and 3)
8,184

 
7,878

Deferred taxes on income (Note 8)
3,567

 
3,607

Prepaid expenses and other receivables
3,486

 
4,003

Total current assets
59,311

 
56,407

Property, plant and equipment, net (Notes 1 and 4)
16,126

 
16,710

Intangible assets, net (Notes 1 and 5)
27,222

 
27,947

Goodwill (Notes 1 and 5)
21,832

 
22,798

Deferred taxes on income (Note 8)
3,396

 
3,872

Other assets
3,232

 
4,949

Total assets
$
131,119

 
132,683

Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 

 
 

Loans and notes payable (Note 7)
$
3,638

 
4,852

Accounts payable
7,633

 
6,266

Accrued liabilities
6,553

 
7,685

Accrued rebates, returns and promotions
4,010

 
3,308

Accrued compensation and employee related obligations
2,751

 
2,794

Accrued taxes on income
500

 
770

Total current liabilities
25,085

 
25,675

Long-term debt (Note 7)
15,122

 
13,328

Deferred taxes on income (Note 8)
3,154

 
3,989

Employee related obligations (Notes 9 and 10)
9,972

 
7,784

Other liabilities
8,034

 
7,854

Total liabilities
61,367

 
58,630

Shareholders’ equity
 

 
 

Preferred stock — without par value (authorized and unissued 2,000,000 shares)

 

Common stock — par value $1.00 per share (Note 12) (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
3,120

 
3,120

Accumulated other comprehensive income (Note 13)
(10,722
)
 
(2,860
)
Retained earnings
97,245

 
89,493

 
89,643

 
89,753

Less: common stock held in treasury, at cost (Note 12) (336,620,000 shares and 299,215,000 shares)
19,891

 
15,700

Total shareholders’ equity
69,752

 
74,053

Total liabilities and shareholders’ equity
$
131,119

 
132,683

See Notes to Consolidated Financial Statements

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
20
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars and Shares in Millions Except Per Share Amounts) (Note 1)
 
2014
 
2013
 
2012
Sales to customers
$
74,331

 
71,312

 
67,224

Cost of products sold
22,746

 
22,342

 
21,658

Gross profit
51,585

 
48,970

 
45,566

Selling, marketing and administrative expenses
21,954

 
21,830

 
20,869

Research and development expense
8,494

 
8,183

 
7,665

In-process research and development
178

 
580

 
1,163

Interest income
(67
)
 
(74
)
 
(64
)
Interest expense, net of portion capitalized (Note 4)
533

 
482

 
532

Other (income) expense, net
(70
)
 
2,498

 
1,626

Earnings before provision for taxes on income
20,563

 
15,471

 
13,775

Provision for taxes on income (Note 8)
4,240

 
1,640

 
3,261

Net earnings
16,323

 
13,831

 
10,514

Add: Net loss attributable to noncontrolling interest

 

 
339

Net earnings attributable to Johnson & Johnson
$
16,323

 
13,831

 
10,853

 
 
 
 
 
 
Net earnings per share attributable to Johnson & Johnson (Notes 1 and 15)
 
 
 
 
 
    Basic
$
5.80

 
4.92

 
3.94

    Diluted
$
5.70

 
4.81

 
3.86

Cash dividends per share
$
2.76

 
2.59

 
2.40

Average shares outstanding (Notes 1 and 15)
 
 
 
 
 
   Basic
2,815.2

 
2,809.2

 
2,753.3

   Diluted
2,863.9

 
2,877.0

 
2,812.6


See Notes to Consolidated Financial Statements



                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
21
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions) (Note 1)

 
2014
 
2013
 
2012
Net earnings
$
16,323

 
13,831

 
10,514

 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
      Foreign currency translation
(4,601
)
 
94

 
1,230

 
 
 
 
 
 
      Securities:
 
 
 
 
 
          Unrealized holding gain (loss) arising during period
156

 
225

 
(248
)
          Reclassifications to earnings
(5
)
 
(314
)
 
(5
)
          Net change
151

 
(89
)
 
(253
)
 
 
 
 
 
 
      Employee benefit plans:
 
 
 
 
 
          Prior service cost amortization during period
(18
)
 
9

 
2

          Prior service credit (cost) - current year
211

 
(27
)
 
(8
)
          Gain amortization during period
400

 
515

 
370

          Gain (loss) - current year
(4,098
)
 
2,203

 
(1,643
)
          Effect of exchange rates
197

 
8

 
(52
)
          Net change
(3,308
)
 
2,708

 
(1,331
)
 
 
 
 
 
 
      Derivatives & hedges:
 
 
 
 
 
          Unrealized gain (loss) arising during period
92

 
344

 
52

          Reclassifications to earnings
(196
)
 
(107
)
 
124

          Net change
(104
)
 
237

 
176

 
 
 
 
 
 
Other comprehensive income (loss)
(7,862
)
 
2,950

 
(178
)
 
 
 
 
 
 
Comprehensive income
8,461

 
16,781

 
10,336

 
 
 
 
 
 
Comprehensive loss attributable to noncontrolling interest, net of tax

 

 
339

 
 
 
 
 
 
Comprehensive income attributable to Johnson & Johnson
$
8,461

 
16,781

 
10,675

 
 
 
 
 
 
 
The tax effects in other comprehensive income for the fiscal years ended 2014, 2013 and 2012 respectively: Securities; $81 million, $48 million and $136 million, Employee Benefit Plans; $1,556 million, $1,421 million and $653 million, Derivatives & Hedges; $56 million, $128 million and $95 million.
 
See Notes to Consolidated Financial Statements


                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
22
                                





JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Millions) (Note 1)
 
Total
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Common Stock
Issued Amount
 
Treasury
Stock
Amount
Balance, January 1, 2012
$
57,080

 
81,251

 
(5,632
)
 
3,120

 
(21,659
)
Net earnings attributable to Johnson & Johnson
10,853

 
10,853

 
 

 
 

 
 

Cash dividends paid
(6,614
)
 
(6,614
)
 
 

 
 

 
 

Employee compensation and stock option plans
3,269

 
19

 
 

 
 

 
3,250

Issuance of common stock associated with the acquisition of Synthes, Inc.
13,335

 
483

 
 
 
 
 
12,852

Repurchase of common stock(1)
(12,919
)
 
 

 
 

 
 

 
(12,919
)
Other comprehensive income (loss), net of tax
(178
)
 
 
 
(178
)
 
 

 
 

Balance, December 30, 2012
64,826

 
85,992

 
(5,810
)
 
3,120

 
(18,476
)
Net earnings attributable to Johnson & Johnson
13,831

 
13,831

 
 

 
 

 
 

Cash dividends paid
(7,286
)
 
(7,286
)
 
 

 
 

 
 

Employee compensation and stock option plans
3,285

 
(82
)
 
 

 
 

 
3,367

Repurchase of common stock
(3,538
)
 
(2,947
)
 
 

 
 

 
(591
)
Other
(15
)
 
(15
)
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
2,950

 
 

 
2,950

 
 

 
 

Balance, December 29, 2013
74,053

 
89,493

 
(2,860
)
 
3,120

 
(15,700
)
Net earnings attributable to Johnson & Johnson
16,323

 
16,323

 
 

 
 

 
 

Cash dividends paid
(7,768
)
 
(7,768
)
 
 

 
 

 
 

Employee compensation and stock option plans
2,164

 
(769
)
 
 

 
 

 
2,933

Repurchase of common stock
(7,124
)
 


 
 

 
 

 
(7,124
)
Other
(34
)
 
(34
)
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(7,862
)
 
 

 
(7,862
)
 
 

 
 

Balance, December 28, 2014
$
69,752

 
97,245

 
(10,722
)
 
3,120

 
(19,891
)
(1) 
Includes repurchase of common stock associated with the acquisition of Synthes, Inc.



See Notes to Consolidated Financial Statements


                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
23
                                



JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions) (Note 1)
 
2014
 
2013
 
2012
Cash flows from operating activities
 

 
 

 
 
Net earnings
$
16,323

 
13,831

 
10,514

Adjustments to reconcile net earnings to cash flows from operating activities:
 

 
 

 
 
Depreciation and amortization of property and intangibles
3,895

 
4,104

 
3,666

Stock based compensation
792

 
728

 
662

Noncontrolling interest

 

 
339

Venezuela adjustments
87

 
108

 

Asset write-downs
410

 
739

 
2,131

Net gain on sale of assets/businesses
(2,383
)
 
(113
)
 
(908
)
Net gain on equity investment transactions

 
(417
)
 

Deferred tax provision
441

 
(607
)
 
(39
)
Accounts receivable allowances
(28
)
 
(131
)
 
92

Changes in assets and liabilities, net of effects from acquisitions and divestitures:
 

 
 

 
 
Increase in accounts receivable
(247
)
 
(632
)
 
(9
)
Increase in inventories
(1,120
)
 
(622
)
 
(1
)
Increase in accounts payable and accrued liabilities
955

 
1,821

 
2,768

Decrease/(Increase) in other current and non-current assets
442

 
(1,693
)
 
(1,264
)
(Decrease)/Increase in other current and non-current liabilities
(1,096
)
 
298

 
(2,555
)
Net cash flows from operating activities
18,471

 
17,414

 
15,396

Cash flows from investing activities
 

 
 

 
 
Additions to property, plant and equipment
(3,714
)
 
(3,595
)
 
(2,934
)
Proceeds from the disposal of assets/businesses, net
4,631

 
458

 
1,509

Acquisitions, net of cash acquired (Note 20)
(2,129
)
 
(835
)
 
(4,486
)
Purchases of investments
(34,913
)
 
(18,923
)
 
(13,434
)
Sales of investments
24,119

 
18,058

 
14,797

Other (primarily intangibles)
(299
)
 
(266
)
 
38

Net cash used by investing activities
(12,305
)
 
(5,103
)
 
(4,510
)
Cash flows from financing activities
 
 
 

 
 
Dividends to shareholders
(7,768
)
 
(7,286
)
 
(6,614
)
Repurchase of common stock
(7,124
)
 
(3,538
)
 
(12,919
)
Proceeds from short-term debt
1,863

 
1,411

 
3,268

Retirement of short-term debt
(1,267
)
 
(1,397
)
 
(6,175
)
Proceeds from long-term debt
2,098

 
3,607

 
45

Retirement of long-term debt
(1,844
)
 
(1,593
)
 
(804
)
Proceeds from the exercise of stock options/excess tax benefits
1,782

 
2,649

 
2,720

Other

 
56

 
(83
)
Net cash used by financing activities
(12,260
)
 
(6,091
)
 
(20,562
)
Effect of exchange rate changes on cash and cash equivalents
(310
)
 
(204
)
 
45

(Decrease)/Increase in cash and cash equivalents
(6,404
)
 
6,016

 
(9,631
)
Cash and cash equivalents, beginning of year (Note 1)
20,927

 
14,911

 
24,542

Cash and cash equivalents, end of year (Note 1)
$
14,523

 
20,927

 
14,911

 
 
 
 
 
 
Supplemental cash flow data
 

 
 

 
 

Cash paid during the year for:
 

 
 

 
 

Interest
$
603

 
596

 
616

Interest, net of amount capitalized
488

 
491

 
501

Income taxes
3,536

 
3,155

 
2,507


                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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Supplemental schedule of non-cash investing and financing activities
 

 
 

 
 

Issuance of common stock associated with the acquisition of Synthes, Inc.

 

 
13,335

Treasury stock issued for employee compensation and stock option plans, net of cash proceeds
1,170

 
743

 
615

Conversion of debt
17

 
22

 

 
 
 
 
 
 
Acquisitions
 

 
 

 
 

Fair value of assets acquired
$
2,167

 
1,028

 
19,025

Fair value of liabilities assumed and noncontrolling interests
(38
)
 
(193
)
 
(1,204
)
Net fair value of acquisitions
$
2,129

 
835

 
17,821

Less: Issuance of common stock associated with the acquisition of Synthes, Inc.

 

 
13,335

Net cash paid for acquisitions
$
2,129

 
835

 
4,486


See Notes to Consolidated Financial Statements

                
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Johnson & Johnson and its subsidiaries (the Company). Intercompany accounts and transactions are eliminated.
Description of the Company And Business Segments
The Company has approximately 126,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company conducts business in virtually all countries of the world and its primary focus is on products related to human health and well-being.
The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices (previously referred to as Medical Devices and Diagnostics). The Consumer segment includes a broad range of products used in the baby care, oral care, skin care, over-the-counter pharmaceutical, women’s health and wound care markets. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. The Pharmaceutical segment is focused on five therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, and cardiovascular and metabolic diseases. Products in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. The Medical Devices segment includes a broad range of products used in the orthopaedic, surgical care, specialty surgery, cardiovascular care, diagnostics, diabetes care, and vision care markets, which are distributed to wholesalers, hospitals and retailers, and used principally in the professional fields by physicians, nurses, hospitals, and clinics.

New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
During the fiscal first quarter of 2014, the Company adopted the Financial Accounting Standards Board (FASB) guidance clarifying the release of accumulated Foreign Currency Translation from other comprehensive income (OCI), into current year Net Earnings. The amendment requires that when the parent company ceases to have a controlling interest in a subsidiary or a business within a foreign entity the parent is to release accumulated Foreign Currency Translation from OCI. This update became effective for all annual periods and interim reporting periods beginning after December 15, 2013. The adoption of this standard did not have a material impact on the Company's results of operations, cash flows or financial position.

During the fiscal first quarter of 2014, the Company adopted the FASB guidance on the presentation of unrecognized tax benefits when various qualifying tax credits exist. The amendment requires that unrecognized tax benefits be presented on the Consolidated Balance Sheet as a reduction to deferred tax assets created by net operating losses or other tax credits from prior periods that occur in the same taxing jurisdiction. To the extent that the unrecognized tax benefit exceeds these credits, it shall be presented as a liability. This update became effective for all annual periods and interim reporting periods beginning after December 15, 2013. The adoption of this standard did not have a material impact on the presentation of the Company's financial position.

During the fiscal second quarter of 2014, the FASB issued amended guidance on the use and presentation of discontinued operations in an entity’s financial statements. The new guidance restricts the presentation of discontinued operations to business circumstances when the disposal of business operations represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.  Examples of a strategic shift could include, but not be limited to, disposal of major geographic segments, a major line of business or other major business component of an entity. The new guidance also expands the required disclosures for entities that have assets held for sale but do not meet the new definition of discontinued operations. This amendment includes early adoption provisions allowing the Company to implement this update immediately for the first quarter of 2014. The Company elected to adopt this standard for the first quarter of 2014. The balances and updated disclosures required by the amended guidance are included in Note 20 in the Notes to the Consolidated Financial Statements.

During the fiscal second quarter of 2014, the FASB issued Accounting Standards Update 2014-12: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This standard clarifies the current accounting guidance for entities that issue share-based payment awards that require a specific performance target be achieved for employees to become eligible to vest in the awards, which may occur subsequent to a required service period. Current accounting guidance does not explicitly address how to account for these types of awards. The new standard provides explicit guidance and clarifies that these types of performance targets should be treated as performance conditions. The accounting for share-based awards with performance conditions is already specified in current

                
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accounting guidance. This update is required to be adopted by all public companies for all annual periods and interim reporting periods beginning after December 15, 2015. Early adoption of this standard was permitted and the Company had elected to adopt this standard for the second quarter of 2014. The adoption of this standard did not have a material impact on the Company's results of operations, cash flows or financial position.

Recently Issued Accounting Standards
Not Adopted as of December 28, 2014
During the fiscal second quarter of 2014, the FASB issued Accounting Standards Update 2014-09: Revenue from Contracts with Customers. This standard replaces substantially all current revenue recognition accounting guidance. This update is required to be adopted by all public companies for all annual periods and interim reporting periods beginning after December 15, 2016. Early adoption of this standard is not permitted.  The Company is currently assessing the impact of the future adoption of this standard on its financial statements.

During the fiscal second quarter of 2014, the FASB issued amended guidance Accounting Standards Update No. 2014-10: Development Stage Entities: Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entity Guidance in Topic 810, Consolidation.  The change in the current guidance will require the Company to determine if it should consolidate one of these entities based on the change in the consolidation analysis.  This update to the consolidation analysis will become effective for all annual periods and interim reporting periods beginning after December 15, 2015.  The adoption of this standard is not expected to have a material impact on the presentation of the Company's results of operations, cash flows or financial position.

During the fiscal third quarter of 2014, the FASB issued Accounting Standards Update No. 2014-15: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to evaluate, for each annual and interim reporting period, whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued. If substantial doubt is raised, additional disclosures around management’s plan to alleviate these doubts are required. This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2016.  This standard is not expected to have any impact on current disclosures in the financial statements.
Cash Equivalents
The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. The Company has a policy of making investments only with commercial institutions that have at least an "A" (or equivalent) credit rating. The Company invests its cash primarily in reverse repurchase agreements (RRAs), government securities and obligations, corporate debt securities and money market funds.
RRAs are collateralized by deposits in the form of ‘Government Securities and Obligations’ for an amount not less than 102% of their value. The Company does not record an asset or liability as the Company is not permitted to sell or repledge the associated collateral. The Company has a policy that the collateral has at least an A (or equivalent) credit rating. The Company utilizes a third party custodian to manage the exchange of funds and ensure that collateral received is maintained at 102% of the value of the RRAs on a daily basis. RRAs with stated maturities of greater than three months from the date of purchase are classified as marketable securities.
Investments
Short-term marketable securities are carried at cost, which approximates fair value. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Long-term debt securities that the Company has the ability and intent to hold until maturity are carried at amortized cost. Management determines the appropriate classification of its investment in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. The Company periodically reviews its investments in equity securities for impairment and adjusts these investments to their fair value when a decline in market value is deemed to be other than temporary. If losses on these securities are considered to be other than temporary, the loss is recognized in earnings.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:

                
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Building and building equipment
20 - 30 years
Land and leasehold improvements
10 - 20 years
Machinery and equipment
2 - 13 years

The Company capitalizes certain computer software and development costs, included in machinery and equipment, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 8 years.
The Company reviews long-lived assets to assess recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows.
Revenue Recognition
The Company recognizes revenue from product sales when the 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 discounts 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 arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, which include Medicaid, are estimated based on contractual terms, historical experience, patient outcomes, 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 returns 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 historical return trends by product and by market as a percent to gross sales. In accordance with the Company’s accounting policies, the Company generally issues credit to customers for returned goods. The Company’s sales returns reserves are accounted for in accordance with U.S. GAAP guidance for revenue recognition when right of return exists. Sales returns reserves are recorded at full sales value. Sales returns in the Consumer and Pharmaceutical segments are almost exclusively not resalable. Sales returns for certain franchises in the Medical Devices segment are typically resalable but are not material. The Company infrequently exchanges products from inventory for returned products. The sales returns reserve for the total Company has been approximately 1.0% of annual sales to customers during the fiscal reporting years 2014, 2013 and 2012.
Promotional programs, such as product listing allowances and cooperative advertising arrangements, are recorded in the year incurred. Continuing promotional programs include coupons and volume-based sales incentive programs. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred.
Shipping and Handling
Shipping and handling costs incurred were $1,068 million, $1,128 million and $1,051 million in 2014, 2013 and 2012, respectively, and are included in selling, marketing and administrative expense. The amount of revenue received for shipping and handling is less than 0.5% of sales to customers for all periods presented.
Inventories
Inventories are stated at the lower of cost or market determined by the first-in, first-out method.
Intangible Assets and Goodwill
The authoritative literature on U.S. GAAP requires that goodwill and intangible assets with indefinite lives be assessed annually for impairment. The Company completed the annual impairment test for 2014 in the fiscal fourth quarter. Future impairment tests will be performed annually in the fiscal fourth quarter, or sooner if warranted. Purchased in-process research and development is accounted for as an indefinite lived intangible asset until the underlying project is completed, at which point the intangible asset will be accounted for as a definite lived intangible asset, or abandoned, at which point the intangible asset will be written off or partially impaired.
Intangible assets that have finite useful lives continue to be amortized over their useful lives, and are reviewed for impairment when warranted by economic conditions. See Note 5 for further details on Intangible Assets and Goodwill.

                
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Financial Instruments
As required by U.S. GAAP, all derivative instruments are recorded on the balance sheet at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value, with Level 1 having the highest priority and Level 3 having the lowest. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. The objectives of this strategy are: (1) minimize foreign currency exposure’s impact on the Company’s financial performance; (2) protect the Company’s cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on Financial Instruments.
Product Liability
Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information. The accruals are adjusted periodically as additional information becomes available. The Company accrues an estimate of the legal defense costs needed to defend each matter. This is referred to as defense costs in connection with product liability litigation. In certain matters an indemnity amount is also recorded. This is referred to as product liability accrual.
As a result of cost and availability factors, effective November 1, 2005, the Company ceased purchasing third-party product liability insurance. The Company has self insurance through a wholly-owned captive insurance company. In addition to accruals in the self insurance program, claims that exceed the insurance coverage are accrued when losses are probable and amounts can be reasonably estimated. Based on the availability of prior coverage, receivables for insurance recoveries related to product liability claims are recorded on an undiscounted basis, when it is probable that a recovery will be realized. As appropriate, reserves against these receivables are recorded for estimated amounts that may not be collected from third-party insurers.
Concentration of Credit Risk
Global concentration of credit risk with respect to trade accounts receivables continues to be limited due to the large number of customers globally and adherence to internal credit policies and credit limits. Economic challenges in Italy, Spain, Greece and Portugal (the Southern European Region) have impacted certain payment patterns, which have historically been longer than those experienced in the U.S. and other international markets. The total net trade accounts receivable balance in the Southern European Region was approximately $1.8 billion as of December 28, 2014 and approximately $2.3 billion as of December 29, 2013. Approximately $1.1 billion as of December 28, 2014 and approximately $1.3 billion as of December 29, 2013 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices customers which are in line with historical collection patterns.
The remaining balance of net trade accounts receivable in the Southern European Region has been negatively impacted by the timing of payments from certain government owned or supported health care customers as well as certain distributors of the Pharmaceutical and Medical Devices local affiliates. The total net trade accounts receivable balance for these customers were approximately $0.7 billion at December 28, 2014 and $1.0 billion at December 29, 2013. The Company continues to receive payments from these customers and in some cases late payment premiums. For customers where payment is expected over periods of time longer than one year, revenue and trade receivables have been discounted over the estimated period of time for collection. Allowances for doubtful accounts have been increased for these customers, but have been immaterial to date. The Company will continue to work closely with these customers on payment plans, monitor the economic situation and take appropriate actions as necessary.
Research and Development
Research and development expenses are expensed as incurred. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.
The Company enters into collaborative arrangements, typically with other pharmaceutical or biotechnology companies, to develop and commercialize drug candidates or intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including

                
JOHNSON & JOHNSON 2014 ANNUAL REPORT
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research and development, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. In general, the income statement presentation for these collaborations is as follows:

Nature/Type of Collaboration
 
Statement of Earnings Presentation
Third-party sale of product
 
Sales to customers
Royalties/milestones paid to collaborative partner (post-regulatory approval)*
 
Cost of products sold
Royalties received from collaborative partner
 
Other income (expense), net